If you have high insurance premiums, carrying life insurance can feel like a burden. So the recent increase in the estate tax exemption limit to $22 million (for couples) seems like a ‘get out of jail free’ card. Certainly, if life insurance was purchased simply to cover estate taxes, and there will not be any estate taxes, it would seem that dropping the policy is the next logical move.
But no one should drop a life insurance policy without careful consideration of all the options and possible outcomes.
Possible Outcome #1: Your estate is over $5 million, and you live past 2026
The estate tax exemption limit will revert back to 2017 levels (adjusted for inflation) at the start of 2026, so the freedom we are currently experiencing will be short lived. For those who do not have an estate that is greater than $5 million, or who have gifted up to $22 million prior to 2026, estate taxes may not be an issue. But if your estate is still greater than $5 million anytime after 2026, estate taxes will still apply. In this case, the current strategy (paying for estate taxes via the life insurance death benefit) is still the best way to preserve your wealth.
Possible Outcome #2: Your estate is less than $22 million, and you don’t expect to live past 2026
Well, you probably you don’t need life insurance to cover your estate taxes (if that was the sole purpose of the policy), since you probably won’t have estate taxes. But before you just let it lapse, consider a few ways you can make the most out of your policy:
- Eliminate or reduce the premiums
Even if your policy has little cash value, it may be possible to reduce the death benefit and thereby eliminate your life insurance premiums. In that case, the policy requires no further investment, but has a guaranteed payout. Why throw away free money? You can update the policy to eliminate the premium, but don’t let it lapse. The money will be available to your heirs at no additional cost to you.
If you don’t want the guaranteed death benefit to enrich your heirs (has Junior has been getting on your nerves lately?), you can gift the policy and/or change your beneficiary to a charity of your choice. Your donation will go a very long way at no additional cost to you, and it may be tax deductible (check out our blog on using life insurance to donate to charity.)
- Get a Life Settlement
If you cannot reduce or eliminate the premium payments, you may still be able to cash in on your policy by selling it. We discuss a real life case study in which a client earned over $400,000 through a life settlement on a policy he was planning to drop in this blog.
Possible Outcome #3: Your estate is more than $22 million, and you live past 2026
The current change in the estate tax exemption limit hasn’t eliminated estate taxes for you, but may reduce it. If you are using your increased exemption limit to increase your giving now, then you may be able to reduce your estate taxes later. In this case, a corresponding reduction in the the death benefit may be an appropriate step, which will in turn reduce or eliminate your premiums.
If you cannot give away some of your estate now to take advantage of the current lifetime gift and estate tax exemption limit, then you will still be subject to estate taxes for any amount over $5 million, so you probably should not make any changes to your existing policy. The change in laws will not affect your estate taxes in any substantial way.
Possible Outcome #4: Your estate is more than $22 million, and you do not live past 2026
Your estate taxes will certainly be reduced, but not eliminated altogether. More than likely, your best move would be to reduce the death benefit (and premiums) to match your lower estate tax estimate.
At the end of the day, there doesn’t seem to be a case for dropping a life insurance policy altogether. In a few cases, a reduction in death benefit may be in order, or you may choose to sell it. You’re safest bet is to make no changes to your plan based on the 2017 laws, since the estate tax limit is set to revert anyway.
Axia Global can help you determine the best next step for your life insurance policy. We have tools that can help you manage all your life insurance policies in one place, and we have experience with life settlements. Let us help you or your affluent clients; it is our goal to make a measurable difference in your financial life. Just give us a call today.
Note: the statements above should not be considered financial, legal or tax advice, but ideas for careful consideration with your trusted financial advisors and lawyers. For current tax or legal advice, please consult with an accountant or an attorney.
About Axia Global
Michael Roney, Founder of Axia Global, has worked alongside the best financial and legal professionals in the field to craft profitable solutions for even the most complex wealth preservation and estate planning cases. Together, the team at Axia Global has nearly a century of combined experience in the financial services sector.
