Should you pay for expensive life insurance in order to provide funds to cover an anticipated estate tax obligation? Or should you save money by dropping the coverage, running the risk that estate tax law will change and your heirs will find themselves short of cash? Fortunately, your choice does not have to be between doing without insurance or paying the premiums in full.
Instead, you might start out with ample insurance and plan to reduce it, as circumstances indicate. Although you can’t increase coverage without a physical exam, you can decrease coverage.
For now, you might plan for the current estate tax exemption of $1.5 million ($3 million for married couples). Carry enough life insurance to pay any resulting estate tax bill. As the exemption increases in future years to $2 million and $3.5 million, you can reduce your insurance coverage, lowering your premiums. If permanent repeal seems likely, you can just drop the coverage, unless you want it for other purposes.
