Life Insurance in Estate Planning: A Winning Combination
Life insurance in estate planning, when implemented correctly, offers financial security and peace of mind for families. If you haven’t safeguarded your wishes or taken steps to preserve as much of your wealth as possible, our free estate planning seminars can help you get a head start on estate planning. Register now or call (828) 258-2888 for an initial case evaluation.
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Why choose us?
My husband and I finally decided that it was time to redo our estate plan, but weren’t really sure what we needed. Chris was so wonderful to work with! He immediately put us at ease patiently explaining his recommendations. Chris took his time throughout the process, making sure that we understood how each document fit into our estate plan and answered many (many!) questions. It’s a great comfort to us to know that we have a thorough plan in place for the future. And working with Chris made it a very pleasant experience. We highly recommend him!
Karla K. | Asheville, NC
Learn the key terms around life insurance in estate planning.
Investment: Refers to the role of life insurance in estate planning as a financial investment tool to provide for heirs or beneficiaries.
Audit: A review of existing life insurance in estate planning components to ensure alignment with current goals and legal requirements.
Retirement: The phase of life where life insurance in estate planning becomes crucial to ensure sustained income and support for dependents.
Permanent Life Insurance: A type of life insurance that provides lifelong coverage.
Financial Advisor: A professional who guides individuals in managing their financial assets, including advising on life insurance in estate planning.
Survivorship Life Insurance: A life insurance policy that covers two people and pays out after both have passed.
Whole Life Insurance: A form of permanent life insurance to provide financial support and accumulate cash value.
Federal Estate Tax: Taxes imposed on the transfer of assets upon death, potentially offset through strategic use of life insurance in estate planning.
Universal Life Insurance: A flexible permanent life insurance policy to provide both death benefits and investment opportunities.
Term Insurance: Temporary life insurance used in estate planning to cover specific financial needs or responsibilities for a set time.
Taxable Estate: The portion of an estate subject to taxes, which can be managed or reduced through life insurance in estate planning.
Funeral Costs: Types of expenses related to death and burial, often covered by life insurance in estate planning.
Real Estate: Property holdings that can be factored into estate planning, potentially requiring life insurance for tax or liquidity considerations.
Capital Gains Tax: Taxes on profits from the sale of assets, potentially mitigated through the strategic use of life insurance in estate planning.
Estate Planner: A professional specializing in life insurance in estate planning.
Financial Advisory: A service involving guidance on managing financial affairs, often including investment advice and how to incorporate life insurance in estate planning.
Social Security: Government benefits that may influence the need and structure of life insurance in estate planning.
Irrevocable Trust: A trust that cannot be altered without the beneficiary’s permission, often funded with life insurance in estate planning to provide financial benefits and tax advantages.
Registered Retirement Savings Plan: This refers to a retirement savings arrangement that may interface with life insurance in estate-planning.
Role of Life Insurance in Estate Planning
Any person, regardless of their wealth, can use life insurance in estate planning to ensure that their loved ones are protected, and their financial goals are fulfilled.
Life Insurance in Estate Planning Provides Financial Security for the Family
A well-structured life insurance policy can provide immediate liquidity following one’s death to alleviate financial strain and help families cope with the loss. This can cover everyday living expenses, educational costs for children, and other financial requirements that a family might face in the absence of the primary breadwinner.
Life Insurance in Estate Planning as a Wealth Transfer Tool
The significant death benefit that life insurance policies provide can allow one to leave a substantial inheritance. The added advantage here is that life insurance death benefits are generally income tax-free and can be accessed directly by the beneficiaries bypassing the probate process.
Insurance policies are flexible enough to be shaped according to one’s unique estate planning goals. For example, one can set up a trust as a beneficiary to control the dispersion of the death benefit according to specific terms rather than giving the lump sum directly to the heir.
Life Insurance in Estate Planning Settles Outstanding Debts and Expenses
Outstanding debts, mortgages, and taxes are the looming threats that one leaves behind after death and can eat into the assets and inheritance that are meant for heirs and beneficiaries.
