How to Use Insurance Strategically

August 3, 2021
How to Use Insurance Strategically

With the potential for step-up in basis to be eliminated as part of President Biden’s tax plan, consider including life insurance in your estate plan as a strategy to help minimize your tax burden and maximize wealth transfer to heirs.

Impact of Elimination of Step-up in Basis

As a reminder, President Biden’s tax plan proposes eliminating the “step-up in basis” on the fair market value of assets inherited at death. Currently, heirs can avoid income taxes on gains of assets they inherit by a readjustment of the tax basis to the market value upon the owner’s date of death. If the step-up is eliminated, it could mean more taxes on wealth passed to beneficiaries.

Tax Advantages of an Irrevocable Life Insurance Trust

Think of using insurance as an alternative way to benefit from a step-up in cost basis at death. To fund an irrevocable life insurance trust (ILIT), you could take a penalty-free distribution from a traditional IRA after age 59½, pay the tax on the distribution and, with the remaining cash, buy a life insurance policy housed inside an ILIT.

When beneficiaries own the life insurance policy within the ILIT, it prevents estate tax on the life insurance proceeds. The trust controls the payout to beneficiaries beyond the account owner’s lifetime.

Using RMDs to Fund Permanent Life Insurance

You can use required minimum distributions (RMDs), which begin at age 72, or pre-RMD distributions, to fund permanent life insurance for yourself or for yourself and your spouse. By using RMDs to pay insurance premiums, you benefit in several ways. First, you reduce your traditional retirement plan balances and thereby reduce taxes owed when funds are withdrawn. It’s also a way to take advantage of potentially being in a lower tax bracket today and to be able to leave more to your heirs.

Private Placement Life Insurance

Another tool for wealth transfer is a private placement life insurance (PPLI). You won’t pay income tax paid on the investments held by the PPLI. This type of insurance may be appropriate for wealthy families, family foundations, trusts and corporations, which work with hedge funds and money management firms to create their own life insurance contracts, designed to reduce their tax burdens. A PPLI combines the financial advantages of highly taxed hedge funds and similar investments with the tax advantages of life insurance.

Keep in mind, there are insurance and administrative costs associated with the life insurance contract, but the tax savings in a properly structured life insurance policy, plus the death benefit itself, should make up for the additional insurance and administrative costs. You have to have a certain level of net worth and income to qualify for this unregistered security product, so consult with your wealth advisor to determine if a PPLI is appropriate for you.

Legislation Makes Insurance Solutions Attractive

An historic change was made to IRS rules for a “life insurance contract” in the Consolidated Appropriations Act of 2021. The rule reduces the guaranteed insurance rate for cash value accumulation for 2021 from 4% to 2% in a life insurance contract, and a variable rate will be used thereafter. This change comes in light of historically low interest rates.

The implication is that you can put a lot more premium/cash into a life insurance policy in relation to the death benefit than was previously allowed. Many of the wealthiest U.S. taxpayers are turning to guaranteed life insurance policies to provide liquidity in their estates to have available cash to cover taxes and estate administration expenses that might otherwise require the forced sale of illiquid assets at an inopportune time. Besides liquidity for an estate, life insurance offers a death benefit that can be structured as tax free in both term and permanent policies and tax-deferred growth of cash value in permanent policies.

Meet With Your Wealth Team

Using insurance as an estate planning tool is just one solution for minimizing your tax burden. At Mariner Wealth Advisors, our in-house risk management team will work closely with you and your wealth advisor to review your current insurance policies and recommend insurance solutions as part of your overall wealth plan.

Our estate planning and trust services team is also in-house to work with your advisor, risk management and outside legal counsel, to help you build an estate plan and trusts that work for your financial situation. The goal is to lower your tax burden while increasing the wealth you can transfer to heirs.


“How Does Private Placement Life Insurance Work?”

“Using Life Insurance to Cushion Blow of Estate Taxes”

“New Law Changes May Make Life Insurance More Attractive”

The views expressed are for commentary purposes only and do not take into account any individual personal, financial, legal or tax considerations. As such, the information contained herein is not intended to be personal legal, investment or tax advice. Nothing herein should be relied upon as such, and there is no guarantee that any claims made will come to pass. The opinions are based on information and sources of information deemed to be reliable, but Mariner Wealth Advisors does not warrant the accuracy of the information.

Some services listed in this piece are provided by affiliates of MWA and are subject to additional fees. Additional fees may also apply for tax planning and preparation services.

Mariner Wealth Advisors is under common control with insurance agencies. Certain representatives are licensed insurance agents with those agencies and are compensated for the sale of insurance-related products.

The tax laws discussed are proposed at this time and any final laws or regulations passed may vary significantly from the proposed. Tax laws and regulations are complex and subject to change, and MWA cannot guarantee that the information herein is accurate, complete, or timely.

Mariner Wealth Advisors (“MWA”), is an SEC registered investment adviser with its principal place of business in the State of Kansas. Registration of an investment adviser does not imply a certain level of skill or training.MWA is in compliance with the current notice filing requirements imposed upon registered investment advisers by those states in which MWA maintains clients. MWA may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by MWA with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For additional information about MWA, including fees and services, please contact MWA or refer to the Investment Adviser Public Disclosure website. Please read the disclosure statement carefully before you invest or send money.

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