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Estate Planning Using Life Insurance Is All About Liquidity & Efficiency

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Life insurance offers an excellent tool for managing an estate and the care of loved ones, namely seniors planning for their families.

The policy is only the tip of the iceberg.

Components such as the naming of a beneficiary and additional riders can customize it to fit the individual’s needs.

For small estates, it can provide the necessary funding to manage expenses and the future financial security of one’s family.

For larger estates, it has significant tax advantages and can be a valuable tool for advanced planning.

Estate planning using life insurance can be simple, using basic products, or it can get very complex requiring specialty products, called survivorship life insurance.

We’ll go into detail more below.

The Advantages of Estate Planning Using Life Insurance Products

Adding life insurance as part of the estate adds a layer of financial security to the overall plan.

Along with a will, it forms the foundation of estate planning.

It offers benefits to both the insured and the beneficiaries.

Thorough analysis is crucial for it to fulfill all the desired needs.

With proper research, it’ll provide welcome peace of mind.

  1. The advantage for the insured is he has control over how these monies are allocated. This may outrank any other consideration.
  2. For the beneficiaries, the benefit is tax-free and not subject to probate. However, while funds distributed to the estate are tax-free too, they may be subject to probate.

Life insurance can serve important functions in an estate plan. It can provide a source of funds so loved ones can keep non-liquid assets such as a house.

  • It can also cover other expenses.
  • It can ensure a spouse has financial security despite the loss of income, when setup to do so.
  • It can offer the same benefit for an existing business, too.
  • It can also provide the insured with the means to carry out his final wishes.

He can use it for charitable donations or funding for other businesses or projects. It gives him the flexibility to create an estate plan which specifically meets his objectives.

Adding riders to an existing policy can customize his life insurance to meet his needs in various other situations, as well.

There is a crucial caveat to the tax-free status.

The policyholder should not have any “incidents of ownership” such as the ability to borrow off the policy.

In these cases, the benefit is subject to federal estate taxes.

He should transfer ownership to a spouse or individual other than the insured to avoid this type of situation.

The taxes owed upon payment of the benefit then would be zero.

A key ingredient to the perfect estate planning recipe is utilizing a trust, or at minimum, a will, which gives explicit directions on how the benefits should be utilized when the insured can no longer make the judgement on their own.

Whole life or universal life insurance offer better options for this type of life insurance. It provides the flexibility for estate planning, but also longevity.

For example, parents with a family farm could leave the property to one offspring. They can then use a life insurance policy to provide for the other one who may not be interested in the family business.

But there are other reasons, which may not be so apparent.

Income Replacement and Financial Security

estate planning with life insuranceOne of the main reasons people buy life insurance, regardless of the type, is for income replacement for one’s family.

The typical scenario is to buy a policy which will ensure the family stays at the same economic level as before.

For planning the estate, a general rule of thumb is to get coverage equaling 10 times the current income of the insured.

But that’s not all.

The amount of coverage should also consider estimated pay increases as well as inflation costs.

A reasonable figure would then place the estimated coverage at 10 times the income.

For financial security, the life insurance portion of estate planning should also consider current debt such as a mortgage or car loan.

Dependents add another dimension to the amount.

Adding about $100,000 per child should cover any additional education expenses, for example.

The life insurance should include funds for anticipated final expenses such as funeral costs, too.

Since life insurance is just one part of the estate, the next step is to subtract the value of any current assets and investments to arrive at an accurate base estimate for coverage.

The main idea is, when a person passes, everything can continue as good as, or perhaps even better, financially speaking. The proper amount and transfer provisions should make it seamless, so the estate is ‘settled’ without dispute.

What About Future Expenses?

The decision-making process regarding life insurance needs to consider future expenses as well.

That will require a frank discussion about needs down the road such as a move to a new home or any other major purchases. This amount can be added to the preliminary figures.

While not a pleasant thing to discuss, it’s essential to ensure the family’s future financial security.

It is a wiser course of action to plan with extra funds than to leave meeting future financial obligations to chance.

If the insured has concerns about the financial management of the estate, he should consider setting up a trust.

He should also name a secondary beneficiary in case his primary choice passes away. Careful planning is vital when considering this designation.

A last will is essential to ensure the insured’s wishes are met.

However, the estate must be the beneficiary of the policy for the will to control the distribution of any life insurance funds.

The individuals should review the objectives of the estate and the designation of beneficiaries periodically to make sure it is current.

Business Obligations Matter, Too

Life insurance can function in the same way with a business, especially if it is a family business.

The benefit can cover anticipated expenses and the value of the owner or employee.

As with a spouse, the payout from a life insurance policy can provide a source of funds to keep a business running.

It can also buy out a portion of the business to keep it intact rather than having it split up between stakeholders.

If the insured has ownership in all or part of a business, he must consider its role in estate planning.

Foremost of these decisions is the participation of heirs in its future. If a family member will continue with the business, a life insurance policy can include provisions for it.

Estate planning then becomes a family affair looking beyond the insured’s role in the business.

Investment Opportunities

While a cash value policy offers some return on the investment, it isn’t the best financial strategy all alone.

However, these monies, such as annual dividends, can add up over time.

The insured can use these funds to pay premiums on the life insurance policy. He may also choose to invest the money in more lucrative financial opportunities to add value to his estate.

The distribution of annual dividends can provide another means to diversify the value of the estate.

For example, the insured may name a spouse as the beneficiary while delegating the annual dividends to another entity such as a charity. The life insurance then has a multi-faceted function to meet more than one objective.

This is just one of many other aspects you might consider, which is why every plan is usually so unique.

The greater the estate, and the larger number of parties involved, the more complex it can get, exponentially.

Charitable Giving Potential

A whole or universal life insurance policy offers additional ways to plan an estate which involves charities.

The simplest way is to name a charity as a beneficiary.

It gives the donor control over his funds while giving him the option to change it, but only if it is revocable.

The donor’s legacy is protected with a transaction which cannot be challenged nor disclosed, if preferable.

Gifting a life insurance policy allows the donor to reap the benefits of life insurance as well.

He may claim an income tax deduction for its fair market value. If he continues to pay the premium, he can declare these funds as well.

The charity benefits by receiving the full face value of the policy without taxes. Alternatively, an individual can donate the annual dividends to charity.

Life insurance offers a means to add financial security to the objectives of estate planning.

It can provide a source of immediate funds for financial obligations:

  • It can also serve as a wealth replacement strategy for a spouse and loved ones.
  • It even can act as a source of funds to pay estate taxes.
  • It can create seamless transition of businesses.
  • It could provide a leveraged benefit for virtually any purpose.

Of course, it requires a thoughtful and candid analysis of the needs of the insured and his family.

If you’re person planning their estate, or a senior who is looking to finalize an existing plan, it’s time to talk.

You’ll want to involve a specialized agency, like ours, in addition to an estate planning lawyer and tax advisor.

Contact us and we can help you with a preliminary consultation.


Jason Fisher

Jason Fisher is the founder and CEO of, LLC. and a multi-state licensed life insurance agent who has helped over a million Americans seek out affordable coverage, compare quotes, or get their family and businesses covered.

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