Life insurance for Estate Planning: Guide for High Net Worth Individuals

Life insurance for estate planning image for article 3333Estate planning is a complex process that many, at times, involves a number of advisors, from lawyers to accountants, trust officers as well as retirement planners. The advisors are often tasked with the responsibility of providing valuable insights on how assets are to handled and transferred upon death. Unknown to most people is that life insurance is an integral part of any well-thought estate plan.

What is an Estate?

An estate, in finance, denotes the net worth of a person at any point of their life. It is calculated by summing up all tangible and intangible assets. In addition, an estate includes any life insurance taken, which acts as an asset given the death benefit at hand. Debts are also included as part of the estate as they are included for estate tax purposes.

Estate planning, on the other hand, refers to the process of indicating how a person’s wealth and assets are to be distributed upon an estate owner passing away. The planning process entails ascertaining who will assume ownership of pensions, real estate, cars personal belongings, among others upon death. Estate plans are legally binding documents as they are signed and notarized’ by the estate owner.

Estate planning is an important process that helps people manage and preserve assets while they are alive. Likewise, it plays an important role in ensuring control after death. A life insurance policy as part of an estate planning strategy can help provide cash when needed as well as shielding assets from sizeable estate taxes.

Life insurance serves two roles in estate planning. First, it helps in creating and unlocking new wealth for the beneficiaries, in the form of the death benefit. Secondly, it helps in preserving any existing wealth. Most people buy a life insurance policy to cover estate taxes and inheritance taxes whenever applicable.

In the event an estate owner passes away, the entire estate is usually subjected to a probate process, a process that can take months. During this time, the family may not be able to access the estate, a process that may trigger financial constraints given the lack of income. It is at this point that life insurance comes in handy, providing the much-needed financing awaiting completion of the probate process.

A simple estate might require a simple will to iron out everything. However, that cannot be the case with a large estate. Large estates present a number of challenges when it comes to estate planning, given the potential estate tax burdens that might require complex strategies such as trust. Consequently, life insurance can be a valuable element awaiting completion of the probate process

How Much Life Insurance to Buy For Estate Planning

The amount of life insurance coverage that one can buy for estate planning purposes depends on the size and estate goals. Similarly, the financial position also plays an important role. As one gets older, needs tend to change, therefore calling for alteration when it comes to life insurance coverage.

With the assistance of a financial planner and advisor, you should be able to come up with the appropriate life insurance coverage that would be able to cater to the needs of an estate adequately.

Uses of Life Insurance in Estate Planning

When it comes to estate planning, estate planners often advise on taking either term life or whole life insurance. Should the inevitable happen, then the death benefit left behind can provide much-needed funds to support the family by awaiting the unlocking of the deceased estate.

Similarly, whole life insurance can also act as a sizeable source of income upon retirement. Partners at retirement can withdraw the cash value or convert the policy to an annuity. Likewise, the beneficiary can use the death benefit to settle state taxes, among other debt obligations.

Life insurance can also provide the much-needed financing that can be passed as an inheritance to non-family heirs as part of the estate equalization process. In return, family members would be able to distribute among themselves the estate left behind by the deceased.

Likewise, there are life insurance plans that allow people to draw on the death benefit to settle any immediate financial obligations.

Benefits of Life Insurance in Estate Planning

Funding Tax Obligations

For high net worth individuals with large estates, life insurance policies can go a long way in providing much-needed funding for settling tax obligations. Federal estate tax rates are known to eat a significant portion of the gross estate and must be paid within the first nine months of the owner’s death,

While in most cases, people use the deceased estate’s personal assets to settle estate tax debt, that should never be the case. Proceeds from a life insurance policy often referred to as a death benefit can go a long way in settling some of the tax obligations left behind. In addition, proceeds from a life insurance policy are received tax-free.

Ensuring Business Control and Continuation

Life insurance policies can come in handy in ensuring business control as well as continuation upon the death of the proprietor. Business owners always envision business continuation even when they are not there. However, that is not always the case, especially when dealing with large families.

The death benefit received upon the death of the insured can help ensure business continuation and control in many different ways. The sum insured in the life insurance policy normally comes out immediately and without delays. Conversely, it can help families cash out some heirs by buying out their stakes in the business to assume full control. Conversely, the death benefit can be used to settle any debts that may threaten the business’s existence.

Estate Equalization

Expenses such as medical costs, funeral costs, business debt, or estate tax can take a significant toll on beneficiaries while awaiting estate distribution on an estate owner passing away. However, with life insurance coverage in place, the family and beneficiaries can rely on the death benefit to offset some of the costs while passing along a tax-free death benefit.

Similarly, a life insurance policy allows the passing down of money to designated beneficiaries with ease while avoiding a number of complications created by probate. Such benefits are also distributed tax-free.


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