When you think about estate planning, life insurance doesn’t come to mind first. Your house, collectibles, and 401k? Sure. Yet, life insurance is present in almost every quality estate plan and can serve as a source of support, coverage, and liquidity to pay death taxes, expenses, fund business buy-sell agreements and sometimes to fund retirement plans. A life insurance policy, when used correctly, can be used to protect your estate and ensure your lasting legacy. Yet, for even the savviest of people who have a plan in place for the future, how life insurance fits into the estate planning puzzle can prove complicated.
Enter Christa Payne, a Financial Representative for Country Financial in North Liberty, who was generous enough to share her expertise on the subject. Christa has been with Country Financial for over seven years and you can tell she’s passionate about what she does. She finds joy in being a part of planning for the future for all her clients.
Gordon Fischer Law Firm (GFLF): In general, what role does a life insurance policy play within an estate plan?
Christa Payne: Generally, life insurance is a great vehicle to provide estate liquidity (in order to pay taxes, debts, administrative expenses, family allowance for surviving spouses and dependents). It can also provide debt relief or continuation plans (buy-sell for businesses, etc.), provide income replacement, and wealth accumulation…proceeds are paid to beneficiaries income tax-free!
GFLF: Can life insurance affect the amount of taxable assets of the estate?
CP: Yes, if you are the owner of the policy, it gets added into estate calculation (up to $5.49 million as of 2017). However, if you give up rights to the policy for longer than three years, it doesn’t have to be included. There are steps you can take to make sure that the death benefit or the replacement value don’t get included in the estate calculation.
GFLF: What are the options for charitable giving with/through a life insurance policy? Can you “give” or transfer your policy to a charity?
CP: Premiums can be deductible, but the owner and beneficiary both have to be the charity. Yes, you can transfer your policy to a charity or purchase a new one. Life insurance can be a great way to turn a smaller cash donation into a larger donation!
GFLF: What are some errors you’ve heard of/seen in regards to life insurance and estate planning? What should people know to avoid these pitfalls?
CP: There are many errors that can be made, including: listing the wrong beneficiary (or failing to update as things change—beneficiaries trump a will!) and having an inadequate amount of coverage in force are two major ones. People should always meet with a competent financial professional and attorney to discuss their life insurance and estate plan. It’s vital to complete annual reviews of the policy, as simple as that seems, things change, and it’s easy to forget. It’s always great to be reminded of what policy you have, how it works, and what will happen in the event of a death.
GFLF: What’s the difference for life insurance between revocable and irrevocable trusts? Is one category recommendable over another?
CP: In a revocable trust, there is no gift tax on funding the policy and it avoids probate. The death benefit, however, is included in the grantor’s gross estate. In an irrevocable trust, it avoids probate, has asset protection against creditors, and is excluded from gross estate. One is not necessarily better than the other, it depends on the specific needs of each individual client at the time the trust is established.
Let’s Talk About Your Life Insurance
Take it from Christa, life insurance as a part of your estate plan is important. If you have questions on her advice or think you need a new/updated policy, don’t hesitate to give her a call at 319-626-3516 or shoot her an email. (A resource like this research can also be useful in comparing insurance plans.)
Of course, you also need an estate plan before life insurance an be a part of it)! Contact me to get started or fill out my obligation-free estate plan questionnaire.