Premium-Finance Life Insurance and Estate Tax Repeal

Premium-Finance Life Insurance and Estate Tax Repeal

Although it remains in question whether the much-maligned federal estate tax will be repealed, there is potentially a significant downside for those who will be the most exposed to what many consider to be a “death” tax.

Ironically, this detriment could conceivably result from a cunning plan to mitigate the tax risk. Like many tax-related issues, this situation warrants some explaining:

Many people who are facing the prospects of estate tax logically take steps to minimize their heir’s exposure, and very often acquire premium-financed life insurance.  Without attempting to oversimplify, this policy entails the leveraging of borrowed money (plus accrued interest) against gains made from investing this money.  As long as interest rates and the broader markets behave according to expectations, this can generate upside far in excess of the underlying life insurance fees plus estate tax requirements.

Should the federal estate tax go the way of the dinosaur, it is likely that a significant portion of wealthy individuals who participate in premium-financed life insurance will be looking for the exits.  This is because most high-net worth individuals who use this method can’t justify a higher exposure to risk knowing that their estates will not be meaningfully attacked by the government.  In short, why risk betting against a tax-generated loss if the tax is no longer there?

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However, this cost-benefit analysis shouldn’t be extended into an all-encompassing blanket statement.  Like all personal investment cases, the devil is in the details, and there is a distinct possibility that some families seeking to unwind their premium-financial life insurance policies are destined for a disappointment.  Depending on the terms and conditions of each individual’s policy, there is a sizeable chance that unwinding the policy could incur a significant loss.

To read about the complications involved in unwinding premium financed life insurance and to determine if this option is right for you, click on the link below:
What Happens With Premium-Financed Life Insurance Without A Federal Estate Tax | Forbes


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