Drug Use and Life Insurance

When a famous actress like Brittany Murphy dies at a young age, Google gets inundated with questions about whether or not the star took drugs, if they owned life insurance and how much.  The drug searches seem logical.

It’s less commonly known, however, why another popular search is for details about the deceased actor’s life insurance policy.

People want to know whether or not he/she had one, how much the death benefit is, and if it’s going to pay out if they died of a drug overdose.

So let’s answer these questions.

Drug Use & Life Insurance: Brittany Murphy Case Study

If Brittany Murphy purchased her life insurance policy less than two years ago, the policy is said to be in its contestability period.

Why Is Contestability Period Important?

During this period, if the insured dies, the life insurance carrier has the right to go back to the original application and launch an investigation into whether or not the insured lied about anything on the application.

If they did, and if they find a material misrepresentation (such as answering “no” about taking any types of non-prescription drugs when in fact they have), then the insurance carrier can deny the claim.

What If You Lie About Drug Use on Your Life Insurance Application?

This exact thing happened when RBC/Liberty Life Insurance Co. learned that Heath Ledger had died.  He had taken out a policy just 6 months before his death.  Technically, they should not have paid out the $10 Million death benefit because he lied on his application about his drug use, which would have altered their decision to issue a policy.

Unfortunately, his lawyers sued RBC and it was such bad PR for them that they reached a settlement with the family to quite them.  Not fair, but it happens when famous people are involved.

If Brittany Murphy bought her policy more than two years ago, she’s in the clear.  Even if we do find out she died of a drug overdose, and even if she lied about drug use on her insurance application, they’ll still have to pay out.  In fact, you can even commit suicide after the two year contestability period and the carrier still has to pay out.

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Life Insurance Covers Estate Taxes For The Wealthy

Next, why would Brittany Murphy need life insurance?  It is publicized that she earned several million dollars during her acting career.  She earned $1,000,000 for her role in “Uptown Girls” and $4,000,000 for her role in “Little Black Book”.  It is not public knowledge, but it would make sense that her two biggest paydays were for “8 Mile” and “Just Married”, and she appeared in at least a dozen other films that hit the big screen.

Net Worth Determines Tax Rate

So let’s just assume she made $15,000,000 during her career, and her net worth at the time of her death was $10,000,000.

If you die with a net worth of $10 Million in 2009, you have to worry about estate taxes.  The IRS will only allow you to transfer $3.5 Million tax-free to your beneficiaries.  After that, every dollar you pass down gets taxed at a rate of 45%.

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In this case, 45% times $6.5 Million would equal a $2,925,000 tax bill which her estate would owe.  Here’s where life insurance comes into play.  Life insurance is often used to pay estate taxes.  So with a net worth of $10,000,000, you can see that a policy with about a $3 Million death benefit would be just enough to pay the tax bill.

Then, of course, you have her loss of income that life insurance can be used to replace.

Who Has To Pay Estate Taxes?

Now, since Murphy had no children, she probably left most of her estate to her husband.  You can leave an unlimited amount of money to your spouse without incurring a tax bill, but then he will have to worry about estate planning down the line.

I’ve also read, however, that Murphy was extremely close to her mother, Sharon, and wouldn’t be surprised if she left half of her estate or more to her.  In this case, her estate would owe taxes on whatever portion given to her mother that exceeded $3.5 Million.