Estate Planning Insurance Covers Your Family's Needs

No estate plan is complete without considering your estate planning insurance coverage. Life insurance is an important aspect of every estate plan.

Estate Planning Insurance Covers Your Family's Needs

It may serve as a means of support for your surviving spouse, funds for education expenses for your children and any other expenses your survivors may face in the event of your death.

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Life insurance may be used in various ways in an estate plan. Some of these include estate liquidity, repayment of debts, income replacement and accumulation of wealth.

There are different types of policies, at different prices and may be owned in different ways.

Estate Planning Insurance: First to Die Policy

This type of policy is also known as whole life joint insurance. It is group insurance where benefits are paid to the insured survivor when one of the insured members of the group dies.

You can set up the insurance policy as a whole life policy or a universal policy. A first to die policy may reduce taxes if the unlimited marital deduction is not used up.

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Estate Planning Insurance: Survivorship Policy

This type of insurance policy is also known as the second to die. It is similar to a joint life policy, where two or more people are covered. The difference is that this policy pays upon the death of the last surviving member in the group.

Since benefits are not paid until the last member dies, life expectancy is increased and thereby the premiums are lower. Survivorship policies are usually whole life or universal policies and are typically designed to insure a husband and wife or a parent and child.

Premiums are generally lower for one second to die policy than they would be for two separate policies because they are based on a joint age.

Also, you only administrative costs for one policy, rather than for two policies. This might not seem like much of a savings, but it really add up over the years.

Estate Planning Insurance: Trust Arrangements

Your estate planning may include a trust arrangement. In this case you name the trust as the beneficiary to your life insurance policy. You retain the right to revoke the trust and any other ownership rights.

An estate planner often suggests this type of arrangement for younger families with little assets but sizeable life insurance policies.

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The trust provides money to the guardian of minor children to help with expenses associated with raising the children. The trustee distributes the funds as needed.

The guardian is normally not allowed to withdraw any funds for personal use. All funds withdrawn from the trust must be used for the well-being and the needs of the children.

Estate Planning Insurance: Irrevocable Life Insurance Trust

This type of arrangement excludes the proceeds from an insurance policy from the estate of the first spouse to die and from the estate of the survivor.

The survivor may be the beneficiary, but might not have rights to or power over the principal of the trust.

Funds are disbursed at the discretion of the trustees. The surviving spouse may petition the trustee for certain expenses, similar to the way a guardian would petition for money for the children left in his care.

Estate Planning Insurance Covers Your Family's Needs

Estate Planning Insurance: Ownership Considerations

One of the biggest questions regarding estate planning insurance, is who should own the policy. Some things to consider:

  • When the insurance policy is owned by the person being insured, he has complete control over the policy and owns the associated cash value. However, death benefits are subject to estate tax and if the policy is transferred out of the estate, the three year inclusion applies.
  • If your spouse owns the policy, you may have some indirect control and some rights to the cash value of the policy. But, the replacement cost would be included in your spouse's estate. If your spouse dies before you, the policy may revert to you and be included in your estate.
  • If your children own the policy, the the death benefit becomes part of their estate, not yours. This gives you no control at all. If the children are minors, a legal guardian will be needed before benefits are paid, and this could be expensive.
  • You may appoint a revocable trust or an irrevocable trust. These also have advantages and disadvantages.

Naming Life Insurance Beneficiaries

Naming a particular beneficiary is cheap to execute, but it could lead to challenges. The biggest drawback of this strategy is that you can not exercise any control over the death proceeds. Whoever inherits the benefits is free to use the money any way he wishes.

Even if you earmarked the money to pay settlement costs or estate taxes, the beneficiary is not bound to use it that way. The challenges could be much greater if the beneficiary is a minor.

When your estate is named as the beneficiary, the proceeds may be included in your gross estate and are susceptible to creditors. This could very easily increase probate costs. Naming an irrevocable trust as beneficiary may protect assets from creditors.

The trustee may be given the power to distribute or withhold death benefits as he sees fit. Assets may then be assigned to a professional money manager.

Do You Need Life Insurance?

Many people think that when they get older, they no longer need life insurance. They do not have a mortgage and all of the children have finished college, so what is the point of life insurance?

What they do not think about is the taxes their estate owes when they die. These taxes may force your family to sell assets, many times far below the fair market value. Your family may have to sell the cottage to cover capital gains taxes on the increased value.

Life insurance can help cover these taxes. Other options include:

  • Save. Saving your money and trying to accumulate enough to cover any taxes that may be owing is one way. But, some liquid assets are subject to taxes, as well.
  • Sell. Your survivors can sell any assets the estate owns.
  • Borrow. The estate may be able to borrow against the value of its assets.
You have options. You might want to consult an experienced estate planning insurance professional to determine which options are best for your individual needs.

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