Understanding the Role of Life Insurance for Estate Planning

Life insurance can be a valuable tool for estate planning, helping ensure your loved ones are financially secure after you pass away. By understanding the different types of life insurance policies available and how they can be used in estate planning, you can make informed decisions about your legacy and protect your family’s future.

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life insurance for estate planning

What is an estate in life insurance?

In life insurance, an estate refers to the total value of all assets and liabilities a person leaves behind after passing away. This includes everything from property and investments to debts and taxes owed. Life insurance can be used to help cover any outstanding debts or taxes, as well as provide financial support for loved ones who may be left behind. By including life insurance in your estate planning strategy, you can ensure that your legacy is protected and your family is taken care of.

Best life insurance for estate planning

best type of life insurance for estate planning

When choosing the best life insurance for estate planning, it’s essential to consider your specific needs and goals. Term life insurance may be a good option if you only need coverage for a particular period, such as until your children are grown or your mortgage is paid off.

However, universal life insurance may be a better choice if you’re looking for a more permanent solution. It offers more flexibility and can be used as a tool for estate planning, helping you leave a lasting legacy and protect your family’s future. Working with a financial advisor or insurance agent is essential to determine the best life insurance strategy for your unique situation.

Life insurance coverage is not only to give a decent burial to the insured, but it has a lot of purposes. Hence, it can replace income and protect real estate and other assets from taxes. 

It pays to plan, especially if you do not want your hard-earned properties to be subjected to higher estate tax. The current estate tax-exempt is $5.49 million regarding estate value, but other states can collect taxes lower than the said amount. It will surely snatch a considerable amount of weight that is supposed to be for your family’s future.

One of the surest strategies that have long been used by many is getting a life insurance policy. With policy coverage, it can cover both inheritance tax and estate tax. By doing this, heirs can get the value of the total assets without any tax deduction that can diminish its value or use as payment. 

If you plan to do the same thing with your asset, it might work. There are two reasons why sometimes it fails.

Firstly, the insured’s policy is sometimes added to the estate value of the insured. In return, it will increase the total value to millions of dollars depending on the importance of life coverage. The life insurance will add to the tax liability instead of covering it.

Another reason is the fact that estate value can increase yearly. It takes a lot of work to target as it changes over time.

Insureds who are counting on the exemptions to protect their asset through life insurance is a risky gamble. For instance, the federal estate tax exemption has changed over the past 15 years. It is from a no estate tax during 2010 to an exemption of $1,000,000. However, Congress can change it anytime.

 It is essential to know and understand your choices regarding estate planning. It is for you to choose the best plan that suits your individual needs. An estate plan now will safeguard your assets and your family’s future. It is helpful while you are still alive and by the time of your passing.

The following are possible estate plans and the role of the life insurance policy. Before that, it is good to understand estate and estate planning better.

Permanent life insurance for estate planning

Permanent life insurance can be a valuable tool for estate planning. It provides coverage for your entire life as long as you continue to pay the premiums. This means your beneficiaries will receive a payout when you pass away, regardless of when that happens. Additionally, permanent life insurance policies often have a cash value component that can grow over time. This cash value can supplement your retirement income, pay for long-term care, or even fund a trust for your heirs. When considering permanent life insurance for estate planning, working with a financial advisor or insurance agent is essential to determine the best policy for your needs and goals.

Universal life insurance for estate planning

Universal life insurance is a type of permanent life insurance that can be used for estate planning. It offers a death benefit and a cash value component, which can be used to pay for estate taxes or other expenses. With universal life insurance, you can adjust your premiums and death benefit as your needs change. This can be particularly useful for estate planning, as it lets you ensure your loved ones are cared for even after you’re gone.

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Is cash value of life insurance included in gross estate

Yes, the cash value of a permanent life insurance policy is typically included in the policyholder’s gross estate for estate tax purposes. However, some strategies can be used to minimize or avoid estate taxes on life insurance proceeds. For example, setting up an irrevocable life insurance trust (ILIT) can remove the policy from the policyholder’s estate and provide tax-free benefits to the beneficiaries. Is it essential to work with a qualified estate planning attorney to determine the best strategy for your situation.?

What happens when life insurance goes to the estate

From an expert and licensed CPA, Jay Varcoe, an estate is the total value of a person’s net worth. It is the sum of the person’s tangible and intangible assets. It is the value of everything you own, from your appliances to your bank account. Anything that has an equal value can be added to your total asset. 

Moreover, debt is included when getting the total net worth. Therefore, a large debt can reduce the full value of the net worth subjected to estate taxes. Debt is not a good sign because it can affect the probate process and lead to the assets’ selling. 