A life insurance policy can come to the rescue and be used to pay off such outstanding liabilities. This ensures that assets are not liquidated for debt repayment and the estate remains intact for the beneficiaries. Additionally, this money could also be used to cover the funeral expenses to avoid burdening the family further.
Life Insurance in Estate Planning Allows for Charitable Giving
Naming a charity as a beneficiary in the policy will ensure that the charity receives a substantial sum upon the death of the policyholder. This helps ensure the longevity of the charity but can also provide estate tax benefits to the policyholder.
Life Insurance in Estate Planning: Understanding Irrevocable Life Insurance Trusts (ILITs)
An Irrevocable Life Insurance Trust (ILIT) is a type of trust that cannot be changed or revoked without the consent of the trust beneficiary. This “irrevocable” nature of ILITs ensures the separation of life insurance policy from the insured’s estate, thereby shielding it from estate taxes.
The insured person, or grantor, creates the ILIT, appoints a trustee (which may be an individual or an institution), and names the trust beneficiaries. The trustee then purchases a life insurance policy on the life of the grantor using funds gifted by the grantor. Upon the death of the insured, the trust becomes the beneficiary of the insurance payout, which is then distributed to the trust beneficiaries per the terms of the trust.
Tax Implications of Life Insurance in Estate Planning
The tax rules concerning life insurance proceeds can vary depending on the state of residence, policy size, and insurance company. A professional estate planning lawyer can provide significant insight into financial planning and tax implications to ensure efficient estate planning.
Life Insurance in Estate Planning: Inheritance and Estate Taxes on Life Insurance Proceeds
In general, the proceeds of a life insurance policy paid to a beneficiary are not subject to income tax; however, these proceeds are included in the gross estate of the policyholder. A life insurance policy can increase the value of the estate and possibly push it over the exemption amount, making the estate potentially subject to estate tax.
Gift Tax and Life Insurance in Estate Planning
If an individual gifts a life insurance policy to a beneficiary, it could potentially result in a gift tax. Every person has a lifetime gift tax exemption, and if the value of the gifted life insurance policy surpasses this exemption, the giver might be subject to gift tax.
If an individual owns a policy on their life and decides to transfer ownership to another individual or a trust, this is also considered a gift for tax purposes. If the policy has a significant cash value, this could lead to gift tax implications. However, if the owner assigns the policy to a trust, it can reduce potential estate tax implications.
Life Insurance in Estate Planning: Role of Estate Planning Attorneys
Estate planning attorneys specialize in helping individuals draft and execute wills, set up trusts, and navigate estate tax laws. They can also help guide you through the quagmire of life insurance policies to help you decide on the one that will best suit your financial situation. These attorneys offer vital advice that can help you use life insurance in estate planning to its fullest potential.
Life Insurance in Estate Planning FAQs
How does life insurance in estate planning help in mitigating taxes on estates?
Life insurance can absorb any applicable inheritance taxes (which are determined by state laws) when a person dies. Proceeds from life insurance are usually tax-free for beneficiaries and reduce the potential tax burden on the estate.
Can a life insurance policy beneficiary be an estate?
Yes, an estate can be named as the primary beneficiary of a life insurance policy. However, this often means that policy benefits get subjected to probate and may also increase estate taxes.
Why should individuals consider term life insurance in estate planning?
Term life insurance in estate planning provides affordable and temporary coverage that can cover expenses such as mortgage debts or children’s education costs. If an individual dies before the term ends, the death benefit can ensure that these financial obligations are not left to loved ones.
Learn More About Life Insurance in Estate Planning
Making the most of life insurance in estate planning requires meticulous planning, professional execution, and regular review to ensure your estate plan is still relevant to your unique situation. Let our professional estate planners at Craig Associates, PC help you navigate life insurance in estate planning with ease. Please call our Asheville office at (828) 258-2888, contact us using the form below, or register for an upcoming free estate planning seminar to learn how life insurance in estate planning can secure your financial future and help ensure your family members are taken care of.
