How much thought have you given to estate planning and your family’s financial affairs after you pass? With recent uncertainty brought on by the coronavirus, estate planning documents are something people are thinking about a little harder these days. What happens to your unpaid debts? Who gets any properties you may own? Will your family be taken care of financially? Will your wealth be distributed in a way that reflects your values and wishes? What about your bank accounts, inheritance taxes and gift taxes? What are the common estate planning mistakes?
These questions, in part, are a big reason why people are actively seeking out life insurance policies right now. Not only does life insurance safeguard loved ones from unexpected debt and financial hardship, the living benefits of whole life insurance hedge against market volatility and help protect you from future economic downturns. Having the right insurance policies in place makes estate planning a lot easier. It also can be used to grow your assets and increase the value of your estate in the long run.
Creating an Estate Plan With Whole Life Insurance
Q. What happens to my unpaid debts?
Most people have unpaid debt of some sort when they pass away. In fact, according to a study done by credit company Experian, 73% of people die in debt. So who pays for it? In some cases, no one.
Family members are rarely responsible for leftover debt. Instead, creditors go after the estate left behind through a probate process. Your estate consists of tangible and intangible assets such as financial accounts, real estate, and possessions. When creditors come collecting, the process is called probate. Probate laws vary by state. Over the course of months (sometimes years!) creditors will try to collect from your estate and divide what is left among your beneficiaries.
This is where whole life insurance can play an important role. Certain types of assets aren’t subject to probate in the majority of states, including life insurance policies, qualified retirement accounts like 401(k) or IRAs, assets placed in a trust, and jointly owned property. These assets go directly to your beneficiaries as long as you have some common estate planning documents, and think about your complete estate plan.
Q. What if I live in a community property state?
In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) your surviving spouse may be on the hook for your outstanding debts. It is especially beneficial to have a whole life insurance policy if you live in one of these states because the death benefit of your policy provides your spouse with immediate liquidity that they can use to pay your debt. Without it, your spouse may have to sell other assets to cover your debt, coming directly out of their savings accounts or personal possessions, and subjecting your family to additional financial hardship.
It’s also worth noting that the death benefit of a whole life insurance policy is generally tax-free, provided it’s below the Federal Estate Tax Exemption amount, meaning your spouse or other beneficiaries won’t be subject to taxation on the amount received, reducing the need for tax planning and inheritance taxes. If your estate is above the Federal Estate Tax Exemption amount, the death benefit of your whole life insurance policy can be used to help pay some or all of the estate tax, depending on the amount of the death benefit.
Q. How do I protect and distribute property in an estate?
Whether you’re a savvy real estate investor with multiple properties or simply worried about who gets the house, whole life insurance policies are great ways to protect and distribute real estate assets in an estate and legally avoid unnecessary estate and inheritance taxes. With an adequate death benefit to cover the value of your real estate, when you die, the death benefit will give your heirs options on any real property. They can sell it, if none of them want the property, or use the death benefit to pay off any remaining mortgage, thereby allowing the property to remain in the family without the burden of a monthly mortgage payment.
Q. How do business owners ensure the succession of their company with estate planning?
Much like distributing property in an estate plan, business owners can use whole life insurance policies to distribute ownership of the company. If you have a family-owned business that will stay in the family, taking out an insurance policy for the business and naming your family members as beneficiaries helps minimize the effect of your absence, allowing the business to continue on after you’re gone. It can also help cover any transitional costs as the business changes ownership.
Another insurance option for businesses is a buy-sell agreement. This type of policy is used when a business has multiple partners. It guarantees the surviving partners will have the liquidity needed to buy up your shares of the company, thereby ensuring the succession of the business.
Q. How do I distribute my wealth to future generations?
Multi-generational wealth is one of the legacies you leave behind for your children, grandchildren, and so on. There are a number of ways to pass on generational wealth using whole life insurance, family banking concepts, and trusts. One of the most effective ways to provide your family with a lifetime of financial independence for generations to come is by utilizing multiple whole life insurance policies.
Insurance carriers typically allow you to insure a person or entity with which you have “insurable interest”. This means a person or entity for which you would be financially impacted if lost may be insured, including your spouse, parents, and children, as well as your business partners and key employees. Taking out multiple whole life insurance policies on your family members increases the spending power of your family bank. The family’s policies can also be put into a trust where cash value withdrawals, policy loans, and death benefits can be used to pay the premiums of insurance policies in the trust in perpetuity.
Q. What if I need long-term care?
Estate planning is more than just planning for what happens to your assets after you’re gone. You also need to think about what will happen in the event you need long-term care or become disabled. What will the financial impact be on your family, and how do you prepare for that?
Many insurance carriers offer stand-alone disability insurance, which covers the cost of being unemployed due to a disability by replacing a portion of lost income, and long-term care insurance, which can cover nursing home or hospice costs and medical bills not covered by health insurance. Whole life insurance can be built to include both.
By utilizing riders in your life insurance policy you can protect yourself and your family from unexpected health issues. Long-term care riders and disability riders can be added to your policy, sometimes at little to no extra cost. Using riders allows you to customize your policy to fit your individual needs and financial goals.
Q. How do life insurance trusts work when it comes to estate planning? What are the Estate Taxes?
Life insurance trusts are most commonly used in estate planning because they offer specific tax advantages to your beneficiaries. Generally they are used by people who have very large estates who are trying to avoid estate taxes. By implementing a life insurance trust in your estate plan, you essentially transfer ownership of your life insurance policies from you to the trust. Because the trust owns the policies, they are not taxed the same way assets you personally own might be.
The benefits of a life insurance trust are similar to the benefits of a whole life insurance policy. They include:
- Increased Liquidity
- Greater tax advantages
- Increased control
- Freedom from probate
- Income and cash flow for beneficiaries
Q. How much life insurance do I need in my estate?
How much life insurance you need depends on a number of factors:
- Are you the primary income earner in your family?
- What is your annual income?
- How many children do you have and do they rely on you financially?
- How much debt do you have, including your mortgage?
- Do you own a business?
- How many properties do you own?
- What is your estate worth? Is it over the Federal Estate Tax Exemption amount?
- What stage of life are you in? Are you trying to grow your wealth, increase your income in retirement, or actively estate planning for future generations?
Whole life insurance is the best financial product for estate planning. It keeps more of your money in your family’s pockets, or in the hands of a charity you designate, rather than giving your hard earned wealth to the government in the form of taxes. It also gives your family the liquidity they need by circumventing probate in most states.
Setting up a properly structured whole life insurance policy now offers you living benefits you, your family, and your business can all benefit from over your lifetime. It also offers financial peace of mind and protection for your family after you’re gone.
At Paradigm Life we can customize a policy to fit your financial situation. Our expert Wealth Strategists are available to answer your questions and show you customized illustrations, outlining an individual plan of action to help you achieve your goals.
Disclaimer: Speak with your tax attorney or other tax professional for details on state probate, estate laws, and tax laws. Paradigm Life Wealth Strategists are neither tax professionals nor attorneys. This information is for educational purposes only. Your attorney should always be involved in setting up trusts and estate planning documents.