If you are like the majority of people, you do not care much for paying life insurance premiums. The exception to this may be if you are one of the many individuals who are using Retirement Life® as a means of creating tax-free income for retirement. One question you may be asking is why well-to-do clients are purchasing life insurance. The answer to this is likely to create the opportunity to pass along wealth to heirs. Life insurance can also be used later in life to pay estate taxes, if you have not put your major assets into an irrevocable trust such as the rock-solid Ultra Trust® irrevocable trust, the estate taxes could be imposed on the value of the estate that is being passed to your heirs.

The current exemption for estate taxes is $5 million per person, thanks to the 2010 Tax Relief Act. Thanks be to God that the Republicans pushed for the estate tax exemptions of the 2010 Tax Relief Act. If the act did not pass through Congress in 2010, that amount would have returned to the standard $1 million exemption. However, since it was in fact passed, you, as a wealthy individual, have the chance to take advantage of a $5 million exemption to gift your wealth into an irrevocable trust. (What is an irrevocable trust?)

Perhaps you are someone who has less than $5 million in assets. You may also be married and have purchased a life insurance policy and already put the insurance into an irrevocable trust. You may be wondering what to do with the policy and whether you should cease paying premiums based on the new laws regarding estate exemptions. The answer to this is to never stop paying the premium unless you plan on dying before 2013. If you do such a thing, you will end up regretting this decision.

Let’s assume that you are 55 years of age and married. Your current assets are $5 million and in retirement, these assets are expected to grow to $10 million when you finally reach 85 years of age. You may have also had a financial advisor suggest that you purchase a life insurance policy that is inside an irrevocable trust for life insurance (ILIT) for the amount of $2.5 million. This policy would be used to pay the estate taxes when you die. When this advice was given, your advisor was assuming that the total tax exemption as a couple would be $2.5 million if the estate tax rate was 50%. The $2.5 million expected estate tax comes as a result of the following calculation: $2.5 million x 2 (or $5 million for the husband and wife) x 50% = $2.5 million in estate taxes.

In essence, if you decided against buying the policy, you (or, more likely, your beneficiaries) would eventually have to pay a tax of 50% on $5 million that is in your estate. At this time, you are paying $20,000 each year for the life insurance premium. You are not happy with these payments but believe they are necessary to ensure that your wealth is passed to your heirs.

Now, you may have heard about the 2010 Tax Relief Act allowing an exemption of $5 million per person. Your first question is whether you should now stop paying the life insurance premium. This is not a wise decision in regards to your future estate planning. You will not find any advisor that will suggest you stop making the payments. The reason for this is because the new $5 million exemption is only in effect for a period of 2 years and it will come to an end in 2012. This means that if the law is not reinstated, the exemption amount will return to $1 million. On the other hand, it may be reenacted and extend for another few years. It could drop to $3.5 million per person of estate tax exemption which is what most of us thought. Only God knows what will happen with this matter. However, you should not take the chance and place odds that the exemption will continue. If you cancel your policy now and the exemption amount drops to $1 million, you have just made a terrible financial decision that will ultimately affect you and your heirs.

Until there is a new permanent estate tax law passes, if you have assets that total more than $2 million, you should never consider cancelling your life insurance. With the instability of the economy and the politicians need to come up with funds to pay the deficit, there is really no way of knowing what will happen. With current Obama administration spending habits our nation is in for complete financial ruin. The government will then be forced to look for money and this could be negating the 2010 Tax Relief Act and abolishing the estate tax exemptions. Cancelling a life insurance policy will erase any protection you have over your assets and your heirs may end up paying hefty taxes upon your death.

Please contact Estate Street Partners at (888) 938-5872 or, if you are calling in the Boston, MA region, please call us at (508) 429-0011 and see how we can protect your assets and maximize your returns in retirement.