Life insurance has always been an estate planning tool. Estate planning, life insurance, wills, and trusts have always gone together like bread and butter.
But, life insurance estate planning techniques have taken a hit since the Obama tax extensions.
Life insurance is sold on three premises.
1) Don’t you love your family, and don’t you want them to be comfortable if you die?
2) You have a large estate and are going to lose a ton of it in estate taxes when you die. You need liquidity (cash) in the estate to pay your estate taxes.
3) Life insurance is a great investment. Well, maybe the investment isn’t the best, but the tax advantages make up for the lackluster investment potential.
All three are true for life insurance estate planning. All three would require a book to justify, explain, defend and discredit.
What’s for sure now is the need for life insurance estate planning designed to pay the estate taxes is gone for most people. Estate taxes at $5 million for a single and $10 million for a couple has solved the estate tax problems for most of us mortals.
However, you can’t trash your life insurance yet. In the wisdom of the Obama administration, the tax deal will expire at the end of 2012. The estate tax is set to roll back to only $1 million. That will hit a lot of the coupon clipping families below the belt.
The bottom line is we don’t know what to do. Your estate planning life insurance type decisions will have to keep that in mind, but under the current law the “you’ve got to pay your estate taxes with life insurance” argument is pretty much out the window.