If you die with a taxable estate, your heirs might have to liquidate real estate or strip your IRA to pay the tax. Instead, you can use life insurance to provide the needed cash.
However, the federal estate tax is tentatively scheduled for easing and eventual repeal. You don’t want to buy an expensive life insurance policy your family won’t really need. (See “Cutting Your Coverage” above.) Possible solutions:
- Buy inexpensive 10-year, level-premium term insurance. Such term insurance can be converted to cash-value life insurance during the full 10-year term. By buying convertible term, you’ll minimize your cash outlay while maintaining the option to convert to permanent insurance without evidence of insurability.
- Look for a “bailout” clause. Some insurers are offering cash-value insurance policies with a no-surrender-charge clause that will take effect if legislation is passed that definitely reduces estate tax.
- Hold the insurance policy in a “spousal lifetime access trust.” As the name suggests, such a trust is funded by one spouse while the other spouse has access to the trust assets. Thus, if you provide the money to pay the insurance premiums, and the policy is not needed, the cash value can be paid out to your spouse; your spouse can, in turn, turn that money over to you.
