Life insurance plays an important role in the estate planning process. It is used to preserve the value of your estate, to support dependents or a surviving spouse financially, and ensures there’s money available to pay any outstanding debts or taxes upon your death.
No matter the size of your estate, you’ll be required to pay taxes, administration expenses, and outstanding debts.
Estate liquidity is also crucial for providing living expenses to surviving family members. One of the best benefits of life insurance is that it offers tax-free money to your beneficiaries. It’s used to not only protect surviving dependents but also increase or preserve funds to make sure your assets are distributed fairly and equally to your loved ones.
There are a number of reasons why you may want a life insurance policy, including:
To cover taxes at death on illiquid assets and pay off debts
To pay funeral expenses, and lawyer and executor fees (including probate fees)
To create a pool of cash that allows your executor to equally distribute your assets to your beneficiaries in the case that some assets can’t be divided
Taking Care of Your Dependents, Heirs
Many estate planning strategies adopt an approach based on life insurance. There are two different approaches for this, which are based mainly upon your net worth. If you aren’t in a position to leave a sizable estate to your heirs, you can take a life insurance-based approach to leave them with a significant inheritance. If you’re better off financially, you can take an approach that’s still based on a life insurance policy, but your objective differs slightly. Instead of creating an estate for your heirs, in this strategy, you’re using life insurance to maintain an estate. Many expenses can deplete an estate, chief among them taxes. The benefits paid from a life insurance policy into an estate are not subject to income tax.
Why Life Insurance is so Important to an Effective Estate Planning Strategy
The benefits of using life insurance as the basis of your estate planning strategy are many and varied, and include:
It’s easier to establish a trust fund
It’s easier to make a charitable donation
As previously mentioned, there are many expenses incurred when an estate is created. Having a life insurance policy that pays into your estate can help your heirs and executor pay off taxes and any debts you might have. The benefits from a life insurance policy will give your estate a degree of liquidity. This can be especially helpful when your estate is primarily comprised of non-liquid assets, such as real estate.
A life insurance policy also makes it easier to establish a trust fund for an individual or individuals that you wish to support. You can designate a specific amount of money through the policy, and even structure the dispensation of the fund. It’s possible to set up a trust fund in your estate through other structures, but a life insurance policy may be the easiest and most efficient way of doing so.
It’s also very convenient to make a charitable donation with a life insurance policy. You can get a policy specifically for this reason, and make the charity the beneficiary of the policy. This ensures that the donation is made promptly and in your desired amount.
Universal Life Insurance vs. Short-Term Life Insurance
Term life insurance, also known as short-term life insurance, is insurance that lasts only for a specified length of time. This type of life insurance is not recommended for estate planning purposes, as the policy may expire before your estate is ready. Consider a universal life insurance policy for estate planning purposes.
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