The Tax Cuts and Jobs Act altered the tax code in some pretty meaningful ways, but these changes can be hard to digest, especially for people not well-versed in legal language. There are some important bits of information that everyone should know, particularly in regards to how your life insurance planning might be affected. Understanding how the Tax Cuts and Jobs Act might change the way life insurance policies work is important when trying to safeguard the financial stability of your family.
There are four major changes in life insurance that can have an impact on how Americans plan their policies. Unfortunately, these stipulations could have a negative impact on some families. If you’re considering changing your policy or starting a new one, then the best time to take action is now.
Alterations to Life Insurance Settlements
Some of the new provisions offered in the Tax Cuts and Jobs Act can have a positive effect on life insurance planning. However, this may only impact a small portion of the population.
Life insurance settlements allow owners to recoup portions of their losses if the life insurance plan expires. Essentially, you can sell your life insurance policy to a private buyer for a portion of what it’s worth. The new changes reduce the size of depreciation during these sales, allowing a larger payout for those looking to sell their policies. This might provide a little extra income to someone who wants to get rid of their plan, but it only offers little value to someone with long-term plans for their life insurance policy.
Bolstered Tax Exclusions
Perhaps the biggest new change to life insurance planning is the revision to gift tax exclusions. The size of tax exclusions offered on gifts and estates has been increased significantly, and can have a major impact on whether or not you should alter an existing life insurance policy or trade for a new one.
Given the scale of the exclusions in the Tax Cuts and Jobs Act, most changes benefit wealthy individuals. However, there are some things to keep in mind regardless of your income bracket.
The extended exclusions are designed to only last for the next seven years. Therefore taking advantage of the gift tax in lieu of a long-term life policy wouldn’t be a reasonable course of action for most individuals. In addition, long-term insurance policies have a cash value in and of themselves. Therefore, life insurance can serve as a valuable asset in its own right.
Gifting to Your Own Trust
One of the best strategies when life insurance planning under the new regulations of the Tax Cuts and Jobs Act is to use trusts to fund your life insurance policy. By setting aside a tax-deductible gift to establish a trust, and then using that money to fund a life insurance policy, you can essentially do so tax-free. This allows you to get the benefits of a more generous policy with less tax liability.
Benefits to Life Insurance Providers Could Lower Your Premium
One big boost offered by the Tax Cuts and Jobs Act goes directly to life insurance providers. A new provision expands the required time period for the capitalization and amortization of certain expenses. While the details of this expansion are complicated, it has a simple yet important impact on those going through the planning process. This expansion should increase the income of insurance providers, offering them the leverage necessary to lower their policies’ rates.
The changes made in the Tax Cuts and Jobs Act are too great to cover in a single blog post. The bottom line, however, is that these changes offer plenty of opportunities for Americans looking to buy a new policy. Due to the limited window of opportunity for exclusions, it’s recommended that you pursue your life insurance planning options now.