Life Insurance & Estate Planning

Note: The specific advice in this article pertains to American readers.

Many of us understand the role that life insurance plays in insuring our families against our untimely death, but one of the most important roles that life insurance can play is in the estate planning process. You can turn a small gift or bequest into a much larger one through a life insurance policy. Although the eventual cash payout can be a significant amount, your survivors could lose a lot of it to taxes when you die. There are many ways, however, to avoid estate taxes.

Some of the reasons to buy life insurance are to help you meet specific goals. Some of these would include:

• Creation of an estate – If you do not have a lot of assets, this is one of the least expensive and easiest ways to create some type of estate for your family or beneficiaries. You can pay a fairly minimal amount and leave a lot behind. One of the more difficult elements of life insurance is the underwriting process. Often as we get older, we develop medical conditions that insurance companies will not rate favorably. Also there is often unclear documentation in our medical records that can make the underwriting process more complicated.

• Providing money to cover final expenses – People often underestimate the costs involved with dying. There are funeral, taxes, fees, and other debts to satisfy. Life insurance can safeguard us from these untimely events.

• Replacement income – Perhaps one of the most common uses for life insurance is the replacement of income to cover monthly expenses.

• Avoidance of "handouts" – Cash can be spent immediately and easily, and the use of a life insurance policy ensures a sum that can be kept for future use.

When deciding what type of life insurance to buy, several factors come into play, the main on being cost. Often I combine permanent insurance, which is whole life, universal life, or variable life, with term insurance to give my clients a combined approach with the least amount of costs.

• Term insurance provides life insurance for a specific number of years, for example 10, 15, 20, or 30 years. It is often inexpensive if you have a relatively clean bill of health and can cover your most expensive years – when your children are young and you have a mortgage.

• Permanent insurance can provide long term insurance and other additional benefits, for example flexible premiums and separate accounts of investments either at a fixed rate of return or variable rates of returns.

The main advantage of life insurance is the tax-free death benefit in most circumstances.

There are three main ways to get the life insurance out of your estate.

• The first is to set up an irrevocable trust and have it buy the insurance.

• Second is to transfer an existing policy into an irrevocable trust.

• Third is to give the annual premium as an annual gift directly to a person who buys the policy on your life and owns it in his or her own name. Remember in trust world if you have a string of any kind attached to an asset it is still in your estate for tax calculation purposes.

In the United States, there is a critical point for people with estates over $2 million. If your total estate (including everything you own, and life insurance) is greater than $2 million, your current taxable rate is 46%. That can really reduce what you thought you had. Often clients tell me that they are no where near the $2 million point, then when we begin to add together all that they have, plus their life insurance policies, they are well over that maximum. And with many people living in their homes for a prolonged period of time, there is a ton of equity, which is added to your estate. You may be worth way more that you think!

Deciding the amount that you need takes careful thought. You must balance what you can afford and what you think the recipients will need. Look at debts, income needs, occasional and regular expenses, and expected future expenses such as school tuition. It is also a good idea to work with a professional to see how much might be needed to pay estate taxes and other expenses when you die.

Upon your death, the money goes to one or more beneficiaries. If you have underage children, you may want the insurance proceeds to go into a trust that will be managed for their benefit.

One of the most important things to do is to coordinate the insurance with your overall estate plan, because the eventual payout could push your entire estate over the $2 million lifetime exemption and trigger estate taxes.

As with so many things in life having a good estate plan will always payoff. The year is new, take the time now to get this done so that you will rest easy knowing your family will be provided for according to your wishes.

Cindy Diccianni is a Registered Nurse, a Certified Senior Advisor (CSA), a Certified Long Term Consultant (CLTC), a Registered Investment Advisor and a Registered Representative with Leigh Baldwin & Company member NASD and SIPC. She is affiliated with Ortner, O'Brien & Ortner Advisory Group, Inc., Malvern PA. Her passion is assisting clients in creating financial freedom. You may contact her at Cindy@taxlegalfinancial.com.

Life Insurance & Estate Planning

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Cindy Diccianni, RN, CSA, CWI, CLTC

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