SmartMoney Blogs

The Tax Blog
The latest news, insights and tips about taxes

Don’t Count on Insurance For Taxes

The market downturn of 2008 is still sending shock waves to investors who had counted on insurance policies to cover estate taxes.

Getty Images

Many are receiving unwelcome surprises. Some of these variable life insurance policies are now failing. They began to unravel during the recession because they invest in baskets of mutual funds known as separate accounts. The damage is only now starting to surface for policy holders and the outcome can be startling  -  and expensive.

Volatile markets can undermine a variable life insurance policy and did just that to many of them after 2008, according to John Resnick, whose Harrisburg, Pa., firm provides life insurance to high-net worth clients.

Many policy holders are only feeling the effects now because the plans’ design can create a delayed reaction. A drop in cash value, together with rising mortality fees and expenses, will drain funds designed to sustain the death benefit.

Once the cash value goes to zero, “the policy will implode without value unless a much higher premium is paid,” says Resnick. Problems get worse as the insured gets older because mortality charges go up annually.

Someone who paid, say, $2 million into a policy may suddenly learn he has lost the cash value and won’t get a death benefit. The insurance company may send a notice requiring more money, and fast – within just 30 or 60 days – to keep the policy alive. Tax attorneys and insurance consultants say this has been happening for a while, but they are now seeing more failures.

Michael A. Mingolelli, Jr., chief executive of Pinnacle Financial Group, in Southborough, Mass., says annual reviews of these policies can help catch problems before they become disasters. But often this isn’t done. Salvaging a policy with a modest account value may be possible, but if enough time has passed that a lot of cash has built up, it is very hard to come up with the amount of money to keep the policy.

Readers, do you own a variable life insurance policy? Are you aware of any problems with the policy?


We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comments (3 of 3)

View all Comments »
    • ******

      It’s a Little off Topic but Anyone Looking for a Job
      Should Check Out this Website!

      They are Hiring People to Work from Home for $67/hour–

      This Job Program has saved Our Whole Family from
      the Recession!

      And I Can Work from Home with my Kids !


    • This superficial article is somewhat misleading. Of course, when the market retreats variable life policy values will also decline. If that is a surprise to an individual who purchased such a policy, then the registered rep and broker dealer overseeing the transaction did poor job. Of course, when the market recovers, cash values will grow, too.

      Declines and rallies should not be the basis of determining whether to purchase or keep a variable life policy. Instead, the decision to purchase the policy and the management (and allocation) of the underlying investments should be determined and reviewed in the light of policy owner needs and preferences.

      It should be kept in mind that variable life is the only type of life insurance policy that enables policy owners to asset allocate their cash values into various classes of investments. Other policies force them into fixed income portfolios. In the long term, that allocation can result in much higher costs in terms of premiums paid and cash values foregone.

      This requires more professional attention and not a superficial warning that seems more like a sales pitch to replace a good variable life policy.

      Finally, it is possible to secure variable life policies with long term death benefit guarantees, so that coverage remains in force even if the policy has no cash value.

    • I’m a little confused. Are these policies using the CV to pay premiums? If not, are you saying these mutual fund type accounts are going to zero? What are they investing in?

About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (, retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at