Life insurance can be an important part of your overall financial strategy. One of the most common uses of life insurance benefits is to pay for final expenses after your death, including funeral or cremation costs, medical bills not covered by your health insurance, and other unpaid obligations you may leave behind. Life insurance can provide income replacement for your family if you die early.
However, life insurance is a very important asset and should be part of any estate planning discussion as long as you are healthy enough to get it. The questions that you should ask your estate planning attorney are how to include life insurance in your estate plan and how life insurance money can be used when it’s part of an estate plan.
The proceeds of a life insurance policy can provide:
- Immediate funds at the time of your death to pay your funeral and burial expenses, outstanding debts, and your final income taxes
- Money to pay your federal estate taxes
- Funds that can be transferred to a trust as part of your will
- Proceeds to donate to your favorite charity or charities
The proceeds from your life insurance policy that are payable to a named beneficiary or beneficiaries can avoid the probate process. The result is that these funds are available immediately so that your family does not have to wait until your estate is settled to receive them.
When it comes to life insurance and estate planning, establishing an effective life insurance trust is a good option.
Who gets what?
If you are a high net worth individual, it’s important for you to understand how life insurance and estate planning work together. With the right strategy, you can use life insurance to safeguard the people you care about, provide for your charitable causes, and create opportunities for your legacy to live on after your death.
Including life insurance in your estate plan can help you to maximize your wealth and pass it on to the people and/or causes you care about with less risk and an increased potential for greater tax efficiency. Using life insurance in conjunction with irrevocable family trusts is one of the most common ways of using life insurance for wealth transfer.
An irrevocable life insurance trust or ILIT holds assets for the benefit of your beneficiary or beneficiaries and is managed by a trustee. The ILIT “owns” the policy instead of you so that your policy is not counted among your assets when the state or federal estate taxes are calculated. In addition, the ILIT protects the cash value of your policy from creditors.
One caveat — if you’ve had a sizable life insurance policy in place for many years and have concerns that your health or age might make a policy of equivalent value cost-prohibitive, you’ll want to discuss this with your estate planning advisor.
Experience advice you can trust
Using a life insurance policy in estate planning is a very effective way to ensure that your beneficiaries are financially taken care of after your death. If you have questions about estate planning, contact the Jeffrey Verdon Law Group, estate planning attorney in Newport Beach, CA.