Estate taxes can put a heavy financial burden on a wealthy Texas resident’s beneficiaries after his or her death. For instance, someone who passes away in 2012 may freely leave up to $5.12 million to heirs, but bequests above this limit incur a tax of 35 percent. That rate is set to rise to 55 percent in 2013, with some experts expecting the tax-free limit to fall closer to $3 million.
Heirs are often unaware of this high tax rate and may be unpleasantly surprised when called on to pay up, typically nine months after the death of the estate holder. Fortunately, an effective life insurance policy can provide a way for beneficiaries to more easily pay estate taxes, and thereby provide Texas citizens of all income brackets a way to secure their families’ financial security.
Individuals seeking life insurance generally have two options to choose from; term life insurance and permanent life insurance. Term life insurance is generally much cheaper, but benefits expire after a certain period of time. Conversely, permanent life insurance provides coverage until the policy-holder dies. While many people choose term life insurance as an easy and cheaper way to cover their beneficiaries’ estate taxes, experts say this can be risky.
“The obvious pitfall with term insurance is the person runs a risk of outliving the policy. Then they’re back to square one in terms of achieving their goal,” explained one attorney, who noted that permanent life insurance policies have long been used to help pay federal and state estate taxes. However, people often fail to purchase insurance for this reason until they reach old age, facing them with much higher premiums. As such, experts recommend that Texas residents considering permanent life insurance as a means of avoiding estate taxes to meet with a qualified attorney to ensure they do so while incurring minimal expenses.
Source: Fox Business, “Life Insurance Muzzles Estate Tax Bite,” Chris Kissel, Oct. 29, 2012