Life Insurance: An Estate Planning Safety Net

One extremely effective tool for effective and efficient estate planning can be found in life insurance. Life insurance can be utilized in an estate plan to increase your heirs’ inheritance or to generate cash for the payment of debts and taxes.

Generally speaking, life insurance is an includable asset when the size of an estate is calculated for an estate tax return. Life insurance proceeds are included because, usually, the insurance policy was owned by the person who died. They paid the premiums and retained control over the cash value and beneficiaries on the policy. Life insurance that was not owned by the deceased is not part of his or her estate.

Often, estate taxes are not an issue for an estate – especially now, with the estate tax exemption set at $5 million. Life insurance is still an effective estate planning tool because it allows you to generate cash after your death which your heirs can then use to pay any debts you may have at your death. Using life insurance to generate cash for your debts means your executor will not have to sell off your property to pay off your mortgage or credit cards.

Another effective way to utilize life insurance in your estate plan is to buy a life insurance policy to cover your estate tax liability. You can do this without increasing the value of your estate by placing that policy into an irrevocable trust. There are several nuances to utilizing this strategy, so you should talk to your estate planner to see if this is a viable option for your estate.

These two options (and many others) provide a safety net for your estate plan, helping ensure your assets go to the people you want to receive them instead of being sold to cover your liabilities.

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Lawyer Joke of the Day:

Q: What do you call a smiling, sober, courteous person at a bar association convention?
A: The caterer.