Can Whole Life Insurance Be Used For Estate Planning?
Can Whole Life Insurance Be Used for Estate Planning?
Whole life insurance can be used to create an immediate estate or to aid in estate planning you’ve already begun. In addition to creating an immediate estate, it can help your heirs pay estate tax and help you divide assets equitably among your heirs.
Whole Life Insurance Can Create an Immediate Estate: If you want to leave your loved ones with an inheritance, but have no cash or assets on hand, whole life insurance can solve that problem. When you buy a policy, you name one or more beneficiaries and specify what percentage of the total death benefit you want them to receive. Your insurer is under a contractual obligation to pay that amount upon your death. When you die, your heirs will need to file a claim to the insurer, who will then pay the death benefit – free of income-tax – in the manner you specified. You may choose to update your beneficiaries and the percentages they are receiving at any point before your death by contacting your insurer. You may choose to do this in the event of divorce, death of a loved one, or birth of a child. The transaction between your heirs and your insurer cannot be held up by probate or be subject to debt collectors, ensuring your loved ones will receive an inheritance no matter what. Your beneficiaries can use that money for anything, making it a wonderful last gift to your loved ones.
Whole Life Insurance Can Help Your Heirs Pay Estate Tax: If you have a high net worth, it is possible that your heirs may need to pay estate tax in order to inherit. As of 2023, the IRS estate tax exemption is $12.92 million. If your estate totals more than this amount, your heirs will owe income tax on the portion exceeding the exemption amount. As of 2023, they will have to pay 40% tax. As an example, if your estate totals $20,000,000, your heirs would owe 40% income tax on $7,080,000. That tax amount would be $2,832,000. If your heirs do not have that amount of cash readily available, they may have to sell some of what you left them in order to pay it. Whole life insurance can help you avoid this situation. If you know how much your estate is worth, you and your financial advisor can estimate the estate tax your heirs will have to pay. You can then buy a policy with a face value at or over that amount, giving your beneficiaries an income-tax-free payout of cash they can use to pay any estate tax. They won’t have to sell assets like a home, artwork, cars, or jewelry.
Whole Life Insurance Can Help Divide Assets Equitably: You may own a business, property, farm, or other assets that can be difficult to divide among your heirs. If you want to leave behind an even inheritance, whole life insurance can help. You can buy a policy with a face value amount equal to the value of the asset or a portion of it that you want to leave each child. The children or other heirs who want a portion of the actual asset, such as a small business, can be granted that asset, while the others can receive some or all the death benefit.
