Estate planning is a really important part of the wealth protection element of a comprehensive financial plan and life insurance can play several roles in this, particularly if you should, unfortunately, pass away suddenly and/or prematurely. It helps by giving you access to emergency funds during sudden and major life events such as needing major medical care.
What are the Benefits of an Estate Planning Tool?
One of the objectives of estate planning tools is to ensure that your assets are distributed according to your wishes using good financial decisions. This estate planning process ensures that your assets are ultimately transferred to those you wish to have access to them after your death. It can also minimise or even eliminate any potential estate tax liability.
Estate planning tools also allow you to manage your affairs in the event of incapacity. It is not just about transferring money to beneficiaries, but it can also be used as a strategy to save on the costs of income tax or federal estate tax. You should consider the following if you’re looking for life insurance for estate planning.
Immediate Access to Emergency Funds
In the event of your death, your real estate will be subject to the probate process, which can take many months. In the meantime, assets within the real estate are tied up and cannot be accessed by your family. This could leave them without regular income or cash with which to pay bills.
In contrast, the cash from a life insurance policy can be made available very quickly. Usually, an insurer’s policy only requires a copy of the death certificate to release money. That money can be used both to cover your beneficiaries’ ongoing day-to-day expenditures in the immediate future and to settle funeral costs. I have seen many instances where it is a godsend to grieving families at sea, replacing income after the loss of their main breadwinner. A suitable life insurance policy can even be turned into retirement income by either executing an exchange into an annuity or surrendering the cash value.
No Payment for Income Tax
Life insurance payouts are usually ringfenced outside of the deceased’s estate, which means that they are not subject to any inheritance taxes. The situation makes this a very effective way to ensure that you can maximise the amount of money from your estate that your family gets and minimise the amount taken as estate tax or inheritance tax. And who doesn’t want more insurance benefits from their life insurance policy?
There may be particular circumstances when life insurance is included in an estate plan, so it is advised to talk with a life insurance expert so you are clear on whether or not this is the case for individual circumstances.
Using a proper estate planning tool with the help of an experienced advisor or an estate planning attorney ensures that your life insurance trust can be used for purposes such as death benefits or access to irrevocable life insurance. It is recommended to discuss your insurance policy with a tax advisor. They will make sure that your assets are safe and will be free of deduction from things such as income taxes.
To inform and instruct an insured, this point in the financial planning process is best illustrated by an example. Let’s say you are a 50-year-old man in perfect health. A life insurance policy that costs around $4,000 will give you access to $500,000 worth of whole life insurance. Based on the average life expectancy of a person, you could expect to live to 82 years. In that case, you will have paid 32 years’ worth of payments, i.e. $128,000, to gain $500,000. That represents a net gain for your estates of $372,000. Not bad!
Repayment of Family Debts
Term insurance in an estate plan is a way to purchase temporary protection as insurance for a specified period and usually accompanies a large debt such as a mortgage. During the term of the mortgage, a person’s remaining balance is paid off if the policyholder passes away. That takes care of one huge great worry for families and certainly helps in maintaining financial stability with the use of a life insurance policy.
There is a whole range of insurance policies available to suit any size of personal finance. We have already mentioned whole life and term insurance, but you can also get single or joint policies, first-to-die or survivorship policies (whereby you can choose whether a payout is received upon the death of the first or second spouse), revocable or irrevocable life insurance trusts and so on. Again, if you aren’t sure which life insurance policy is relevant to you, it is best to talk through your needs with life insurance professionals or advisors.
All life insurance policies must have an owner, and choosing who the owner should be is sometimes the tricky part of insurance estate planning. In most cases, it is the insured’s spouse or the insured’s children that have access, and each has certain advantages and disadvantages, and tax implications.
A policy also needs a named beneficiary or beneficiaries, which is the most important decision you will make with life insurance. Usually, this will be a spouse or children, often your dependents, but you should choose carefully as that person or persons can invest money that was meant to be used to settle estate taxes.
