How? Passing on an estate can involve numerous issues, depending on your personal circumstances and the amount of assets at hand. The strategic use of life insurance can help with:
- Final expenses
- Estate taxes
- Estate equalization
- Business ownership
- Special purposes
- Probate
Here's a closer look at life insurance’s application to each of these issues.
1. Final expenses
When you pass, your loved ones may face some expenses. These can include:
- Funeral expenses. The median cost of a funeral is more than $7,000, according to a trade association. Adding the cost of a vault for burial adds even more to the bill.
- Some debts. Your debts become your estate’s responsibility when you die. As a result, those debts may reduce the assets that remain for your heirs.
- Final income taxes. The government requires payment of any back taxes, plus any taxes owed for the year you die.
Life insurance can help cover these costs as well as provide a source of funds for beneficiaries to use to meet other obligations, without having to tap estate resources or assets. This can be especially beneficial if the estate holds real estate or other assets that can’t easily or quickly be converted to cash.
Vast majority of a retiree’s assets are in retirement accounts and home ownership. Both retirement accounts and homes can be difficult to turn into liquid cash. A house that is left to multiple siblings can be difficult to handle for financial and emotional reasons — you cannot sell or retain your childhood bedroom without selling or retaining the whole house. A retirement account will be counted as taxable income to the beneficiary and must be taken out within the first ten years by any non-spousal beneficiary, which could impact taxes for your beneficiaries for a decade.
A life insurance policy death benefit can solve many of these problems, such as providing instant liquidity to one or more children, without having to quickly sell a family home or paying the tax that would be owed on an inherited retirement account.
Also, life insurance proceeds are generally not subject to income taxes.
In next blogpost, we will keep introducing the other use of life insurance in estate planning.