Using Whole Life Insurance for Estate Planning

Whole life insurance proves to be an effective estate planning tool that allows beneficiaries to receive an untaxed, lump-sum payout. The policyholder can use the policy during its life for its cash value, improving the estate, and to plan for the future of any business they are involved in.

In this article, we explore what whole life insurance is and exactly how it can be applied to these estate planning situations.


Whole Life Insurance Explained

Whole life insurance is a type of permanent life insurance that features a death benefit and a cash value.

The death benefit is the amount that the insurance company is required to pay to the beneficiary of the policy upon the death of the insured. This payment is guaranteed as long as the policyholder keeps up on premium payments, and the policy does not expire.

The cash value of a whole life insurance policy is the portion of the premiums that the insurance company takes to put either in savings or investments. These policies make a guaranteed return on the cash invested, and policyholders can tap into this cash value as needed (with certain restrictions) throughout the life of the policy.


Whole Life Insurance vs. Other Estate Planning Devices

Whole life insurance policies are most effective when used alongside other estate planning devices, such as:

A whole life insurance policy creates instant wealth that can be passed onto a beneficiary at the time of death. They differ from other devices by providing an immediately accessible, untaxed benefit that heirs can use to cover expenses after death, mitigate any losses of contribution, and offset estate fees, including taxes and legal fees.

Whole life insurance policies also offer a unique way to grow their value during the life of the policy. This cash value can be leveraged for loans while also growing to pass on to beneficiaries.


Benefits of Using Whole Life Insurance for Estate Planning

When it comes to estate planning, whole life insurance policies bring quite a bit to the table. The payout of the policy is not taxed, and you have access to the cash value through its life.

Whole life insurance returns are guaranteed, separating them from universal policies that invest more unpredictably.

Whole life insurance policies are also a great tool for planning how you will pass along any ownership you have in a business.


Untaxed Payouts

When someone dies, their assets are immediately frozen and go into the probate process. During this time the value of the assets is considered when calculating:

  • The final income tax
  • Probate fees
  • Capital gains taxes

These can reduce the amount of the estate that actually goes to beneficiaries, sometimes as much as 50 percent.

When you set up a whole life insurance policy you create a contractual obligation for the insurance company to pass funds directly to the beneficiary upon the death of the insured.

Because these funds do not pass through the possession of the insured, they are not capable of entering the estate or being taxed. The only time a beneficiary will be taxed on what they receive is if they are provided any gains of investments.


Access to Cash Value

During the life of the insurance policy, the policyholder has the opportunity to access the cash value of the policy with fewer repercussions. A policyholder can leverage this ability to maximize their estate by:

  • Taking loans with smaller interest from the policy
  • Using the funds to invest in opportunities with a higher ROI, building assets to pass onto the next generation
  • Growing the cash value to increase the funds paid out at the end of the policy

A whole life policy allows you to different withdraw options from the policy, but these partial withdrawals decrease both the cash value and the payment to the beneficiary. A policyholder can cancel the policy to receive the cash surrender value if the life insurance policy is no longer necessary, but this is not recommended for estate planning purposes.


Guaranteed Return

One of the distinguishing factors of a whole life insurance policy is its guaranteed rate of return. While a universal life insurance policy can offer a higher return on investment, those investment types are not guaranteed and require the policyholder to manage the portfolio.

With a whole life insurance policy, the part of the premiums paid into investments is managed alongside other policies in such a way as to meet the guaranteed rate of return. This may be a lower number, but it offers stable growth and requires less work on the part of the policyholder.


Business Planning

Whole life insurance policies are an effective way to distribute the ownership of a company after the death of an owner or shareholder.

In the case of family-owned businesses that stay in the family, the owner can name their family as beneficiaries to minimize the effect of their death on the business. Losing an owner can decrease productivity, and the funds from a life insurance policy balance out those losses until the business can recover.

In partnerships or corporations, the whole life insurance policy can facilitate a buy-sell agreement. Corporate-purchased life policies like whole life provide adequate funds for the business to buy out the shares of the deceased, but this intended use should be outlined in the policy.


Using Different Insurance Types for Estate Planning

You can combine your use of whole life insurance with other types of life insurance to create a more comprehensive plan. Depending on how you do it, this allows for:

  • Increased coverage at lower rates
  • Chances to engage in more unpredictable interest rates
  • Term coverage for term expenses

While whole life insurance is the standard recommendation for estate planning, other types of policies have benefits that should be considered.


Whole Life Insurance for Your Situation

Whole life insurance has many benefits to offer in any situation, but for the most effective use of this tool, you need to contact an experienced life insurance advisor. Many variables should be considered, including:

  • Your current financial situation
  • Your age of purchase
  • Your estate objectives

Contact Sim Gakhar today for assistance in estate planning and developing a life insurance plan to fit your needs, as well as to discover any other tools that are beneficial to your situation.


FAQs & Helpful Resources Regarding Life Insurance for Estate Planning


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