Life Insurance Companies Love the Estate Tax

I bet you didn’t know how much the life insurance industry really loves having the estate tax stick around?  Yes indeed…according to a recent report on the fox business channel, life insurance companies spent $60 million in the last six months lobbying for the estate tax to stick around.

Why in the world would they do a crazy thing like that?

Well, you see selling large permanent life insurance policies to people who have estate tax issues is a tried and true business model for life insurance companies.  In fact, the clip from Fox points out that life insurance companies generate a significant amount of revenue as a result of the estate tax sticking around.  They say in the interview that the revenue generated by life insurers is 66% of what the federal government takes in for estate taxes.

Here’s the video:



Not sure where they get that data and I’ll admit I’m a bit skeptical about that number.

However, I’m not at all surprised that the industry is lobbying hard to keep the estate tax in place.

Brandon and I have discussed this very topic for quite some time.  Many life insurance general agencies, brokerage agencies and agents have built their entire career around selling life insurance policies to help people pay their impending estate tax liability.

Life Insurance Companies and the ILIT

In fact, there’s an entire sub-set of the industry that extols the virtue of placing large life insurance death benefits inside of an irrevocable life insurance trust (ILIT).

Now, there are some cases where an ILIT makes sense, however, we contend that it is way overused and that the cost and aggravation of the setup and compliance in many cases are not worth it.  Depending upon where you live, the cost of setting up the trust could range from $10,000-$15,000 along.  Then you’ve got to make sure you comply with funding the trust and finally the trust purchases the life insurance.

There’s a lot more I could say about ILIT’s but that’s not really what this post is all about, so I’m gonna leave that for now.

Let’s get back to the issue at hand.

life insurance companies love the estate tax

In the last couple of years especially as the exemption for the estate tax has been at $5million, many agents and the life insurance companies themselves have bemoaned the drop in sales.  Selling life insurance to pay estate taxes was a bread and butter business for a lot of people at one time.

Think about this, when I started in the life insurance business 13 years ago the estate tax exemption was at $650,000.  That meant that pretty much any small business owner or farmer had an estate tax “problem”.  Many of the veteran life insurance agents that worked in my office back then spent a vast a majority of their time talking to these folks about the impending doom their families would face trying to pay the estate taxes due at their death.  Let’s not forget that most small business owners and/or farmers are asset rich but don’t have very much liquidity.

So, everyone has horror stories of the family having to “fire sale” real estate and business assets just to pay the estate taxes after dad passes away.  Very sad but it does happen.

It was a real problem, no denying that.

But I can tell you that it was not a fun conversation to have and many times it was a really tough financial decision for the person who needed the coverage to make.

See, it’s pretty easy to have a guy who owns a business or property that’s valued over a million bucks but that only generates $100k a year or less in income.  Now he’s being told that he needs to buy an insurance policy that’s gonna cost him 10-12k per year to solve a problem created by the federal government? Oh happy day.

Yeah, he’s not really excited about that one.

…and rightfully so

Anyway, now that the exemption has increased to $5million we’re just not seeing near as many people with an estate tax issue.  And we think that’s a good thing.

Sorry for the life insurance industry as a whole, guess all the life insurance companies will have to actually work a little harder to earn their money rather than relying on people who have a gun to their head to buy life insurance.

Can you detect my sarcasm?

A suggestion from me…how about working on product performance and innovation?  Just an idea.  Seems to me that would be something strive for—increasing sales and greater profitability from actually creating a better mousetrap.

As always, please don’t hesitate to send us your questions and comments.

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