What is Life Insurance? In the simplest form, it is a guarantee of money from an insurance company to your loved ones if you pass away. This money is usually not readily provided to your loved ones when you do not have a life insurance policy. In many cases, your loved ones may not even see your assets if you do not have something planned out in writing. In official form, a life insurance policy is a contract between you and an insurer in which the insurer guarantees payment of a death benefit to named beneficiaries when the insured dies. The insurance company promises a death benefit in exchange for premiums paid by the policyholder.

As a basic principle of financial planning, it is advisable to buy the life insurance policy that is right for you to help you and your family minimize financial stress should the worst happen. Here’s a brief guide to the different types of life insurance policies available in the market.

Term Life Insurance: This is the simplest form of a life insurance plan and is affordable to buy. Term life insurance lasts for a specific amount of time before it expires. In a case where the life of the insured passes away within the time period stated in the policy, the beneficiary will be paid the death benefit by the life insurance company. One should opt for a plan that provides a sum of at least 10 times the annual income, plus the home loan amount, expenses, and other liabilities. In the absence or disability of the policyholder-cum-borrower, this will help in waiving off the beneficiary’s financial liability towards the home loan and other expenses.

Whole Life Insurance: This plan, on the other hand, is a permanent form of life insurance, as it does not expire as long as you pay the premiums. It has a death benefit but also a cash value which accrues interest at a predetermined fixed rate and grows over time. With this cash value, you could borrow funds or even cash out for unplanned expenses such as home repair or temporary unemployment. Because of the cash value feature, premiums of whole life insurance are higher as compared to term plans.

Universal Life Insurance: Similar to whole life insurance, this one also falls into the category of permanent life insurance with a cash value feature. Though similar in some respects, whole life and universal life insurance have some key differences. Universal life is an adjustable form of life insurance due to the flexibility it offers in terms of premiums and death benefits. This allows the person insured to reduce or increase the death benefit and pay premiums at any time in any amount (subject to certain limits). Premiums of universal life insurance are generally higher but it’s more appealing to the customer because of its added flexibility feature.

Key Note: Each policy is unique to the insurance company and the person insured. It’s important to understand what risks your policy covers, how much it will pay your beneficiaries, and under what circumstances.

Alterations to Life Insurance Settlements

Some of the new provisions offered in the Tax Cuts and Jobs Act can have a positive effect on life insurance planning. However, this may only impact a small portion of the population.

Life insurance settlements allow owners to recoup portions of their losses if the life insurance plan expires. Essentially, you can sell your life insurance policy to a private buyer for a portion of what it’s worth. The new changes reduce the size of depreciation during these sales, allowing a larger payout for those looking to sell their policies. This might provide a little extra income to someone who wants to get rid of their plan, but it only offers little value to someone with long-term plans for their life insurance policy.

Bolstered Tax Exclusions

Perhaps the biggest new change to life insurance planning is the revision to gift tax exclusions. The size of tax exclusions offered on gifts and estates has been increased significantly, and can have a major impact on whether or not you should alter an existing life insurance policy or trade for a new one.

Given the scale of the exclusions in the Tax Cuts and Jobs Act, most changes benefit wealthy individuals. However, there are some things to keep in mind regardless of your income bracket.

The extended exclusions are designed to only last for the next seven years. Therefore taking advantage of the gift tax in lieu of a long-term life policy wouldn’t be a reasonable course of action for most individuals. In addition, long-term insurance policies have a cash value in and of themselves. Therefore, life insurance can serve as a valuable asset in its own right.

Gifting to Your Own Trust

One of the best strategies when life insurance planning under the new regulations of the Tax Cuts and Jobs Act is to use trusts to fund your life insurance policy. By setting aside a tax-deductible gift to establish a trust, and then using that money to fund a life insurance policy, you can essentially do so tax-free. This allows you to get the benefits of a more generous policy with less tax liability.

Benefits to Life Insurance Providers Could Lower Your Premium

One big boost offered by the Tax Cuts and Jobs Act goes directly to life insurance providers. A new provision expands the required time period for the capitalization and amortization of certain expenses. While the details of this expansion are complicated, it has a simple yet important impact on those going through the planning process. This expansion should increase the income of insurance providers, offering them the leverage necessary to lower their policies’ rates.

The changes made in the Tax Cuts and Jobs Act are too great to cover in a single blog post. The bottom line, however, is that these changes offer plenty of opportunities for Americans looking to buy a new policy. Due to the limited window of opportunity for exclusions, it’s recommended that you pursue your life insurance planning options now.