Life insurance for estate tax planning

life insurance for estate tax planningIt means planning for transferring a deceased person’s assets to his or her heirs after death. An asset’s summary can be divided into real estate, assets, personal belongings like jewelry, cars, life insurance, and debt. If you want to secure an estate plan, then it is important to write a sign and notarized it before your demise.

The main objective of this plan comes from the client itself. The will of the person creating the estate plan can be very simple to complex, depending on what the person wants to achieve after his or her death. However, most people are confused about estate planning, especially if you will get life insurance coverage as part of the plan.

According to a popular guidebook for estate planning from the Wall Street Journal written by Rachel Emma Silverman, many peoples common mistake about their estate is not having any plan at all. It encourages people with huge net worth is to plan as early as possible. 

Indeed, your plan today might not be applicable tomorrow. The earlier you set a plan or goal, the more time you have to make some changes if it is not applicable anymore. The main point is that everything, including the death benefit from your life coverage, is considered an asset that will determine your estate’s total value. If you do not have any plan for it, lawmakers are crafting a plan to get a huge amount. 

Estate planning for life insurance

estate planning for life insuranceIt is good to realize that the most important parts of estate planning have a life insurance policy. There is a decreasing trend in the pricing of life insurance. Therefore makes it an attractive option for many to secure their assets in the future. It is not as difficult as many think because it is a flexible way to develop an estate plan

Furthermore, your heirs can enjoy tax-free benefits from the coverage. Also, it offers liquidity if you have a business or real estate properties that you want to sell to get cash. After your demise, three things can happen with your estate.

  1. You may want to donate it an organization
  2. You will designate people who will get a portion of your assets.
  3. You can give it all to the government by means of estate taxes.

With the right estate planning, you can get away from the last option. You can freely leave your estate to your family or donate half to charitable institutions. Cash value from insurance policies can provide:

  • Source of money to pay for all your funeral costs, debts, and income taxes. 
  • Payment for the federal estate taxes to avoid selling assets to get some cash.
  • Money can go to a trust fund.
  • Funds to buy out your interest in a business.
  • Donate to a charitable institution.

The ability of life insurance benefits to provide immediate funds after your death is essential. The passing of someone means a lot of unforeseen expenses. Mostly it will exceed your expectation, so better to be prepared than sorry.

According to statistics, only 4% of the total income of a family is used for savings. The truth is that money is not always available on hand at the time when you needed it the most. Many assets are in the form of state properties that you cannot sell immediately.

Furthermore, most assets that come from an inheritance require payments like cars and homes that are not fully paid. This type of asset will only harm your family’s financial status right after your passing. Indeed, a life insurance policy can give cash value to the beneficiary to pay for all debts.

The benefit of the policy can stay away from the probate process. It can make money available at any time. The family does not have to wait to settle the estate that can take more than six months. A huge financial burden can happen within a period of six months and more.

Estate as beneficiary of life insurance

estate as beneficiary of life insuranceThere are different options for you when it comes to securing your estate using life insurance coverage. The simplicity and complexity of the process are according to the client’s status. It is good to have a plan in place in case something unexpected happens. 

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Life insurance for estate tax planning

court ordered life insurance policyOne great benefit of owning life insurance is the ability to generate a large sum of money payable to your family upon your death. An even more significant advantage is the federal income-tax-free benefit that life insurance proceeds provide when paid to your beneficiary. You could use the life insurance to cover estate taxes. Although the proceeds are income-tax-free, they could still be included in your taxable estate for estate tax purposes.

Section 2042 of the Internal Revenue Code states that the value of life insurance proceeds insuring your life are included in your gross estate if the proceeds are payable: (1) to your estate, either directly or indirectly, or (2) to named beneficiaries if you possessed any incidents of ownership in the policy at the time of your death.1

1 United States Government. “Title 26 – Internal Revenue Code – Section 2042.” Accessed Dec. 10, 2020.

Life insurance proceeds cannot be included in the deceased’s estate quizlet

True. Life insurance proceeds are generally not included in the deceased’s estate and are typically paid directly to the named beneficiaries of the life insurance policy.

State farm estate protector life insurance

State Farm’s Estate Protector Life Insurance is a permanent life insurance policy that covers your lifetime. It offers flexible premiums and death benefit options, which makes it an ideal product for those looking to protect their wealth and legacy. It also has optional riders, such as the Accelerated Death Benefit Rider, which pays a portion of the death benefit to the insured while they are still living if they are diagnosed with a terminal or chronic illness.

Irrevocable life insurance trust

irrevocable life insurance trustIt is the best flexible option for many. Hence, it is good to remember that it is not a different entity as a business. Instead, ILIT is an asset or different assets that can benefit beneficiaries. The trustee is the one to manage the trust, but with irrevocable life insurance trust, a client will only forward invoices and other necessary documents to the insured. 

