A life insurance death benefit can help the estate by providing immediately accessible funds and boosting inheritances. An individual can also secure multiple life insurance policies to create a comprehensive estate plan that fits the situation.
Keep reading to learn about the benefits of life insurance for estate planning, how different types of policies can be used for the estate, and the specific applications of the death benefit in this situation.
Life insurance is often used for estate planning because of its built-in benefits, including:
While you can use other tools to plan the inevitable distribution of your estate, life insurance policies are a unique tool for handing funds to heirs that they can use when handling your estate, especially during the probate process.
The payout of a life insurance policy to a beneficiary is not taxed as long as it is immediately claimed and does not go through the estate.
While this means that a policyholder cannot deduct premium payments throughout the life of the insured, it leads to a greater amount that the beneficiary can claim and use for after-death expenses.
Regardless of whether the policy is set to a term or permanent, the death benefit is not subject to an income tax. It also does not increase the value of the assets of the insured, so there is no trouble added onto and potentially raising the estate tax.
As mentioned, the payment of the death benefit goes directly to the beneficiary, completely avoiding the estate and any legalities tied into it. This means that it does not:
The last part is a major benefit of using life insurance for estate planning. In many cases, the family of the deceased needs access to funds immediately following the death of their loved one, and a life insurance policy is a way to guarantee they have funds available.
Life insurance policies come in many varieties, including:
You can even end up with a policy that has more than one of these features, or you can purchase multiple policies to cover different needs. The variations in life insurance policies you can purchase allow you to find and mold a policy to fit any needs you have regarding your estate.
This is best done working alongside a reputable life insurance advisor who can point you in the right direction and bring attention to things you didn’t know to consider. Working together you can create a plan that uses the death benefit to help the estate.
While there are many variations in life insurance, even within the same company, there are two basic types that you can leverage for help in estate planning.
Term life insurance policies are cheaper and offer coverage for a certain period. Term life insurance is not a major choice for estate planning, but it has its benefits.
If this is all that you can afford, then a term life policy is usually better than foregoing life insurance.
Even those with whole life insurance policies can benefit from a term-life payment. These policies are often used to cover aspects of an estate that will fall off as time passes, including:
This is a good option for peace of mind over a certain term without breaking your budget.
Permanent life insurance encompasses many other types, including whole, universal, and term-to-100. As long as you stay on top of premium payments you receive the death benefit, and the policies feature a cash value that you can access until the policy is claimed. The premiums are higher, but the guarantee does not expire.
Depending on when you purchase a permanent life insurance plan, you can end up with lower premiums as you age. These also have a cash value that you can leverage for the length of the policy and potentially turn into a higher death benefit.
Permanent policies are great for:
Because permanent policies are more expensive, it is important to determine whether the cost is worth what you will leave behind or whether there are more appropriate avenues.
The death benefit of a life insurance policy is helpful for providing easily accessible funds to be used for:
You can start by choosing coverage that pays off any outstanding debts so that assets are not finished off by this debt. Many choose to use term life insurance policies to cover the set debt, such as mortgages, or they seek coverage in the amount of their debt.
The immediate access to funds in an appropriate amount also ensures that non-liquid assets, such as a cottage or business, are not sold off to cover these costs. The life insurance policy covers the amount, and these assets are left to beneficiaries to use as they please.
Even if you have other plans for covering after-death expenses, adding a life insurance policy is a way to diversify the plan and account for the unexpected. With another avenue for accessing funds, your beneficiaries have less to worry about when addressing these expenses.
The amount that you need for estate planning depends on a few factors, including:
Contact Sim Gakhar for the most accurate input on how much you need and how you should cover that amount. An experienced and trained advisor is the best way to handle estate planning, and they can set you up with the most appropriate policy for your needs.
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