Why Use Life Insurance with Estate Planning?

To avoid subjecting estate property to the probate process in certain situations, each state has approved limited methods of transferring property at death via “Will substitutes.” In some instances, these are limited to certain types of assets.

Using a Will substitute, can allow you to transfer certain assets without the need to put them – and your loved ones – through the lengthy, costly, and frequently very public process of probate. Rather, a Will substitute can allow your beneficiaries quicker access to funds that may be needed for the payment of funeral and final expenses, administrative costs, or other pressing financial obligations.

Beneficiary designation is a form of Will substitute. This allows you to transfer certain assets by contract, such as the proceeds of a life insurance policy. Therefore, life insurance can be an important component of an estate plan.

How Life Insurance is Used in Estate Planning

One of the most common ways that life insurance is used in estate planning is through an Irrevocable Life Insurance Trust or “ILIT.” In this case, an insurance trust owns the life insurance policy – and because of that, the insured’s estate does not have any incidents of ownership, thus removing the proceeds from inclusion in his or her estate value for estate tax purposes. This, in turn, will reduce the amount of estate taxes that are owed when the insured passes away.
An ILIT has three parts. These include the:
• Grantor – The Grantor is the person who creates the trust (also the insured person);
• Trustee – The Trustee will manage the trust assets;
• Beneficiary (or Beneficiaries) – The trust’s Beneficiary (or Beneficiaries) are those who will receive the trust’s assets at the death of the insured person;
• Once the proceeds from the life insurance policy have been paid out at the insured’s death, the Trustee will make them available for the payment of estate taxes, as well as any other costs, such as legal fees, probate costs, and/or income taxes that are due.
Life insurance can also be used to substitute income. The death of a spouse or parent is already difficult, and finances may become a major concern. If a spouse dies, his or her income may no longer be available to care for a surviving spouse or children. An insurance policy may also provide the spouse or children with a lump sum or an income stream to substitute the deceased spouse’s salary. If a spouse or child has unique needs, having an insurance policy in place to help pay for necessary care may provide great relief to a surviving spouse or child.

When Should You Review Your Life Insurance Policy?

The National Association of Insurance Commissioners (NAIC) suggests that you regularly consider a life insurance policy review to determine if the coverage in your policy is still appropriate for your situation. In fact, most financial advisors and insurance professionals recommend reviewing your life insurance coverage annually.

Reviewing your life insurance policy should be part of your overall financial plan. So when you sit down to check up on things such as your retirement and savings accounts, emergency fund, and even your family budget, it just makes sense to include your life insurance.

Call Wilson+Miller today to help with your estate planning, including a review of your life insurance coverage. 501.221.7776.

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