52% of Americans have a life insurance policy! That’s pretty impressive. So for the approximately 179.4 million people who have a life insurance policy, how does their policy play into their estate plan? It’s a great supplement to covering immediate costs, covering taxes, probate fees, supporting financial dependents, and assisting with business succession. In addition, it can be simply another way to grow your estate in order to create a larger inheritance for your loved ones. Let’s get into the details of the role of life insurance in estate planning.
How life insurance works
Life insurance is something you pay into (usually monthly or annually) in order to potentially or definitely receive a future “death benefit,” which is a payout upon your death. For example, let’s say John has a life insurance policy with a death benefit of $100,000, so he has to maintain payments of $200 per month for the rest of his life or up to a certain point (depending on the policy). The money ($100,000) is paid out upon his death and given to the person he listed as his beneficiary, which is his wife. As you can see, this can be a nice complement to an already existing estate plan, such as a will and/or a trust.
Different types of life insurance
There are different types of life insurance, and it’s important to understand each of the available options:
- Term Life Insurance: This is typically the cheapest option and covers you only for a limited “term” such as 10, 20, or 30 years. If you die during this time, your loved ones will receive a pay out. If you don’t, and the end of the term arrives, you can sometimes renew it. This is good for people who maybe only want cheaper coverage for certain periods of time, such as when their children are young.
- Whole Life Insurance: This type of life insurance covers you for your entire life, not just a set limited amount of years. It accrues interest and you can also take out a life insurance loan if it grows to a certain amount.
- Universal Life: This is another type of life insurance that covers you for your entire life but is a bit more flexible because you can change the death benefit unlike with a whole life policy and the interest rates aren’t fixed.
- Variable Life: This is another type of lifetime insurance that covers you for your whole life. It is connected to the stock market, so it can be very “variable” at times, unlike whole and universal life, which are attached to interest rates set by the insurance company.
- Final Expense Life: This type of insurance only covers end-of-life expenses like burial and funeral costs.
The benefits of having a life insurance plan in your estate plan
One of the main benefits of having a life insurance plan and also an estate plan set up is the liquidity of life insurance. For example, receiving the life insurance cash is usually a relatively quick process compared to assets being distributed through an estate, especially if the assets need to go through probate.
Life insurance can cover immediate expenses
Life insurance can be a great way to quickly cover the immediate expenses following a person’s death, such as funeral expenses, medical bills, probate expenses, etc.
Income replacement for breadwinners
If the life insurance holder is the breadwinner and then passes away, the income that covers the entire family will be halted. Life insurance can replace that income. Cover estate taxes and probate costs
Many large estates are taxed heavily upon the owner’s passing. A life insurance death benefit can help cover these costs to ensure the beneficiaries aren’t losing out on their loved one’s full estate.
Business succession planning
For business owners, having a life insurance plan in place can ensure the business’s continued success by covering costs to transfer ownership and/or sell the business.
Growing your inheritance
Another great benefit of a life insurance policy is simply growing your estate and being able to leave more money to your beneficiaries. A life insurance policy is just another asset (that you won’t enjoy, but your loved ones will!).
Tax benefits
Along with growing your inheritance to your loved ones, you can also set up your life insurance policy in a trust in a way that avoids taxes and allows your beneficiaries to enjoy the death benefit from the policy tax-free.
Diversification of assets
Instead of just having all real estate or all assets in the stock market, having a life insurance policy can be a great way to diversify your portfolio and grow your net worth.
The bottom line
Life insurance is a powerful tool that can significantly enhance your estate plan. It provides numerous benefits, from ensuring your loved ones have immediate access to funds after your passing to mitigating estate taxes and safeguarding your legacy. With a variety of policies available, you can find one tailored to your unique needs and goals. Consider joining the millions of Americans who have already secured their family’s future with life insurance – it’s a decision you hopefully won’t regret.
Nicole Sheehey is the Head of Legal Content at HelloPrenup, and an Illinois licensed attorney. She has a wealth of knowledge and experience when it comes to prenuptial agreements. Nicole has Juris Doctor from John Marshall Law School. She has a deep understanding of the legal and financial implications of prenuptial agreements, and enjoys writing and collaborating with other attorneys on the nuances of the law. Nicole is passionate about helping couples locate the information they need when it comes to prenuptial agreements. You can reach Nicole here: Nicole@Helloprenup.com
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