Life Insurance for Estate Planning

Life Insurance for Estate PlanningGetting a life insurance policy can be beneficial in many ways. Whether you have a small or large estate, your life insurance can benefit you and your family. Your life insurance can make a small estate large or it can make your large estate protected. Just remember to be wise and do your research because you’re about to make one of the most important decisions you will ever make. Today we will be going over the different uses of life insurance, the basics of life insurance for estate planning, we will explain how life insurance trust work, and how much life insurance you should buy. We will also touch base with those who are single and with no dependents and estate planning for those who have a high net worth. The following are some key points from this article;

  1. Life insurance can serve as a source of support for a spouse who is not the breadwinner because if something happens to the breadwinner then the other spouse would not know what to do next.
  2. You can use your life insurance policy to cover education expense because many people still have school loans they haven’t paid back yet and just because they pass away their debts don’t disappear.
  3. Life insurance can also pay death taxes and expenses associated with the death of the insured.
  4. Life insurance just like other types of insurance is put in place to reduce financial risk. We will go over the two important types of life insurance before we get into estate planning because it is important to know which kind of life insurance policy you want to buy.
  5. Term life insurance is a type of temporary insurance which can provide coverage for only a short and specified period of time.
  6. A whole life insurance policy is a form of permanent life insurance that provides life insurance coverage for your entire life.
  7. If your estate is considered large and you have a lot of assets you will be more than likely to be subject to federal and state estate taxes. Once you buy life insurance the proceeds from life insurance will be received by the beneficiaries upon your death and most of the time it is tax-free.
  8. A trust has the ability to purchase life insurance policies under the grantor (the person who established the trust, or trust beneficiaries)
  9. Creating a life insurance trust can help you avoid taxes such as your estate tax or a death tax.
  10. If you are single and have no dependents and no debt then this may be the only reason to not buy life insurance because you don’t really need it. Just because you don’t necessarily need life insurance right now you should still consider a life insurance policy because your good health is never guaranteed and you may plan on getting married or have kids in the future and having a life insurance policy now will help you lock in your rates while it is still amazing.
  11. As a high net worth individual, you can use your life insurance to help provide liquidity for your estate and the pay that will be necessary to pay any estate tax.

The different uses of life insurance

When buying life insurance it is beneficial for you to know how and in what ways you can use your life insurance policy. Life insurance can serve as a source of support for a spouse who is not the breadwinner because if something happens to the breadwinner then the other spouse would not know what to do next. You can use your life insurance policy to cover education expense because many people still have school loans they haven’t paid back yet and just because they pass away their debts don’t disappear. In fact, these school loans will have to be paid back after the death of the one who is in debt or a family member will have to pay on their behalf. Life insurance can also pay death taxes and expenses associated with the death of the insured. Basically, your family will be hit with estate taxes and funeral costs if you don’t have a life insurance policy to take care of that. This can cause a financial burden to the family of the insured. If you have a larger estate with more assets (the applicable exclusion of $2 million) your life insurance policy can be an essential component of the estate plan.

The basics of life insurance for estate planning

Life insurance just like other types of insurance is put in place to reduce financial risk. We will go over the two important types of life insurance before we get into estate planning because it is important to know which kind of life insurance policy you want to buy. Term life insurance is a type of temporary insurance which can provide coverage for only a short and specified period of time. This type of insurance is the most affordable and this provides protection to replace the income of a family breadwinner. If the family’s breadwinner were to pass away the family would be left with not only financial burden following the death of the breadwinner but also will not know what to do next as far as their financials. Since this type of life insurance only provides coverage for a short period of time your needs may change late in life and that’s when you should consider buying a whole life insurance policy.

A whole life insurance policy is a form of permanent life insurance that provides life insurance coverage for your entire life. This life insurance policy will allow you to be free of the stress of having to think about your term period ending and still provides burial coverage and other final coverage. Once you choose which type of life insurance you would like to buy then you can think about how the policy can help you plan for your estate. Life insurance won’t increase estate taxes as long as you plan ahead. Keep in mind that we will always recommend for you to speak to a licensed financial advisor. If you have a large estate you will be subject to federal and state estate taxes which can cost a hefty amount.

Tax Implications of life insurance and your estate

Like we mentioned above if your estate is considered large and you have a lot of assets you will be more than likely to be subject to federal and state estate taxes. Once you buy life insurance the proceeds from life insurance will be received by the beneficiaries upon your death and most of the time it is tax-free. However, there can be three circumstances in which cause life insurance to be included in the decedent’s estate. One circumstance can be if the proceeds are paid to the executor of your estate. Another circumstance can be if you decided to transfer ownership within three years of your death because there is a three-year rule that voids the whole process if you pass away within the first three years. Or lastly, if you got an incident of ownership in the policy which means that any interest or rights that an individual maintains in an asset modify, use, or benefit from that asset.

