Estate Planning with Life Insurance

Although most people don’t like to think about what might happen to their loved ones after they’re gone, the reality is that if you aren’t properly prepared for certain situations, a potentially bad scenario could become much worse for the people that you care about most. In fact, for most people to achieve lasting peace…
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Although most people don’t like to think about what might happen to their loved ones after they’re gone, the reality is that if you aren’t properly prepared for certain situations, a potentially bad scenario could become much worse for the people that you care about most. In fact, for most people to achieve lasting peace of mind, effective estate planning is oftentimes a necessity.

Many people believe that they must have millions of dollars in order to plan their estate. But even if your family doesn’t have substantial estate tax issues, you will still want your valuables to be passed on to those you love.

This can often be accomplished using life insurance.

What is an Estate Plan?

Many people mistakenly think that estate planning only involves the writing of a will. But estate planning involves a great deal more than that, as it can include such aspects as financial, tax, business, and even medical planning. So, while writing a will is certainly a big part of the overall process, there are many other documents that are also necessary to fully address all of your estate planning needs.

In addition to the substantial amount of money that an estate plan can save your survivors, this type of plan can ensure that your family and your financial goals are met when you are no longer here or able to make such decisions on your own.

An estate plan can help you to clarify your intentions both during life and after death. For instance, should you become incapacitated due to an illness or accident, you can pre-state your intentions regarding medical treatment.

Additionally, death can take a tremendous toll on a family. In addition to the emotional turmoil, survivors must deal with a number of financial and tax-related issues. Having an estate plan already in place, however, can provide the steps that your survivors will need to move forward – alleviating a great deal of stress, strain, and emotion.

In most cases, a person’s taxable estate will likely consist of some or all of the following types of assets:

  • Cash
  • CD’s
  • Stocks, bonds, and mutual funds (including retirement accounts such as IRAs and 401ks)
  • Real estate
  • Personal property
  • Life insurance
  • Business(es) owned
  • Autos and other vehicles
  • Jewelry

There will also typically be at least some amount of estate liabilities. These may include:

  • Mortgage balance
  • Home equity loan balance
  • Auto loan(s)
  • Student loan(s)
  • Other loan(s)
  • Credit card balance(s)

Why Use Life Insurance With Estate Planning?

To avoid subjecting estate property to the probate process in certain situations, each state has approved limited methods of transferring property at death via “will substitutes.” In some instances, these are limited to certain types of assets.

Using a will substitute, can allow you to transfer certain assets without the need to put them – and your loved ones – through the lengthy, costly, and frequently very public process of probate. Rather, a will substitute can allow your beneficiaries quicker access to funds that may be needed for the payment of funeral and final expenses, administrative costs, or other pressing financial obligations.

Beneficiary designation is a form of will substitute. This allows you to transfer certain assets by contract, such as the proceeds of a life insurance policy. Therefore, life insurance can be an important component of one’s estate plan.

How Life Insurance is Used in Estate Planning

One of the most common ways that life insurance is used in estate planning is through an Irrevocable Life Insurance Trust or ILIT. In this case, an insurance trust owns the life insurance policy – and because of that, the insured’s estate does not have any incidents of ownership, thus removing the proceeds from inclusion in his or her estate value for estate tax purposes. This, in turn, will reduce the amount of estate taxes that are owed when the insured passes away.

An ILIT has three parts. These include the:

  • Grantor – The grantor is the person who creates the trust (also the insured)
  • Trustee – The trustee will manage the trust
  • Beneficiary (or Beneficiaries) – The trust’s beneficiary (or beneficiaries) are those who will receive the trust’s assets at the death of the insured

Once the proceeds from the life insurance policy have been paid out at the insured’s death, the trustee will make them available for the payment of estate taxes, as well as any other costs, such as legal fees, probate costs, and/or income taxes that are due.

While an ILIT is an irrevocable trust – which means that the owner cannot make changes after it has been set up – the owner can still garner a great deal of control over the way in which his or her assets are distributed. This is particularly the case with the trust as the policy’s beneficiary.

One way that an ILIT allows the owner more control is because the trustee is required to follow the instructions that are left by the owner. Likewise, with the insurance trust as the beneficiary of the life insurance proceeds, the owner of the trust can also stipulate how the money is spent.

What Type of Life Insurance is Best for Estate Planning Needs?

In most cases, permanent life insurance is the best type of policy to use with estate planning. One of the key reasons for this is because, unlike term life insurance that only remains in force for a certain time period, a permanent policy is typically designed to remain in force for the insured’s entire lifetime (provided that the premium is paid).

Because of this, it is less likely that the policy will expire if you use permanent coverage. In this case, different types of permanent coverage could be considered – including whole life, universal life, indexed universal life, or variable universal life.

In most cases, Irrevocable Life Insurance Trusts are set up when the owner is in his or her 50s or 60s. That is because, at this point in their lives, family relationships have typically been settled. It is important to keep in mind, though, that the insured on the life insurance policy needs to be insurable. This means that if he or she has an adverse health condition, it could be more difficult to be approved for coverage. With this in mind, moving forward with this type of planning is best done sooner rather than later.

Who Needs an Estate Plan?

Although the term “estate plan” may sound like it is only for those who are wealthy, the truth is that many people – even those who don’t have an excessive amount of assets – can benefit from having an estate plan.

Laying the groundwork for estate planning consists more of setting up the proper methods of transferring wealth so that those assets you’ve built up over time can avoid excessive taxation, and can be put to the best use that you see fit going forward.

How to Learn More About Estate Planning with Life Insurance

If you’d like to learn more about estate planning with life insurance, it can be beneficial to talk with an independent life insurance agency or brokerage. We can assist you with any of the questions or concerns that you may have.

Please feel free to contact us directly! We understand that setting up an estate plan using life insurance may feel a bit intimidating. But with an expert on your side, it can make the process much easier. So, contact us today – we’re here to help.

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