No Estate Taxes? You May Still Need Life Insurance

Increases in the estate tax exemption (up to $11.4 million per person as of the date of this writing) has an impact on how some people are thinking about life insurance, says ThinkAdvisor in the article “Estate Planning Is Still Important.” However, before making any changes, consider the larger picture and think long term.


Let’s start with why many people buy life insurance policies. As young parents, they buy life insurance so a surviving spouse and family will be able to continue to live in their home, pay the mortgage and send children to college.


Another reason for life insurance is to cover the cost of estate taxes. The new higher estate tax exemption referenced above is federal. Your heirs may still have state estate taxes and inheritance taxes, depending upon where you live and the laws in effect at the time. Having an insurance policy will still help with the costs of settling an estate and paying any taxes that are due. 


Also remember, the new tax exemption has a sunset date. The year 2026 may seem far away. However, it will arrive, while we are busy with our lives. It may be much harder and more expensive to purchase a life insurance policy in 2026 than it is right now.


If someone is very old or in ill health, they have a different window of time for planning. However, if you are in your middle years or relatively healthy, now is not the time to put off purchasing life insurance or to let an existing policy lapse.


We know that political landscapes change. If they do, and you want to buy a policy, there may be additional obstacles in the future.


Life insurance also serves as a tool for your estate. If one child wants a specific asset you own (such as a home or a business), life insurance can become an equalizer.  Or, if you have a person (child or otherwise) in mind as your successor in your business, having a life insurance policy can provide a source of funds for the person to buy your interests in the company after you pass away.


If your estate plan seeks to distribute an inheritance equally from assets in a traditional IRA, life insurance can become an equalizer. Or, suppose one child is in a much higher tax bracket than the others. Upon receiving the IRA distributions, they will have to pay more in taxes than the others. The child in the lower bracket will end up with a larger sum of money, having lower taxes on their inheritance. This could lead to sibling arguments, which are not uncommon when brothers and sisters become heirs. Once again, the insurance policy proceeds can be used to make up the difference.


You get the takeaway here, the extra liquidity is always helpful.


Another point to consider is who owns the insurance policy? If it is owned by a trust, you may not have the legal right to make a change. If the trustee does not agree that the policy should be liquidated or cancelled, they may not allow the change to go forward. 


Your estate planning attorney will be able to review your life insurance policies if you provide them to us. Your estate plan works best when all parts work in concert.


Reference: ThinkAdvisor (Jan. 11, 2019) “Estate Planning Is Still Important”


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