Life Insurance and Your Estate Plan

Life insurance is (or should be) an important part of nearly every family's estate plan. When evaluating their overall financial condition, many parents discover that if something were to unexpectedly happen to them, there wouldn't be much cash available for their minor children. They find that the vast majority of their assets are tied up either in their home (which might be hard to liquidate) or their plans (which would simply be a bad idea to liquidate). What they need is a quick source of cash for their kids in the event of a tragedy. Life insurance is for just such occurrences. It's typically the cheapest, most dependable way to make sure that if you're suddenly not around, your children will have enough money to grow up comfortably and be financed for college.

If you have children who rely on you for support, it's your responsibility to make sure that there's enough ready cash to provide for their needs – both immediate and long term – if you die unexpectedly. Life insurance is a very effective way to provide that funding. However, not every family may need the financial coverage that life insurance affords. For example, if you have significant cash or equity savings (enough, at least, to pay off your mortgage), an extended family that would step in and take care of your children, investment properties that could be sold quickly to raise money, or a pension plan that will provide adequate benefits for your family, then you might not need a life insurance policy to fill the financial gaps.

However, if you're like most, you'll sleep better at night knowing that your family's needs will positively be taken care of. Here's what life insurance can contribute to an overall estate plan:

Immediate cash after a death. This money can be used for last illness and funeral expenses and to pay any remaining debts and taxes of the deceased parent. If most of your assets are locked up in things that would be difficult to sell quickly (like a house or business) or in retirement assets that would be better kept intact, insurance money is the perfect solution.

Tax-free money. Except in certain rare circumstances, the beneficiary will not owe income tax on the proceeds of a life insurance policy.

Replacement of lost income. If a working parent dies, life insurance can allow a stay-at-home parent to continue to stay home and raise young children.

Money for childcare and domestic services. This can permit a breadwinning parent to continue working by hiring help to take care of the children and household.

Probate avoidance.. As long as you don't name your estate as your policy's beneficiary, life insurance proceeds aren't subject to probate court proceedings.

Estate tax reduction. If you're apprehensive about estate taxes, you can transfer your life insurance policies to a trust. The money will be paid to your surviving spouse or children, but it won't be a part of your taxable estate. Under current law, only about one percent of Americans die with estates large enough to actually incur taxes, so this isn't likely to be a concern for most people.

blog comments powered by Disqus