- How are life insurance policies and estate plans related
- What are the benefits of having life insurance in your estate plan
- Which types of life insurance can be included in an estate plan
- What is an Irrevocable life insurance trusts and who should consider one
- How much life insurance should you include in your estate plan
1.How life insurance policies and estate plans work together
You might be wondering how life insurance and estate plans work together, and if you have life insurance do you really need to do estate planning, and if you have an estate plan why would you also need to have life insurance? These issues can be somewhat daunting, not only because they are several legal and financial factors to consider, but also because most of us would rather not think about our inevitable death. You might be surprised to learn, life insurance policies and estate plans can function together or separately from one another.
A person’s life insurance policy may impact how their estate is taxed, the fees the estate must pay upon their death and how the proceeds are used. If the life insurance policy is included in the estate plan, the funds are available to cover the debts, bills, and other financial obligations of the deceased. Commonly, a spouse is named as both the primary beneficiary of the insurance policy and the trustee of the family trust thereby ensuring that funds from the policy can be used in settling the estate. But this does not fit every family situation and there are other ways of including life insurance policies into an estate plan.
2. What are the benefits of having life insurance in your estate plan
Generally speaking, having an insurance policy or multiple policies in your estate plan yields several benefits. The presence of the insurance policy in your estate plan creates an immediate estate (pre-death) which helps avoid taxes; maximizes your total net worth which may be leverage you can use and the cash value of the policy could be a source of tax free money in case you needed to use it for your retirement.
3. What types of life insurance can be included into an estate plan
There are several types of life insurance that you can include in your estate plan: term, whole, guaranteed universal, second to die, indexed universal, etc. Some term policies are a good option because they have return of premium benefits so you will either get your money back at the end of the term or your beneficiary will get it upon your death. Whole life policies are perhaps a better option for some, as they do not have a fixed term and can build cash value, but they have higher premiums. Guaranteed Universal Life policies blend the two by offering a whole life policy with minimal cash value at a lower fixed premium. Second to die policies are popular with well-off married couples where the first to die spouse is not in need of the proceeds and the couple plan to endow their entire estate to their children or to a charity. Of course, there are other types as well and it’s quite common for attorneys to meet with financial advisors to discuss a mutual clients’ best options.
4.What is an ILIT and who should consider it
For example, you can set up an Irrevocable Life Insurance Trust, or ILIT which is often a better idea if your total assets will exceed the exemption amount (currently 11.58 million). An ILIT is created to own life insurance policies while the insured is alive and manage the proceeds to be paid out after one’s death. There are several benefits to creating an ILIT. Your ILIT can help to minimize your estate taxes because the life insurance policies held within are not part of the gross estate and hence not subject to estate taxation. And in some situations, ILITs can provide liquidity and you might want cash on hand to pay the estate taxes and other debts and expenses. ILITs can provide asset protection from the creditors of the grantor and/or beneficiary. Another benefit is that the ILIT can protect the benefits of a Trust beneficiary who is receiving government aid such as social security or Medicaid. There are many other benefits beyond those stated here. See this article from Investopedia to learn more or contact our office or your financial advisor.
5.How much life insurance do I need for my estate plan?
By now you may be thinking, what amount of life insurance should I buy. There is no real answer to this as there is one size fits all scenario. How much life insurance someone needs will depend on how their life played out and hence it will be vastly different from one person to another. There are several factors to consider that can help you determine the right amount for you, including:
First of all, you should consider all of the other money sources that your family will have access to after your death, like money in your bank accounts and cash on hand and then consider whether you would want them to cash in savings bonds, CDs, stocks, etc.
Do you own a business or are you a partner in business ownership and how much cash would be needed to buy out your business partner
Will you owe estate taxes and how will your beneficiaries want life insurance proceeds to help pay off estate taxes;
Do you own a home or multiple homes and have a mortgage and how much would be needed to pay off your mortgage;
Do you have young children and what would be needed to provide for their schooling, now and once they get to college;
Are you the primary bread winner in your household and how much money would be needed to replace your yearly income so that your spouse and children will be able to experience the same life style as they are accustomed to for the next 5-10 years.
Once you have considered these factors and have come up with a figure to reach toward and have subtracted any liquid funds you, how much money is left for you to provide? This is how you can estimate the right amount of life insurance to buy so that your family will not have to dip into a 401K, stock, or mutual fund portfolio, or sell real property in order to maintain their lifestyle.
If you have any questions about your situation don’t hesitate to contact us.