What is a life insurance trust and what are the types of trust?

A life insurance trust is a trust that is set up for the main purpose of owning a life insurance policy. A trust has the ability to purchase life insurance policies under the grantor (the person who established the trust, or trust beneficiaries).Life insurance trust works the same way as regular life insurance policies far as the benefits being given to the beneficiaries of the insured, the only difference is that with a trust, a beneficiary will not be allowed the money unless they follow the terms that are included in the trust document. In a trust document, it will specify who the trust beneficiaries are and how they will be receiving the distributions of the trust. It will even state how the beneficiaries can spend the money in the trust or where they can invest it.

Irrevocable Life Insurance Trust

  • This type of trust is beneficial for wealthy people because it can help protect their heirs from estate taxes.
  • This type of trust is also essentially giving up ownership and control of your assets, so choose those assets carefully.
  • If you have children who are minors, or who otherwise need financial protection, an Irrevocable life insurance trust hold assets and protect them from the creditors of a beneficiary.

Revocable Trust

  • This type of trust will likely allow the insured to be the sole trustee of your trust.
  • The grantor/sole trustee has the ability to revise the trust up until death.
  • Assets in a living trust will pass to heirs sooner than a will.
  • A revocable trust does not offer the grantor tax advantages.
  • To avoid probate the grantor must create a will to designate beneficiaries for the remaining assets.

What does a trust have to do with estate planning?

Creating a life insurance trust can help you avoid taxes such as your estate tax or a death tax. Some states make you pay a death tax or make you or your family pay your estate taxes if your estate and assets are above the federal exemption level of $5,450,000 (as of 2016). Your life insurance can be taxed as well if the proceeds are included in your gross estate when you die. That’s why we mentioned creating a life insurance trust because this helps avoid paying these taxes. The advantage of life insurance purchased through an irrevocable life insurance trust is that both your estate and death benefit will not be subject to tax.

Estate planning for high net worth clients

If you consider yourself a high net worth individual then you need to understand how insurance and estates make a lovely couple together. As a high net worth individual, you can use your life insurance to help provide liquidity for your estate and the pay that will be necessary to pay any estate tax. Remember that creating a trust contract can be the most beneficial for you or maybe the option of transferring your assets to a family member because this way you will not have to worry about the high death and estate taxes. You should definitely be looking to set up an irrevocable life insurance trust for estate planning or even consider funding your irrevocable life insurance trust with a single premium life insurance policy.

What if I’m single with no dependents?

If you are single and have no dependents and no debt then this may be the only reason to not buy life insurance because you don’t really need it. However, you should consider the benefits of a permanent life insurance policy because it creates cash value or a permanent cash value life insurance policy, especially when used as a self-banking policy. Just because you don’t necessarily need life insurance right now you should still consider a life insurance policy because your good health is never guaranteed and you may plan on getting married or have kids in the future and having a life insurance policy now will help you lock in your rates while it is still amazing. You should consider buying a term life insurance policy but make sure it has an option to convert into a permanent life insurance policy in case you decide you need it more in the future. If you choose to not buy a life insurance policy it’s okay just know that anything can happen in the future and maybe you develop a disease which makes it hard for you to obtain a life insurance policy when you need it the most.

How much life insurance should I buy for my estate plan?

If you decide to buy a life insurance policy for your estate plan then the amount is really dependent on what your needs are. For example, if you own a business you may need to know how much cash would be needed to buy out your business partner, or if you have a mortgage you may need to know how much cash is required to pay off your mortgage. These are things that we do not know at this moment and you may need to even include your children in the equation or if you are the breadwinner how much would be needed to replace your income so that your spouse and kids can be taken care of when you are gone.

Final thoughts

In conclusion, buying a life insurance policy can be beneficial when you are looking into estate planning. It can also be beneficial for many other reasons and can help you prepare for the worst. Whether you have a small estate or a large estate, you should consider buying life insurance to protect your assets. We recommend to always speak to an estate planning professional before making an estate plan. There is no better day than today to buy a life insurance policy and you should look into working with an independent life insurance agency for all your life insurance needs or questions (like us). We are a free service and are here to make life insurance more simple and your lives a little simpler as well. Don’t waste any more time trying to DIY and take advantage of our free service today, let us do all the comparisons for you so that you can spend more time with those who matter the most, your family. Here at InsureChance, we work with over 60 top rated companies in which gives us a bigger selection to work with to be able to find the best life insurance company for you! Give us a call today and protect your family’s assets and estate!

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About Mack Dudayev

Mack is owner and life insurance expert at InsureChance. On a mission to create a way everyone can understand, afford and attain the right life insurance coverage to protect their financial responsibilities.

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