The new tax law & your life insurance options: What to know
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The new tax law had people rushing to pay their property taxes before the end of the year and Googling the deficit. The law touches on many areas of your finances, from your local property taxes to your income. It could also impact people shopping for life insurance or those deciding whether they should hold on to their policies.
Permanent life insurance policies have long been used by high-net worth individuals to create tax-free inheritance for beneficiaries. Notably, they allow affluent families to avoid the estate tax, which is levied on wealth transferred from a deceased person to their heirs. (We've got more on filing 2018 taxes here.)
Before the new law, estates worth up to about $5.5 million were exempt from the estate tax. That exemption doubles under the new law, to $11 million for individuals and $22 million for couples. As such, whole life insurance policies purchased to avoid the estate tax may seem obsolete for anyone with an estate worth less than $11 million — and some estate planners have called on people to sell those policies.
Policyholders should stop and think before deciding to cancel or surrender their life insurance policies, said Martin M. Shenkman, an estate planning attorney and founder of Shenkman Law.
"The knee-jerk reaction of tons of people is, 'Oh, I'm never going to have a $22 million estate. I don't need this insurance. Let's cancel it,'" Shenkman said.
Even without the need to pay the estate tax, permanent life insurance is still a useful tool for protecting your assets, Shenkman said. For example, life insurance has the advantage of providing quick cash to beneficiaries when you die, unlike other parts of your estate that are tougher to turn into cash, like real estate, a business or artwork.
Permanent life insurance policies are still useful if you want to leave your wealth to family members who won't want to share their inheritance, like children from a previous marriage and a new spouse. Instead of fighting over a house, they can split cash.
In addition, you pay many of the costs of whole life policies up front, so after a certain point it may become more efficient to hold on to it.
One of the main pieces of the tax law is a cut in the corporate income tax rate from 35% to 21%. This should save money for life insurance companies, said Doug Meyer, managing director of insurance for Fitch Ratings, a credit rating agency. However, it's too early to tell whether these savings will trickle down to consumers in the form of lower life insurance premiums.
"I suspect the insurance companies are still trying to make sense of what the new tax landscape will look like and what's appropriate," Meyer said.
Life insurance rates are already close to 20-year lows, so any additional savings will only make a new policy a better deal. (Don't wait too long. Premiums rise with age.)
While the cuts to the corporate tax rates are permanent, almost all of the other provisions of the tax law expire after 2025, including the estate tax law. A new Congress may change the law even before then, Shenkman said. The estate tax, in particular, has been subject to a constant tug-of-war since its inception, with rates and exemptions changing every few years.
"How foolhardy to cancel a good plan on the anticipation that this estate tax change is going to last forever," Shenkman said. "It may well not."
While you may be tempted to jump in response to the new law, it's a good idea to avoid making a rash move, especially if it involves your end-of-life planning.
"People should not make simplistic decisions without a broad analysis of their circumstances, the new law, the economics and everything else," Shenkman said.
Life insurance polices last a long time, while tax laws come and go, so if you're in the market for life insurance, it's important to broadly consider your options.
Permanent life insurance policies, which double as investment vehicles, are meant to last your whole life (so long as you're paying premiums). Term life insurance policies, which cost less, last for a fixed period of time, usually 5 to 30 years. They're meant to provide a financial cushion to your family, in the event of your death, while they're dependent on your income. Our Policygeniuses can help you figure out what life insurance policies are best for you, but, if you're not ready to pull quotes, here's a crib sheet to deciding between term or whole life insurance.
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