Often universal life insurance is purchased to solve an anticipated estate tax issue. What happens when circumstances change and the life insurance is no longer needed or no longer affordable?
The new tax bill, temporarily doubles the annual exclusion amount (the exemption) for estate, gift and generation-skipping taxes from the $5 million base, set in 2011, to a new $10 million base, good for tax years 2018 through 2025. The exemption is indexed for inflation, so it looks like an individual can shelter $11.2 million in assets from these taxes. Another federal estate law provision called portability lets couples who do proper planning double that exemption. So, a couple could exclude $22.4 million. And the annual gift exclusion amount is $15,000 for 2018—up from $14,000 where it’s been stuck since 2013. This tax liability threshold has risen several times in recent years, and as a result, many clients who originally purchased life insurance to cover estate taxes, may no longer need that protection. Additionally an estate lawyer may come up with a more tax efficient way to give a gift to heirs or charities. Through the use of trusts and other planning techniques, a good attorney or CPA can reduce, or even eliminate, a tax burden. Note, the tax bill doesn’t make changes to the rules that step-up basis at death. That means that when you die, your heirs’ cost basis in the assets you leave them are reset at the value at your death.
If the tax is eliminated through the good work of a professional advisor or a change in the tax code, the client’s life insurance may be rendered unnecessary. Keep in mind life insurance policies are not a liability. They are an asset that can be sold often for more than the policies cash surrender value.
A lack of understanding about how to best leverage these life insurance assets, is the reason that over $100 billion in face value of life insurance is lapsed or voluntarily surrendered each year by seniors aged 65 or older. Research suggests that if policy holders knew life settlements were an option, they would have considered selling their policy. Considering the new tax law, it may be good to advise the client to review their estate plan and if appropriate explore selling all or part of his or her life insurance rather than lapsing or surrendering the policy.
To learn about this and other options available to consumers who no longer need or can afford their life insurance policies, contact your sales and marketing professional at 3 Mark Financial by calling 888-533-6275
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