Life Insurance, the Forgotten Asset Class

Estate Taxes are not the only reason to own Life Insurance. Life Insurance can be regarded as a vital, asset class separate from other savings and investments that adds diversification and certain unique benefits. With the November 2016 presidential and Congressional Election looming, the possibility of a Clinton presidency and possible Democratic Congress, there is the specter of the Estate Tax exemption being reduced to $3.5 million dollars. No one can predict for sure what will happen to the estate tax exemption amount, but the possibility exists that the current amount may be lowered, and more estates would be subject to the estate tax.

There are also current proposals to eliminate the stretch out of required minimum distributions from inherited retirement accounts (“IRAs”). Proponents of the change in IRA stretch out rules cite it as a way to balance the federal budget and an effort to restore “fairness.” Eliminating the stretch-out also, according to the proponents, would simplify the tax code. If such changes to our tax laws do pass, these tax increases could be very disruptive to existing estate plans. Certain life insurance products present an option that can help replace the stretch out of inherited retirement benefits and hedge against the possibility of a lower exemption making more estates taxable. Time-tested estate planning strategies can help ensure that the life insurance death benefits are estate tax-free.

If clients are to take advantage of a life insurance strategy, it is important to look at purchasing coverage while the proposed insured is relatively young and still relatively healthy. Waiting could cause coverage to be denied to become cost prohibitive. For those that are uninsurable or for whom the cost does not make economic sense, a charitable remainder trust might be an option to replace the lost retirement plan stretch out benefits. For those that are currently insurable, but have cash flow issues, consider purchasing term insurance with a guaranteed conversion option, to preserve options for later.

Finally, for those that already purchased life insurance it is crucial to have your policy reviewed by a qualified agent. For instance, many people still carry an insurance policy purchased more than ten years ago under very different economic conditions. Given the unprecedented, sustained, low interest rate environment we’ve experienced for the last ten years, these policies should be reviewed for performance and competitiveness of premiums. Also, policy features and benefits have evolved, and with changes in economic conditions, a policy that may have met a client’s goals in the past may need to be recalibrated to meet their goals today.

We encourage clients to discuss options with their financial advisors and insurance professionals. Though we do not offer insurance and act solely in an advisory role, we are happy to facilitate discussion from the perspective of how we can help integrate these strategies into a comprehensive estate plan. Life insurance still enjoys many favorable tax attributes, including income tax-free cash value build-up. The Life Insurance Industry still has effective lobbyists who do a very good job of reminding legislators why life insurance plays a critical role in the financial security of American families. As a result, we encourage our clients not to overlook this asset class as an excellent way to diversify portfolios and transfer certain risks to insurance companies. Life insurance can be a very good way to make certain financial goals self-completing in the event of premature death.