On October 3, 2010, the Wall Street Journal published Shift to Wealthier Clientele Puts Life Insurers in a Bind, by Mark Maremont and Leslie Scism. This article is interesting because it shows that “a growing proportion of the tax benefits of life insurance goes to the well-off, not to the middle class that once was the industry's backbone.” Among other things, the article highlights the role of life insurance in estate planning for wealthy individuals:
in a development all but unnoticed outside the industry, life-insurance companies gradually have shifted away from their broad historical base of middle-class households. Instead, statistics show, an increasing portion of insurers' business consists of selling large policies to wealthier Americans, often as part of complex estate-tax plans. . . .
Many large policies are part of estate planning. In one method, the insured sets up an irrevocable trust to buy a life-insurance policy and pays the premiums by giving sums of money to the trust annually.
This can lower estate taxes, because the trust isn't considered part of the estate, and the payment of premiums reduces the estate's size. Then, to the extent estate taxes are due, the insurance proceeds can help cover them.
The article provides quotes from those who are sympathetic to having tax-advantaged life insurance for the wealthy. These supporters use similar arguments to those used to support a reduced (or eliminated) estate tax:
- the tax breaks “encourage wealth accumulation that helps feed capital formation and job creation”
- the tax breaks help those who save and accumulate their wealth
Significantly, the article points out that “[t]here is no proposal in Congress this year to curb the tax breaks for life insurance.” Two reasons are (1) there would be “heavy opposition from insurers and agents,” and (2) higher taxes are not popular when the economy weak.