Life insurance plays a pivotal role when it comes to estate planning, including preserving the value of the deceased estate. Ideally, people want their estate to provide financial security or at least stability for their dependents or surviving spouse. In order to accomplish that, the deceased has to be able to ensure that other funds are available for any taxes, fees, or other outstanding debts upon their death.
It does not matter the size of the estate, each and every estate will be required to pay administration fees, taxes and (depending on the financial situation) any outstanding debts. This is why estate liquidity is also significant when it comes to being able to provide living expenses to a surviving partner or dependant.
Preserving Your Estate
Did you know that life insurance proceeds can be used to pay taxes, debts, taxes and other costs that are related to the estate? This is done so that any estate asset, like a designated retirement income fund or a registered retirement savings plans, are not used to pay for these expenses. Capital gains tax, which is the tax that is associated with these registered plans, as well as estate taxes, and probate fees can all be covered by life insurance if the life insurance policy is set up to do so.
Life insurance can be used to provide the necessary funds to pay capital gains taxes. This can be critical if the policyholder’s beneficiaries intend to retain a property, or if market conditions are at a point where the market will not provide the estate with an amount equal to fair market value.
Life insurance is often also used to replenish an estate. This means that if an estate owes a lot in debts, to the point that they take away what would otherwise be available to beneficiaries the death benefit can help to replenish the amount that was lost, thus providing financial security for the beneficiaries.
Providing for Your Dependents
When you have children, life insurance is an absolute necessity. After all, the last thing that you want is to leave your children without when you could have ensured that they had the funds that they needed. Life insurance can be used to replace the income of a parent, pay off outstanding debts, or to even provide for the education and day to day living expenses of your spouse and children. But what if one of your children needs additional help? Perhaps they are special-needs or have a physical disability that requires assistance? Well, there are ways that you can set up your life insurance to provide them with exactly what they need, even after you’re gone.
If you have a special-needs child who requires special care or assistance throughout their lifetime, life insurance is a great way to provide the necessary funds. Generally, life insurance proceeds are paid in a substantial one-time, tax-free lump sum. However, insurance contracts can be set up to be paid out in several ways that would allow for payment of the death benefit in multiple installments over a specified timeframe.
This is often how life insurance policies are set up if the policyholder is planning on leaving their life insurance to a minor, or someone whom for whatever reason might not be able to manage the full amount in the best manner.
Creating the Estate You want to Leave your Loved Ones
Life insurance can be an additional way to build the estate that you want to pass along to your family. It can be used to pass on wealth and assets setting your family up for financial security for generations to come.
One way that this is done is through the equal distribution of the estate to more than one beneficiary. For example, if an estate includes shares of a business, those shares would be distributed among the family (who are listed as beneficiaries) that are also active in the industry. Usually, when this happens, the business is a significant asset within the estate. The remainder of the estate at this point would be distributed among any beneficiaries who are not active in the industry. By using life insurance to increase the amount of money within the estate, the beneficiaries who are not engaged in the business would receive an equal amount – or much closer to a fair amount – than what they would without that additional life insurance top-off.
Protecting Your Estate from Creditors
It is not uncommon that estates are left with unpaid debts that have to be settled upon a policyholders death. There are a number of ways that this can be done without eroding the money that is set aside for the beneficiaries. However, this has to be planned out ahead of time when the policy is being drawn up. Individual states have different laws regarding what a creditor is allowed to go after upon someone’s death. Ideally, the policyholder will know and go over with the executor of the state what funds will be used to pay off any outstanding debts and what cannot be touched.
Am I Able to Leave Money to a Charitable Organization?
Some people are surprised to find out that as a policyholder, you can decide to use your death benefit to make a charitable donation. This can be done by merely naming the charitable organization of your choice as your beneficiary. Doing this is also an impactful way to reduce the amount of tax that your estate is hit with.
What About Probate Fees and Other Estate Costs?
Probate is a term that is used to describe a legal process that validates one’s will and confirms the appointment of your estate’s executor(s). Probate fees are determined by the monetary value of your estate and can vary from state to state.
Life insurance can pay for the additional probate costs, as well as any other fees that are not initially thought of when looking at one’s estate. These might include executor fees, and burial expenses. Due to the number of costs that have to be covered, the quick availability of insurance money and the liquidity of assets is critical.
When it comes to estate planning life insurance is an absolute necessity to make sure that your loved ones are well taken care of. Planning for your children or spouses future without you can be a daunting and heartbreaking task, but it has to be done. By making sure that you are taking the time and working with the best agent to get you and your family the highest-quality and most affordable life insurance coverage possible you are not only protecting your loved ones in the future but providing yourself with peace of mind for today. You can rest easy knowing that should anything happen your estate is planned out, and the finances are in place to ensure that everything you have worked for stays with the people you want it to.