Life insurance will be a useful estate planning tool.
You want to leave an inheritance to your loved ones.
To do so, you have created an estate plan.
Even so, you are concerned about estate taxes.
The are never “permanent” in terms of the applicable exemption limit.
You know these could take a bite out of your estate, depending on the politics du jour.
According to a recent FedWeek article titled “Protect Your Estate With Life Insurance,” you should consider purchasing life insurance as part of your estate plan.
Consider this cautionary scenario.
A man leaves his estate to his daughter.
Because of where he lived, there is a significant state estate tax bill due.
Unfortunately, most of his assets were illiquid.
To pay these state estate taxes, the daughter would have to sell the home and tap into his traditional IRA.
As a result, she will have to pay income tax on the withdrawals.
With a life insurance policy, the proceeds could be used to pay these state estate taxes and clean up any other lingering estate expenses.
Although life insurance can be helpful, you should be careful to avoid these common errors.
Designating the estate as beneficiary.
If you do this, the money will be disbursed through probate.
This means it will be subject to state estate taxes and to potential creditors.
A better option would be to make your heirs the direct beneficiaries.
Designating a single beneficiary.
If you name only one person, you run the risk of having the primary beneficiary die before you or at the same time as you.
You should include contingent beneficiaries of your life insurance policy to ensure you will have an heir.
Never reviewing your policy.
A lot can happen in just a few years.
If you do not review or update your policy, you could end up leaving it to an “unintended consquence” (think ex-spouse).
When you update your plan, you should request confirmation from the insurance company in writing to ensure your affairs are in order.
Before you purchase a life insurance policy, you should carefully consider what coverage you will need.
If you have minor children, you may want to have a policy to cover college tuition in the future.
If you are underinsured, you could leave your spouse and children in financial hardship.
There are many benefits to including life insurance as part of your estate plan.
Start researching your options now.
Better yet, engage the services of a life insurance professional who can help you select the right type and the right amount of coverage for your needs.
If you do not have such a professional, ask your estate planning attorney for a referral.
Reference: FedWeek (June 11, 2020) “Protect Your Estate With Life Insurance”