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Mystery Tech Billionaire Purchased $210 Million Life Insurance Policy: Too Much?

www.mainstreet.com

NEW YORK (MainStreet) — The mystery billionaire who purchased a $210 million life insurance policy may be able to sell it in 30 years should he ever go broke. That's if the Silicon Valley techie sells the policy to a life settlement company.

"A life insurance settlement enables the elderly to sell an existing policy for immediate cash," said Scott Page, president and CEO of the Lifeline Program. "If this policy were sold when the insured is a senior, it is possible that he could receive approximately 20% of the face value and walk away with about $40 million."

The $210 million policy was reportedly purchased through SG, a global advisory firm in Santa Barbara.

"Life insurance is often part of an estate plan," said Wendy Witt, an estate planning attorney in Pittsburgh. "It never precludes it. It's used in conjunction with charitable planning to reduce and minimize estate taxes, to pay estate taxes, replace income, create an estate, liquidize an estate, equalize inheritances and fund buy-sell agreements."

But just how much is too much insurance? It varies.

"There is no one size fits all formula, because life insurance is used for a myriad of purposes for a myriad of goals," Witt told MainStreet. "The amount of life insurance required depends on the needs and goals of each family."

Insurance products are always a good way to protect a rich person's assets from estate and other taxes, but for a single person earning under $100,000 per year, an affordable term life policy may be the only estate planning tool needed.

"Life insurance is only one piece of the estate planning puzzle, which always uses a life insurance policy to produce the funds necessary to pay estate taxes," Page told MainStreet. "This allows any excess cash and tangible items to be passed directly to the heirs without uncertainty."

The federal government sets an exclusion amount on estate taxes.

In 2014, the exemption increased to $5.34 million from $5.25 million last year.

This means if someone dies with a $10 million estate, the first $5.34 million is excluded and not taxed. Any amount above $5.34 million is subject to estate taxes, which can be as high as 50%. For example, the deceased of a $10 million estate would be subject to taxes of $2.5 million, which is 50% of $5 million.

"In the case of this billionaire, he purchased a policy with a death benefit of $200 million to pay taxes on his estate," said Arthur Rudnick, independent long-term care insurance specialist with New York Long Term Care Brokers in White Plains. "For those who have an estate of $5 million or less, which is most of us on the planet, it's not an issue."

Although the tech billionaire may have to watch his back, if push comes to shove before death, there's always life insurance settlement.

"The interest in a policy holder's death by a life settlement company can become a bond that only matures when they pass away," said CJ Bowker, an independent life insurance broker with Aclaro Risk Management in Massachusetts. "It's morbid to think about it that way, but life insurance settlement can provide value to a policy holder that they may not otherwise receive." And that value is a percentage of the death benefit before death.

"Without knowing the precise details of the policy such as premium amounts, health status and age of the insured, it is difficult to estimate beyond industry estimates which range from 10% to 75% of the face value or death benefit," said Page.

--Written by Juliette Fairley for MainStreet


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