Life insurance policies are often overlooked when developing an estate plan, but are flexible and beneficial estate-planning tools that can provide financial security to your loved ones after your passing. Life insurance policies can provide your survivors an income-tax-free payout, as well as provide liquid assets that can easily pay estate taxes, when your estate consists primarily of difficult to liquidate assets, such as businesses or real estate.
Who Should Consider Life Insurance as an Estate Planning Tool?
There are many factors and considerations when deciding to purchase life insurance. You should consider life insurance if you are a business owner or if you have dependent children or relatives. You should also consider life insurance if you are married and your spouse does not work or there is a significant income disparity. Under these circumstances, a life insurance policy will relieve your beneficiaries of the financial burdens that may result from your premature passing.
What type of Life Insurance Policy Should You Consider?
Life insurance can generally be divided into two categories: term life insurance and permanent life insurance.
Term life insurance is the simplest and most affordable coverage, and is a policy that is generally bought in larger amounts ($100,000 – $2,000,000) for a set period, typically 10, 20, or 30 years. These policies are used as a safeguard to replace the income of a family breadwinner, whose premature passing would significantly impact the surviving family’s lifestyle.
Permanent or cash-value life insurance, unlike term life insurance, lasts for the remainder of your lifetime. These policies are often used for specific estate-planning purposes; such as funding future estate taxes or for ensuring the family’s ability continue the family business. Permanent life insurance can also be used to cover burial costs, unexpected medical bills, and other final expenses.
Although your life insurance policy may pass to your beneficiaries income tax-free, it can affect your estate tax. In order to avoid having your life insurance policy taxed, you can either transfer the policy to someone else or put the policy into a life insurance trust. You should consider speaking with an attorney and a financial planner to understand the best options for you and your loved ones.
If you have questions about how life insurance policies can impact your estate plan, creating a life insurance trust, or you would like to discuss developing an estate plan, please feel free to contact our estate planning attorney the Law Office of LaSheena M. Williams at (301) 778-9950.