How life insurance can be a useful estate planning tool
Written by Jordan Donald on November 27, 2018.
Estate planning is a really important part of the wealth protection element of a comprehensive financial plan and life insurance can play a number of roles in this, particularly if you should pass away suddenly and/or prematurely. I’d like to take a look at these below.
1. Immediate access to funds
In the event of your death, your estate will be subject to probate, a process which can take many months. In the meantime, assets within the estate are tied up and cannot be accessed by your family. This could leave them without regular income with which to pay bills. In contrast, the funds from a life insurance policy can be made available very fast, usually an insurer only requires a copy of the death certificate in order to release cash. That money can be used to cover your family’s ongoing day-to-day expenditure in the immediate future, to settle funeral costs, and of course to pay estate taxes due. I have seen many instances where it is a godsend to grieving families at sea, replacing income after the loss of a main breadwinner.
2. Reducing your tax bill
Life insurance policies held in trust are usually ringfenced outside of the estate of the deceased which means that they are not subject to inheritance tax. That makes this a very effective way to ensure that you can max out the amount of money from your estate that your family gets and minimise the amount the taxman gets. And who doesn’t want to do that?! There may be certain instances when life insurance is included in an estate so I would advise talking this over with an expert so you are clear on whether this is the case for your particular circumstances.
3. Leveraging your assets
This point is best illustrated by an example. Let’s say you are a 50 year old man in perfect health. A policy costing around $4,000 will buy you $500,000 worth of whole life insurance. Based on average life expectancy, you might expect to live to 82. In that case you will have paid 32 years’ worth of payments, i.e. $128,000 to gain $500,000. That represents a net gain for your estate of $372,000. Not bad!
4. Repayment of family debts
Term insurance is a way to purchase temporary protection for a specified period of time and usually accompanies a large debt such as a mortgage. During the term of the mortgage, the remaining balance is paid off if the policyholder passes away. That takes care of one huge great worry for families and certainly helps in maintaining financial stability.
There are a whole raft of life insurance policies available to suit all budgets. We have already mentioned whole life and term insurance but you can also get single or joint policies, first-to-die or survivorship policies (whereby you can choose whether a payout is received upon the death of the first or second spouse), revocable or irrevocable life insurance trusts and so on. Again, if you aren’t sure which ones are relevant to you, it really is best to talk through your needs with a professional financial adviser.
All life insurance policies must have an owner and choosing who the owner should be is sometimes tricky. In most cases it is the insured, the insured’s spouse or the insured’s children and each has certain advantages and disadvantages and tax implications.
A policy also needs a named beneficiary or beneficiaries and this is the most important decision you will make with life insurance. Usually this will be a spouse or children, often your dependants, but choose carefully as that person or persons can use the money as they see fit even if you designed it to be used to settle estate taxes.
You can also nominate a secondary beneficiary in case you and your primary beneficiary die together. Some individuals nominate charities to be their beneficiaries. It’s best to talk through your decisions with your financial adviser. And don’t forget to change your beneficiaries in response to big life changes – removing a divorced partner for example - and to let your beneficiaries know that they have been nominated.
If you have any questions about life insurance and how you can use it to protect your family, please feel free to get in touch with me. I have a wealth of experience in putting in place a wealth of different policies to suit my clients’ wide ranging needs and would love to do the same for you. Please email me at email@example.com.