Would life insurance be available for a $1.9B Powerball winner?

Update: Saturday night's drawing yielded no winners, so the new Powerball jackpot increases to $1.9 billion for Monday night.

There might not be enough life insurance available to cover a solo winner of the massive $1.5 billion Powerball jackpot.

The next drawing is slated for Saturday night, with $745.9 million available to a single winner who opts for the lump sum. Big winners are these big jackpots should immediately put together a team of advisors, attorneys and even psychologists to aid with financial and mental planning, said Richard M. Weber, a 56-year veteran of the life insurance industry.

Part of that planning should include at least the option of purchasing enough life insurance to cover the estate tax bill should the winner suddenly pass away, he said. That means a policy worth hundreds of millions. No one insurer could underwrite such a massive policy. Whether even a team of insurers could handle it remains to be seen.

“I'm not sure if the industry is capable of issuing $400 or $500 or $600 million of life insurance today. I don't know that underwriting today is up to that kind of buy.”Richard M. Weber, principal, The Ethical Edge

"I'm not sure if the industry is capable of issuing $400 or $500 or $600 million of life insurance today," Weber said. "I don't know that underwriting today is up to that kind of buy."

Weber is a principal in The Ethical Edge, which provides professional life insurance consulting services to businesses and advisors on behalf of their clients. He once consulted on a $300 million life insurance transaction.

"It took 17 different carriers to be able to manage placing 300 million, with the reinsurance and everything else that was involved," Weber recalled.

Estate tax bill

The concern with high-dollar earnings such as a big lottery win is the estate tax. For those wealthy folks who pass away in 2022, the exemption amount is $12.06 million (it will be $12.92 million for 2023). For a married couple, that comes to a combined exemption of $24.12 million.

That means anyone with an estate less than those figures escapes the estate tax. In reality, only a small percentage of Americans die with an estate valued at $12 million or higher. But for those that do, their most of the estate's value is taxed at a hefty 40% rate.

Setting up a life insurance policy to fund the estate tax bill is a good way to net "a reasonable savings," Weber said. "A six, seven, eight percent, per annum discount wouldn't be unreasonable."

The estate tax exemption was hiked considerably in the 2017 tax bill. However, the current estate and gift tax exemption is scheduled to sunset at the end of 2025. After that, the exemption amount will drop back down to the prior law’s $5 million cap, adjusted for inflation. In addition, the 40% maximum gift and estate tax rate is set to increase to 45% in 2026.

"You can currently dispose of a lot of wealth through gifts, or inheritance prior to the sunset," Weber said. "Then the question is, who wins the 2024 election? That's probably going to have a lot to do with what happens with the sunset."

Annuity carries risks, too

While most lottery winners take the lump sum, many financial advisors recommend taking an annuity. This option pays out the $1.5 billion in 29 annual installments and permits the lottery winner to avoid the staggering financial decisions upfront, advisors say.

However, there are still hidden tax bombs that life insurance planning can help cover, Weber said. Since the lottery annuity is “period certain,” it means somebody is going to get that money, even if the winner or winners die. And if they do, the IRS is coming to collect taxes on the entire $1.5 billion.

In tax parlance, it is known as “income in respect of a decedent,” or income the deceased person has yet to earn.

Life insurance has a variety of uses and many of them, along with charitable gifts and inheritances and other strategies, can help a lottery winner avoid a lot of taxes, Weber said. But in reality, the winner might not be interested.

"Some people might say, 'That's interesting, but I'm going to have a great deal of fun. I'm going to buy one of those mega yachts, and if I do it right, I'll spend it all before I die.'" Weber said. So then there's no worry about the estate taxes."

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.