What happens to the kids when the head of the family passes away before the former comes of age? You must invest in life insurance to secure your dependents’ future.

Incorporating this insurance into your estate plan can provide your heirs with valuable flexibility in the future.

Insurance can replace lost income for numerous families if a parent or spouse passes unexpectedly. Yet, it also proves invaluable as an estate-planning tool for those aiming to pass on substantial wealth to their heirs.

What Are the Main Types of Insurance?

There are two types of insurance — term life and permanent life.

The former type offers coverage (usually 10-30 years), ideal for specific needs like providing for minors. It’s affordable for the young and healthy due to its limited coverage.

On the other hand, the latter life insurance policy provides lifetime coverage and benefits for property planning. However, it’s costly, often five to 15 times more than term policies. This insurance is particularly advantageous for those who need to:

Cover Estate Taxes

Estates over $13.61 million ($27.22 million for married couples) are subject to up to 40% taxation.

The tax bill is often due within nine months of the owner’s death. It poses a burden on heirs inheriting significant illiquid assets like art or real estate. Insurance payouts can prevent heirs from rushing to sell assets at a below-market valuation.

Federal estate tax laws have seen over ten significant changes in the last five decades, creating uncertainty in estate planning. Even if your estate doesn’t surpass the current exemption, future tax changes are inevitable.

Veer Away from Inheritance Inequities

Insurance can address inheritance inequities caused by assets like family businesses or real estate that are challenging to divide among heirs. It enables leaving more considerable assets to suitable heirs and balancing inheritance disparities.

Provide for a Family Member With Disabilities

Suppose you’re supporting an heir with a disability who may never achieve financial independence. In that case, you must ensure their long-term financial security, which becomes crucial.

However, the expenses associated with lifelong care might diminish the inheritances of other heirs.

In such scenarios, term life insurance offers an effective means to furnish tailored financial assistance for the disabled heir. They can do this while preserving the integrity of the estate for other beneficiaries.

It’s essential to exercise caution when bequeathing assets to an heir who relies on government benefits. These payments often come with stringent income thresholds.

Ways to Use Insurance As Part of Your Estate Plan

Transferring an estate can present various complexities, contingent upon your situation and the extent of the assets involved. Here’s a deeper examination of how your insurance can address these complexities:

Pay for Funeral Expenses

You can never underestimate the impact of insurance on your heirs. The advantages justify why you should include it in your estate plans. Upon your passing, your loved ones may encounter several financial obligations, including:

  • Funeral costs

The average funeral expense surpasses $7,000, as reported by Times Magazine. Additionally, the inclusion of burial vault expenses further elevates the total bill.

  • Outstanding debts

Your debts become the responsibility of your estate upon your demise. Consequently, these debts might diminish the assets available for your heirs.

  • Final income taxes

The government mandates the settlement of any outstanding taxes and any taxes due for the year of your passing.

Life insurance serves as a means to cover these expenses and provides a financial cushion for beneficiaries to fulfill other obligations without depleting estate resources or assets.

It proves exceptionally advantageous if the estate comprises real estate or other assets you can’t swiftly liquidate.

Business Succession

For business owners or co-owners, the event of your passing can pose significant challenges. These challenges may be faced by family members or business partners tasked with continuing the business. The proceeds from an insurance policy can alleviate this situation.

Many partnerships and startup ventures establish plans to address the potential loss of an individual possessing vital knowledge or talents crucial to the enterprise’s success.

You can manage this matter by implementing a buy-sell agreement. Make it part of your estate planning process.

Draft a contract delineating the process for selling or transferring a departing partner’s stake in the business to other stakeholders. Insurance is essential for funding such agreements.

Special Cases

Furthermore, you can use the proceeds for specific purposes, such as fulfilling divorce obligations like spousal or child support. Alternatively, you can allocate death benefits to sustain support for dependents such as minors, children with special needs, or elderly relatives.

You can manage these targeted allocations through the establishment of a trust. These arrangements hold assets on a beneficiary’s behalf under a trustee’s oversight.

You can use a life insurance policy as the funding source for a trust with a specific objective, such as maintaining alimony payments, supporting a child until a certain age, or covering the expenses of caring for a loved one with special needs.

Various types of trusts exist, each with advantages and disadvantages concerning taxes, probate, and other considerations.

Many individuals seek guidance from a financial professional to explore the available options and their relevance to their circumstances and objectives.

Avoid Probate

Probate is the legal procedure for administering the settlement and distribution of deceased assets. It is often a protracted and complex process, even with a will and comprehensive estate plans.

In contrast, insurance proceeds bypass probate when directed to a designated beneficiary. Furthermore, these payments can maintain privacy, whereas the probate process is public.

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Get Professional Help from Us

These examples show just a fraction of how you can utilize insurance in estate planning. The potential applications are as diverse as each person’s circumstances and objectives.

That’s why many individuals seek advice from a financial professional regarding the array of possibilities. Like a will, life insurance is a valuable instrument in estate planning. However, effective utilization requires some understanding of how to wield it appropriately.

If you need legal assistance in all things related to insurance and estate planning, we can help. Contact Cristy J. Carbón-Gaul today for expert guidance tailored to your needs.