I often discuss life insurance when working with a client on their estate plan and the role of insurance in estate planning in general. Some have term life insurance policies from when they are young, others whole life policies promoted to them as money available into late retirement, and even a few solely because of the tax benefits to life insurance. It’s possible that life insurance may play a much bigger role in your estate planning than you might have thought, says a recent article in Kiplinger titled “Other Uses for Life Insurance You May Not Know About.”
If you own a life insurance policy, you’re in good company—just over 50% of Americans own a life insurance policy and more say they are interested in buying one. When the children have grown up and it feels like your retirement nest egg is big enough, you may feel like you don’t need the policy. However, don’t do anything fast—the policy may have far more utility than you think.
Tax benefits. The tax benefits of life insurance policies are even more valuable now than when you first made your purchase. Now that the SECURE Act has eliminated the Stretch IRA, most non-spouse beneficiaries must empty tax-deferred retirement accounts within ten years of the original owner’s death unless some other exception applies. Depending on how much is in the account and the beneficiary’s tax bracket, they could face an unexpected tax burden and quick demise to the benefits of the inherited account.
Life insurance proceeds are usually income tax free, making a life insurance policy an ideal way to transfer wealth to the next generation. For business owners, life insurance can be used to pay off business debt, fund a buy-sell agreement related to a business or an estate, or fund retirement plans.
Even more, life insurance is often a very good tool to pay estate taxes. This is true for two reasons. First, the tax has to be paid in dollars, so an infusion of cash from a life insurance policy provides funds to pay it without selling off other assets such as real estate or business interests. Second, life insurance is an easy asset to include an irrevocable trust. It would be held outside of your estate (thus doesn’t make your estate tax bill go up) and for most insurance you don’t need immediate access to it. See here for more information: https://www.galliganmanning.com/the-irrevocable-life-insurance-trust-why-should-you-have-one/
What about funding Long Term Care? Most Americans do not have long-term care insurance, which is potentially the most dangerous threat to their or their spouse’s retirement. The median annual cost for an assisted living facility is $51,600, and the median cost of a private room in a nursing home is more than $100,000. Long-term care insurance is not inexpensive, but long-term care is definitely expensive. Traditional LTC care insurance is not popular because of its cost, but long-term care is more costly. Some insurance companies offer life insurance with long-term care benefits. They can still provide a death benefit if the owner passes without having needed long-term care, but if the owner needs LTC, a certain amount of money or time in care is allotted.
Financial needs change over time, but the need to protect yourself and your loved ones as you age does not change. Speak with an estate planning attorney about the role of insurance in estate planning for you.
Reference: Kiplinger (July 21, 2021) “Other Uses for Life Insurance You May Not Know About”