Life Insurance

When you purchase life insurance, you agree to pay regular premiums in exchange for a lump-sum payment payable to your heirs upon your death.

Many people put off purchasing life insurance because they assume that the longer they wait, the more money they’ll save by avoiding costly premiums. But that is a bad strategy: the older you get, the more expensive new life insurance policies become and the less insurable you become. Life insurance can actually become entirely unavailable to you at certain ages or after certain medical events. So be sure to look into purchasing a policy as soon as possible, while youth and health remain in your favor.

From an estate planning perspective, life insurance can be used to:

If you haven’t acquired significant assets during your lifetime but still want to leave something to your children, life insurance is an effective way to create an estate. You can personally own life insurance policies and name anyone you want as a beneficiary. If you want to leave the benefit to your estate, however, the safest way to avoid estate taxes is to buy the insurance within an irrevocable life insurance trust.

If you already own life insurance policies and want to transfer them to an ILIT, you may need to pay gift tax, a tax levied against individuals who give certain amounts of money to others without compensation for the gift. Consult your tax advisor to determine whether you’ll have to pay gift tax when moving insurance policies into an ILIT.

Many people hesitate to give to charity while they’re still alive because charitable giving reduces the money available to leave to their families. One effective solution to this problem is to purchase life insurance in an ILIT to replace the value of the assets you gave to charity. Life insurance can be set up to match the amount of money you give to specific charities, place in an educational savings plan, or gift to individuals during your lifetime.

Life insurance policies can provide a quick lump-sum payment to your heirs to help fund the many expenses that arise when you die. These expenses include:

If your estate owes federal estate taxes, the full amount is due nine months after your death. Having cash available to pay bills is crucial since many of your assets (such as real estate) may not be easily converted to cash. If your executor has to sell property to cover taxes or other expenses, the asset may have to be sold at a loss—but taxes may still be owed on the much higher fair market value that was applicable when you died. Tax liabilities can actually cause your heirs to lose money, rather than gain any inheritance, after you die. Life insurance is among the most effective ways to prevent this problem.