Using Life Insurance in Your Estate Plan

When people think of life insurance, they frequently imagine providing resources to replace loss of income for their family should something happen to them. While this is an important and obvious purpose, there are other ways to use the benefits of life insurance in your financial and estate planning.

There are different kinds of life insurance. Term life insurance provides coverage for a certain time period with fixed premiums. Once that period is up, you may be able to renew coverage at an adjusted rate or convert the term life insurance into whole life insurance, depending on your policy. Term life insurance is an affordable option that many families use to provide security for their families until their children reach the age of majority.

Permanent life insurance provides coverage throughout your life or for specific expenses when you die and pays a benefit no matter when you pass away, assuming you continue to pay premiums. Whole life insurance is a type of permanent life insurance with fixed premiums and a guaranteed death benefit. It also has a cash value/savings component upon which you may draw during your lifetime. Universal life insurance is similar to whole life insurance in that it can be for life and have a cash value, but there is more flexibility in changing premiums and death benefits. However, this flexibility means the cash value and death benefit are dependent on the amount of premiums you pay.

Another type of permanent life insurance is final expense insurance that you can get to cover end-of-life expenses such as funeral costs, medical bills, and outstanding debt. These policies are usually for a much smaller amount than other life insurance policies (from $10,000 to $50,000). They do not generally require a medical exam and have lower premiums.

When it comes to estate planning, you can use life insurance benefits in a variety of ways. First, some people use life insurance proceeds to cover state and federal estate taxes owed, either to avoid liquidating assets or to increase tax efficiency in their estate plan.

Life insurance proceeds can also help you equalize inheritances in your estate plan. For example, if you have assets that may be difficult to divide, like real estate or a family business, you can use life insurance proceeds to ensure that your heirs get similar inheritance amounts.

Another way to use life insurance in estate planning is to use it to fund a supplemental needs trust for a disabled beneficiary. A supplemental needs trust can provide supplemental support for a disabled loved one’s medical care and living expenses while not jeopardizing their eligibility for public benefits.

In addition, if charitable giving is a big part of your estate plan, you can name a charity as the owner and/or beneficiary of a life insurance policy.

While life insurance payouts are generally tax-free for the beneficiary, such proceeds are included in a decedent’s estate if they owned or had certain rights or powers over the policy. Some people with large estates and life insurance policies transfer ownership of the policy to an irrevocable life insurance trust to exclude the policy from their estate, as long as it is set up 3 or more years before their death.

Life insurance can be a useful tool when making your estate plan. When you develop your estate plan with Ozdeger Law, I’ll walk you through the best strategies to plan for the care of your loved ones. Together, we can help make sure that the future is more secure for those you love!