The life insurance industry has long thrived on the fear that your heirs will be stuck paying a “death tax” on your estate and end up forced to sell long-held family assets to pay for it. For many asset-rich, cash-poor clients, the only option was a life insurance policy that provided funds their heirs could use to pay the 40 percent tax on estates of $5 million or more.
That is going to change. With the passage of new Tax Cuts and Job Act, the size of affected estates has doubled, changing how this pool of clients will look at their life insurance needs and how insurance companies approach them.
With the passage of the tax cut, a couple can amass an estate of up to $22.4 million without federal tax when they die, making it unnecessary for many consumers to find a funding source like life insurance to pay the estate tax. That will not only change a key selling strategy for the life insurance companies, it will mean that many of those who bought policies based on the estate tax will be taking a hard look at the insurance they own.
For the insurance industry, estate planning has been one of the most important reasons Americans buy life insurance. The Insurance Barometer Study conducted by the Life Insurance Marketing and Research Association (LIMRA), found it to be the third most popular reason to buy policies with 63 percent of survey respondents citing their estate as a major reason to buy life insurance.
While the estate tax has only affected two out of 1,000 estates, according to the Congress’s Joint Committee on Taxation, it has had a disproportionate impact on small-to-medium-sized business owners and property owners like farmers and other middle-class wage owners (the general assumption has always been that larger estates have other options for avoiding the tax or raising capital to pay it).
As welcome as the change has been for advisors, it is not permanent. The entire Tax Act’s provisions will sunset in 2026, meaning the estate tax exemption is scheduled to go back to $5 million. More likely, the “death tax” issue will be back for a political fight in eight years.
In the meantime, the change in the regulations will open up an opportunity for an agent or advisor to reach out to those who bought their life insurance based on the old estate tax level, are of advanced age and likely to die before the law is back before legislators. Agents and advisors can use this time to review policies and needs to see what to do with it.
It’s a good chance to take a new look at all their insurance needs, an area about which many Americans are not well informed. As the needs of a client’s family change – as well as the laws that impact their investments – it is important to review their life insurance and to see if they need more or a different type of coverage.
The Tax Act also made the secondary market more appealing by changing the way life settlements are treated under the tax code. Policies that are settled at a gain will receive a more favorable treatment, saving money for those who sell them.
All told, the tax changes are likely to put more policies into the secondary market as consumers understand the estate tax change and seek to receive cash for policies they would otherwise want to pass onto heirs or change the types of insurance products they can use while they are still alive.