Many people tend to view life insurance as an unnecessary extra expense. They may not realize that life insurance can bring multiple benefits to their estate planning and provide more thorough coverage for their needs.
Here are 8 reasons to consider adding life insurance to your estate planning:
Settling an estate typically takes eight months or longer. MoneyGeek points out that federal estate taxes and some states with estate taxes require payment within nine months.
If the estate settlement takes longer than expected, your spouse may need to sell assets and other belongings to cover taxes. Because these payments are usually required promptly, the proceeds from a life insurance policy can prevent this situation.
During that period, your spouse and any children still at home will need a way to meet their day-to-day expenses. They may still be paying for regular needs, tuition, mortgages or rent, taxes, medical costs, utilities, vehicle maintenance, and more. The policy proceeds can help them maintain a normal standard of living.
You can use the life insurance proceeds to pay off any remaining debts upon your passing. This money can cover one or two mortgage payments, credit card debts, car loans, funeral expenses, hospital bills, and more.
When you need extra cash to pay bills, if you’ve had a whole life insurance policy for a few years, you can borrow against the cash value. You are not required to repay this amount, but interest must be paid, which will reduce the policy’s face value. However, be cautious: withdrawing all available cash value can lead to the policy being canceled.
You might wish to leave the majority of your estate to one heir, such as real estate, leaving another child with a significantly smaller amount. However, you may feel the need to provide roughly equal inheritances to all your children. Schwab states that life insurance can help bridge this gap.
Purchasing a large enough life insurance policy is equivalent to providing an inheritance to another child or children, helping them feel secure and less likely to challenge your wishes. Since life insurance policies do not go through probate – if you designate beneficiaries – it can be an ideal solution.
Depending on where you reside, your estate may be subject to federal taxes (if it exceeds $11.61 million) and state estate taxes. If the life insurance policy does not have designated beneficiaries and becomes part of the estate, it could be subject to taxation.
Another method recommended by Prudential is creating an irrevocable life insurance trust (ILIT) and buying a life insurance policy to deposit into the trust. The trust will designate beneficiaries, and upon your passing, the money will go to them.
Prudential also warns that if you place an existing life insurance policy into a trust, there is a three-year look-back period. If the policy pays out within three years of being placed into the trust, that money will be considered part of your estate.
Forbes mentions that if you own a business, insurance proceeds can keep the business running. This money can be used to hire new employees, purchase supplies, pay off loans, etc., preventing your spouse from having to sell it quickly at a low price. If you have a partnership in the business, the proceeds can buy out your share.
Long-term care insurance policies can be quite costly. Plus, the need for it is not always clear.
Some life insurance companies offer long-term care rider in their policies. NerdWallet notes that these companies use a portion of the face value to cover long-term care needs, but may not pay as much as a traditional long-term care insurance policy. If you don’t need it, you can still provide the full face value of the policy to your heirs.
Although no one knows how they will pass away years in advance, incurring significant medical expenses before death is common. There are also funeral expenses. Life insurance can help cover these costs, preventing your spouse and other dependents from accumulating debts for years.
Another option is to pre-purchase a burial plot and coffin, along with paying for the opening of the site. Alternatively, you could consider purchasing burial insurance.
There are two basic types of life insurance to choose from: term and whole life insurance. All other forms add some modifications.
Term life insurance is purchased for a period of 1 to 30 years, with the cost increasing upon renewal. As you near older age, it becomes significantly expensive.
Whole life insurance costs much more but provides equal premiums and can last your entire life. It accrues cash value over time, which can be substantial depending on the policy size.
For estate planning purposes, a whole life insurance policy is needed due to the cash value aspect. When determining how much insurance you may require, consider your income, future family needs for the next few years, business requirements, and potential healthcare costs. Before purchasing, research multiple life insurance quotes as costs can vary greatly. An estate planning attorney can help guide you on the best life insurance strategies for your situation.