Life insurance and estate planning are intimately connected. By purchasing life insurance today, you are making a decision about how you want your heirs to be provided for after your death. Here’s what you need to know about life insurance and estate planning.
Life Insurance Protects Your Heirs
Life insurance can help protect your surviving spouse and children from financial ruin after your death. That’s one reason most people purchase coverage when they are young and worried about replacing income. But many people let life insurance policies lapse as they age, thinking they no longer need the protection they offer. But even if you’re retired, life insurance can still be useful.
If you have a pension, for example, those payments will likely shrink after your death, or may even stop entirely, depending on the payout options you’ve chosen. A life insurance policy will provide your spouse with a tax-free source of cash that can be used to supplement other income and maintain a certain standard living.
Another reason to incorporate life insurance into your estate planning? It can help your survivors pay off any debts, like a mortgage, that you may leave behind. Or if you have a complicated family situation, like children from a previous marriage or a second spouse, you may use life insurance as a way to ensure all your loved ones are provided for after your death in a way that reduces the likelihood of an intra-family battle over assets or even a protracted legal fight.
Finally, for people who are worried about being able to afford long-term care in retirement, certain types of life insurance policies may offer relief. Hybrid life insurance and long-term-care policies marry the benefits of each type of coverage into one convenient package. These are typically single-premium policies and a variation on whole life insurance. With a hybrid policy, you pay a lump sum upfront. When you die, your heirs receive a benefit. But you also have the option of taking what is known as an accelerated death benefit. That means that you can draw down the death benefit while you’re still alive, if needed. If you don’t use all the funds, some money will be left for your survivors. This can be a way to pay for long-term care and preserve the value of your estate for your loved ones.
Life Insurance and Charitable Giving
Many people dream of leaving a lasting legacy to a favorite cause or organization. But if you’re not a multimillionaire, you may assume that leaving a major charitable bequest is beyond your means. But with a life insurance policy, you may well be able to turn your dreams of endowing a scholarship at your alma mater or providing for a new building for your church into a reality in a very affordable way.
One simple way to give to a charity after your death is to name the organization as a beneficiary on your policy. That way, they’ll receive all or a portion of the benefit after you’re gone. You could even purchase a policy specifically with the intent of leaving the benefit to charity and another to provide for your family. In either case, the charity receives the money tax free, and there is usually little chance for squabbling among heirs over who should get the money, since the beneficiary designation makes that clear.
Advanced Life Insurance Strategies
We’ve barely scratched the surface of all the ways life insurance can work in concert with your estate plan. For people with complex needs or planning goals, it may be worth it to explore advanced life insurance strategies with your insurance agent or other financial professional. For example if your estate is sizable, tools like an irrevocable life insurance trust might be a way for your heirs to help manage estate taxes without having to liquidate other assets. Please call if you’d like to discuss your life insurance needs in more detail