Do You Need Life Insurance for Life?

Not everyone needs life insurance. And for those who do, some situations can be solved with simple solutions, while others may require more complex planning. It’s worth noting that insurance of any kind is simply a transfer of risk. You pay premiums to shift the financial risk from you to the carrier.

Life insurance is typically used to cover the risk of losing income, settling an illiquid estate, or paying an estate tax liability. If none of these risks apply, then it’s likely no coverage is needed. If they do apply, there are multiple solutions to choose from.

Term policies

Your income is likely the source of funds for the family’s lifestyle, college tuition, and mortgage payments. If one spouse passes away, the survivor may not only lose that income, but may have their own affected by the need to reduce working hours, or incurring new costs such as childcare. A term policy provides the temporary coverage necessary until there is no longer a financial risk of being able to afford the current lifestyle.

Illiquidity issues

For small business owners or farmers, a big concern can be when wealth is tied to an illiquid asset. Life insurance can provide cash for final expenses and can help prevent the need for a quick sale of the asset at a deep discount. Depending on other available assets, a term policy may again be a simple and easy solution if there is a plan to sell the asset in the future.

Large estates

For individuals who have amassed wealth exceeding the Estate Tax exemption amount (either federally or at the state level), insurance protects the heirs’ inheritance from being reduced by taxes. In this scenario, the premiums paid and the benefit received can offset the tax bill in part or in whole. This allows the full estate to be distributed to the beneficiaries, net of tax. At this level, things can get complicated.

Life insurance and estate taxes

The right kind of life insurance can help cover estate taxes incurred on your assets. It is important to remember that policies on your life are included in your total estate. If estate taxes are a concern, and life insurance is even part of the solution, properly titling the policies within your overall estate plan’s scope is important (i.e., using an Irrevocable Life Insurance Trust).

Remember, the estate tax exemption is a moving target—and can change if you move:

• Currently, only 12 states (plus D.C.) impose their own estate tax, and
• 7 have some form of gift or inheritance tax
• On the federal level:
  • The exemption doubled in 2017 with the Tax Cuts and Jobs Act, and is indexed to inflation ($11.7 million in 2021)
  • It’s scheduled to sunset in 2025 back to pre-2017 levels (~$6-7 million in 2025 dollars), and
  • It’s a hot topic in Washington right now for sweeping change (a potential decrease to $3.5 million!)

Taking all of that together makes for tough planning—not to mention the impossibilities of predicting death!

Permanent policies for high-net-worth estates

If you are in a position to have a taxable estate, there is a good chance it will be a risk for as long as you live—unless your wealth decreases in value, is spent down, or the tax itself goes away. Instead of covering a ‘Term’ of years, you may need protection that is more permanent.

There are three types of permanent policies: whole, universal, and variable—each with their own pros and cons and variabilities between policies and carriers. However, all three (and any of their variances/hybrids) provide permanent, ‘lifelong’ coverage.

Instead of spending your time trying to distinguish the nuances between the universe of options—and what makes sense for you, give your CI Private Wealth advisor a call. We are happy to help walk you through your options and implementation of the policies you choose.

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