4 Ways To Use Life Insurance In Estate Planning
While the term estate planning may sound like it's only for the wealthy, it's really about managing and preserving the assets you have and passing them on according to your wishes after you pass away. This can and should be done, even with smaller estates as well. When this type of planning isn't done, things go through probate, and drag on through the system, which means more of your hard earned money and assets will go to the government in the process of "figuring out" what should be done with it since you didn't specify it in writing. No one wants that.
What you may not realize is that life insurance can play a valuable role in estate planning, especially when combined with a will or trust. Wondering what role life insurance can play in the process? Here are 4 ways life insurance can be used in estate planning:
USE #1 - Estate Tax Funding
Federal estate taxes can be as high as 50% of your gross estate, and must be paid in cash within nine months of your death. Uncle Sam ain't patient! In many cases the estate's personal assets are used to cover that tax. But the issue many people run into is that assets such as an IRA or a home are not easily liquidated on short notice without incurring substantial tax penalties. A death benefit from a life insurance policy however is typically income-tax-free (yeah!) and often more readily available for your beneficiaries to fund estate taxes. You can have the proceeds from a life insurance policy be paid to your estate, or to a specific individual, and you can even specify what you want done with the proceeds. Life insurance removes a HUGE burden from your family's shoulders as to how they are going to cover these costs, and allows your assets to remain in tact for them.
USE #2 - Family Assets Preservation
If you are a business owner, what do you envision will happen with your business after you die? Do you want it kept in the family? Do you have business partners whose family will need to be bought out? What will happen if one of them passed away? Are there key people in your business whose loss would have devastating effects? It is vital to have these conversations and to get a plan in place so that the business that you've worked so hard to build can continue to thrive, and provide an income for your family, even if the unexpected happens. In many situations, life insurance can be used to provide the funds to cash out business partners, family members, or ensure that key people can be brought into the business to keep it thriving.
USE #3 - Estate Equalization
Even with an estate plan, it can take time before money is released and distributed to heirs. In the meantime, expenses don't get put on hold, patiently waiting until this distribution of funds happens. Expenses such as funeral costs, business debt, and estate taxes can place huge financial burdens on your family, and can force them to have to make decisions they don't want to make. These expenses can force them to dip into their own bank accounts (and they may not have the funds available), or liquidate assets to cover the costs. Funds from life insurance on the other hand can provide more immediate funds that can be used to cover all of these costs by passing along a tax-free death benefit.
USE #4 - Estate Plan Creation
The beautiful thing about life insurance is that it creates money where it didn't exist before. Life insurance can create an immediate estate for your beneficiaries when you die. It allows money to be passed directly to the designated beneficiary, essentially bypassing the complications created by probate, keeping the money in your family's hands where it belongs. Another perk? The benefits are distributed tax-free and remain untouched by potential debts.
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