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Is life insurance a replacement for trusts or wills?

According to the Guinness Book of World Records, a financial adviser for a billionaire in another state has taken the record for the largest life insurance policy ever sold. The adviser says his client, who wishes to remain anonymous, took out the gigantic policy in part to protect his heirs from a large inheritance tax. It's a growing trend among the wealthy, but should residents of Oklahoma consider life insurance a replacement for trusts or wills?

Reports indicate that the insurance policy in question is worth $201 million. Since no single insurance agency would be able to back such a large policy, the financial adviser worked with 19 companies over the course of seven months to create the policy. Authorities from the Guinness Book of World Records reviewed information about the transaction for three months before declaring the policy a record holder. Previously, the largest policy on record was for $100 million and was purchased by a Hollywood mogul in 1990.

According to the financial adviser, the billionaire purchased the policy because his heirs would face a 45 percent estate tax on inheritance. A life insurance policy payout would be taxed differently, and apparently, it makes financial sense to pay something like $1 million a year in premiums to save the heirs millions later in taxes. Life insurance isn't the only tactic wealthy individuals are using to reduce estate taxes, says the financial adviser. Some individuals are taking out loans that are payable upon death to reduce cash for inheritance tax purposes.

It's unlikely that life insurance policies will take the place of trusts and wills, however. Legal vehicles such as living trusts provide too many other benefits and protections. Individuals of any means should consider all options when planning for estates and combine legal documents with financial protections such as life insurance where beneficial.

Source: News 9, "Silicon Valley billionaire buys record life policy" Paul Elias, Mar. 15, 2014

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