Most people know what life insurance is and what it does for you. However, if you do not, let’s go over the basics. Life insurance is insurance that you can pay a monthly fee for that will pay a beneficiary an amount of money after you pass away. The amount of money paid at the time of death is known as the death benefit, and the expense of the monthly payment usually depends on the total death benefit amount.
Within life insurance, there are two major different types of life insurance: term life and whole life. Term life insurance has level premiums for a specified term of years, and then the premiums usually increase dramatically after the initial term (10, 20, 30 years). “Whole” or “permanent” life insurance commonly has level terms for life, and includes an investment element that can be used to reduce premiums, purchase additional death benefit, or can be taken as cash dividends by the policy owner. Whole life insurance premuiums are more expensive then term life, but there are added benefits.
A life insurance agent can help you decide which policy or policies are best for you. However, estate planning attorneys are there to help make sure that your policy is effectively used in your estate plan, and help set up the best legal structure for the death benefit, as well as help you make a decision as to who should own the policy.
How is life insurance taxed?
Unless Congress or the State of Oklahoma changes the income tax law (which could very well happen in 2013), life insurance’s death benefit is usually received by the individual beneficiary income tax free. However, life insurance money can be subject to the estate tax and generation skipping transfer tax, if the deceased insured had any “incidents of ownership” in the life insurance policy. Since there is a possibility of estate taxes, it is important to consult with an estate planning attorney prior to selecting ownership of the policy and making beneficiary designations.
How to use life insurance in your estate planning.
Life insurance can be used in several ways in your estate plan. Life insurance is very helpful, since it provides additional or supplemental inheritance money to your heirs, besides a home or your savings money. Some of the estate planning uses of life insurance include:
- Life insurance provides liquidity to pay administration expenses or debts, so your house or accounts would not have to be sold or split up to pay for estate costs.
- Life insurance also provides liquidity to purchase assets from other trusts or probate estates. This can occur when there is real estate or business interests that the family wants to keep in the family.
- Life insurance can provide a trust estate for people still in the accumulation phase of life, usually a minor or young adult. You can put the life insurance in a trust to be held in trust, rather then given in a lump sum.
- Leveraging the value of the gift tax annual exclusion and exemption, and generation skipping transfer tax exemption, life insurance could potentially allow you to transfer larger amounts of wealth than you could with a straight, outright transfer.
Basically, life insurance is a helpful asset to include in your estate plan. If you already have life insurance, consult with an estate planning lawyer to see how to maximize the benefit of your life insurance in your estate plan. If you do not have life insurance, consider discussing life insurance with an estate planning attorney and/or insurance agent to see what type of insurance policy integrates well with your estate plan. Contact the Skillern Law Firm office today and set up your free consultation.