If the Trump Administration achieves its stated objective of repealing the federal estate tax, U.S. life insurers predict it will have a negative impact on survivorship life insurance sales.
In April, LIMRA asked 24 U.S. insurers how they thought repealing the estate tax would affect life insurance sales. Forty percent of carriers said they believe it would have a “significant negative impact” on their survivorship life insurance sales and 54% think it would have a “minor negative impact” on their single life sales.
While six in 10 surveyed (58%) do not expect U.S. estate tax law to change this year, if it is repealed three-quarters believe it would have a significant negative impact on industry survivorship life insurance sales in the following year.
Current federal estate tax law only applies to estates exceeding $5.49 million per person, with a 40% top tax rate. Since Americans can leave an unlimited amount of assets to their spouses, the threshold for married couples is $10.98 million. According to the Joint Committee on Taxation, roughly 0.2% of Americans, or one out of every 500 people who die, are impacted by the estate tax. This includes family owned businesses and farms.
Survivorship life insurance is intended to pay federal estate taxes and other estate-settlement costs owed after both spouses pass away. It represents approximately 4% of the life insurance market and 10% of premium for companies who offer it annually. LIMRA notes that the carriers participating in the survey represent 64% of the survivorship life insurance market.
Beyond the LIMRA study about how carriers think it would impact future sales, the issue also begs the question of whether families with current life insurance policies who would potentially be subject to the estate tax would question the necessity of those policies moving forward. Would life insurance agents who specialize in working with high net worth clients who need life insurance to address estate tax issues need to rethink their business model, perhaps transitioning to wealth management?
Those who might think about canceling policies would first want to consider the following:
• Even if the federal estate tax is repealed, individual states may keep their estate tax.
Currently, 14 states and the District of Columbia have an estate tax, and six states have an inheritance tax. Maryland and New Jersey have both. State estate taxes can kick in for estates valued at only $1.5 million or less in several states.
• If it is repealed, it could very well be back in 10 years.
Republicans would need several Democrats to support estate tax repeal in order to achieve a supermajority — 60 votes — and avoid a filibuster, which is unlikely. Republicans can bypass the need for 60 votes and achieve repeal with a simple majority in the Senate by passing it through budget reconciliation. But as current rules dictate that any legislation passed under reconciliation must “sunset” after a decade if it would increase the budget deficit outside of a 10-year window, it is likely that the estate tax would return without further action down the road. That could put families subject to the estate tax who canceled their life insurance in a tight spot, as they may not be able to obtain new coverage – or may have to pay much more for it.