Christina Gives Insight on Life Insurance and Estate Planning

Why is life insurance an important component to estate planning?

A financial plan will help you help identify risks that could potentially be reduced with life insurance as a component of your estate plan. The type of life insurance, the amount needed, and the ultimate purpose are unique to your situation. Let's look at three different scenarios where life insurance plays a critical role in estate planning:

Sudden Wealth: a woman in her second marriage, with two grown children from a previous marriage, found out that she would receive a significant inheritance. Her dilemma was how to adequately plan for her current spouse to maintain their planned lifestyle while leaving a sizeable legacy to her children. Without life insurance, she would either have to name her children as direct beneficiaries of the assets – leaving little to no assets to her husband – or "hope" that her husband either wouldn't spend all the assets or leave the assets to someone else (say a new wife). We discussed using a Marital Trust, which would allow her husband to use the assets for certain expenses during his lifetime and leave the remaining assets to her children after his death. Still, she wanted him to have control overspending. In addition, she shared she was concerned about needing some form of long-term care in the future and wanted to preserve as much of the assets for that scenario as well. For her, using a permanent life insurance policy that could potentially provide long-term care benefits (instead of the death benefit) felt like the best fit.

Starting Out: a common scenario is a young family in their earlier working years and carrying a relatively large amount of debt (student loans, mortgage, auto loans, credit cards, etc.). While life insurance is critical to a young family to help alleviate the financial burden that the sudden death of a spouse can bring on, its expense can sometimes make it unrealistic. Many families live paycheck-to-paycheck and can't afford to add another cost but don't see the bigger picture of what happens if one dies too early. They don't realize that a one-income household can't afford to continue making all the payments or continue carrying the debt – or be able to provide their children with the hoped-for lifestyle and education. In this scenario, young families often find term (temporary) insurance a good fit through the leaner years. Ideally, the term insurance policy can be converted to permanent insurance later in life when the need lessens. Term insurance is an excellent option for those looking for more significant amounts of insurance (to cover their debt), for lower cost, and for a short length of time (5 – 20 years). An added benefit is that getting a term life policy at a young age may allow you to convert at a later age at your original risk level (even if no longer insurable). Later in life, when chronic health conditions for older adults are more likely, insurability is often a challenge for estate planning.

Retirement: the possibility of the early death of a retiree with a pension connects retirement with estate planning. In this common scenario, a spouse is interested in retiring because they want to start drawing their pension. However, they are hesitant to take a joint-life pension because it's a significant decrease from the life-only option, but ultimately don't want to harm their spouse (typically the female) financially should they die early in retirement. After reviewing their financial plan, they can estimate the impact on their estate of the different pension options. This leads to a discussion on permanent insurance as a "wrap" around the pension; you can use the insurance to purchase an annuity designed to replace the lost income from the pension. This is a sophisticated strategy with varying factors to consider (including tax implications), but one that could potentially meet current income needs and estate planning objectives.

What type of life insurance is best for estate planning? What special considerations should you take into account when choosing a type of life insurance?

The type of insurance "best" for your estate planning depends on your situation. However, suppose the cost isn't a primary consideration. In that case, some form of permanent life insurance is commonly recommended, so you don't have to worry about your insurance coverage expiring on a fixed date. Often it's a combination of permanent and term insurance that is best.

Special considerations to take into account:

• Determine actual need.

• Be aware of your general health status so you can apply at the correct risk classification (generally, the better health you are in, the lower the premium).

• Work with an advisor that understands that there is such a thing as being over-insured.

When is the right time to use an irrevocable life insurance trust?

An irrevocable life insurance trust (ILIT) is typically used in scenarios where a large estate could potentially be subject to estate taxes. (As of 2022, the estate tax applies only if the deceased person's assets are worth $12.06 million or more.) It is important to remember that any funds used to purchase the insurance are removed from your estate (and therefore, you also lose "control" of the funds). This is a highly sophisticated strategy that will require a qualified estate-planning attorney and a knowledgeable advisor to coordinate the process.

Disclosures: This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information. Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA SIPC. Financial Planning offered through Clute Wealth Management, a registered investment advisor and separate entity from LPL Financial.