Wealth Management Group Newsletter – Summer 2020
Dan Newman

Now More Than Ever, Life Insurance is Worth Considering

The COVID-19 pandemic has changed the way people think about many things — including the fragility of life. If you do not already have a will and estate plan, you may have been thinking more about putting them in place. The same applies to life insurance. Here are some of the issues you should consider.

Do you need it?

If you have others depending on you financially, your top priority is likely to ensure they will continue to be provided for after you are gone. Life insurance can help achieve this goal. These policies are appealing because small payments now can produce a proportionately much larger payout at death. But the fact that the return on the investment generally is not realized until death can also be a downside, depending on your financial situation and goals.

Not everyone needs life insurance, though. If you are single and have no dependents, it may be less important or even unnecessary. Perhaps you will want just enough coverage so that your mortgage can be paid off and your home can pass unencumbered to your heirs.

High-net-worth individuals may also not need life insurance. But even if you have enough to provide for dependents, a life insurance policy could serve other purposes in your estate plan. For example, it can provide liquidity to pay estate taxes without having to sell assets that you want to keep in the family. Or, if you have a family business, it can be used to equalize inheritances for children who are not involved in the business without giving equal business interests to everyone.

How much coverage?

If you determine that you need life insurance, the next step is calculating how much. Is the policy intended to support your family? Tally the costs that would need to be covered, such as housing and transportation, child care and education — and for how long. Do not forget about funeral costs, which can easily top $7,000. Gravesite expenses typically add thousands more to this number. In addition, you may need coverage equal to the amount of your outstanding mortgage balance.

Estate tax liability is another factor. If you are a business owner buying insurance to equalize inheritances, estimate the value of business interests going to each child active in your business. Then purchase enough coverage to provide equal inheritances to the inactive children.

Finally, identify income available from Social Security, investments, retirement savings, employer insurance policies and other sources. Insurance can help bridge gaps between expenses to be covered and available income.

Term or Permanent?

Life insurance policies generally fall into two broad categories:

  1. Term
    As the name suggests, these policies are effective for a specific period of time. If you die during the policy’s term, it pays out to the beneficiaries you have named. If you do not die during the term, it does not pay out. Term coverage is usually much less expensive than permanent, at least while you are relatively young and healthy. Renewal typically becomes more expensive as you get older or your health changes.
  2. Permanent
    These policies last until you die — so long as you have continued paying premiums. Most permanent policies build up a cash value that you may be able to borrow against. Over time, the cash value also may reduce the premium size.

Because premiums typically are higher for permanent insurance, consider whether the extra cost is worth the benefits. It might not be if, for example, you do not need much life insurance after your children are grown. On the other hand, a permanent policy may make sense if you are concerned that you could become uninsurable or if you are providing for special-needs children.

Life is unpredictable

As we have all learned in a very real way during the COVID-19 pandemic, life is precious. Life insurance is just one of many tools to make sure you and your family have peace of mind when it comes to your overall financial health. 

For more information, contact David Bowman at 312.670.0513 Visit ORBA.com to learn more about our Wealth Management Services.

Make the Most of Estate and Gift Tax Exemptions


Legislation enacted in 2017 temporarily doubled the federal lifetime estate and gift tax exemption — from $5 million to $10 million, indexed for inflation — through 2025. Without further legislation, the exemption is scheduled to return to its previous level of $5 million, to be indexed for inflation, on January 1, 2026.

For affluent families, the temporary increase provides a window of opportunity to transfer substantial amounts of wealth tax-free. But even those with more modest fortunes should consider taking advantage of the exemption while it is available.

Potential tax savings

For 2020, the inflation-indexed estate and gift tax exemption is $11.58 million. The following scenario shows how the increased exemption can potentially save millions of dollars in tax.

Anne, a single taxpayer, dies on January 1, 2026, with an estate valued at $15 million. Assuming the exemption amount has dropped to an inflation-adjusted $6 million and the top marginal estate tax rate is 40%, her estate’s tax liability is $3.6 million.

Suppose, instead, that Anne took advantage of the increased exemption and made $11 million in tax-free gifts in 2020. Assuming her estate is worth $4 million when she dies ($15 million – $11 million), her estate’s tax liability is only $1.6 million. The $11 million in gifts reduce the exemption. By seizing the opportunity to make large gifts while the exemption was elevated, Anne avoids $2 million in estate taxes.

If the ability exists, it is advantageous and prudent to gift at or near-maximum exemption levels at the current time. There will not be adverse consequences if substantial gifts are made now and future legislation lowers the exemption below the amount of those current gifts. 

When considering the potential estate tax savings, keep in mind that gifting assets that you expect to appreciate in value, such as stock or real estate, may trigger future additional income taxes in the hands of your heirs. That is because property transferred by gift generally retains your tax basis, while property transferred at death receives a “stepped-up basis” equal to its fair market value on the date of death. Therefore, you should weigh the expected estate tax savings against the potential income tax costs to the recipients should they sell the assets.

Tried-and-true strategies

Even if it seems like you will never come close to using up your gift and estate tax exemption, it may pay to use tried-and-true estate planning strategies — such as making annual exclusion gifts and direct payments of tuition or medical expenses on behalf of your loved ones. The annual exclusion allows you to gift up to $15,000 per year (for 2020), tax-free to any number of recipients, reducing the size of your estate without using any of your lifetime exemption.

Married couples who split gifts can transfer up to $30,000 per recipient. So, for example, a couple with three children and seven grandchildren can give away up to $300,000 per year. In addition, you can pay any amount of tuition or medical expenses on behalf of your children, grandchildren or others — without triggering gift taxes — so long as the payments go directly to the educational institution or health care provider.

What if you are not in a position to make large gifts now, but are concerned that the exemption will be drastically reduced in the future? Regular annual exclusion gifts and direct payments of tuition and medical expenses can provide a hedge against future tax law changes. These strategies may enable you to shelter substantial amounts of wealth from taxes while preserving your exemption.

Have a plan

Changes in the gift and estate tax exemption can have an enormous impact on the amount of wealth available to benefit your heirs. In recent years, some lawmakers have proposed reducing the exemption to $3.5 million, or even as low as $1 million. It is critical to consider a potential reduction in the exemption after 2025 (with no further legislation), as well as the risk that it may be reduced even further.

For more information, contact Dan Newman at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.

Forward Thinking