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Life Insurance & Estate Planning: Here's What You Need to Know

Ever wonder how life insurance and estate planning are related? We break down everything you need to know in our comprehensive guide.

Patrick Hicks

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

Have you ever thought about how your loved ones will be taken care of after your death? The answer starts with Estate Planning and Life Insurance. When properly combined, these components can provide invaluable financial support to your family and friends after your death. The key is understanding how to integrate both to form a comprehensive plan. 

If you are unsure of how to get started, the following guide to Life Insurance for Estate Planning will help. Begin by learning what you can about the various benefits and then reach out to us with any remaining questions you have. Here are some important considerations on how Life Insurance can be used in Estate Planning

How Is Life Insurance Used In Estate Planning?

Life Insurance can be used in Estate Planning a few different ways, but is often used as a way to provide extra financial support to loved ones. Life Insurance policies can help provide immediate funds to your family members which can be used to replace lost income, cover funeral costs, and pay off any debts. In many cases, these policies are exempt from the same taxes that your Estate will be subject to after death. It is not uncommon for families to use Life Insurance funds to cover federal Estate taxes, especially if there are any delays in the distribution of assets. 

Life Insurance is also frequently used in Estate Planning as a way to divide ownership of a family business. Many business owners will take out a life insurance policy that specifically designates how ownership will be divided after their death. If ownership is split between heirs, each individual can then decide to sell or keep their stake in the business. The purpose of these policies is to ensure a smooth transition of ownership and to maintain business operations in the event of death in the family.  

How Life Insurance Can Benefit Your Estate

Life insurance can benefit your Estate by providing financial protections to your loved ones. Let’s say you have some outstanding debts at the time of your death. While your family members would not be directly responsible for paying them back, creditors could still go after your Estate in probate court. Ultimately this could reduce your Estate and what you left behind for loved ones. Life Insurance is one way to protect your family’s finances, as the funds could be used to pay off debts. 

How are Survivorship Life Insurance Policies Helpful in Estate Planning?

Survivorship Life Insurance differs from traditional policies because it is taken out on two lives, typically a married couple, instead of one. Both parties must die before the policy is paid out, at which point it will distribute to the beneficiary. This can be used in Estate Planning to offer financial support to a child with special needs, particularly when it is used in conjunction with a Trust. Survivorship Life Insurance is also sometimes used by couples who want to leave money to a charity after death, in these cases it is used in Estate Planning as a way to leave a legacy. 

Factors to Consider When Choosing a Life Insurance Policy

If you have ever tried to take out a Life Insurance policy, you are likely well aware of the numerous options available. It can be overwhelming trying to decide on the best insurance policy for your needs. Here are some factors to consider when choosing a Life Insurance policy to help guide your search: 

  • Income: Are you the primary earner in your household? If yes, consider life insurance policies that will offer immediate financial support to your spouse and children. The right policy should aim to help your family transition through the loss. 

  • Healthcare Costs: No one can fully predict the care they may need later in life; but one thing that is certain is that healthcare costs are constantly rising. A life insurance policy can help provide the funds necessary to cover any unexpected medical costs.

  • Family Size: Depending on the size of your family, it may be beneficial to name more than one beneficiary or to take out multiple Life Insurance policies. Consider how many people rely on you financially when looking at different policies, this could include spouses, children, business partners, and even employees. 

  • Business Ownership: Whole Life Insurance policies are commonly used as a way to divide business ownership after one’s death. You can also utilize a buy-sell agreement, which helps to ensure surviving business partners have the capital to buy shares after your death. 

What is the Best Type of Life Insurance for Estate Planning?

The best type of Life Insurance for Estate Planning will vary depending on the specific financial needs of your family. That being said, there are certain tax-forward strategies that can be used to ensure your loved ones receive the maximum amounts available. For example, many Estate Planning lawyers will recommend the creation of a Trust depending on the size of your Life Insurance policy. By creating a Trust simultaneously, policy holders can help ensure the proper distribution of assets while minimizing overall Estate taxes. 

How to Choose a Beneficiary For Your Life Insurance

First, it is important to make the distinction between the beneficiary of a Will and of a Life Insurance policy. If you name a beneficiary in your Life Insurance, that does not necessarily make them a beneficiary in your Will and vice versa. You can choose the same person, or people, but the key is to include that information in both legal documents. 

To choose a beneficiary for your life insurance, think about who will be in charge of your end of life care and associated costs. Many married couples will choose their spouse as the main beneficiary, especially if the deceased is the primary income-earner. One thing to keep in mind is that you should always name contingent beneficiaries in the event your spouse or other named beneficiary passes away. 

One of the best ways to protect your loved ones after your death is with Estate Planning and Life Insurance. Not only can Life Insurance provide financial support to your family at a difficult time, but it can also help with business ownership, Estate taxes, and even end of life care. It’s easy to get overwhelmed by the process of choosing a Life insurance policy and making an Estate Plan -- so try to let the factors mentioned above guide you through the process. In doing so, you can create a comprehensive Estate Plan that protects your family for years to come.

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