People often don’t think of life insurance as being part of their estate plan. However, for many Americans, it’s the first step they may take in estate planning, even if they don’t realize it.
Life insurance can help ensure financial stability for loved ones when someone whose income they rely on passes away. People often get their first life insurance policy when they have young children.
Later in life, when their kids are independent, people often think they no longer need life insurance. They may think they have a large enough estate to allow their spouse to live comfortably if they die first.
Providing needed funds to cover immediate and short-term expenses
It often takes time for estate assets to be disbursed – even without a long probate process. Unless you add a joint owner to your bank accounts or give them access via a payable-on-death or transfer-on-death designation, your family could end up scrambling to try to pay funeral expenses, hospital invoices, mortgage payments, college tuition and more.
Having a life insurance policy that will pay out relatively quickly can help your loved ones financially during an already difficult time.
How else can life insurance help with your estate planning?
A life insurance policy can also help in the following situations:
- If many of the assets in your estate will take time to liquidate or get a fair price for (such as real estate, art, vehicles and more)
- If there are conflicts or other complications that cause a delay in disbursing inheritances
- If you want to provide equal inheritances to your children or a greater inheritance to one child but the assets in your estate are difficult to divide
The two main types of life insurance are term life and permanent. It’s important to learn about them both in order to decide which fits your needs and goals better.
There’s also an estate planning tool called an irrevocable life insurance trust (ILIT). This can help minimize the taxable value of your estate and gift taxes on your heirs. ILITs have a number of benefits that are worth looking into.
With sound legal guidance, you can better determine how life insurance may fit into your estate planning, regardless of what stage of life you’re in, and better optimize the financial assets you’re able to leave for your loved ones.