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C. The “discounted dollars” concept.

C. The “discounted dollars” concept.

Insurance sales people like to say that a life insurance death benefit is purchased with “discounted dollars.” Their point is that the annual premium will usually be only 1% – 5% of the policy face value, but that full amount is available from Day One. So, life insurance is the only investment able to guarantee that a definite sum of cash will be available immediately. The ultimate “discount” will depend on the cumulative premiums paid by the time the death benefit is received.

The “discounted dollars” concept enables substantial wealth transfer at reduced (or zero) gift tax cost. A program of yearly gifts, intended (but not required) to be used by your children (or others) for premiums, can take advantage of the annual $11,000 gift tax exclusion. That way, no tax is paid by anyone on those gifts, and the donor’s full $1 million (in 2003) federal gift and estate tax shelter remains available for use at death. Better yet, the certainty of the death benefit will produce a sizable, predictable, “instant” estate, that can be quickly created and regularly increased by additional premium payments.

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