Strategic use of life insurance frequently is a key aspect of comprehensive estate planning,

Strategic use of life insurance frequently is a key aspect of comprehensive estate planning, solving a wide variety of estate planning challenges from providing liquidity to pay estate taxes, to charitable bequests and ensuring the continuation of a closely-held business. One of the key characteristics of life insurance, however, making it such a versatile estate planning tool, is preferential tax treatment. Properly structured, life insurance proceeds pass tax-free to beneficiaries, and earnings on investments held within certain types of “permanent” life insurance also generally accrue tax-free.

According to a recent article in The Wall Street Journal, there is some national debate, however, about the tax-preferred status of life insurance.  Once primarily a safety-net against the impoverishment of widows and orphans, life insurance has increasingly become a tax-advantaged investment and estate planning tool. 

High-end policies for $2 million and up, which can carry annual premiums of $20,000 or more, made up nearly 40% of the face value of new whole-life and universal-life policies sold in 2007, according to an analysis done for The Wall Street Journal by Limra, an industry-funded research group. Such large policies accounted for just 10% a decade earlier, and 1% two decades ago. 

Meanwhile, the percentage of American families owning life insurance continues to fall. Thirty percent have no life-insurance coverage of any kind, a four-decade high, according to a Limra survey. In an effort to reverse this trend, some insurance companies are experimenting now with policies for sale through banks that can be issued more speedily. Prudential, Allstate, MetLife, and ING Group are among those trying new approaches that aim to sell policies more cost-effectively to the middle class.