In my 1992 consumer guide, Life Insurance Sense and Nonsense, I offered this advice on how to evaluate complicated sales proposals for life insurance:

 

“There’s no simple way to evaluate a complicated proposal, but the starting point is always a simple question: what makes it work?

 

If the proposal merely draws upon the usual tax advantages of life insurance, you already know the potential benefits from our earlier analysis. Life insurance combined with charitable remainder trusts is one example of no value added beyond the usual. You may also discover that some benefits are attributed to life insurance when in fact they have nothing to do with life insurance; for example, the difference in tax rates between the corporation and the executive in executive bonus plans.”

 

Yesterday I attended a conference on various life insurance topics sponsored by the New York Chapter of the Society of Financial Service Professionals. The first speaker, an advanced planning attorney for a life insurance company, gave an excellent presentation on the pros and cons of Roth IRA conversions, and then he encouraged the audience of life insurance agents to consider a better alternative: taking taxable distributions from an IRA and using them to buy a life insurance policy in an irrevocable trust.

 

His numerical example showed that the life insurance strategy would provide much more wealth for the beneficiaries after income and estate taxes.

 

What is the problem with this? The decision to take taxable distributions from an IRA and gift the after-tax proceeds to an irrevocable trust is one decision. And the decision to use the money in the trust to buy life insurance is another decision. They are separate decisions, and each decision can create, or destroy, wealth independently of the other.

 

Making a lifetime gift gets money out of your estate, so it will not be subject to estate tax.

 

Buying life insurance can create wealth for the beneficiaries, although a lot depends on the policy design and performance and the timing of the insured’s death.

 

By conflating the two decisions, the attorney misattributed the value added by lifetime gifting to the value added by buying life insurance. In this sales pitch, even an overpriced life insurance policy would look good.

 

And then we had a delicious buffet lunch and moved on to the next presentation by another life insurance company attorney. This one included a reminder — not necessary for this audience — that life insurance lets you pay estate taxes for pennies on the dollar. That is a misattribution of the time value of money.