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How life insurance fits into your estate plan

How life insurance fits into your estate plan

February 01, 2024

Most people view life insurance the same way they view homeowner’s or auto insurance. It is a necessary expense to protect against the unforeseen event, in this case someone passes away much earlier than expected.

What most people do not understand is that life insurance can play a much bigger role in your estate plan. A term insurance policy, which ends for most people around retirement, is a great way to protect against that unforeseen event. There are benefits in life insurance for those that live to 80, 90 or even 102 like my sweet Italian grandmother. So, what are some of the benefits life insurance can provide in an estate plan?

Tax-Free Wealth Transfer

For many families, the bulk of their assets outside of their home sit in retirement accounts such as 401(k)s or IRAs that will be taxed when funds are withdrawn. Your beneficiaries have to withdrawal all funds within 10 years and pay those taxes. Life insurance death benefits are tax free and many times, the longer you live, the better the tax benefits. Consider a variable universal life policy that can be invested in an S&P 500 index fund growing tax deferred and when you pass away, the proceeds can go to your heirs tax-free. There are no limits on how much you can put into a policy, but the IRS does have some requirements to make sure the contract does maintain its status as a life insurance policy.

Living Benefits

Permanent life insurance with a cash value is considered an asset that is part of your net worth. A well-structured life insurance policy within your financial plan can include a growing cash value balance that can be used while you are living your best life. You can take withdrawals or borrow money against your life insurance policy, rather than take out a loan from the bank, often with better interest rates. And if the policy is designed correctly, you can possibly supplement your retirement income by taking systematic withdrawals and/or loans from the policy. This is all done tax-free as long as you stay within the parameters set by the IRS and the contract does maintain its status as a life insurance policy.

Estate Liquidity

Another great benefit that life insurance can provide is liquidity for the estate immediately after someone passes away, and maybe even prior to. Many policies include a terminal illness rider, which allows a portion of the death benefit to be accessed prior to death if someone is given a short time to life, usually less than 12 months. There are also many policies that have optional riders for long-term care. These allow distributions to be taken upon triggering events and the death benefit can be accelerated to pay for care.

If you are interested in learning more about how these can fit into your plan, please contact us today