Life Insurance, like all assets owned by an individual, should be included in your estate plan discussion and used as a tool for future planning.
At its base level, life insurance is used to provide for those who depend on you, whether that be children, a spouse, or other family members. However, even if you are single with no dependents, life insurance can still be a useful tool to store and access wealth.
Simple term life policies that have a death payout benefit are usually transferred upon death to a designated beneficiary. That beneficiary is selected by the owner of the policy and once the insurance company has verified the death, they will pay out the policy to the beneficiary. This type of policy does not need much more interaction with your estate plan, with one main exception.
What if you have underage children? If the children are named as beneficiaries, the proceeds of the policy will need to be overseen by the probate court through a guardianship proceeding. This situation can easily be remedied by creating a revocable trust and making it the beneficiary or contingent beneficiary of the policy. This structure would allow your chosen trustee to administer the money for your children under the terms of the trust, and without the need for court intervention, cost, or approval.
Whole or universal life insurance operates a bit differently than a term policy. Under these types of life insurance, the premiums paid to the insurance company provide for the same death benefit as a term policy, but they also accumulate a cash value. This cash value can then be accessed to supplement retirement income or used as a personal loan to the owner, as opposed to using a bank line of credit or a credit card.
In addition to the issues with underage children, there are other strategies for the use of life insurance that can be a great benefit to your estate. Life insurance is a great source of funds for paying final expenses, debts, and taxes. This type of planning is crucial if the decedent has many assets but little cash.
Wealthy individuals can employ more sophisticated tactics such as creating a dedicated irrevocable trust, called an Irrevocable Life Insurance Trust (ILIT), which would then allow for the owner to pay the premium during their life and then control the distribution when they die by the terms of the trust. This structure has the added advantage of removing the value of the policy from the decedent’s estate for Estate Tax purposes. The number of individuals who will benefit from this strategy is less and less every year though because of the extremely high exemption from the Estate Tax, currently $11,580,000 in 2020.
