When you think of estate planning, you probably think of tools that can help direct how your assets pass at your death like wills and trusts. Life insurance can play a key role in the estate planning process too. Here are some of the most common applications for life insurance in estate planning:
- Create liquidity. If your estate might be subject to federal and/or state estate taxes, you may want to consider an irrevocable life insurance trust. Life insurance is often used to fund irrevocable trusts for the purpose of creating funds family members can use to pay estate taxes and the expenses of administering the estate. Because irrevocable trusts are generally not part of the taxable estate, the death benefit amount doesn’t increase the amount of taxes or estate expenses owed.
- Transfer business interests. If you own a business with partners, you could create a “buy/sell” agreement, funded with life insurance. This can help ensure that if one of the owners dies, the surviving owners will have the cash available (from the life insurance death benefit) to buy out the deceased owner’s share of the company, helping ensure the business can continue.
- Fund charitable giving. Life insurance death benefits can also be used to help you accomplish your philanthropic goals. You could create a charitable trust funded with life insurance or annuities, or simply purchase a life insurance policy or annuity contract naming your favorite charitable organization as the beneficiary.
- Create a financial legacy. Life insurance benefits passed on to future generations can help them break the poverty cycle, providing funds your children, grandchildren, and future generations can use for any purpose.