Life insurance serves many very important purposes in planning throughout a person’s lifetime, and with the right life insurance strategy, you can safeguard who and what you care about while creating opportunities for your wealth to go further.
Continue reading or Click here to download a copy of our eBook outlining a few of the very important reasons life insurance can help during the estate planning process.
ESTATE / FINANCIAL PLANNING
Income Replacement
When a couple is first married, life insurance is a cost-effective way of assuring that the surviving spouse will not suffer financially if one of the spouses dies before the couple has had the opportunity to set aside a sizable emergency and retirement nest egg.
Education Fund
With the addition of children to the family, life insurance can be used to provide a fund for the children’s needs and assist with the education of the children should one or both of the parents die before the children are able to care for themselves.
Caring for Disabled Child
The cost to raise a disabled child from birth to death can be astronomical. Some children are lucky enough that government
assistance can provide for their needs. For many, government assistance is either not available or not enough to pay for the total cost for care of the child. Many parents also wish that the disabled child continues to reside in the home with caregivers after the parents’ death. A Special Needs Trust funded with life insurance is an excellent way to pay for the total needs of the child or supplement what may be provided by the government.
DEBT RELIEF
Some individuals and couples have a desire to make sure that all of his/her/their debt is paid off upon death. Life insurance can be an excellent and affordable means to assure that happens.
EQUALIZING DISTRIBUTIONS
Often a business, real estate investment, or even a family home makes up the bulk of the parents’ estate. The parents want to give the business or property to one child but desire that the other children receive an equal share of the total estate. This would mean that the child receiving the business or property would have to borrow against it or use his or her personal funds to “buy out” other siblings. An effective way to prevent this scenario would be to have a sufficient insurance policy that one child would receive the business or property while the other children would receive an income tax-free distribution funded by the death benefit from the life insurance policy.
Discounted Payment of Estate taxes
With the recent elections completed, some people are concerned that the new administration will be raising income and estate taxes. During his campaign, President Biden spoke about lowering the estate tax exemption amount from $11.7 million to $3.5 million. While $3.5 million is still a sizable estate, many more people will be subject to estate tax should this occur. Taxpayers who will potentially be hit by the increased estate tax may want to consider an irrevocable life insurance trust as a means to pay the estate tax at a reduced cost. A life insurance trust can be established and funded with an insurance policy designed for this purpose. For example, let’s assume a $5 million policy could be purchased for a lifetime cost of no more than $1 million. At death, the irrevocable life insurance trust would receive an income tax-free and estate tax-free death benefit of $5 million. That $5 million could be used to pay the anticipated estate tax, which leaves the balance of the estate to be distributed to the intended beneficiaries. The cost to pay that $5 million in estate taxes would be no more than $1 million and would have been paid during the lifetime of the taxpayer.
BUSINESS PLANNING
CREATING LIQUIDITY
Extra liquidity is often needed to assure that a business can continue after the death of the owner or key employee. Keyman insurance may provide the funds to hire a replacement employee to fill the gap left after the death of the owner/key employee. Business continuation insurance can also provide the funds necessary to cover any temporary fluctuation in business due to the loss of the owner/employee.
BUY/SELL AGREEMENT
While many business partners have very symbiotic relationships with each other, they may not work well with the spouse of the business partner or other family member who stands to inherit the deceased partner’s share of the business. Life insurance, combined with a buy-sell agreement and other estate planning documents, allows the surviving business partner to buy out the spouse or other beneficiary of the deceased partner’s share of the business, which leaves the surviving partner free to run the business. This is beneficial to the surviving business partner because many times the surviving spouse or beneficiary may not desire to be involved in the business or lack the necessary skills to be involved. This is equally beneficial to the beneficiary because he or she is being bought out at a pre-agreed price that is paid in a lump sum that is income tax-free.
ELDER LAW
LONG-TERM CARE INSURANCE
Traditional long-term care insurance is like health insurance. You pay premiums during your lifetime. If you need long-term care services (such as caregiving in the home or assisted living expenses) and meet the requirements set forth in the policy, the policy will pay the pre-determined benefits. Some of these policies require that you pay the bill and are then reimbursed within the limits of the policy. Other types of these policies pay the predetermined amount once you have met the requirements. There is no need for you to submit your evidence of payment of the long-term care expenses. However, once you have reached the limits of the policy, there are no further payments. Additionally, if you never need long-term care services, there is no refund of the premiums that you have paid.
LONG-TERM CARE LIFE INSURANCE
These are life insurance policies that also have a long-term care component to them. The long-term care benefit is usually some multiple of the life insurance benefit that is purchased. For instance, if you purchase a $100,000 death benefit, the long-term care benefit might be $150,000 – $300,000. These types of policies are usually designed for payment of a single large up-front premium— but they sometimes can be designed for premiums paid over time. If you meet the requirements for the payment of the long-term care benefit, that benefit is subtracted from the death benefit. For instance, if you purchase a policy with a death benefit of $100,000 and a maximum long-term care benefit of $150,000 but then you receive $75,000 in long-term care benefits during your lifetime, your beneficiaries will only receive $25,000 at the time of your death. If you used $125,000 in long-term care benefits, there would be no death benefit as the $100,000 death benefit had been exceeded during your lifetime.
Life Insurance with Long-Term Care Rider
These are life insurance policies that allow for the purchase of a rider that pays a long-term care benefit if you meet the requirements for payment of the benefit. These types of policies are usually designed for distribution of periodic premium payments— although a single large up-front premium would be paid if desired. As with the Long-Term Care Life Insurance policies, receiving long-term care benefits during life reduces the amount of the ultimate death benefit that will be paid.
Long-Term Care Annuities
For those persons who cannot qualify for a traditional long-term care policy or a life insurance policy due to pre-existing health conditions, a long-term care annuity may be an excellent alternative. An annuity is a tax-deferred investment purchased from an insurance company. It is similar to an Individual Retirement Account in that it accumulates tax-deferred until funds are withdrawn. The funds and return are guaranteed by the insurance company, so you should be very concerned about the financial condition of the issuing company. This type of annuity offers an additional perk: it pays a bonus if you need to withdraw money to pay long-term care expenses, such as caregiver services or assisted living expenses. This is a way for you to leverage your investment funds. As an example, you might invest $100,000 and get a fixed return on your investment that compounds tax-deferred. If you needed to withdraw funds to pay long-term expenses, you might receive a bonus of $10,000 to $25,000, giving you up to $125,000 plus the annuity earnings that had built up over the years to pay for the long-term care costs. For our clients who are transferring funds to an irrevocable trust in order to qualify for Long-Term Medical or Veterans benefits, this could be an excellent vehicle in which to invest the funds transferred to the irrevocable trust.
Contact California Planning Lawyers
If you have additional questions or concerns regarding your estate plan, contact the experienced California estate planning lawyers at Sandoval Legacy Group, A Professional Law Corporation by calling (951) 888-1460 to schedule an appointment.
Have a question? Ask Dennis.
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