Why Life Insurance Can Make a Big Difference in Estate Planning
Updated: Oct 26, 2021
Updated October 11, 2021
Photo: Mathieu Stern / Unsplash
An estate plan is all about protection and making decisions while you still can in order to minimize the despair and burden that your loved ones experience after you pass away. Understandably, this is a weighty topic and can be uncomfortable for most of us to think about, but that doesn’t make it any less necessary to address.
Life Insurance Strategies That Actually Work
There are many resources and strategies available to help ease the burden of losing a cherished family member. Life insurance is one important resource that when used strategically, can help with the various issues families face after they’ve lost a loved one. If you drive a car or own or even rent a home, then you know how important and necessary having insurance can be when something inevitable happens. If you have minor children, having life insurance is often an essential safety net that provides immediate protection for their continued care and well-being.
There is no question, when loved ones pass away, it is a stressful and sensitive time filled equally with grief and often, chaos. For many, there is the added sting of complicated yet practical financial matters that must be addressed, such as funeral costs, debt, probate, business succession, estate or income taxes, and divorce or child support obligations.
Life insurance gives your family choices
If something were to happen today, what would tomorrow look like?
Let’s break down some of the typical issues one can expect to encounter and the key advantages to an estate that life insurance will help to cover.
In California, it’s often been said that death isn’t cheap. The U.S. average funeral costs top $7,300, and California is one of 17 states where the cost to die is more than $20,000 when adding in the healthcare expenses. Depending on the services and products you choose for your final expenses, unless you have created a roadmap or plan to pay for this, your family will have to scramble in a hurry to pitch in their own resources at a moment’s notice to cover these expenses. Death benefits can often help people to avoid leaving their families in a desperate state of limbo during the critical time immediately following the death of a loved one.
This is a topic often overlooked that has the potential for creating lasting strife for survivors, for many years to come. When you pass away, your debts will become the responsibility of your estate. Even if you’ve been mostly financially responsible during your lifetime, there is still a strong possibility that you may die with some debt, which must be settled and will be taken from the assets that you might plan to leave to your family. If you have family members who rely on these financial resources to live, the debts charged to your estate could leave them without money to pay for necessities such as housing, bills, education expenses, healthcare premiums and more. If you or anyone you know has ever experienced money troubles after a loved one’s passing, you know it’s one of life’s most cruel and devastating events. Life insurance benefits can help to ease the debt burden on the estate and protect your loved ones from facing financial hardships that can upend their lives for the foreseeable future.
Probate often throws people for a loop. Many are surprised to find that in certain circumstances, a court must oversee the process of transferring and distributing a decedent’s property either according to a Will, or the default rules of the state when there is no last will. Probate fees are assessed as a percentage of the total value of the estate and costs can often skyrocket when adding in attorney’s fees. The law determines the fee amount and many families are often shocked to learn just how much the state charges an estate in order to distribute the assets and property. Since probate takes months and sometimes even years, assets can be tied up in probate, which can leave a family vulnerable to experiencing a financial crisis. With proper planning, life insurance can be used strategically to eliminate costly delays by naming a beneficiary to receive the proceeds of the insurance policy outside of the probate process.
If you’re a co-owner or partner in a business, the other owners or partners will need to know how to handle your share and responsibilities in the business in the event you die. If you’re running a family business, your loss in this regard will also be felt by your surviving family business co-owners. Buy-sell agreements are often contemplated during the formation stages of a business to address this very issue and can predetermine how your share of a business should be either sold or distributed to the other owners. Your death benefits can give some flexibility and freedom for handling any big ticket costs associated with the reassignment of those business assets.
So, it’s cliché, but nevertheless, it bears repeating: Nothing is certain but death and taxes. When you die, your taxes must be paid. Let's hear that again. They don't just go away because you're no longer alive. Most of us will not have to pay federal estate tax, unless you’re in the higher net worth categories, that is, your individual estate is valued at more than roughly $11.7 million in 2021 or $23.4 million for couples. Amounts in excess will be assessed at 40% estate tax in 2021. You should know that the topic of estate taxes is a moving target (and hotly debated) and Congress can change these exemption amounts, but that’s a subject for another day.
So, naturally, many people are often confused by what taxes are actually owed at the time of death as it depends on what state you live in and the amount of assets the estate owns. At the very least, when a person dies, even if they don’t owe federal estate tax, the government will collect any back taxes owed as well as income taxes due during the year of the death. Life insurance is a key tool for legacy planning, which can provide survivors with ready cash especially where other tangible assets cannot be easily or quickly liquidated in order to pay taxes. Typically, an heir may find that the biggest asset they will inherit is real property such as a family home, where the equity can't be traded for quick cash.
In some situations, spouses or minor children receive ongoing support from someone who has died. Unless the estate has specifically earmarked how that financial support should continue and be handled in the event of their death, the process can be complicated by the estate’s other debts and those resources may be impacted. In the case of minor children, this can be additionally devastating. Death benefits can be directed to be placed in a trust for minor children to be managed by a trustee and will minimize any possible financial impact or disruption in support that children might face.
These are just some of the more common issues that people face upon losing a loved one. Many people fret over when or whether it’s the right time to protect their families and the answer is simple: While you still can.
It’s never too early to make good decisions that protect your family members and your assets. Chances are, you've worked hard your whole life so why risk anything when it comes to those who matter most to you. There are no downsides to making sure that our loved ones are protected when we’re no longer here. The truth is, a good estate plan with a life insurance policy has so many advantages that it’s a wonder why more people aren’t rushing to acquire their own peace and protection by getting their affairs in order.
For more information about what you can do to incorporate life insurance planning into an estate plan, contact an attorney, financial advisor or insurance specialist for a broader understanding of how to make the tools available work best for you.*
*This information is for educational and planning purposes only. It is not an endorsement. Talk to your provider for more information.