With many Americans reviewing their financial situation after the passage of the Tax Cuts and Jobs Act, it is important that any life insurance needs are also reviewed at this time. The reality is that many people do not think about life insurance as a financial asset and don’t review their life insurance needs frequently enough. Individual life insurance policies consist of over $12 trillion in the United States. But many Americans are not well informed about their life insurance needs, policy specifics, or planning options. As finances change, as families grow, or when laws change, it is important to review your clients' existing life insurance and to see if there is a need need for any more  or any less  insurance.

Life insurance in a new light

The Tax Cuts and Jobs Act made significant changes that impact the use of life insurance as an estate protection vehicle and modified the tax ramifications of selling a life insurance policy on the secondary market as part of a life settlement. From a fundamental life insurance planning standpoint, these changes reduced the need for some individuals to have life insurance to protect an estate from federal estate taxes and improved the tax situation surrounding the sale of a life insurance policy.

Tax DodgeLet’s look at the estate tax changes first. The Tax Cuts and Jobs Act doubled gift and estate tax exemption from $5 million per person to $10 million per person (adjusted for inflation). The exemption is $11.18 million for 2018. This means that couples could now transfer up to roughly $22 million between 2018 and 2026, when the law reverts back to the previous $5 million exemption, without paying any federal estate taxes. The heightened exemption amount of nearly $10 million for couples reduces the need for some to have life insurance as part of an estate plan.

Many people facing the estate tax use life insurance as a funding mechanism to create liquidity to pay the estate tax. Additionally, life insurance can be a useful vehicle in transferring wealth to heirs while minimizing the estate tax impact. However, with a higher exemption amount some people will now have life insurance policies that they no longer need because they are no longer subject to the estate tax. At a minimum, it is worth reviewing the policies and needs due to the changed laws. Because the exemption amount is temporary, many people might decide to keep the policy in effect. However, others might decide they no longer need the policy and might consider surrendering the policy or selling it on the secondary market.

Considerations for unneeded life insurance policies

If someone has a life insurance policy that they no longer need or can no longer afford, there are a variety of options:

  1. First, you can just let the policy lapse by not paying the premiums. This is often not the best option as you could lose rights to your policy completely over time and could be leaving thousands of dollars on the table by not exploring other options.
  2. Next, you could consider surrendering your policy back to the insurance company. In some cases, this makes sense if there is a good amount of cash value built up in the policy.
  3. You can also consider selling the policy on the secondary market if you no longer have a need for that insurance policy. In some cases, you can get 10 times the amount of the cash surrender value from a life insurance policy if you sell the policy on the secondary market instead of turning it back over to the insurance company. In fact, some life insurance policies have no surrender value but still have value on the secondary market. At a minimum, if you are considering getting rid of your life insurance policy you should get the policy appraised for its value on the secondary market.

According to Jason T. Mendelsohn, president of the Ashar Group, “the tax act also made the secondary market more appealing by returning the tax treatment of a life settlement transaction to rules used prior to an IRS revenue ruling back in 2009. (Rev. Ruling 2009-13) What the change does is treat a life settlement and policy surrender in the same manner from a tax perspective for the seller.” Ashar Group, which values life insurance policies for sellers considering using a sale on the secondary market, has reported a sharp increase in inquiries since the tax act was passed.

Life insurance is an incredibly valuable financial planning tool and asset. In many cases, it is the foundation and starting point for a financially secure life. It helps bring peace of mind and protection to one’s family in the event of an early or unexpected death. Life insurance can also help fund a number of business needs, estate planning needs, and can serve as a retirement planning savings vehicle. In most cases, life insurance policies should be kept in effect, not lapsed, sold, or surrendered. However, as life progresses, insurance needs change. It is important to review your clients' life insurance needs over time and consider all of the options, including surrendering a policy and selling a policy on the secondary market.

 Jamie Hopkins is the Director of The American College New York Life Center for Retirement Income and an Associate Professor of Taxation at The American College of Financial Services. This article was originally published on Forbes.com.

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