Post-cliff, life insurance a tougher sell

Raising of estate tax exemption to $5M lessens need for policies that shield assets

Jan 3, 2013 @ 3:49 pm

By Darla Mercado

Agents and financial advisers may have a tougher time selling life insurance this year.

The American Taxpayer Relief Act of 2012, which President Barack Obama signed into law yesterday, sets the individual exemption for estate taxes at $5 million and the tax rate at 40%. Had Congress not come to an agreement on the estate tax, the levy would have reset to 55% with a $1 million exemption.

That smallish lower exemption — and jacked up rate — would have provided insurance agents and advisers with a plum opportunity to sell policies for estate-planning purposes. “There's some low-hanging fruit, but the branches are going to be a little higher now that the exemption is higher,” said Judson Forner, an investment analyst with ValMark Securities Inc. “There are fewer simple life cases in terms of sheltering assets from estate taxes when the exemption is at $5 million versus $1 million.”

Though it will be a little harder to close on life insurance sales tied to shielding inheritances from estate taxes, this is the time to encourage clients to think about their estate planning — aside from just the tax angle, according to Jim Swink, vice president of Raymond James Insurance Group.

“Estate planning isn't estate tax planning,” he said. “It's not just the estate taxes that are of interest to me right now.”

Life insurance, for instance, can still play a vital role in establishing trusts for families with special-needs children or for small-business owners. Further, it can ensure that clients leave a legacy for their children while permitting those investors to squeeze returns from their own investments.

“It allows you to be more aggressive in your other investments because you decided to leave something for your kids,” Mr. Swink said. “Now you'll get to take a little more risk and get a little more yield. And none of that has to do with estate taxes.”

In some ways, knowing that the exemption will stay at $5 million can open the door to an estate-planning conversation with a client. Investors at the highest end of the market will be in search of life insurance strategies, predicts Bob Kerzner, chief executive of LIMRA. “Those who have larger estates will contact their estate-planning attorneys,” he said. “There's clarity that the estate tax isn't going away, and at the very high end, this could spur some [life insurance] sales over the next 12 months.”

Mr. Forner noted that regardless of the size of an estate and the tax exemption, irrevocable life insurance trusts are still an essential part of estate planning. Such policies can protect assets from creditors, spendthrift heirs and their significant others. As a result, it's still worthwhile for advisers to revisit clients' estate plans, even if the estate tax worry isn't on the table anymore.

“ILITs are still important for being able to control things from the grave,” Mr. Forner said. “There's a lot of protection with ILITs and life insurance regardless of what the estate tax laws are.”


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