How Can Life Insurance Benefit Your Estate?
Estates are now subject to being taxed again with what is known as the inheritance tax or the estate tax, but people who have worked all of their lives to earn what they own would rather leave this money to their heirs than the federal government. Purchasing life insurance to prevent this from happening is a great plan for those who will be leaving behind a large estate, but it can also be good for those with smaller estates. Another benefit of life insurance is that it can provide people with any size estate with a way to keep harmony between family members after their deaths.
Pay Taxes without Having to Lose Assets
Sometimes, the assets within an estate aren’t monetary, but the survivors will still be required to pay cash for the estate taxes. In these cases, the survivors have to begin selling assets, and not everyone is going to agree on what will be the best plan of action. This can split the family apart and make holidays contentious events from then on, but a life insurance policy will provide the family with the means to pay the estate taxes without having to sell anything.
Prevent Family Squabbles
Another way that people ask for trouble to begin after they have passed away is to leave their assets only to one of their children. This happens when there is a family business but only one of the children is involved with the business. The business owners’ assets are tied up in the business, so they don’t have as much to offer to the other children. By purchasing life insurance, they will have something to give the kids who chose to follow a different path than the one who will inherit the family business.
Save the Family Home
Life insurance is not subject to being taxed, and the heirs receive the death benefits without having to wait until the probate process has been concluded. By being able to receive money right away, the survivors don’t have to worry about how they will pay the bills until estate taxes have been paid and probate has ended. The possibility that they will lose the house because they can’t pay the mortgage won’t be a concern at all.
Leave Money to Charity as Well as Their Families
Some people feel passionately about their causes and would like to leave the bulk of their estates to their favorite charities, but this could be a dangerous proposition. Their families are expecting to be included in their wills and may not take kindly to being left out of the will in favor of a charitable organization. People have been known to mention their children in their wills and send them their love this way, and although this is a nice gesture, it may not be enough to satisfy everyone. By making the charitable organization the beneficiary of their life insurance policies, people can leave money to an organization they care deeply about and leave the bulk of their estates to their families.
Take a Surviving Spouse Comfortably Into Retirement
Sometimes, surviving spouses were not the main breadwinners or they have not worked at all. Therefore, they don’t have retirement plans through their jobs, and they aren’t earning any money to support themselves and the rest of the family. Even if they do have a retirement account set up for them through their spouses, they will still need to survive until they reach retirement age. If they can’t earn enough money to maintain the lifestyle they enjoyed when their spouses were alive, they may have to sell their homes. The life insurance policy will provide surviving spouses with the money to help them survive until retirement or offer them enough money to set up a retirement account.
Make Life Easier for the Survivors
Estate planning is not always the focus of life insurance, because the estate is not large enough to qualify for the highest tax rates. People will still need to leave their survivors with a way in which to dissolve debts, replace the main breadwinner’s income and finance children’s college educations. Without money to fund these expenses, the survivors may experience serious economic hardship.
Types of Life Insurance
Several types of life insurance can be used to help with all the debts and expenses that will be left behind when the policyholder passes away. One is the First-to-Die Life Insurance policy. This policy insures everyone under a whole life or universal life policy; they both fall under the category of permanent life insurance that can’t be revoked and doesn’t need to be renewed if the policyholders continue to fund it. Two spouses can be named on this policy with the benefits paid to the remaining policyholder after the first spouse has deceased.
The Second-to-Die policy pays benefits after all people listed on the policy have died. More than two people may be listed on this policy. With so many people on the policy with varying numbers of years of life expectancy, the rates charged are, generally, more affordable. The drawback to this policy is that the death benefits will also be lower when it comes time to receive them.
If so desired, the policyholders can place their life insurance policies into a trust arrangement. These trusts can be revocable or irrevocable. The revocable trust keeps control of the policy in the hands of the policyholder who names the trust as the beneficiary of the policy. Since it is revocable, policyholders can make any changes they like after they have set the terms of their policies. They can also have an irrevocable trust. This type of life insurance policy keeps the insurance benefits from becoming a part of both spouse’s estates, and this means they will be free from estate taxes.
Everyone has a different size estate and different needs for estate planning, but a good financial planner can help them determine what their needs are and how best to plan for them with a life insurance policy.