Lasting Situations of Wealth

Life Insurance in Estate Planning

A life insurance policy is often a vital instrument in an estate plan, because a life insurance benefit delivers a specific amount of cash upon the death of the insured. For the beneficiaries of an estate, life insurance can provide:

•    ongoing income for living expenses,
•    educational funding, 
•    liquidity to pay death taxes,
•    payments to settle outstanding obligations,
•    funding for business buy-sell agreements,
•    completion for retirement plans.

Under good management instructions, in combination with other assets, life insurance can allow the estate to satisfy the claims of beneficiaries, retain ownership of its most valuable assets, and buy time so other assets don’t have to be liquidated at a discount.

However, to be most effective in an estate plan, the life insurance must be properly established regarding the design of the policy/ies and legal considerations. Some examples:

Policy Design.
Because some estate plans will not become effective until the death of the second spouse, a financial professional may recommend a second-to-die, or survivorship life insurance policy. This policy, which insures both husband and wife, does not pay a claim until both spouses have passed. Because the claim is not paid until the second death, premiums may be lower than if the spouses held two individual policies.

If the primary emphasis of life insurance in the estate plan is to provide proceeds at death as opposed to liquid cash during one’s lifetime, some insurance professionals may also recommend blended policies (i.e., a combination of term and cash value life insurance) which emphasize a guaranteed death benefit, with minimal cash value accumulation.

Ownership.
Proceeds from life insurance that are received by the beneficiaries upon the death of the insured are generally income tax-free. However, while not incurring income tax to the beneficiaries and avoiding probate, these proceeds may also become part of the deceased’s estate; a $1 million insurance benefit could add $1 million to the value of the estate, and in doing so, incur additional taxation. According to Cathy Pareto, a Certified Financial Planner writing for investopedia.com, the inclusion of life insurance in an estate occurs if:

•    The proceeds are paid to the executor of the decedent's estate.
•    The decedent at death possessed an incident of ownership in the policy.
•    There is a transfer of ownership by the Insured within three years of death (three-year rule must be observed).

To avoid adding life insurance proceeds to the estate, the policy may be owned by children of the insured, or placed within an irrevocable trust under specifically delineated terms. Each of these options, along with several others, should only be undertaken with input from competent legal and insurance experts.

Because of the financial leverage of life insurance (the ability to reserve a large amount of money for the future with a small premium), it is an ideal financial instrument to protect the best assets in an estate and maximize distributions to beneficiaries.

IF YOU ALREADY HAVE LIFE INSURANCE, NOW WOULD BE A GOOD TIME TO FIND OUT IF YOUR
CURRENT COVERAGE CAN SERVE YOUR ESTATE PLANS AS WELL.