The Importance of Life Insurance in Estate Planning from Brad Anderson

An estate plan can include any number of tools for managing and protecting your assets, including life insurance policies. In fact, the importance of life insurance in estate planning should never be overlooked.
Learn more about the importance of life insurance in estate planning in this presentation.

The Importance of Life Insurance in Nevada Estate Planning
Creating a comprehensive estate plan is one of the most important things you can do to protect the future of your loved ones. An appropriate plan allows you to remain in control of your finances, including how they are distributed, while sparing your loved ones from the frustration and expense of managing your affairs after your death.
An estate plan can include any number of tools for managing and protecting your assets, including life insurance policies. In fact, the importance of life insurance in estate planning should never be overlooked.
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The role of Life insurance is extremely important when considering your estate plan.  We would like to highlight three commonly asked questions about the tax implications, and provide the answers to them here.
I have been made aware of the fact that I am the beneficiary of a life insurance policy, and I'm concerned about the tax implications. Will I be required to report the receipt of the proceeds when I file my income tax return?
This is a frequently asked question, and the answer is probably going to be a welcome one. In general proceeds received from a life insurance policy are not going to be looked at as taxable income by the Internal Revenue Service.
I own a number of insurance policies, and my estate is quite valuable. Will the value of the insurance policy proceeds count as part of my taxable estate for estate tax purposes?
Unfortunately the answer to this question is yes. At the present time the estate tax exclusion is $5.25 million, and the maximum rate is 40%. If the sum total of your assets is in excess of $5.25 million, including your life insurance policy proceeds, the estate tax may indeed be a factor.
Can anything be done to remove these policies from my taxable estate?
Yes, it would be possible to place the policies into an irrevocable life insurance trust. However, to satisfy IRS regulations you must live for at least three years after transferring the policies into the trust for the assets to be effectively removed from your estate. There are ways to avoid the three-year wait, but they must be addressed by a qualified estate planning lawyer.

Each estate plan is as individual as the person who creates the plan. Having said that, one of the most common components to an estate plan is life insurance. Whether or not you should include life insurance as part of your estate plan will depend on a number of factors; however, there are some things you should take into account when making the decision.
Your age and health. Life insurance is less expensive to purchase when you are younger and healthy, meaning you should be able to lock in the best rates. This is also when most people need life insurance for wealth and income replacement -- before they have other estate assets that can be passed down in the event of death.
Know what kind you are buying. Life insurance falls into two basic types -- term and insurance with cash value such as whole life or universal life. Term insurance only provides a death benefit while insurance with a cash value component potentially earns cash value, as the term implies.
Know your objective. If you only want to provide a financial safety net to your family, sticking with term insurance is likely your best bet. Talk to a financial advisor if you are considering whole life insurance. It can be a complicated investment strategy, but there are benefits that are not available to term policy holders.
Decide how much you need. This can change over the years. If you are young and single, you may only need enough to cover debts and your funeral. As you age, you should factor in what it will cost to raise your children if you die before they reach the level of maturity when they will be able to fend for themselves.
Shop around. Just as with other types of insurance policies the policy rates can vary widely. Take your time and compare rates before you commit. You should also be certain you are dealing with a company that is secure, so look at their rating with AM Best or Standard and Poors.
Know when to terminate or convert. Life insurance is rarely the best way to invest your money, but when it comes time to collect, your loved ones will find that you have provided well for them. Review your financial portfolio and your needs on a regular basis not only with your financial adviser, but your attorney, as well. You may find that you no longer need to include a life insurance policy for wealth or income replacement, but it could be useful in your estate plan as protection from estate taxes, expenses of administration, or other financial burdens of which you may not be aware.

The voice behind the famous song I Will Always Love You, was found dead of unknown causes in the bathtub of her hotel room just hours before the Grammy Awards. The untimely death of the 48-year old singer/actress comes after a decade of personal troubles including drug and alcohol addiction as well as the end of her highly publicized relationship with Bobby Brown. Just hours after her death, sales of anything “Whitney Houston” started to soar. The ultimate value of her estate has yet to be determined; however, it is clear that, as has been the case with other artists, her death may cause her popularity, and therefore her wealth, to increase substantially. The death of the once darling of both the screen and the radio reminds us all of how important it is to create an estate plan.
People often make the mistake of thinking that creating an estate plan is not necessary unless you have a substantial estate at the time. What many people don’t realize, however, is that the value of your estate can soar at any time. Unfortunately, as the untimely death of Houston reminds us, death can also strike at any time. The seed you plant today, whether it is an investment, life insurance, law suit or fledgling business, could be worth a small fortune tomorrow. Those “seeds” will become part of your estate upon your death. Even if they are not worth a substantial amount at the time of your death, they may continue to grow after your death. Deciding who will receive those assets, therefore, becomes important. The only way to ensure that your assets will be handled in the manner you intend is to create a comprehensive estate plan today.

Life insurance is a very important and useful element that is included in most estate plans. The most common use for life insurance is as an income replacement vehicle, and it is vital for people who have family members relying on their income. Even if you are relatively young, there are no guarantees and the well-being of your family is at risk if you do not have adequate coverage.
In addition to its value as an income replacement vehicle, life insurance is used in estate planning for other purposes as well, and one of these is to balance inheritances. We will explain what this means by way of example.
Assume that you are the owner of a successful small business, and the value of the business is by far your most significant asset. You have two children, a son named Doug and a daughter named Deborah, and you want to leave them equal inheritances. Doug works in the business, loves the job, and has expressed his desire to assume ownership upon your passing. Deborah has never worked in the business and has no particular interest in it.
A solution for scenarios like this would be to utilize life insurance to balance the inheritances. You take out a life insurance policy on your own life in an amount that is equal to the estimated value of the business, and you make your daughter Deborah the beneficiary. When you ultimately pass on, each of your children will receive an inheritance of similar value.
Enabling the balancing of inheritances is just one of the ways that life insurance can play a role in your estate plan beyond serving as a vehicle of income replacement. To learn more about this and comprehensive estate planning in general, simply arrange for a consultation with an experienced estate planning attorney.

The details of our lives are constantly evolving. So in a very real sense estate planning is an ongoing process rather than a single event. A plan that makes sense for you today may not be appropriate five, ten, or twenty years from now. There are many strategies that can be utilized in a well drafted estate plan depending on the specifics of your situation. When you prepare an estate plan you should do so recognizing that you should revisit it over time.
Life insurance is one such tool in an estate planners tool box that may have very usefull apllications depending on your circumstances. When you are still in your working years it is likely that your family depends on your income to maintain their standard of living. If you consider where they would be if that income was suddenly absent, you can immediately see the value of life insurance as an income replacement vehicle. Life insurance coverage should be reviewed periodically as your income increases and the needs of your family change.
Life insurance has some other very useful applications in addition to its value as an income replacement vehicle. It can be used to balance an estate in cases when certain real property or a business interest is left to one beneficiary. It is also commonly used as part of a business succession strategy where the business will take out insurance policies on owners in amounts equal to their respective ownership in the business. Upon the death of an owner insurance benefits are then used to buy out that partner's share and the funds are distributed to a designated beneficiary of the deceased owner. Life insurance may also be important to create liquidity at death to pay expenses so that the sale of assets is nor forced in order to pay expenses such as federal estate tax.

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