To help offset the costs of the estate tax, many wealthy people purchase survivorship insurance. Now that a repeal of the federal estate tax is possible, some might be considering dropping those insurance policies. However, that might not be a good idea.
Paying the federal estate tax has never been easy, because it normally requires selling assets to come up with the cash. For estates that have relatively few liquid assets compared to their total value, it can sometimes seem almost impossible.
To get around this, many wealthy people purchase survivorship or second-to-die insurance policies. These policies pay a death benefit when one spouse passes away. As a result, liquid cash is available to pay the estate tax out of the insurance proceeds.
With Republicans now in control of the government, many people anticipate that it is only a matter of time until the estate tax is repealed. This new political reality has led many to consider dropping their expensive survivorship insurance policies.
On the other hand, dropping the insurance might not be the wisest decision as Financial Advisor discusses in "Eliminating Estate Tax Could Torpedo Survivorship Insurance Market."
After all, there is no guarantee that any repeal of the estate tax will be permanent. Political winds can shift quickly and, if the Democrats retake control of the federal government in a few years, the estate tax could come back.
People who cancel their survivorship policies now, will likely find that premiums have gone up significantly later, if they need the insurance again.
In the end, it is still possible that the estate tax will not be repealed at all. This is because Congress could get bogged down in other things and never get around to repealing the estate tax.
Reference: Financial Advisor (Feb. 28, 2017) "Eliminating Estate Tax Could Torpedo Survivorship Insurance Market."