Prior to the tax law changes of 2012, life insurance policies were commonly used to provide cash on hand for the decedent’s heirs to pay off any estate taxes. Now that estate taxes will apply to fewer estates, estate planning attorneys are exploring alternative uses for life insurance policies. A recent article discusses some of these uses.
Permanent life insurance has an investment component against which the policy holder can eventually take out a loan. Not only are these loans tax free, but they do not need to be repaid during the lifetime of the policy holder. Many policy holders choose to take out these loans to assist their children with college tuition, or pay for medical care during their retirement.
Life insurance is now more attractive in employer retirement plans as well. When a person buys a life insurance policy through a pension plan, he or she uses tax deductible dollars to make the purchase. This way, insurance benefits far exceed the cost of the premiums.
The tax law changes have also simplified life insurance ownership. Prior to the changes, people routinely moved ownership of their life insurance policies to a trust in order to remove value of the policy from their estate. Due to the higher estate tax exemption, however, many people can own their life insurance policies directly.