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Estate Planning
Does Life Insurance Still Matter?

The next couple of years could be financially beneficial for the heirs of high net-worth individuals.  

Thanks to "The Economic Growth and Tax Reform Reconciliation Act" President Bush signed into law in 2001, the amount of an estate that is exempt from federal taxes jumped from $1.5 million on Dec. 31, 2005, to $2 million the next morning.

The figure will rise again on Jan. 1, 2009 when it jumps to $3.5 million, then be repealed, or ended altogether for 2010.  But then, unless new legislation is passed, it will return to the original $1 million in the year 2011.

"Unless you know for sure that you're going to die in 2010, the year there will be no 'death tax,' it's important to have a plan in place to protect your assets," says Byron Udell, founder and CEO of AccuQuote, a Web-based company that offers free online insurance quotes.

Before making any decisions, it's important to separate fact from fiction regarding estate taxes and their impact on your need for life insurance:

FICTION: The new tax law means I no longer need life insurance to help my heirs pay estate taxes.  

FACT:  Even if the federal estate tax is eliminated, your heirs still might need cash to cover costs such as state inheritance taxes, lawyer fees, probate costs or appraisals.  

Plan conservatively, based on today's rules. In most cases, when a life insurance policy is placed in an irrevocable trust, it is not counted as part of your estate and its proceeds are immediately available to your heirs to pay any taxes or fees they might face.

FICTION:  When I die, my heirs can liquidate my assets to cover any estate taxes or other expenses.

FACT:  Assets that pass according to your will are subject to supervision by the probate court, meaning it may not be possible for your heirs to liquidate them immediately.

Even if selling assets is an option, the family may be forced to dispose of them quickly, at only a fraction of their true value. Or, assets may be tied up in art or real estate, which heirs might be reluctant to liquidate.

When properly planned, life insurance can provide cash that isn't subject to probate and allows heirs to make decisions about the estate that aren't influenced by an immediate need for cash.

FICTION:  I can give up my insurance now. If the estate tax is never fully repealed, I'll just buy more later.

FACT:  If you give up your policy thinking you can always buy another later on, you may be in for a surprise. Factors such as higher premiums at a later age, the onset of health conditions or dangerous new hobbies may make such a purchase expensive or impossible. You are better off having the insurance in force and changing your mind than not having it and having your health change.

FICTION:  Estate tax laws are unpredictable, so I cannot plan properly.

FACT:  Life insurance advisors, accountants and attorneys can help you adjust your estate and financial plans to take advantage of the opportunities in the new law. Planning should continue, as long as there is somebody or something you love.

More about life insurance around the Web:

Just the facts on life insurance

Life's Tax Advantages