When you pass away your family will go through the normal emotions associated with the death of a loved one. On top of that, there may be financial concerns that are a part of that process, as well. From making sure the bills can be paid to preparing for their future how you plan your estate will determine how your family can react to your passing. You have the power to ensure that your family can focus on your life, their emotions, and being together. The alternative is a reality for your family that is based on stress and worry.
Life insurance is one of the ways that you can help to build a legacy for yourself as a part of estate planning. For the most part, when we think of estate planning, we think about wills and trusts. While these are absolutely kinds of estate planning tools the reality is that estate planning goes beyond things that a lawyer can assist you with. So much of estate planning is just thinking ahead and being intentional. Purchasing life insurance can be one of those elements of estate planning that helps you and your family have peace of mind regarding end-of-life scenarios.
Throughout your life, your needs and those of your family will change. What made sense for you as far as estate planning was concerned at age 25 will probably no longer work well for your family at age 45. As such, you should be willing to look at the situation with a new set of eyes and also consider the opinion of your spouse and family. After all, they will be the ones to be impacted directly by the estate planning decisions that you make right now.
Most families find themselves in a situation where the need for life insurance is most significant early in life. This is when you are raising small children, building up your net worth in terms of assets, or perhaps simply paying down debt. The irony, as it is with many things like this, is that your family may least be able to afford life insurance early in life when you all need it the most. Then, as you get older, and your income increases the need for life insurance decreases substantially.
What are the types of life insurance?
There are, broadly speaking, two types of life insurance that are on the market for purchase: term or universal life. Term insurance includes a certain "term" for the insurance to last: ten, fifteen, twenty, or twenty-five years for example. The policy is purchased on an annual basis. You would pay the same amount each year for the insurance based on several factors taken into consideration when you purchase the policy. Your age, location, health level, family history of wellness, occupation, and other factors are considered by the insurance company when determining whether to offer you a policy and how much to charge annually for the policy. Broadly speaking, the costs of term insurance per year increases as you get older.
Term insurance will pay out benefits to a named beneficiary at your death so long as you have kept the policy active by paying the designated premium each year. There is no cash value component to term insurance. The premium is simply used to pay for the cost of the insurance that you have signed up for. For this reason, many financial professionals believe that term insurance offers a few primary benefits. Foremost among them is that term insurance is typically less expensive and simpler and more straightforward. There are no quasi-investment options for a term policy. Term insurance works like most other types of insurance: you pay a yearly premium in exchange for a defined benefit that is paid out upon a certain event occurring. In this case, the event in question is your passing away.
Whole or universal life insurance is a type of term insurance. However, alongside the term policy element is a savings plan that is built into the policy, as well. The savings that build up over time within the policy can be borrowed at a specific interest rate while the policy is active or can be taken out if the insurance policy is canceled. The premium payments that you make each year are higher than the premium payments on a similar term policy. This is since a portion of your whole life insurance premium will be allocated to purchasing you a savings plan.
How can life insurance be utilized within an estate plan?
There are many ways that life insurance can play a role in proper estate planning. Probably the most straightforward way that life insurance can play a role in estate planning for your family would be if you are in a position where your family would need cash relatively soon after your passing to pay bills, rent, or expenses regarding a funeral. Life insurance proceeds do not depend upon a probate process. this means that if you're a state would have to go into probate your family would be able to access the funds from the policy sooner. Typically, the beneficiary on the life insurance policy would need to obtain a death certificate and contact the life insurance company to inform them of your death. The representative from the life insurance company would walk you through the next stages of how to begin the process to get the money out of the plan.
On a whole life insurance policy, the savings portion of the policy can be utilized as income at the policy's expiration. Once the policy expires there will be some cash value in the account. That money can be withdrawn or even converted into an annuity that will pay the cash value out at a certain rate over a certain period. Many people like the idea of being able to essentially invest within the insurance that they purchased. This will allow you to kill two birds with one stone, essentially.
For those of you with a relatively modest estate, life insurance will allow you to provide some sort of inheritance to your heirs or beneficiaries after you pass away. While life insurance operates independently of a will, you can look at it as money that can be handed down to your spouse or children at your passing. If you have recently gone through a divorce you should check with any prior life insurance policies so that you can ensure that the beneficiary is who you want to receive the money at your passing. The last thing you want to do is to have your ex-spouse listed as a beneficiary on a policy.
Life insurance can also be used to help your family pay a debt that you may owe at your passing. The largest debt that you will probably have at your passing will be your home mortgage. Your spouse and children will feel much more secure knowing that they will have a place to live if you have taken out sufficient life insurance to pay off your home mortgage. Many spouses comment that the security that they have from knowing that they and their children will have a place to live if their spouse passes away allows them to focus their energy on aspects of funeral planning and generally being present with family members and not worried about money. Especially for young families, all this can be due to having proper life insurance.
Who will be the beneficiary of your life insurance policy?
