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Needs and Uses of Life Insurance in Estate Planning

Estate Planning and Life Insurance - Assessing Needs vs. Uses


Family meeting with Insurance Agent.
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Life insurance should play an important role in your estate plan in two very distinct ways.

Assessing Your Need for Life Insurance

The first, and probably most common, role of life insurance in your estate plan is the overall need for it. It can help financially by offering your family long term replacement of lost income and benefits and by providing liquidity for immediate costs such as medical bills and funeral expenses. It can also provide the emotional benefit of peace of mind, knowing that if something happened to you, your family wouldn't be left financially insecure.

Assessing Your Use of Life Insurance

The second and often overlooked role of life insurance in your estate plan is its use to reposition or leverage your assets in order to provide additional financial security for your family. For instance, if you won't have any need for your IRA or 401k to pay for your retirement, then you can cash out the account, pay the income tax, and then invest the balance in a life insurance policy. If the life insurance policy is purchased and owned by an Irrevocable Life Insurance Trust, then the proceeds will pass to your loved ones estate and income tax free. Compare this with leaving your money in the IRA or 401k, which will pass subject to both income and estate taxes when you die.

Life Insurance Reviews

Most financial advisors will complete a comprehensive life insurance analysis free of charge. And even if you currently have life insurance, regular reviews of existing policies are a must, since these days the same premium can buy significantly more insurance, or, if your financial situation has changed, then in some cases the death benefit can be reduced along with the premium payments. Regular reviews will also reveal if and when you'll need to purchase additional insurance and if you have the potential for leveraging an existing policy or other assets for the benefit of your loved ones.

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