Hi, I recently talked to a friend also an insurance agent. He touched on legacy planning and mentions that a policy he has is able to multiply my parent's money by ten folds. Can anyone clarify this?

Hi anon,

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Multiplying by 10x is close to impossible if your parents are already in their 50s (which is probably the case), especially if the policy is on their life. The only way that might feasibly work is a leverage life insurance policy that only pays on death, with a minimum death benefit; but your parents will have to service the interest on the leverage (bank loan) in PERPETUITY. That might not be the sort of cash outflow they want in retirement.

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Of course, without the details of the plan that is being proposed, I can't give you a definitive answer. I might be wrong, but I doubt it.

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I have a client who was sold a USD $1M policy by a bank, premium was USD$300K, loan was USD$216K and he only had to pay ~USD$84K (that was funded by more financing, but I won't get into that). He was 59 years old. Upon death, after accounting for the loan, his USD$84K will 'become' USD$784K. So 10x is possible, but if you factor interest costs, then the true cost of the policy is higher and the returns will be lower than 10x. And that's if he dies before age 85. After 85, the death benefit is lower.

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As a side note, he regretted it because of the interest servicing.

Hi, I am not 100% sure but I got a feeling this is an annuity type plan although 10 folds is a bit of an exaggeration. Basically, the idea is this:

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If your parents have for example 10 million dollars. And they are maybe 65 and have retired. What they can do is keep 6 million for their retirement and 4 million for you. However, this means that they have 4 million that they cannot touch because investing it is too risky (they might lose it and have nothing for you) and doing nothing with it is just a waste.

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So what legacy planning is all about is that they can use the money that they cannot touch (the 4 million in this case) and buy an insurance policy that pays them a monthly amount (like an annuity). At the end of their life, the payment stops and the 4 million lump sum is paid out to you. If they lived an additional 30 years, they will be receiving maybe e.g. 2% on the 4,000,000 per year which is $80,000 for 30 years which adds up to $2.4 million. This would mean they could have $2.4 million additional in their lifetime and $4 million to payout to you when they die.

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Not sure if your friend is looking at this but it could be. Hope it helps.