The beneficiary of a life insurance policy is the person who will get the death benefit named within the policy if you pass away while an active policy is in place. The most common person to list if you are married would be your spouse. You may also choose to list your children (if any) as your secondary beneficiaries. If you and your spouse pass away at the same time, for example, then the life insurance company would likely place the benefit amount in a trust to be held until your children reach 18 years of age.
Estate taxes and their impact when you have life insurance
The federal estate tax rate can be a big percentage of your overall estate value and need to be paid in cash within nine months of your passing. Usually, it is a portion of your estate that is used to pay the estate tax. What we need to consider is how your executor of your will or personal representative of your estate can pay this tax bill easily when you pass away. Trying to liquidate a retirement plan or trying to sell real estate to do so can be a lot of trouble just to ultimately have to turn around and pay a tax bill with the money proceeds. Many times, trying to sell one of these assets can carry with them penalties and taxes of their own. Not an ideal situation to be sure.
This is where a life insurance policy can step in and provide a real leg up for you and your family. A life insurance policy can become liquid a lot easier than real estate or a retirement fund. Life insurance policies are usually received by a beneficiary without the taxes having been taken out of the money. This means that the representative of your estate could turn around and pay the tax bill quickly rather than having to wait for some other asset to be sold.
One thing that I will note when it comes to taxes is that the attorneys with the Law Office of Bryan Fagan are not tax attorneys and are not tax experts by any means. While we work in the field of estate planning, we do not claim to know every aspect of federal tax law. As a result, we think it is a great idea for you to work with an experienced tax preparer, accountant, or other entity who is qualified to provide you with tax advice.
Life insurance policies can be used to preserve assets owned by your family
Suppose that you started a small business many years ago with only some optimism, some cash you had saved, and a whole lot of hard work. In those days you were not exactly sure if the business was going to succeed but you were going to work hard to find out what was in store for you and your plucky little business. What you came to find out is that the business had some staying power and you have now been the man in charge for nearly twenty years. It’s a good feeling to help others and to employ several people from your community.
Many times, a person in your position would want to help ensure that the business stays in your family after you pass away. In that case, you should think about what person in your family can take on the responsibilities of the business by caring for your clients and building the business even more than you have. However, what you may find is that by selecting one of your children to run the business after you pass, for example, you may be alienating your other children by telling them that their sister is going to be running the family business after you pass away rather than one of them.
What can you do to make sure that everybody is happy with your decision is to take out a life insurance policy before your passing and name your other children as the beneficiaries? You can figure out a dollar value that each is due based on the value of the business and other factors that are relevant to your family. You can check with a business sales broker, business appraiser, or another expert in this field to determine the proper amount of money to give.
Tick, tock, tick, tock- waiting is tough
Even the most highly scrutinized and intentional estate plan can take time to get your beneficiaries the money that they have been promised under your will. For the single mom who needs that money yesterday for her monthly bills, the property promised to her in the will is incredibly important to her survival. However, it can take some time for the money to get to your beneficiary even if there is no need to go through probate to do so.
All the while, costs associated with your beneficiary's life or your funeral costs can put your spouse or other loved ones in a pinch financially. Remember how we talked about how this is the perfect time to spend together as a family after you pass away? Having to scramble around while waiting for the money to get out of your estate can feel like an eternity.
Life insurance can bridge the gap for your family in this regard. Your family can usually get their hands on life insurance proceeds quickly. A tax-free death payment can go a long way toward helping your family get back on its feed after your passing.
Life insurance is better than nothing
If you have done absolutely nothing to plan your estate, then purchasing a life insurance policy can be a smart move for you to make. We have already talked about some of the advantages and disadvantages of each type of life insurance. You should take some time and think through your options before deciding on the type of insurance to purchase. If you are dead set against doing any formal estate planning then at least having some life insurance going to help your spouse, family, or other group is better than doing nothing.
Closing thoughts on life insurance and estate planning
Estate planning is not an activity that many people like to plan for. There is so much going on in your life already that trying to think far enough ahead to an estate plan can seem like an unreachable dream. While you wait for the perfect opportunity to go ahead and start estate planning, the needs of your family are not going to magically improve. Rather, you still need to be able to consider them.
A life insurance policy can be just what you need to be able to help your family stay on their feet while sorting out all the details of your passing. Not only does life insurance bypass probate but most term policies are extremely affordable depending upon your age and health specifics. These are flexible policies that can help you and your family feel more at ease when it comes to the future and any estate planning. However, the first step in that process is to reach out to an experienced estate planning attorney with the Law Office of Bryan Fagan to learn more about the process and how one of our attorneys can help you.
Questions about the material contained in today’s blog post? Contact the Law Office of Bryan Fagan
If you have any questions about the material contained in today’s blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed estate planning attorneys offer free of charge consultations six days a week in person, over the phone, and via video. These consultations are a great opportunity to learn more about the world of Texas estate planning law as well as about how your family’s circumstances may be impacted by a probate case.