The Link Between Life Insurance and Estate Planning
Estate planning concerns the arrangements made for disposing of the net worth of an individual. Here, the net worth refers to all the legal rights and entitlements to property, without the liabilities that apply to the individual. In estate planning, one works to remove any uncertainty of the administration of his or her estate. This happens for the maximization of value by reducing expenses and taxes.
Life insurance provides heirs with a sum-assured benefit of the policyholder when he or she dies. Within life insurance products, one can have other investments, as in the case of private placement life insurance, where the accrued growth passes to heirs upon death of the policyholder. Therefore, life insurance is one component of estate planning.
The following are estate plan goals that life insurance is able to provide:
- Provides a ready source of cash for liabilities and cushions heirs from the need to forcefully sell assets for cash
- Where the heir is a surviving partner, he or she can buy out the interests of the deceased and keep the particular enterprise running
- Oftentimes, people make contractual agreements to buy assets for family members. However, they can die before accumulating enough reserves to purchase the asset. In this case, the family member can insure the life of the other person so that when they die, he or she will still buy the promised asset.
- Protects the risk of a business collapse when a child, who is transitioning to manage it, dies; parent can issue the adult child for the interest of business continuation.
- Sometimes subdivision of assets is not viable, especially for inheritance purposes. Still, the sum assured for the policyholder becomes an alternative for children to inherit and leave the asset to one person. For land, splitting into smaller sizes goes against the intention of estate planning, which is to maximize the value of assets.
- Life insurance as part of net worth
- Normally, you have rights with your life insurance policy and therefore it qualifies as part of your net worth, and can be used for borrowing or earning dividends. The rights you take, such as the option of changing premium schedule or changing beneficiaries, acts as incidents of ownership, which makes you liable for estate tax. You can remove life insurance from your estate tax obligations by detaching all rights from you and assigning them to someone else, such as a child or trust.
- Offers estate protection
- Provides a flexible tool for estate planning. As explained above, when well structured, it provides security that is income tax-free for your beneficiaries. On the other hand, it is useful for liquidity purposes, ensuring your estate does not dissolve due to credit and tax obligations.
- By using placement life insurance services, you are able to invest in high yielding securities while avoiding tax obligations. This is possible because the investments in placement services are held within the life insurance period. Thus, according to the law, you only qualify for estate taxes when you hold some rights to the insurance policy.