Life insurance isn’t just a short-term way to protect your family’s livelihood. It can also be a valuable estate-planning tool.
“Having life insurance in your estate plan offers several benefits,” says Woody Hughes, Vice President and Director of Insurance for BOK Financial Corporation, the parent company of Bank of Oklahoma. “It can help families more efficiently pass along their assets while also helping with long-term tax-planning.”
Here are three ways life insurance can be useful in your estate planning:
1. Providing financial protection to loved ones
Life insurance—which provides an immediate payout after the policyholder passes away—can help ensure that your loved ones have the financial resources they need after you die. For example, parents may get life insurance to help cover their children’s living expenses or other specific costs once both parents pass away. If the parents deplete most of their assets while they are alive, they at least know their children will have the insurance proceeds as an inheritance.
Life insurance can also be used to fund a trust that provides income to, say, an adult child with a disability, a child who is not good at managing money, or a child under the age of 18.
Unlike “term” life insurance—which only provides coverage over a set period, such as 20 years—a “permanent” insurance policy builds cash value and will cover you throughout your lifetime. “Though the premiums you pay are typically higher than with term insurance, permanent coverage is often preferred because it avoids the risk that you’ll outlive the coverage period,” Hughes says.
2. “Equalizing” the Estate
If you own a business or property that will be left to a particular family member, having life insurance can ensure your other heirs get a fair share of your estate. For example, a married couple that owns a business valued at $5 million that one child will inherit may take out a $5 million life insurance policy with the proceeds going to another child.
Such an insurance policy can be set up so the death benefit rises over time along with the expected value of the business—so the two gifts will still be roughly equal in value if you pass away in 20 or even 40 years, Hughes says. “Having insurance makes some complicated estate-planning issues, such as business or real estate ownership, much simpler to settle,” he adds.
3. Minimizing tax consequences
Individuals and couples concerned about their heirs facing estate taxes after they pass away might get life insurance to pay those taxes. This prevents heirs from having to liquidate assets to cover them. (Currently, the top federal estate and gift tax estate rate is 40%, with an exemption of about $5.5 million per individual—$11 million for married couples. Some states have an estate or inheritance tax, as well.)
Life insurance can also reduce overall tax obligations. Insurance proceeds are typically income-tax-free, and when an insurance policy is put in an irrevocable life insurance trust (ILIT)—a trust specifically designed for holding life insurance—they can also be exempted from your taxable estate. ILITs have special rules and the beneficiary often cannot be changed once the trust is created, so it’s important to work with an estate-planning expert who can help you set it up correctly.
Working with Bank of Oklahoma
When shopping for life insurance, it’s important to work with an experienced financial advisor who can find you the right policy and right amount of coverage for your unique situation. Policies must be structured carefully to ensure they meet your specific estate-planning goals.
Moreover, you should only consider policies from insurers with a strong financial rating—as you may be relying on that insurer for decades.
“Bank of Oklahoma works closely with a robust team of professionals who perform due diligence on insurance carriers and select only those with high ratings and strong historical performance,” Hughes says. Moreover, clients have access to investment, insurance and trust advisors who can help them incorporate insurance into their financial plans.