There are no estate tax benefits to permanent life insurance until you have an estate larger than $10 Million ($5 Million if you're single). What percentage of doctors do you suppose that is? I'll give you a hint, it's not 99%.
And while buying a permanent policy might be a lot more expensive at 50 than at 20 (if for some crazy reason you wanted it), you also get the benefit of not having to pay premiums for 30 years until you're already rich. I don't supposed there'd be any value in that, nah.
With all due respect, Dr. AD, you are playing in the wrong sandbox. The younger the individual the less you know about when someone is going to die and therefore no idea what the combined exemption will be at that time, no idea what inflation will do to the numbers you are mentioning as current, and this area (estate tax specifically) is best left to the legacy lawyers who do nothing but this type of ongoing planning when an estate gets, or seems like its going to get large enough. You also are not considering marriages, inheritances, divorces, blended family wealth and windfalls, all of which can happen in multiples. So if non-estate lawyers stay away from this kind of planning, you are out on a limb here giving advice, IMO. But that is really very beside the point here anyway. Very. This is not an estate tax play. It is an income tax play.
1. You can pay Ordinary income on earnings and income, or cap gains on cap investments if long term. This is pay as you go.
2. You can defer into 401k, 403b, defined benefit, etc., deduct contributions, defer gains, and pay on the rate (speculative) you will pay in retirement. Note you are paying on a MUCH higher amount of money which has grown tax deferred, and your hope is that you are paying at a lower rate over a longer time, but today's current rate is all time pretty low to start with. And today's retirement experience is that the rate in retirement is NOT lower.
3. You can pay your current rate and invest after tax, THEN pay income and cap gains as you go, at today's returns, not really keeping up with our very small inflation. But you get to keep what is left, at least until you invest it again and again pay tax currently on it.
4. Suppose you want a lot of safety and a lot of principal protection? Cash, CDs. and perhaps annuities, fixed indexed, or variable with income guarantees. Cash gets you very very small returns, taxed currently, so almost no return after tax on income. Cds maybe a bit more, but also less liquidity for not much more return, so not worth it in the opinion of most, since spread between cash and 5 year CD not big enough, also taxed at OI currently. Fixed indexed annuities have very low caps these days, around 4% or so, so they are not good at all, though better than 5 year CD, but don't have FDIC protection, just backing of insurance Co insurer. Variable contracts with income guarantees have limited liquidity usually unless you are willing to pay higher charges for a 4 year or no year liquidity, but generally you won't get a lump sum back, just some form of withdrawals which can vary substantially. The upside is, you would pay tax on a full withdrawal in one year (bad); the downside, you can't access all the money at one time if you wanted it, so this should only be done with a PART of your portfolio that you don't mind being illiquid. The other bad thing a bout annuities is their taxation--it is LIFO, Last in First Out, so you pay tax on gains first, then later you recover capital. Ok, now here we get to the tax advantage of life insurance: IT, unlike annuities, is taxed FIFO, First in First Out, so the money you put in in earliest days (your premiums) comes out tax free to you first, and later on you pay on the gains in the policy. OR, even better, you can BORROW against the cash in the policy, in most policies, and this BORROWED money is not taxed to you, just like you are not taxed on money you borrow for taking out a mortgage.
These are relatively safe things to do with money, as they each have a significant measure of principal protection, but are each taxed differently, with the non-death benefit portion of a life insurance contract receiving the most favorable tax treatment of all. Put that together with a contract which says you are guaranteed not to earn below zero in any market year when the market index chosen makes less than zero and you have a very strong product.
