Many people neglect considering life insurance as a part of their estate plan. Although each estate plan should be tailored to your specific circumstances, everybody should at least take life insurance into consideration. Obtaining life insurance can make things easier for your beneficiaries in various ways when you have passed away.
What is life insurance?
Like all types of insurance policies, life insurance is basically a contractual agreement between the policyholder or the insured, and the insurer or the insurance company. In exchange for premiums paid by the policyholder, the insurer promises to pay out a specific sum of money to a beneficiary chosen by the policyholder.
The advantage of life insurance in terms of estate planning is that the payout your beneficiaries will receive can be quite useful for a variety of reasons as the administration of your estate is being completed. The payout from your life insurance policy can help your beneficiaries cover expenses arising as a result of you passing away.
Below are some of the expenses and costs which life insurance can help with covering.
When you pass away there will likely be some final expenses which will need to be taken care of. These can include things like funeral costs, debts, and income taxes. Funerals are known to cost thousands of dollars which could end up being a significant financial burden for your intended heirs. When you die, you will be leaving your heirs with any debts you have leftover which can eat into the estate proceeds. Also, your final income taxes may have to be paid by your beneficiaries.
Your beneficiaries may end up owing estate taxes, depending on the size of the estate. Federal law exempts the value of your estate left to beneficiaries up to a certain amount, but every dollar over that limit will be liable for estate taxes. The limit is constantly changing which means you may want to consult with a professional financial advisor or tax professional who will be knowledgeable about the current estate tax rules.
Dealing with illiquid assets
There can be certain types of assets which are not easily divided since some assets are more liquid than others. For example, assume you leave your children your house and one of your children wants to keep it while the others want to sell it. The proceeds from the life insurance policy payout can be used to help your child who wants to keep the home pay off the other siblings who want to sell.
Supporting a loved one
Another option would be to direct the life insurance proceeds to be earmarked in order to support a loved one who may not be able to provide for himself or herself. This can often be a minor child or an adult dependent, such as an aging widow. In this case the proceeds would go into a trust which can been especially set up for the benefit of your loved one.
Is life insurance right for you?
Now that you have a good idea about what life insurance is about, you will need to decide whether or not life insurance is right for your specific circumstances. This will depend on what assets you will have in your estate and your estate planning goals. Call us to help determine what type and amount of life insurance could be a good fit for you.