Life insurance is an invaluable tool when estate planning. It can provide solutions to various problems and serve as an important financial instrument in reaching your objectives. Life insurance commonly serves one of two purposes: preserving an existing estate or creating one for your heirs.
In most cases, life insurance premiums are not tax-deductible. However, when issued, insurances proceeds to an estate or designated beneficiaries are not subject to income tax.
Reasons to use life insurance
As stated above, life insurance can play a significant role in estate planning. Below we will enumerate some of the more common reasons life insurance is used.
It can provide liquidity
By having life insurance, the estate can ensure that the more liquid assets comprising the estate do not have to be sold to pay the liabilities. These liabilities can include mortgages or taxes. If the estate is not privy to life insurance proceeds, it may be forced to sell assets that were otherwise intended to be bequeathed to beneficiaries.
It can provide income to an individual you intended to support
By subscribing to life insurance, you can designate an individual as a beneficiary. In turn, this allows you to ensure that they will have adequate financial support when you pass away.
It can be used to donate to charity
It is important to note that although term life insurance can be a valuable tool to fund short term estate needs, universal or whole life insurance is more beneficial when the insurance is for estate purposes. The latter can be used for many issues, such as covering estate taxes on death or the ability to bequeath property without the advent of taxes payable. Like all estate planning strategies, subscribing to life insurance should always be considered carefully and according to a cost-benefit analysis.
Amount of insurance coverage needed
Depending on your objectives and financial status, the amount of coverage you require or want will vary. There is no one size fits all when it comes to the amount of coverage. Often, that amount of coverage an individual will need will decrease or change as they age.
An individual's financial status and objective will also help determine the amount of coverage required. Determining how much and what type of insurance is most beneficial for you can be best assessed by preparing a financial plan and consulting a relevant insurance authority.