September often ushers in a re-shifting of our focus, past the delights of summer to the priorities of fall — a season for transitions. This is one reason why September is life insurance awareness month. Now is a great time to consider how life insurance may offer value to you and your family, the available policy types, and how to approach purchasing a new insurance policy or review an existing one.

Although many people may feel that life insurance does not make sense for them based on their stage of life or level of wealth, life insurance may serve as an important strategic step in caring for your loved ones, protecting the wealth that you have accumulated over your lifetime or transferring your business.
 

Why purchase life insurance?

Life insurance is often purchased during one’s working years to help financially protect family members in the case of a premature death. However, life insurance as a financial and estate planning tool goes well beyond income replacement, burial costs and covering debts. 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.
• Supporting a blended family — Life insurance proceeds can help equalize or allow for a distribution of assets among blended family members. This may be particularly useful when balancing the needs of a surviving spouse and children from a prior marriage.    
• Securing financial support for a legacy property — Life insurance can provide a financial endowment for a legacy property (like a family vacation home) to help fund property maintenance and taxes and minimize financial disagreements among beneficiaries.
• 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.

Planning in light of potential tax reform

Although the likelihood of tax reform 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.

Because of the scheduled decrease of the gift, estate and GST tax exemptions after 2025, proactive insurance planning today may offer 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 high gift tax exemption may help fund premiums for life insurance that will be owned in trust.

Choosing the right policy

If you are considering a new life insurance policy (or replacing an existing policy), choosing a policy type can feel overwhelming as there are several types of products available, all with distinctive features. Oftentimes, the “right” policy will depend on the purpose of the insurance, premium cost and your tolerance for risk. To help better understand your choices, consider the following options:

• Temporary insurance that provides a death benefit of a stated amount for a stated duration or term. At the end of the term, the coverage expires or becomes cost prohibitive.
• Permanent insurance — In contrast to term insurance, permanent insurance is designed to pay a death benefit at the insured’s death, whenever that occurs. Permanent insurance generally requires higher initial premiums than term insurance but offers several advantages, including accumulation of cash value, premium flexibility and riders that offer additional benefits.
   

Important questions to ask as you consider life insurance

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

1. 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 for financial support
• Having a blended family, which may include children from different marriages
• Anticipating a large estate tax liability
• Desire to secure an inheritance  
• Owning a business

2. 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.

3. Who should own the policy? Depending on the purpose of the policy, it may be beneficial to have another person or entity own the policy. For example, if insurance is purchased to help cover estate tax liabilities, the insured typically will not own the policy as this brings the death benefit into the taxable estate, thus potentially increasing the estate taxes owed.

4. 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

For more information on life insurance and insurance planning, visit our Estate Planning Fundamentals resource page.

To learn more about how CIBC Private Wealth partners with clients to analyze new insurance purchases or to update an existing policy, the following case studies may be helpful:

Life insurance: Evaluating a new policy 

Life insurance: Evaluating an existing policy 

Caroline McKay is a senior wealth strategist representing CIBC Private Wealth in Boston. She has over 15 years of industry experience.