You can also nominate a secondary beneficiary in case you and your primary beneficiary die. Some individuals nominate charities to be their beneficiaries. It’s best to discuss your decisions regarding your estate plan with legal advice from your financial or life insurance adviser. And don’t forget to change your beneficiaries in response to significant life events, such as removing a divorced partner, for example, and to let your beneficiaries know that they have been nominated to receive benefits under your life insurance.
How Can a Life Insurance Policy Help With Estate Planning?
Life insurance proceeds will greatly ease the sorting of assets and liabilities of a deceased person. Purchasing life insurance will alleviate many of the difficulties associated with estate planning, so family members will have financial support and be able to pay estate taxes and other necessary expenses in their time of grief.
Estate Taxes Payment
A life insurance policy is undoubtedly one of the best ways to pay estate taxes. The federal estate tax will apply to the gross estate of the deceased person, and tax payments must be made within nine months after the owner’s death. Many states even instate estate taxes, subjecting you to both federal and state taxes, but life insurance proceeds are most often tax-free.
Business Asset Coverage
Universal life insurance allows you access to an investment savings element. You will also be able to borrow the cash value to provide you with a financial net if your business faces difficulties, depending on your life insurance policy terms. Life insurance proceeds may also serve as collateral to fund a buy-sell agreement or as a business loan. These buy-sell agreements include terms and prices a surviving spouse or business partner must adhere to purchase the deceased’s shares. Surviving owners will get a death benefit in the case of your death, and these death benefits will ensure your family receives payments for your interest in a company.
There are many final expenses associated with death, including burial costs, the funeral, potential debts, and taxes, which death benefit proceeds can greatly alleviate. The death benefit of a life insurance policy can be claimed instantaneously, making it easier to cover such expenses and relieve the financial burden of the grieving family.
When there is more than one rightful heir to an estate, it could result in some complications. Often, conflicts arise when assets need to be divided, and breaking an estate up into equal parts could potentially reduce its capability to generate revenue. Life insurance can be utilised to equalise estate inheritance between parties. For example, one heir could receive the insurance policy’s death benefit while another receives property.
Preparation for Financial Future
A life insurance policy owner can choose how the life insurance proceeds should be used. For example, life insurance coverage could see to it that remaining minors or aging adults are cared for financially after your death. Life insurance funds can also be used to continue alimony or to fund a trust for specific purposes such as education. A trust allows you to hold assets on behalf of one of your beneficiaries under the protection of a trustee.
Is an Irrevocable Life Insurance Trust Necessary?
An irrevocable life insurance trust can be used to control either a permanent insurance policy or a term while the policy owner is still alive if you wish to use life insurance in estate planning. With an irrevocable life insurance trust, you can transfer the policy to the trust or use the trust to pay life insurance premiums, meaning the trust is the owner of your policy. The official trust document will establish who will designate beneficiaries, administer assets, and decide on the terms of how beneficiaries will receive the assets.
An irrevocable life insurance trust greatly facilitates wealth management and general estate planning. However, it may not be the best course of action for everyone. It is important to note that the agreement set under the ILTL is utterly irreversible, meaning the terms cannot be changed once they are in effect. If the terms may potentially cause complications in the future, it would be better to consider alternative routes.
It is advised to consult a financial professional, an expert estate planner, and legal advisors and seek investment advice to ensure the terms of your document are suitable for your personal circumstances.
Infinity is a trusted insurance company with esteemed financial professionals that can offer you investment objectives and a helping hand in the entire process of estate planning.
If you have any questions about financial planning, estate planning, or life insurance and how you can use it to protect your family members, please feel free to get in touch with me. I have a wealth of experience putting in place a range of different policies to make financial decisions that suit my clients’ wide-ranging needs and would love to do the same for you. Please email me at email@example.com.
I work as a Financial Planner with expat clients to meet their financial planning needs and goals, with a focus on adequately protecting expats & their families, and helping people to grow their savings over the long term. I strongly believe in building meaningful and lasting relationships with clients to ensure the best client outcomes are achieved.