Best Life Insurance for Estate Planning
Best Life Insurance for Estate Planning
One of the most significant benefits of life insurance as part of a comprehensive estate plan is that the insurance provides both liquidity and leverage.
Life insurance plays a vital role in estate planning, including preserving the value of your estate, providing financially for dependants or a surviving spouse, and ensuring money is available to pay for any taxes, fees, or other outstanding debts upon death.
Any estate — large or small — will require money to pay taxes, administration expenses, and outstanding debts. Estate liquidity is also very important for providing living expenses to a surviving partner, spouse or dependent children.
Life insurance can not only be used to protect surviving dependents, but also to create, increase or preserve funds to ensure the fair and equitable distribution of your estate
Using Life Insurance for Estate Planning
In general, life insurance for estate planning is used for a few purposes which may include any of the following:
- Providing a death benefit to beneficiaries
- Providing liquidity to assist the estate
- Providing spousal income and support
If federal estate tax planning is an issue, life insurance can be used to supply liquidity to pay the estate taxes.
Again, this would be for an estate that is in excess of the exemption limits discussed above.
The good news is life insurance is not taxable when paid to a beneficiary, if your estate is below the Federal Estate Tax Exemption amount.
That means your beneficiary will not have to pay income taxes on the death benefit payout.
If business continuity succession planning is required, then liquidity is also the objective, even if the estate tax is NOT an issue, because the life insurance proceeds may be used to finance the purchase of the business from the estate by a beneficiary OR a third party.
Usually, business succession planning with a buy sell agreement that is funded by life insurance is the most effective way to do this kind of planning.
If family business succession planning is involved, the terms of the transition should be spelled out in the estate documents including any revocable or irrevocable trusts.
Also, a second-to-die life insurance policy may be beneficial where both spouses are active in the business and the surviving spouse will not need the death benefit.
Charitable estate planning may accomplished by assigning the death benefit or making a charity the contingent beneficiary of a life insurance policy.
Generational estate planning is often used to take care of future generations such as children and grandchildren. Often an irrevocable life insurance trust (ILIT) can be used for this purpose, although you must be careful to avoid incidents of ownership, which may turn off those who want control of all aspects of their estate. If a surviving spouse doesn’t need the death benefit, a second to die life insurance policy can fund the ILIT.
Special needs or pre-Medicaid estate planning may be accomplished by making an irrevocable special needs trust the beneficiary of a life insurance policy, thereby providing necessary support to a dependent beneficiary without disqualifying them from public benefits.
Finally spousal estate planning may be required where it is determined that a spousal will need additional income or support in order to maintain his or her current standard of living following the death of the income earner spouse. Life insurance proceeds are often utilized for the purpose of providing this additional support.
Life Insurance and Creating Your Estate
Life insurance can be an efficient way to create an estate or pass on wealth to next generations as more funds can be provided to heirs tax-free.
Another common use for life insurance is to facilitate equal distribution to beneficiaries.
An example would be an estate that includes shares of a business to be distributed among family members who are active in the business.
Often, the business represents the major asset of the estate; the value of the remainder to be divided among non-active family members is significantly less. Life insurance can provide additional funds to ensure fairness.
Life Insurance Creditor Protection
Your beneficiary designation affects whether or not life insurance proceeds are protected from your creditors.
Insurance laws provide that where a spouse, child, grandchild or parent is a beneficiary, insurance proceeds are exempt from seizure by creditors.
Just as importantly (and often overlooked), whole life policies also offer the benefit of protection against creditor claims, making whole life an great choice for asset protection.
In general, when a creditor obtains a judgment or when a debtor files bankruptcy, the debtor’s assets can be “attached” to satisfy debts. An attached asset is seized and liquidated, and the proceeds are applied to creditor claims.
However, every state has exemption laws identifying certain asset categories which are immune, or partially immune, from attachment.
The classic example is the “homestead exemption” protecting a debtor’s primary residence, but the cash value and death benefits of life insurance policies are also exempt – in whole or in part – in nearly every state.
Best Whole Life Insurance for Estate Planning
If you were to ask someone who does estate planning and sells life insurance whether permanent or term life insurance is better for you, you’d likely be told that permanent insurance is the way to go.
As a general rule of thumb, term life insurance — while it might offer a lower cost because it’s a temporary policy — is not ideal for things like creating a trust or providing for a large estate.
In some very specific cases, term life insurance could be an advisable option, but support is overwhelming for universal life or whole life policies over term policies.
In fact, statistics show that about one-third of those who bought life insurance policies in 2014 bought permanent life insurance.
Those numbers make sense because most people who use life insurance aren’t simply using it to provide for beneficiaries. They’re using it to provide a legacy, so whole life insurance is the better option.
Life Insurance for Estate Planning
If you need help with life insurance planning, contact Mintco Financial Independent Advisors.
Life Insurance for Estate Planning will create a buffer of cash to help pay estate taxes or any other expenses upon the death of a loved one.
This helps a great deal when faced with the realities of losing a family member.
In addition, life insurance trust planning inherently reduces the estate taxes owed simply by removing the insurance policies from the estate thus decreasing taxes owed. Therefore it provides a less expensive avenue to pay off estate taxes, which can add up to more than you think.
Life insurance trust planning can also provide for a spouse without the insurance proceeds being included into the estate of the spouse as well.
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