5. Your Bogle answer to that is a 100% risk investment in the stock market, subject to the whims of the behavioral, political, regulatory, monetary, systemic and nonsystemic risks of the public markets, which we all saw operate so beautifully in 2008, 2000, 1987, etc, etc. You may believe that a long time frame (30 years in your scenario above is enough to make you" rich" enough to not NEED insurance). But I would suggest that captialism is a two edged sword, has to have banruptcies, disruptions, corrections, losses. There have to be two sides, a winner and a loser. The entire market can be a loser at one time. Not likely, I agree, but it has happened and will happen again, and I would argue that it is the little investor who will get hurt the most. You do NOT see the executives of Countrywide in jail, do you? And you do see millions of American homes empty and forecosed upon, and millions lost in real estate by small investors in what they thought were safe, HIGHLY RATED investments, by trusted RATING AGENCIES, and traded in real estate indexed funds. No principal protection, taxed at OI and cap gains rates, currently, If this is how you get "already rich" in your scenario above, I'd say it has some flaws in the system. You can't argue this both ways. Drs aren't rich, don't need estate tax planning, but they are "already rich" having saved all those 30 years of wasteful insurance premiums--which is it? If you are looking at your 401k, plan on looking at about half that amount after taxes and it doesn't look so "rich" anymore does it? I really do think its time to get out the spreadsheets and calculators because the financial misconceptions under which the whitecoats labor are widespread and heartfelt, but I do not believe they are evidence based. Your industrial counterparts, executives, have both pensions and 401Ks, section 79 supplemental life insurance programs, cafeteria plans, and a host of valuable fringe benefits. It is simply not possible to make those up while starting late due to prolonged education and training, and then not saving at a similar rate, which you typically don't. The executive who lives on 200k per year, while racking up benefits and retirement at 150k a year is going to come out ahead of the doctor who spends his300K per year and puts 50k a year into his 401K. Pretty simple math. Then put that in an indexed fund in the market and let it ride the ups and downs of the index and you have a recipe for mediocrity, unless you live in the middle of a 30 year bull run. Even so, its probably not going to be enough to match his or her pension and insurance benefits. It would be great if they just came with your job, but they don't so you have to get them yourself or stay well and live a long time, in which case you'd better have some longevity insurance so you don't run out of money, as you have to protect yourself against both dying too young and living too long.. You can definitely get that with a military career or gov't pension, for which you will trade current income, another method, if you will, of, forced savings, and a good one, at that.
6. Some investment alternatives: equipment leasing funds, currently paying around 7%, after tax but better if in a 401K, similar with nontraded REITs, especially now apartments since so many are seeking rental housing, both considered speculative, but backed by good quality leases of large companies if that is any comfort. Nice that they are not subject to market whims. Downside is that they have current fees to managers which are confusing, to say the least. There is at least some good research and history on many of these.
7. A lot of argument out there about what are ideal portfolios, and most trusts require some form of MPT or modern portfolio theory, or diversification over assets classes, now especially over even boutique asset classes.
8. Sovereign debt has become a global investment issue, where countries debts are inextricably tied to their banking systems when private debt, as in the US (GM, Lehman) are taken over by governments, increasing worldwide debt beyond any peacetime limits previously known. I think this is going to be a game changer, and politicans aren't ready to cram it down yet.
9. Spending exceeding GDP is worldwide problem. Answer seems to be a significant writedown of debt with some severely depressing consequences, worse than we have seen so far. Again, markets are ahead of politics here, so what will happen won't be pretty, likely.
10. Not sure that even strongest insurers can meet obligations in an unprecedented meltdown. Am currently researching reserve issues.
11. Where does the invidivual investor hedge in this case? Can you rely on the traditionall firewalss anymore given the MF Global scandal which seems to have included the custodian Morgan STanley allowing the breach of the never=before touched individual investor accounts? Can you still rely on buying hedging bullion in an ETF Gold Spider or do you have to take delivery of gold?
12. I'd suggest we are not living in simple times and investing isn't simple anymore, if it ever was. My money managers are beating the indexes and the markets, significanly up this year, after all fees. Can they keep it up? Who knows? As I see it, other than a huge risk to my principal, another big problem with index funds is when the indexes are down, right? That is NOT where I want to go.
Rental housing isn not a panacea and unless you love it as a hobby is probably not a good investment for these reasons: 1. highly illiquid for long time 2. tax writeoff early but will be "recaptured" later at ordinary income rates if not done in a correct 1031 exchange, which can be cumbersome and may not come when it is good to "buy" again 3. must buy low. 4. Sell high will result in unusually high tax because of 2, if sell high timing is all you go by 5. major hassle value when least wanted, and can't be timed, as in nice lady tenant's trucker boyfriend becomes abusive when he shows up in town, takes her money and knocks holes in your drywall, so she can't pay rent, while you have call or finals or something. (yes, this happened to us) 6. The more of these you have the more hassle you have, so passive is better, as you will be treated as passive investor, but you won't BE one, so no tax benefits but lots of trouble potential. If you love being a handyman and love bookkeeping, then maybe ok, do a duplex where you control everything from right where you are and can keep an eye on it, but go with your eyes open. 5 years is pretty minimal hold.