Expert Bruce Rothbard, CLU®, ChFC® answers questions on incorporating life insurance into estate plans

How is life insurance utilized as an estate planning tool?
Because both federal and state estate tax laws are ever-changing, liquidity is essential for HNW clients. Life insurance provides instant liquidity for estate plans and also provides the best leverage of annual exclusion gifting (currently $14,000 per individual). Estate tax bills are due within 9 months of death. Avoiding a fire sale of assets to come up with the liquidity necessary to pay for estate taxes, along with the extra income tax burden, is easily accomplished with life insurance.

Who should incorporate life insurance into their estate plan?
Ironically, life insurance makes sense for any individual, whether they have an estate tax issue or not. Life insurance is incorporated for the sole purpose of leaving a legacy for loved ones. Its many uses such as business succession planning, legacy planning, charitable planning, supplemental retirement income, asset protection and many others make it a very good alternate asset class for consideration.

What are some of the risks involved and how can they be avoided?
The life insurance industry and its products have evolved. There have been many recent changes in internal costs associated with declining interest rates and other internal factors. You must do periodic reviews to ensure policies issued years ago are still on track to perform as anticipated. Another looming problem can be the individuals acting as fiduciaries (trustees, attorneys, accountants, etc.) who rarely review policy specifications to ensure they are on track with the policy owner’s original assumptions. Utilizing an advanced life insurance planning specialist helps avoid and sometimes completely eliminates any potential risks associated. An objective specialist stays up-to-date on the latest life insurance products and strategies and will properly perform periodic policy review for clients.

How can advisors provide life insurance solutions to their high-net-worth clients for estate planning?
Each client is different and requires their own customized strategy such as premium financing, private financing, charitable planning, legacy planning, income replacement or business succession planning. A quality life insurance specialist can implement different techniques based on each individual client’s goals to avoid tax ramifications.


What are the most common misconceptions you see about life insurance and estate planning?
One of the most common misconceptions is that life insurance is difficult to understand when it is simply another class of asset. In estate planning, life insurance is the equivalent to a stock or bond. However, it has significant tax advantages such as tax deferral, asset protection and creditor protection that other assets do not. Another common misconception is that life insurance is somewhat complex, but in the hands of an expert is can be as simplistic as other asset classes.

How should advisors address client life insurance policies if estate tax laws change?
As indicated previously, ongoing policy reviews are imperative to keep in line with the ever-changing estate tax laws, both state and federal. Under the worst-case scenario, all estate tax laws are repealed. That simply means your heirs will not need the liquidity to pay taxes, they will simply receive more inheritance estate tax-free. Even the worst-case scenario is still a positive.

If estate tax laws change, does it mean that life insurance will no longer provide tax efficiency and immediate leverage?
No, life insurance is still an extremely effective asset for the benefit of heirs. Hence, the reason so many estate planning attorneys recommend life insurance in a quality estate plan. The general characteristics of life insurance, regardless of possible tax law changes, still make it a very viable asset class to have in your portfolio.

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