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Friday, March 6, 2015

Role of Insurance in Estate Planning

Failure to plan can mean unnecessary hardship for loved ones. The hardship can be financial (not having sufficient money to live on) or emotional (a feeling that the parent treated the children unequally).

Life Insurance

Reasons to have one:

  • For heirs: Immediate cash for payment of debts and burial. Elimination of the possibility of a forced sale of assets that would be needed to generate cash to live on.

  • For businesses: Funds for surviving partners to buy the partnership interest of the deceased partner from heirs.

  • For fairness: if a parent wants to pass on a business (or a real estate investment) intact to one child, the other child may feel left out. In order to prevent one heir from having to buy out interests of the other heirs, a life insurance policy left to the other children may equalize the inheritance.

  • For creation of a larger estate: if there are few assets to leave to heirs, or if the parent wants to increase the money she leaves, a life insurance policy is an easy method of doing so.

  • For funding of a Supplemental Needs Trust. Many parents are worried about what will happen to their special needs children after the parent passes. While the parent is alive, he is caring for and supporting the child. But after the parent's passing, life insurance proceeds placed into a Supplemental Needs Trust for the benefit of a special needs child can assist the child for the rest of his life. The money in this trust can help pay for the child's needs beyond those provided by government programs, including a private care giver, better medication, better living facility, etc.

  • For avoidance of estate tax: COMPLEX STRATEGY: an individual can pay high premiums for a large life insurance policy on his own life. The policy should be owned by an irrevocable trust, preferably with a lot of beneficiaries (to take advantage of the annual gift tax exclusion). By paying high premiums and utilizing the annual gift tax exclusion, an individual gets money out of his estate without having to pay gift taxes. Once the individual dies, the life insurance policy proceeds are out of his estate, no estate taxes are due, and the heirs receive a large inheritance.

Types of Life Insurance:

  • Term Insurance provides financial protection for a limited specified period of time. The policy provides a constant amount of insurance, the annual premiums are fixed, the term of the agreement is predetermined (usually 10 or 20 years). If the premium is not paid, the policy usually lapses. This is the cheapest type of life insurance.

  • Whole Life policy provides a death benefit for the entire life of the insured. There is also a tax-deferred build up of cash values. Premiums can be paid either for a specific period of time or for the life of the insured. You can borrow an amount from the insurance company up to the current cash value of the insured.

  • Universal Life offer flexible premium payments, an adjustable death benefit and cash values that are often tied to current interest rates. There may be beneficial tax treatments.

  • Variable Life builds cash value that can be invested in a variety of separate accounts. Policyholders assume the risk of negative investment performance.

  • Survivorship Life policy insures two lives simultaneously. Policy provides benefits to heirs only after the last surviving spouse dies.

 

There are other common types of insurance that you should consider as part of your comprehensive plan.

  1. Disability insurance. For people between the ages of 25 and 65, the chances of becoming permanently disabled may be higher than chances of dying. If you live in a one income household, you may not want to rely on the employer’s policy, since it may be inadequate or may only apply if you are still working there.

  2. Long Term Care Insurance. This type of policy is expensive. However, given that over 70% of seniors can expect to need long term care (home care or nursing home care) at some point in their life, a long term care insurance policy may be a basic necessity. Without one, the alternative options are Medicaid Planning or using all of your savings to pay for your care.  A long term care rider may now be attached to a whole life policy.

A team of an estate planning lawyer and a financial advisor can give you comprehensive advice for a plan and a policy that is appropriate for you.

This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney client relationship.


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