It is the ILIT that own the policy for you, so it is removed as part of your estate. It is the trust that owns the policy. Therefore, it is not computed as part of your total asset when federal estate taxes come in. Additionally, it is the ILIT that gives protection to your cash value from other creditors. Other states give creditors the right to seize the cash value from an insurance policy to be able to get their claims. 

The amount of exemption to the federal estate tax changes each year, hence covering your assets with ILIT seems very significant. It is the safest way to make sure that your heirs or beneficiaries will get what they deserve. As the name implies, “irrevocable” means that once you get it, then you can never get the policy back in your name. 

The good thing about it is that you can still control a lot of aspects within the trust. For instance, you can choose beneficiaries and define terms to get the benefits. You may also select one or more trustees that can manage the ILT on your behalf. Others can allow you or your spouse as the trustee, but you may want to choose an outside trustee. Otherwise, the IRS will assume that cash value is still part of your estate.

There is no doubt that the ILIT can safeguard your assets and get tax free cash value. However, all of these benefits are possible if it is properly designed, and important guidelines are met, such as:

  1. Name of beneficiaries
  2. Name of Trustees who will receive all correspondence about the trust, even if you are the one paying for all the premiums.
  3. State all circumstances in which all beneficiaries can get their money from the ILIT.
  4. Carefully understand everything about the ILIT according to your state.

It is imperative that you ask the help of an experienced lawyer about estate taxes. In case you have a huge estate, it might be subjected to both federal and state taxes. However, it depends on the applicable law by the time of your passing.

Existing Policy with Irrevocable Life Insurance Trust (ILIT)

There is an option to gift an existing life insurance policy to an ILIT. However, if the insured dies within three years while making the ILIT a gift, then the policy can still go to the estate for tax. The amount of the policy is included within the estate’s value that is subject to taxes. Today, the current exemption is $5.49 million, but it can go lower.

In case you will but a new policy for the ILIT, it does not have to go through the three year gifting period. You can stay away from the lookback period if the ILIT is the one who owns the policy from the start. The amount of the policy will not go estate even if the insured dies immediately right after getting the policy for the ILIT.

There are instances when purchasing a new policy for the ILIT is not practical, especially if you already have a policy for many years. It is good to discuss with an expert agent from Coach B. Life Insurance regarding your situation. They can offer you current quotes and talk about better options to solve your problems. The current life insurance rates have fallen over the years, so it might be practical to get a new one.

How can Irrevocable Life Trust (ILIT) Help in Estate Planning?

You may also choose to place other valuable properties within the trust or get ILIT specifically for that asset.

Also, for a married couple, there is a Survivorship policy or Second to Die Policy. It is created for two married people, and the policy will only provide benefits after the death of the second beneficiary, the part of the spouse. With this type of policy, it can take away the proceeds in the estate taxes’ eyes.

Singles can also take advantage of ILIT using individual policy coverage to keep 100% of their proceeds to their beneficiary. One can choose from a policy such as whole life, variable, and universal life. However, all of these policies can generate cash value that might be taxable in the trust. It is because ILIT also has a tax return.

If you think you are ready and determined to safeguard your assets from future snatching of the estate and federal taxes, you can talk to Coach B. Life Insurance and be guided on your way to a tax-free estate. Grab your phone and dial 1-800-342-1537.

Frequently Asked Questions

What type of life insurance is often used for estate planning?

One type of life insurance often used for estate planning is permanent life insurance, which includes whole life, universal life, and variable life insurance. These policies provide a death benefit that can be used to pay estate taxes or provide an inheritance to beneficiaries. They also have a cash value component that can be used for retirement income or other financial needs.

How is life insurance used in estate planning?

Life insurance can be used in estate planning to provide financial security for loved ones after the policyholder's death. It can help pay for funeral expenses, pay off debts, and provide income for surviving family members. Additionally, life insurance proceeds can be used to pay estate taxes, ensuring that heirs receive the estate's total value.

What role does life insurance play in estate planning?

Life insurance can play a crucial role in estate planning by providing a source of funds to pay for estate taxes, debts, and other expenses. It can also provide for loved ones after death or leave a legacy for a favourite charity. Additionally, life insurance can help equalize inheritances among heirs and provide liquidity to an estate.

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About Coach B.

After starting his financial career with Phoenix Home Life Insurance Company back in 1992, Scott decided he wanted to provide people with an easier and more enjoyable way to buy life insurance. That was the start of Coach B. Life Insurance, whose mission is to be transparent, honest, and helpful to customers — without ever bugging or pushing them.

In the years since then, he has worked tirelessly to improve the process of shopping for insurance. His goal is to make sure that everyone who comes to Coach B. — whether they end up buying a policy or not — has the best possible experience.


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