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Asset Protection: Life Insurance
Life insurance, if properly utilized, can be a powerful estate planning tool. Instant estates can be created through the purchase of a life insurance policy. Life insurance proceeds are income tax free and if held correctly, and the death benefit will pass estate tax free, as well as probate free. Life Insurance is often utilized to provide liquid assets that are available to pay estate and inheritance taxes, debts, and other estate expenses. It is also used to provide replacement income for the family you leave behind, or to benefit your favorite charity, or to replace the cost of nursing home care.
A Whole Life Policy should be seen as more than just a death benefit. The owner of the policy can benefit from it while he/she or it (in the case of a Trust) is alive. A Whole Life Policy is an asset. You can use the cash value (equity) built up in the policy for loans. You can borrow money from your policy without going through the hassle of the cumbersome loan application process. You can also use the cash value of the policy to pay the premiums on the policy, which is especially helpful if you find yourself temporarily or permanently disabled. In effect, your whole life policy can become self funded during a period of incapacity. Furthermore, in most cases the equity built up in your life insurance policy is not subject to creditor claims of either the insured or the policy owner.
At the beginning of this book we discussed Wills and Will Contests. If you are concerned about the possibility of a Will Contest, life insurance can be a useful tool. Life insurance, if positioned properly, passes outside of your probate estate and thus cannot be contested like a Will. You can ensure your assets get into the hands of the people you want to be your beneficiaries, free from a potential Will Contest. In addition to passing outside of the probate estate, properly positioned life insurance will pass outside your taxable estate (See our discussion about Irrevocable Life Insurance Trusts.)
Life insurance can also be utilized to fund your family’s charitable endeavors. This can be done by purchasing a life insurance policy and naming a charity as the beneficiary. The charity will receive the death benefit (when the insured passes away) tax free and free from probate proceedings. There are also tax benefits to naming a charity as beneficiary of your life insurance policy. You are eligible for a charitable deduction equal to 100% of your premium payments, with certain limitations. This has the practical effect of letting you donate large sums of money for pennies on the dollar. It is certainly more bang for your charitable buck.
If you are “insurable” (meaning healthy enough for a life insurance company to take a risk by insuring you) life insurance is a great tool to “gross up” your estate. Imagine creating an instant estate at your death. Your grossed up estate can be used to fund many different plans. Some folks use this tool to create parity between their children when a family business is involved. We are all familiar with the situation where one child remains in the family business and the other does not. When parents are planning their estate there is often a desire to create equal shares among their children. This presents a problem. One child has dedicated himself/herself to the family business, helped it grow, and now is going to have to give up half of the business and control of the business to his/her sibling who chose not to be involved. The division of assets certainly may be equal, but might not be equitable in this situation. By grossing up your estate with life insurance there will be enough cash on hand to give one child the business, and the other the cash equivalent. This is an important tool in preserving family harmony long after you are gone.
Grossing up the estate can also be a useful tool in financially lopsided marriages, especially in the blended family sense. It is quite common to have a marriage where one spouse brings a lot more to the table financially. Typically, each spouse will have children from a previous marriage. If each child inherits from their respective parents there could be quite a financial gap in how the children are treated. If the inheritance is spread equally there could be some bad feelings on the part of the children who feel that they had to give up some of their inheritance to a step-sibling. This problem can be solved through the use of life insurance. The life insurance benefit can be utilized to equalize the estate of both of the parents, ensuring equal treatment of the children.
Life insurance is a valuable estate planning tool. Care needs to be used when using life insurance. Shop around. Ask many questions. Read the fine print. Do not commit to a policy until all of your questions are answered to your satisfaction.
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Estate Planning • Asset Protection • Charitable Planning • Probate Administration • Medicaid Planning • Premarital Planning