Life insurance is an important component of estate planning. After all, we know it can be a useful tool for providing financial protection for loved ones in the event of the policyholder’s death. Unfortunately, both Regina and I– the attorneys here at the Slaton Schauer Law Firm, PLLC– have spoken with many people who purchased policies that just weren’t right for them. What do I mean?
Let’s think about how life insurance is commonly used in estate planning. Consider applications such as providing liquidity to pay estate taxes and other expenses, replacing lost income, and providing for the needs of dependents. How does this work out in practice?
We’ll start with considerations of liquidity. One of the primary uses of life insurance in estate planning is to provide liquidity to pay estate taxes and other expenses. Estate taxes can be a significant burden for some estates, and life insurance can help to alleviate this burden by providing ready cash to pay estate taxes and other expenses– which can reduce the temptation for an executor to make a disadvantageous withdrawal from other sources of funding or a quick sale of real property.
For example, a life insurance policy with a death benefit that is equal to the expected estate tax liability can help to ensure that the estate does not have to be liquidated to pay taxes. This helps to preserve assets intact instead of having them be split up and/or sold to pay immediate expenses.
Another important use of life insurance in estate planning is to replace lost income. The death of a family’s breadwinner can have a significant financial impact on a survivor beyond the obvious emotional toll, and life insurance can help to ensure that dependents are financially secure.
An example is a life insurance policy with a death benefit that is equal to the deceased’s income for a period of time, which can help to ensure that the family can maintain their standard of living.
Life insurance can also be used to provide for the needs of dependents. For example, a life insurance policy with a death benefit that is sufficient to pay for a child’s education can help to ensure that the child is still able to attend college without incurring massive financial hardship– even after a parent’s death! This can be a fantastic legacy and gift to a young person, because it gets them “off the ground,” metaphorically speaking, without a huge burden to start their independent lives. Similarly, a life insurance policy with a death benefit that is sufficient to pay for long-term care expenses can help to ensure that a dependent with a chronic illness or disability can receive the care they need.
Further creative uses for life insurance include: charitable giving, buy-sell agreements, funding of trusts for children or other beneficiaries.
When considering life insurance in estate planning, it’s important to consider the different types of life insurance available, such as term insurance, permanent insurance, and variable insurance. Each of these has unique features and benefits, and it’s important to understand the pros and cons of each type to make an informed decision. It’s also essential to consider the beneficiaries, the death benefit amount, and the premium payment structure when purchasing a life insurance policy.
Life insurance plays a crucial role in estate planning by providing liquidity to pay estate taxes and other expenses, replacing lost income, providing for the needs of dependents, funding charitable giving, buy-sell agreements, and funding trusts for children or other beneficiaries.
It’s important to understand the different types of life insurance available, the beneficiaries, the death benefit amount, and the premium payment structure to make an informed decision. And of course, it always helps to consult with an experienced estate planning attorney. You can reach us at (512) 258-9455 to schedule a free consultation.