Term and permanent life insurance policies are used to help the very wealthy and the not-so-rich cover estate taxes or balance financial relationships among heirs. Estate planning experts suggest a thorough review of the purpose of the insurance before choosing between term or permanent policies.
Affluent Californians who die before the end of 2012 have fewer tax worries than individuals who pass away later. That’s because federal exemptions and the estate tax rate are expected to change. Strategies among estate planning attorneys, tax advisers and financial consultants differ.
If Congress does nothing before year’s end, estate tax exemptions will fall from above $5 million to $1 million. The tax rate may jump from 35 to 55 percent for assets above the exemption amount.
Sources explain that a life insurance policy offers immediate liquidity at death and can be used to cover taxes that would otherwise be paid by heirs. Some states add inheritance taxes on top of the IRS burden, which may also be paid using insurance.
Term life insurance is cheaper than a permanent policy. Term policies cover a measureable time period. Permanent plans stretch to a policyholder’s death. Term insurance is renewable but costs more as the policyholder ages. However, with a paid-up, permanent life insurance policy, time is not a worry. Policyholders never have to be concerned that they live longer than the policy terms. Health issues can drive up premiums for individuals who purchase plans in later life.
Experts say the amount of insurance an individual needs for estate purposes depends on the tax structure and the expected liquidity of the estate minus a policy. Any change in the estate tax rate may be dependent upon the person who wins the White House.
Life insurance isn’t just used to pay estate taxes. Policies can be arranged to help a spouse remain in a marital home, mortgage free. Insurance can be used to equalize business assets between family members or secure a future for a loved one.
Source: foxbusiness.com, “Life Insurance Muzzles Estate Tax Bite,” Chris Kissell, Oct. 29, 2012