Life Insurance in Estate Planning

Eric Van Haaften Estate Planning with Life Insurance

Many individuals typically view life insurance as a means to provide financial stability for their loved ones in the event of their death.

However, it may come as a surprise that people often utilize life insurance for estate planning purposes.

In fact, there are numerous ways in which life insurance can be employed to manage one’s estate effectively and safeguard one’s assets.

If you want to discover how life insurance can create an immediate estate, continue reading!

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What is estate planning?
What is the best type of life insurance for estate planning?
How is survivorship life used inside an ILIT to pay estate taxes?
How does life insurance help families manage their estates?
How can succession planning help business owners?
FAQ: Life Insurance in Estate Planning

What is Estate Planning?

An estate plan encompasses the legal paperwork outlining your desired asset distribution upon your death or if you cannot manage your affairs.

These assets typically include life insurance, real estate, investments, personal belongings, and debt.

You’ve probably heard the saying, “If you don’t have a will, the state has one for you.” Estate planning offers an opportunity to strategically control what happens to your assets after you’re gone and to reduce potential tax burdens on your heirs.

Investoped ia explains that estate planning goes beyond drafting a will. It also includes details like establishing trusts for loved ones or establishing a durable power of attorney.

There are several options available to you when creating an estate plan. You can utilize an online service, seek assistance from a professional estate planning attorney, or create your own estate plan.

Life Insurance for Estate Planning

Should life insurance be a part of your estate plan? According to Charles Schwab, life insurance is more than just a safety net; it’s a key player in estate planning.

When you die, life insurance can give your family the money they need without liquidating assets or incurring debt. But how does it all work?

When looking for life insurance, it is essential to understand the different types of policies available. Here are some life insurance policies that can help you protect your estate.

Term Life Insurance for Estate Planning

Term life insurance offers guaranteed death benefits and premium payments for a specified period, typically 10 to 40 years.

The term length you choose directly affects the amount you pay in premiums, with more extended periods generally resulting in higher costs.

Many individuals opt for term life insurance to replace their income or cover a mortgage loan because it allows them to obtain significant coverage at an affordable price.

It is important to note that term life insurance is generally not used for long-term estate planning purposes. However, it is possible to convert term life insurance into permanent coverage later.

If you need term life insurance, we make it easy and convenient for you to compare and apply for the best plans from top insurance providers.

Just use our insurance calculator to get instant life insurance quotes that meet your coverage needs and budget.

Permanent Life Insurance for Estate Planning

In contrast, permanent life insurance policies offer a death benefit that lasts your entire lifetime and builds up cash value over time.

Permanent life insurance guarantees lasting financial stability by enabling you to transfer more wealth to your heirs.

There are various types of permanent life insurance policies to choose from, so it is essential to understand their differences before deciding.

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Types of Permanent Life Insurance

Whole Life: Whole life protects you for your entire life and offers guaranteed cash values and dividends that accumulate over time.
Guaranteed Universal Life: GUL allocates your cash value to a fixed or equity index account and provides lifetime coverage.
Variable Universal Life: VUL is another form of permanent insurance where cash values are invested in sub-accounts containing stocks and bonds.
Indexed Universal Life: IUL invests your cash values in accounts linked to the performance of a financial index such as the S&P 500 Index.
Hybrid Long-term Care Insurance: Hybrid Life is a form of permanent coverage with a rider granting you access to part of the death benefit to pay for nursing care.
Survivorship Life Insurance: A SUL covers a married couple, and both parties must die before a death benefit is paid out to your beneficiaries.

Most budget-conscious buyers opt for guaranteed universal life insurance due to its lower premiums and lifelong guarantees.

While those seeking policies that offer cash accumulation typically choose IUL or whole life insurance.

Life Insurance to Pay Estate Taxes

Nobody likes estate taxes, but substantial estate taxes may be owed upon death if you’ve amassed considerable wealth throughout your lifetime.

The proceeds from a policy are usually exempt from income tax, which means beneficiaries get full access to these funds.

However, the IRS can assess an estate tax on property transfer upon death for wealthy people with large estates.

After you die, your beneficiaries must pay federal estate taxes if your total estate value exceeds the tax exemption amount. Find Law dives deeper into the nitty-gritty of estate taxes.

Selling assets like company ownership or real estate can be complex for heirs who need quick cash to settle the estate.

In such cases, life insurance policies can provide immediate liquidity and help pay off debts without having to sell valuable properties at potentially lower prices.

Affluent couples often invest in survivorship life insurance to safeguard their estate or transfer wealth to their children.

One strategy to effectively manage estate taxes is to set up an Irrevocable Life Insurance Trust (ILIT) that allows beneficiaries to receive tax-free insurance proceeds while removing the policy from their taxable estate.

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Setting Up A Life Insurance Trust

An ILIT is a type of trust that holds a life insurance policy for your benefit and distributes it to your heirs after you die.
A survivorship life insurance policy covers two people and pays out when the second person dies, making it ideal for estate planning.
By transferring a survivorship life insurance policy to an ILIT, you can reduce your taxable estate and provide cash for your heirs to pay any estate taxes that may arise.
The ILIT’s beneficiaries will receive the policy’s death benefit without paying estate taxes if the ILIT is appropriately structured and administered.
Setting up an ILIT requires careful planning and legal guidance, as there are many rules and regulations to follow to ensure its validity and effectiveness.

Benefits of Estate Planning for Families

Death is a topic that most people prefer to avoid, but it’s an inevitable part of life. Unfortunately, many individuals delay purchasing life insurance to leave a legacy until it’s too late.

A well-crafted estate plan can help your loved ones sidestep costly and time-consuming legal battles following your passing.

