This is the second blog in a four-part series that focuses on purposeful planning this year amidst some uncertainty.
Read part 1: Is uncertainty preventing you from planning?
Read part 3: Flexible gifting for possible tax reform
Read part 4: Four planning ideas that can help further your wealth planning goals

A well-constructed and comprehensive wealth management plan involves the periodic evaluation of your goals and objectives. Such evaluations can often lead to the conclusion that a life insurance program, when structured and monitored properly, can play an integral part in your overall wealth management plan.

Owning life insurance can be an important strategic step in caring for your loved ones, especially those who depend on you for their financial support. It can help protect and transfer the wealth that you have earned or accumulated over your lifetime, as well as assets gained from investment activities. Life insurance can also be an effective tool to provide liquidity to cover estate taxes, replace lost income, eliminate debt or provide for specific needs.

1. Consider the purposes of life insurance

Although the likelihood of tax reform during the Biden administration remains uncertain, we do know that many provisions of the Tax Cuts and Jobs Act enacted in 2017 are set to expire at the end of 2025. This includes a reduction of the estate, gift and generation-skipping transfer (GST) tax exemptions to $5 million, adjusted for inflation. This reduction would likely increase the number of families that will be exposed to, or see an increase in, estate tax liability. 

Life insurance can play a significant role in estate and tax planning in several ways, including:

• Satisfying estate tax liabilities
  Life insurance can provide immediate liquidity at death to help replace wealth lost to payment of estate taxes, or to help avoid a forced sale of assets, such as closely held business interests or concentrated stock positions.
• Managing trust taxes
  Proceeds from life insurance owned inside an irrevocable trust could be used to help pay trust income taxes on assets that are sold or liquidated following the grantor’s death. Insurance proceeds could also be used to help satisfy mandatory or discretionary distributions to trust beneficiaries in order to avoid selling assets and recognizing income. 
• Coordinating business and estate plans
  For business owners, life insurance can play a critical role in helping to successfully transfer business interests after an owner dies, and can help equalize the distribution of assets among family members who participate in the business and those that do not. 

Because of the uncertainty regarding potential tax reform and the scheduled decrease of the gift, estate and GST tax exemptions after 2025, proactive insurance planning today offers several benefits including:

• Securing your insurability based on current health
  A change in health down the road could significantly affect the cost of insurance or even your ability to purchase insurance in the future.
• Pricing that favors younger applicants
  Each year you wait, the cost of insurance increases.
• Funding premiums in a currently favorable environment
  The current gift tax exemption of $11.7 million may help fund premiums for life insurance that will be owned in trust. Alternatively, the low interest rate environment may help make funding life insurance premiums through loans and similar techniques tax-efficient.
• Having coverage and planning in place should there be a reduction of the gift and estate tax exemptions prior to 2025.

2. Review existing and proposed policies

As you contemplate whether to purchase new life insurance, or are reviewing existing coverage, consider the following:

• What is the policy’s intended purpose? Your needs and objectives can vary with your circumstances and may include:
  • Having a young family that depends on your income
  • Having a blended family, which may include children from different marriages
  • Anticipating a large estate tax liability
  • Owning a business

• How much insurance should you carry? The amount and type of coverage will depend on your objectives and long-term needs, but should consider:
  • The purpose of the coverage
  • The time frame for coverage
  • The amount of flexibility you may need to skip or change a premium or reduce coverage in the future
• How should premiums be funded? There are several different methods available to fund premiums, including:
  • Outright gifts
  • Loans to the trust that owns the life insurance
  • Use of existing trust assets

If you already own life insurance, it is important to regularly evaluate your coverage to ensure that the policy and the death benefit meet your needs and goals. Given the long time horizon that insurance is often owned, the “need” for insurance can change significantly over the course of ownership. For example, clients who have sufficient wealth may no longer need insurance originally purchased for income replacement, but could repurpose the death benefit to now cover estate taxes. Before stopping premiums on existing coverage or surrendering a policy, speak with a planning professional about your options and the possibility of replacing the coverage for a new need. 

If you would like more information about life insurance planning, please reach out to your CIBC Private Wealth advisor or an insurance professional. 

Caroline McKay is a senior wealth strategist with CIBC Private Wealth’s Boston office, and has 13 years of industry experience. In this role, she works closely with relationship managers and clients to develop and implement estate and wealth transfer strategies as part of the firm’s integrated wealth management process.