Legacy planning with life insurance

Anyone who has lost a loved one knows the difficulty of that time. The sadness, regret, shock, and other emotions can be hard to handle.

Adding the financial stress of funeral expenses, debts, and bills can feel like too much to bear. You can ease some of that burden by planning financially for that inevitable day.

Life insurance may come to mind as a way to handle funeral expenses and the departed’s bills. While it is great for that, there are additional reasons to use life insurance in your legacy planning. Even the ultra-wealthy rely on the versatility of life insurance to help reach some of their goals.

Beyond protecting your loved ones, life insurance can create a cash cushion, balance inheritances, and reduce tax liability.

There are many options available when factoring life insurance into your legacy planning. While we don’t sell life insurance at Laurel Wealth Planning, we can help you sort out coverage needs, policy types, premiums, and benefits to help reach your goals.

Protecting your loved ones

A life insurance policy helps your loved ones maintain their lifestyle should the unthinkable happen. It gives them an income stream and/or the ability to cover expenses and debts.

When deciding your coverage amount, consider everything a survivor will need to pay for:

• Intangibles that make a household function. Will the survivor pay for things the insured person used to do, like home maintenance, cooking, cleaning, car repairs, or yard work?
• Existing debt. Beyond a mortgage, are there other debts to pay down? Maybe you secured a loan to start a business, or have student loans, or car loans. A life insurance benefit could help resolve that debt.
• Future obligations. Are there looming payments — perhaps college tuition or the care of a dependent with special needs – that could be costly for the survivor?

We can help you estimate what it takes to keep your quality of life up to your family’s standards and insure it accordingly.

Creating a cash cushion

A permanent policy (not term life insurance) can offer a cash-value component. This cash cushion can fund unforeseen circumstances or pay for long-term health needs for the insured person.

It’s possible to “overfund” these accounts to accumulate cash value, allowing the funds to grow tax-free and be accessed later. It acts much like a savings account, backed by the insurance company. You can withdraw gains on a first-in, first-out basis and even borrow against the policy value — all tax-free. This is one of the more distinct advantages of life insurance.

Providing balance

Life insurance can be a great equalizer when it comes to bequeathing illiquid assets like a business or property.

Say your daughter loves the lakeside cabin and visits it often. Your son, not so much. If you’re looking to keep things equitable, you could leave the cabin to her and leave an equivalent life insurance payout to him.

Families who own a farm or a business often use life insurance in this way. Children who run the family farm or business are likely to be interested in inheriting it. Meanwhile, the children who don’t run it are likely more interested in receiving cash.

Life insurance creates a source of funds so heirs don’t need to sell businesses and property. Instead, everyone gets their equal share of the inheritance in the form that makes the most sense for them.

Gaining tax advantages

Life insurance trusts are worth considering in your legacy planning. These are a special type of trust that own the life insurance policy to shelter it from estate taxes.

Life insurance that is owned directly by the insured person counts as an asset when determining what estate taxes are due upon their death. If the trust owns the policy, the life insurance is estate-tax-free. This ensures the whole amount of life insurance is fully available to the heirs.

Families with large estate values, who are likely to owe estate tax, can purchase trust-owned life insurance equal to their projected estate-tax liabilities. While the government will still take its cut, the life insurance benefit held in the trust would pass both income-tax- and estate-tax-free. This increases the overall inheritance without further increasing taxes.

Decode your policy

Once you’ve determined how much coverage you need, how do you know what kind of policy to get? Here are the basics on the different types of policies.

• Term insurance provides a set amount of coverage if the insured dies during a certain timeframe, or term. Term insurance often has lower premiums than permanent life insurance. After the term expires, coverage can continue, however, the premiums often increase significantly. Term insurance might make sense for a family with young children, who will let the policy lapse after the children become self-sufficient. Some term policies can be converted to permanent life policies.
• Permanent life insurance policies can be both more complex and more flexible. They guarantee a payment to the beneficiary after the insured’s death, as long as the policy doesn’t lapse. Permanent policies have an investment future that can provide a cash value and can be complemented by a variety of riders, including long-term care options. A family with a lifelong dependent, or one that wants to guarantee a certain amount of inheritance, might choose a permanent life insurance policy.
• Whole life insurance features a cash buildup that comes from your premiums. You pay fixed premiums and guarantee a death benefit for your heirs. These policies typically have a guaranteed cash component that grows at a fixed rate. Review policies that pay dividends whenever the market changes.
• Universal life insurance goes a step further, linking adjustable premiums to a fixed general account or investment subaccounts. The cash component fluctuates with interest rates or with the stock and bond market, depending on the type of policy. These policies may also offer a guaranteed death benefit.

Insurance policies have exclusions and/or limitations. The cost and availability of life insurance depend on factors such as age, health and the type and amount of insurance purchased.  As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Guarantees are based on the claims paying ability of the insurance company. You should discuss any tax or legal matters with the appropriate professional.