Life insurance plays a crucial role in estate planning by offering immediate cash flow to cover expenses, clear debts, and settle potential estate taxes following the policyholder’s death.

Life insurance policies are typically not considered part of an estate since they directly pay out to beneficiaries without going through probate.

Life Insurance for Final Expenses

Final expense insurance is a form of permanent insurance designed to cover end-of-life costs.

Unlike term life policies, it does not necessitate a medical examination and remains active as long as premiums are paid.

It’s important to note that final expense policies do not require beneficiaries to use the death benefit solely for end-of-life expenses. Therefore, it is crucial to communicate your intentions with your chosen beneficiary.

Many individuals allocate the death benefit towards medical bills, funeral arrangements, burial expenses, or purchasing a casket. It can also help preserve your estate for loved ones by paying off any outstanding debts you may have left behind.

Replacement income to your spouse

When planning your estate, it is essential to consider how you can provide for your loved ones after you’re gone.

One option that can be especially helpful is income replacement life insurance, which pays out a lump sum benefit to the policy owner’s spouse.

Death benefits will provide an ongoing income stream to your beneficiaries, which can help them cover essential expenses and maintain their standard of living.

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Protection Against Debt

You must ensure your loved ones are not burdened with debt when you pass away. Fortunately, having a good life insurance policy can prevent this from happening.

With the payout from your policy, any outstanding liabilities can be covered so your family doesn’t have to struggle financially after you’re gone.

With sufficient mortgage protection coverage, you can pay off your mortgage balance and ensure your home remains secure for your loved ones.

Additionally, credit card bills won’t become haunting reminders of lost loved ones because the insurance payout will take care of them.

Furthermore, medical expenses won’t go unpaid and cause additional stress during a difficult time.

FUNDING LONG-TERM CARE

Hybrid long-term care insurance offers the option to use a portion of the policy’s death benefit for nursing home expenses.

The cost of nursing care can be extremely high, but with hybrid long-term care insurance, you can ease the financial burden on your family.

Long-term care expenses have the potential to drain your savings and assets rapidly. By opting for hybrid insurance, you can preserve these resources for future generations.

MAXIMIZING WEALTH TRANSFER

Permanent coverage offers a tax-efficient way to optimize the distribution of assets to a spouse, child, or charity organization.

You can diversify against a volatile stock market by buying a life insurance policy that passes a tax-free inheritance to beneficiaries.

A second-to-die life insurance policy offers the best return on investment for transferring wealth to the next generation.

The death benefits of a life insurance policy are paid directly to a trust or beneficiaries when you die, bypassing probate.

Charitable life insurance

A gift of life insurance can provide to the charity of your choice, serving as an
a noteworthy part of your overall estate plan.

Gifting a life insurance policy to your favorite charity offers a beautiful way to leverage tax-deductible premium payments today into a meaningful future donation.

Establishing a charitable life insurance policy allows people of all income levels to contribute much more than donating money directly to the charity.

The future death benefit of your policy would most likely exceed the amount you could afford to donate during your lifetime.

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Estate Planning for Business Owners

As an entrepreneur, you have likely invested significant time and effort into nurturing and expanding your business.

Therefore, estate planning is a necessary consideration for business owners, as they must not only secure their financial future and that of their loved ones but also safeguard the ongoing operations of their businesses.

With various life insurance options available, business owners must familiarize themselves with these choices and understand how to shield their businesses effectively.

ESTATE EQUALIZATION WITH LIFE INSURANCE

If you want the family business to continue after you die, you should decide which of your heirs is interested in operating the business.

With estate equalization, the family business is given to one child actively involved with the company.

Then, a universal or whole-life policy is purchased to provide an equal benefit as an inheritance to the kids not involved with the business.

So, a life insurance policy can help equalize your estate by dividing assets equally among beneficiaries.

Business buy-sell life insurance

A buy-sell life insurance policy can help ensure that the owners of a business can get the money they need to continue operating in the event of one of their deaths.

The death benefit provides immediate cash to remaining partners to buy out the deceased partner’s interest in the business and pay out their heirs.

An advantage of buy-sell insurance is that there is no hindrance on the surviving partner to sell company assets to raise the cash.

This will allow surviving partners to continue normal operations without dealing with outside family members.

Key person protection

Companies invest in keyman life insurance to safeguard against losing a critical individual, like an owner, executive, or uniquely skilled employee.

The company covers the premium costs and is also the policy’s beneficiary. The company receives a death benefit in the event of the key person’s death.

This financial support assists in recruiting a replacement, sustaining business operations, or settling any outstanding debts.

Business loan life insurance

Business loan life insurance is a policy purchased by small business owners to safeguard lenders in the event of their death.

In this arrangement, the business owner is covered under the policy, with the lender named as the beneficiary.

The coverage amount matches the loan value, ensuring that if the owner dies, funds are available to repay the outstanding debt fully.

FAQ: Life Insurance in Estate Planning

What role does life insurance play in estate planning? Life insurance pays various expenses, including funeral costs, debt repayment, and estate taxes. Life insurance eliminates the need to sell or liquidate assets, ensuring that your heirs can maintain financial stability after you’re gone.

How can life insurance proceeds avoid probate? When you buy life insurance, you designate beneficiaries to receive the death benefit. The proceeds will not go through probate if your primary or contingent beneficiaries are alive at your death.

What is the best type of life insurance for estate planning? Permanent life insurance is typically the most suitable choice for an estate plan. After all, If your coverage doesn’t extend until the very end of your life, it may not be particularly beneficial if its primary purpose is to support your estate.

When should you use an irrevocable life insurance trust? The timing for using an IILIT depends on your goals and circumstances. ILITs offer asset control, protection against creditors, privacy, and guidance in transferring assets to future generations. Yet, ILIT relinquishes ownership rights and some control over the included assets.