Peanut butter and jelly.  Salt and pepper.  White wine and fish.  

Some things were just made to go together.

We want to add a pair to that list - estate planning and life insurance.

Why?  While many people understand that estate planning is a critical aspect of financial and wealth management, life insurance often goes under appreciated or missed altogether as part of that process.  However, life can help facilitate estate planning goals around wealth transfer, managing estate taxes and providing financial security for successful families.

Let’s examine that in more detail.

Estate Liquidity

One of the main, if not the primary, benefit of life insurance is that it delivers liquidity at the moment when you need it most.  This is especially true when it comes to estate planning.

One of the significant challenges in estate planning is ensuring liquidity to meet potential liabilities created by an estate, such as estate taxes. Estate liquidity refers to the availability of cash or easily convertible assets to cover expenses such as estate taxes, legal fees, and outstanding debts. Without sufficient liquidity, heirs may be forced to sell valuable assets, such as real estate or family businesses, at unfavorable prices to meet these obligations.

It is important to note that estate taxes are due nine months from the date of death and must be paid in cash.  Life insurance can provide the necessary liquidity to cover these expenses, ensuring that your heirs do not have to sell off assets hastily. The death benefit from a life insurance policy is typically paid out quickly, providing immediate funds that can be used to settle the estate’s liabilities. This is especially important in cases where the estate consists primarily of illiquid assets.

Estate Taxes and Preservation of Wealth

Maybe we should have added death and taxes to the list that started this piece.  Not only are the two inevitable, they are often tied together.  We are talking, of course, about estate taxes.

Estate taxes can significantly reduce the value of the assets passed on to your heirs. In many jurisdictions, estate taxes are levied on the transfer of assets from the deceased to their beneficiaries. These taxes can be substantial, depending on the size of the estate and the applicable tax laws.

Life insurance can play a crucial role in estate tax planning. By purchasing a life insurance policy, you can create a source of funds specifically designated to cover estate taxes. This strategy ensures that your heirs receive the full value of the estate without the burden of paying taxes out of pocket or liquidating assets to cover the tax bill.

Moreover, using life insurance in conjunction with an irrevocable life insurance trust (ILIT) can further enhance the tax efficiency of your estate plan. An ILIT owns the life insurance policy and removes it from your taxable estate. The trust receives the death benefit upon your passing and can use those funds to pay estate taxes and other expenses, preserving the estate’s value for your beneficiaries.

Equalizing Inheritance

We all loved watching the TV show Succession, but few of us would want to face a real life situation with that much family drama around inheritance.  Enter life insurance!  Life insurance is an effective tool for equalizing inheritance among your heirs, particularly in cases where your estate includes illiquid assets like a family business or real estate. It can be challenging to divide such assets equally among multiple heirs, leading to potential disputes and dissatisfaction (just ask Logan Roy).

By using life insurance, you can provide an equal cash distribution to heirs who are not receiving an interest in the family business or other illiquid assets, such as legacy real estate. For example, if you plan to leave a family business to one child, you can use a life insurance policy to provide an equivalent cash inheritance to your other children. This approach facilitates fairness and may reduce the likelihood of conflicts among your heirs.

Supporting Charitable Giving

Many of our clients care deeply about their charitable passions and charities and want to include these organizations in their estate plans so their legacy can continue after they have passed. However they often lack a long-term, strategic philanthropic plan, mostly relying on checkbook philanthropy (generally small gifts to the solicitors who make the most noise).  Life insurance can support these goals. 

By naming a charitable organization as a beneficiary of your life insurance policy, you can make a significant donation that may not have been possible during your lifetime. This strategy not only supports causes you care about but can also provide tax benefits to your estate.

In some cases, you can establish a Charitable Remainder Trust (CRT) and fund it with a life insurance policy. The CRT can provide income to your chosen beneficiaries for a specified period, after which the remaining assets are transferred to the designated charity. This approach combines financial support for your heirs with a lasting legacy for charitable causes.

Flexibility and Control

Often, people are afraid of estate planning because they fear once a plan is put into place, it is locked in and there is no flexibility for change.  This is not correct!  When done well, estate planning will provide you with flexibility and control to adjust your planning as your life and circumstances change.

Life insurance can help create and complement this flexibility and control in estate planning. Policies can be tailored to meet your specific needs and objectives, providing a customizable solution to complement other estate planning tools. 

Additionally, life insurance policies can be adjusted as your circumstances change. You can increase coverage if your financial responsibilities grow or reduce it if your estate planning needs evolve. This adaptability ensures that your estate plan remains aligned with your goals and provides optimal protection for your beneficiaries.

Peace of Mind

Ultimately, one of the most significant benefits of incorporating life insurance into your estate plan is the peace of mind it provides. Knowing that your loved ones will be financially secure and that your estate will be managed efficiently in your absence can alleviate the anxiety and stress associated with estate planning.

Life insurance ensures that your beneficiaries are not burdened with financial hardships during a difficult time. It provides a safety net that allows them to focus on grieving and healing without the added pressure of immediate financial concerns. This peace of mind is invaluable and underscores the importance of life insurance in a well-rounded estate plan.

Conclusion

Hopefully now you can understand why we think life insurance and estate planning go together like chips and dip.  Incorporating life insurance into your estate planning is a strategic decision that enhances that planning by offering numerous benefits. 

Life insurance addresses key challenges in estate planning such as estate liquidity, tax obligations, and equalizing inheritance, making it a versatile and essential tool in your estate planning arsenal. By carefully selecting the right life insurance policy and integrating it with other estate planning strategies, you can protect your legacy, support your loved ones, and achieve peace of mind knowing that your affairs are in order.