Home / Insights / How Can Life Insurance Benefit Your Estate Planning?

How Can Life Insurance Benefit Your Estate Planning?

November 15, 2022

Typically, people buy life insurance to provide funds for their families if something happens to them. However, there are other ways life insurance can benefit your estate plan. If you are considering buying a policy or changing your existing one, it is helpful to understand some of the most desirable features of life insurance that are available to protect you and your family.

Income Tax Deferral and/or Tax Exemption

Some life insurance policies allow you to defer income taxes and even avoid them completely. For example, if you have a whole life insurance policy that is paid up or you are making regular contributions to cover the life insurance premiums, you may have cash value in the policy. That cash value can grow over time depending on how the funds are invested, market conditions, and expenses. The appreciation is tax-free until it is withdrawn and if it is not withdrawn before your death, it will likely be tax-exempt to your beneficiaries.

Instant Liquidity and Income Replacement

You may want life insurance so your family has money to pay expenses, but there are many costs that people forget about and so they fail to buy enough insurance. Life insurance can be used to cover expenses, such as estate taxes, and final income taxes, and/or to pay off mortgages or other obligations to allow beneficiaries to have full access to their inheritance.

If you are the primary breadwinner in your family, life insurance can also serve as an income replacement tool. Your spouse and children may have trouble managing even with a significant inheritance if they have little or no income coming in once you are gone.

Importantly, provided there is a valid beneficiary listed on the policy, death benefits from life insurance are usually paid quickly after the claim is filed. Often, families need cash to pay bills and cannot wait for the probate process to be completed. Probate can take time during which period assets may be frozen. However, your family can use the death benefits to pay for immediate and short-term needs, such as tax bills, living expenses, and other debts.

Long-Term Care Riders

Long-term care can easily cost $100,000+ per year and Medicare will not pay for most or any of that. One option that is available to help cover some of those costs is to purchase a life insurance policy with a long-term care rider. The rider allows the insured to use a portion of the cash value or death benefit to pay for long-term care. If the individual never needs long-term care, the policy acts as a normal life insurance policy and pays out to the beneficiaries.  Such policies can serve as a substitute or supplement to standalone long-term care insurance policies.

Coordination of Life Insurance and Estate Planning

It is essential to discuss life insurance with an estate planning attorney to help ensure that your insurance meets your needs and that it is consistent with the rest of your estate plan. Many people name beneficiaries of life insurance policies, bank accounts, trusts, and other assets without considering how that affects their will. That’s why our attorneys work with clients to develop a comprehensive estate plan that will assist them in implementing their wishes and protecting their families.

If you are interested in discussing your estate plan, contact us for a consultation


Smith Legacy Law:
Your Lawyers For Life

Recent Posts

R-E-S-P-E-C-T the Will: Lessons from Aretha Franklin’s Estate

When Aretha Franklin passed away in 2018, it was believed that she had no will. That meant her estate would be divided among her surviving heirs – four sons, one of them disabled and under legal guardianship. However, several years after her death, two different...

Kiddie Tax – Are You Kidding?

Many parents wonder whether and when their children have to pay taxes. Children who earn wages pay taxes if their income exceeds their standard deduction, however, where children have unearned income, such as from investments or interest on bank accounts, they may owe...

The Rise of AI: What Does It Mean for Lawyers and Clients?

Thanks to extensive press coverage, you have probably heard of the lawyer who submitted a legal brief prepared using ChatGPT that cited cases that didn’t exist. ChatGPT just made them up. Artificial intelligence (“AI”) tools like ChatGPT are increasingly being...

Protecting Your Cash Holdings from Bank Failures

The failure of several banks in early 2023 raised fears among many individuals and businesses that their cash deposits were at risk. Most depositors were covered by FDIC insurance but others were not. The best way to protect your cash holdings is to understand the...