Life Insurance Products Play Valuable Role in Estate Planning
By Joseph R. Crea, CLU, ChFC
While Washington debates its next move in dealing with estate tax legislation (as summarized in the article by John Tullio, Esq. in this newsletter), proactive estate planning continues to be an important focus for business owners and other individuals with significant wealth. Although federal taxes are a valid consideration in estate planning, there are many other factors that may impact your planning:
• Federal estate taxes
• State inheritance taxes
• Estate administration costs (e.g., attorneys, probate)
• Debt repayment (especially with highly leveraged assets earmarked for heirs’ retention
• Equalizing inheritances in family business estates between children who are active in the business and those who are not.
• Creating legacies for charitable organizations
• Planning for children or family members with special needs
• Protecting wealth against the potential erosion of the estate due to market values in volatile times
• Personal situation (e.g., divorce, separation)
Protecting your estate and ensuring that it is distributed in the way you intend requires careful planning and a variety of tools and strategies. Particularly during times of legislative and financial uncertainty, the enduring value of life insurance makes it an extremely attractive estate planning component.
Insurance Products That Work for You
Life insurance has traditionally been included in estate plans to provide family members with quick access to cash to take care of immediate financial needs and daily living expenses. Because life insurance proceeds are paid to named beneficiaries, they are not tied up in potentially lengthy probate proceedings. Properly designed life insurance policies are income tax-free and can be structured to be estate tax-free, making them even more attractive to beneficiaries.
Life insurance can also be useful in other ways in your estate planning. For example, life insurance can be used to:
• Provide a floor amount of assets for your heirs no matter what;
• Provide for transfer of wealth on a leveraged basis utilizing irrevocable trust (ILIT);
• Maximize wealth transfer; and
• Serve as a creative planning tool for charity and families with Charitable Lead and Remainder Trusts.
How life insurance fits into your estate plan will depend on your estate planning philosophy, your needs and your unique personal situation. A variety of life insurance products are available on the market today. Here are the most common options:
• Term Insurance. With term life insurance, the premium and death benefit is known and guaranteed for a period of time only – premiums are paid for a limited time and so is the death benefit. While the policyholder bears no risk with this type of policy (the full value is paid out even if the policyholder dies much earlier than expected), there is also no potential for an increase in value, decrease in premium, or flexibility to access value prior to death. If the insured lives beyond the term period, the premiums increase dramatically or the insurance terminates.
• Whole Life. Whole life policies were developed to share some of the downside risk as well as the upside potential with policyholders. In times of favorable mortality, interest and expense results, these policies pay dividends, which can be used to suspend premiums or increase the face amount.
• Universal Life and Variable Universal Life. Universal life insurance offers the same risks and opportunities as whole life, but with a more transparent and “unbundled” approach. Variable universal life takes the risk and opportunity sharing one step further, allowing the policyholder to almost completely assume the investment allocation control and investment risk. A hybrid of universal life and variable universal life, called Equity Index Universal Life, provides a combination of the two – allowing for investment participation while providing a guaranteed floor and typically a cap on earnings credited.
• Joint Second to Die Life. This life insurance provides coverage for two individuals and is specially designed for estate planning. It pays proceeds upon the second death (when the estate taxes are due). Premiums are based on two lives and are substantially reduced when compared to single life policies.
• Guaranteed Not to Lapse Policies. These policies stay in force through a designated age between 100 – 120 years of age.
Purchasing life insurance, particularly for high net worth individuals, can be complex. It is important to understand the different types of life insurance – including the risks and opportunities they include – as well as carefully evaluate different carrier’s offerings. BRG helps many clients evaluate and select the right combination of life insurance for their general and estate planning needs. Because the market and available offerings are constantly changing, it is also important to review your life insurance policies regularly – at least every three to five years. See Linda Cahill’s article, “Have You Reviewed Your Life Insurance Lately?” for more information about conducting life insurance policy audits.
BRG Can Help
Effective estate planning requires a comprehensive understanding of your family, business and financial situation. It requires a team of trusted advisors, which should include a qualified insurance professional to help you evaluate and select the products that are best suited to your needs. Contact BRG for assistance with your estate planning.
Joe Crea is the President and co-founder of Benefits Resource Group. He manages the development of leading edge solutions and services for BRG clients. You can contact Joe by phone at 216-393-1818 or by email at jcrea@benefitsrg.com.
Securities and Investment Advisory Services Offered through M Holdings Securities, Inc., A Registered Broker/Dealer, Member FINRA/SIPC; BRG is independently owned and operated; This material is intended for informational purposes only and is not intended to replace the advice of a qualified tax advisor; Product guarantees are subject to the claims paying ability of the issuing insurance company; Variable life insurance products are long-term investments and may not be suitable for all investors. An investment in variable life insurance is subject to fluctuating values of the underlying investment options and entails risk, including the possible loss of principal. The performance of your account will vary and you may receive more or less than the amount invested.