WSJ Article-Consider Keeping Your Life Insurance
Mar 16, 2011
Jamie Fleischner

Jamie Fleischner

16 Mar, 2011

WSJ Article Posted March 13, 2011

Changes in estate taxes have prompted some families to consider dropping their life insurance. But for many, there are better options than allowing coverage to lapse.

In recent years, the amount an individual can shelter from the estate tax has risen steadily, from $675,000 in 2001 to $5 million in 2011 and 2012. The trend is causing families with estates below that figure to re-examine the need for life insurance obtained to help heirs cover the tax.

Faced with continuing premium payments, “more of our clients are asking themselves whether to keep the insurance,” says Richard Connolly, an insurance agent at Ward & Connolly in Columbus, Ohio.

The answers are tied to your health, financial goals and the type of policy you have. To start, “if your health isn’t as good as it was when you purchased the policy, chances are the economics of maintaining the policy are attractive,” says Mr. Connolly. To find out, ask the insurer to project the total premium payment required to keep the policy in-force to various ages, such as your life expectancy and age 90. That way, you can calculate the return your heirs will receive at various points in time on the premiums you will have paid.

Moreover, while it may no longer be needed to cover an estate-tax liability, the policy may help solve other problems. Mr. Connolly points to clients — a couple, ages 85 and 90 — who have spent more of their savings than anticipated. “At this point, their $750,000 life-insurance policy will fund the inheritance they want their children to receive,” he says.

Due to uncertainty about the future of the estate-tax exemption, maintaining coverage also could be a smart tax move for people who might get caught if the individual estate-tax exemption drops back to $1 million in 2013, as it’s currently scheduled to do.

If you’re too cash strapped to continue paying premiums, some recommend asking your heirs to cover all or a portion of the costs. (As long as the policy is owned by a trust for their benefit, there are ways to do this with no gift-tax consequences.)

There also are ways to restructure coverage to make premiums more affordable. For example, if you own whole or universal life insurance, you can ask the insurer to reduce the death benefit to a level at which you can afford to make payments, says Gary Cotter, a certified financial planner at Cotter Financial in Sun City Center, Fla. Or, you can keep the same death benefit, but shorten the period for which the coverage will be in force.

Those who need cash may be able to surrender a policy to the insurer for a lump sum. If you have a relatively short life expectancy, you may be able to sell your policy for a higher amount in a so-called life settlement transaction. With these, an investor buys a stranger’s life-insurance policy for a lump sum and continues to pay the premiums until the policyholder dies to collect the death benefit.

A sale or surrender has tax consequences, so consult an adviser. Be aware, too, that if your life-insurance policy is held in a trust for your heirs, the money won’t be available to you.

But your heirs can give you up to $13,000 a year tax-free.


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