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By: Scott Kallenbach, FLMI

After months of political wrangling and speculation, the “fiscal cliff” was averted when Congress enacted the American Taxpayer Relief Act of 2012. The legislation provides some long-awaited clarity for income and estate tax rates, as well as the estate tax exemption. As a result, there is no uncertainty or planned changes for the foreseeable future for the estate tax exemption and maximum tax rate.

While some bemoan the opportunity lost when the estate exemption and maximum tax rate did not revert to 2001 levels, I disagree. I think a significant need for life insurance remains. Based on my analysis of the Federal Reserve’s 2010 Survey of Consumer Finances (SCF), more households have a need for life insurance under the 2013 rules than in 2012 (chart).

Households with a tax liability, on average, have a need for $3.5 million of additional life insurance, a 14 percent increase over 2012. Overall, I estimate that the life insurance market opportunity for those households subject to estate taxes is just over $4.0 trillion.

While the amount of potential new life insurance business is substantial, these affluent households will not take action on their own. Based on past LIMRA research, relatively few households initiate changes to their estate plans unprompted.

Advisors need to talk with their affluent clients to ensure their clients take the necessary steps to protect their assets. History shows that changes to estate tax policy alone do not motivate the affluent to take action. Advisors should use the recently enacted adjustments to estate exemptions and tax rates as a conversation starter — but don’t forget your clients who have estates below the exemption level. LIMRA’s life insurance ownership results and additional analysis of SCF data show that at least half of all US households need more life insurance. Households with assets below the exemption level may still need life insurance for other reasons, such as income replacement and/or debt repayment, which would increase the size of the overall life insurance opportunity.

Now is the time to revisit existing estate plans, and to initiate the discussion to create new plans. LIMRA’s research shows that a considerable need for life insurance exists, those who put in the extra effort will find the rewards.

Scott Kallenbach, research director of LIMRA’s Strategic Research program, is responsible for identifying strategic issues that can impact the financial services industry and helping member companies develop strategies to meet these challenges and grow. He received his bachelor’s degree from Bentley College, and is a Fellow of the Life Management Institute.