How can a life insurance complement your estate planning?

Life insurance can be a key component in an estate plan. Whenever I think about this tool, the words that come to mind are security, liquidity, and non-probate. Let’s discuss how each of these benefits can play a role in an estate plan:

1. LiquidityOne of the most common issues that arise with family members who have lost a loved one is that they have no money to pay for immediate and even foreseen expenses, such as funeral costs, attorney fees, maintenance of properties, potential estate taxes (which must be paid within 9 months of the date of the decedent’s death), etc.  The fact that those family members have no easy access to cash, could become a real problem and make the process of grieving even harder.In some situations, especially with foreign clients, whenever they make investments here in the US, life insurance can be a great tool to protect against a US estate tax liability. Considering that foreigners have an estate tax exemption of only $60,000.00, if they were to pass away holding US assets above this value, those assets could be subject to an estate tax of up to 40% of its market value at the date of death. The proceedings of life insurance could be used by family members to pay for this tax in the event of death.
2. SecurityThere is nothing more comforting and priceless than knowing that your loved ones will be in a secure financial position, at least for a while, if you were to pass away.  With the proceeds of a life insurance policy, family members can be ready to face financial challenges, especially if the deceased were the family’s breadwinner.  It can be used to pay for typical household expenses such as childcare, medical expenses, mortgages, and any other expenses that might arise along the way.  Another factor that must be taken into consideration is that the proceeds of life insurance are usually tax-free and, in most cases, will not be subject to US or state estate tax.
3. Non-probate AssetLife insurance could be considered what we call a non-probate asset. What does that mean? It means that the proceedings of the policy are passed to the beneficiaries without the need for a probate/ administration proceeding.  The proceeds, as a general rule, are not part of a judicial proceeding, unless the estate is designated as the beneficiary of the policy. That being said, the beneficiaries can have access to the proceeds as soon their claim is accepted by the insurance company, without having a court involved in the case.The benefit can be claimed immediately after the insured’s death and usually takes about 30-60 days to receive the benefits after the submission of the claim with the required documents by the insurance company.

In conclusion, life insurance can be a great tool in estate planning for all the reasons mentioned above and much more. I would dare to say that I don’t even consider the monthly payments that must be paid by the insured (owner of the policy) as a downside, considering the peace of mind received in exchange. Chaves Perlowitz Luftig, LLP is a New York estate planning and real estate law firm. We have decades of experience helping people like you plan appropriately for their future. Contact us today for a free consultation.