Can whole life insurance be used for estate planning? Yes - by providing a lump sum of cash to your beneficiary (or beneficiaries) upon your death with no red-tape or legal wrangling. There’s no other financial product that can do that. Let’s get into the details.
An “estate” is everything that makes up your net worth. This includes real estate, any cash in your bank account, stocks, retirement accounts, all your possessions, the death benefit of your life insurance policy, and any other assets you own in full or in part.
An “asset” is something that has value that is either tangible, intangible, or financial.
Whole life is the most popular type of permanent coverage for several reasons. For starters, it offers guaranteed protection for as long as you live with level premiums, so you will always know how much your coverage costs.
Like the majority of permanent policies, your premiums will be split between covering the cost of insurance and growing your cash value component. The cash value fund of your policy will accrue compounded interest, as well as grow from each premium you pay. After several years, you will be able to access the value in that fund, almost like a “self-loan.”
Those funds are tax-deferred and can be used to pay medical bills, supplement your retirement, pay for education for your children, and more. The fund will grow at a faster rate than money sitting in a bank savings account. While whole life costs significantly more than term protection, the cash fund of a permanent policy is an asset that can help you strengthen your financial portfolio. You can read more about how permanent life insurance can be considered an asset here.
The biggest benefit of whole life insurance? It's the least complicated of all permanent policies.
Least complicated how? Universal, variable, and indexed policies can all gain more value in your cash fund, but they require you to be more hands-on and have knowledge of investments and the stock market. Your gains are not guaranteed, and there may be high management fees on what you do gain. For this reason, whole life is the most popular option and adds value to your estate.
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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.Get a Free Quote Now
You may be wondering, “Why not just leave my heirs money in a will?” If you create a will to leave your loved one’s money, here’s what will happen when you pass away.
First, your executor – who must be named in the will – will file a copy of your will with the court. Every will must be authenticated and analyzed by the court in a process called “probate.” If you have left behind debts, some or all your estate may be liquidated to pay off those debts before it can be distributed to the people named in your will. The court will oversee your executor in clearing that debt.
Probate can be incredibly time-consuming and drawn-out, with the risk of your estate being used to pay off debts instead of going to your loved ones. Even if the judge sees no issues with the will and you have no debts, the court’s busy schedule often means it takes months for a will to clear probate after a person’s death. If there are issues, it can be tied up for years. In the meantime, your grieving loved ones may suddenly be left without your income while facing funeral costs, medical bills, as well as their regular bills.
When you leave behind money in the form of life insurance, the insurer must pay the death benefit in full to the beneficiaries named by you in a timely manner. Most death benefits are paid within 3 to 6 weeks of a claim being filed, making the process timely and straightforward. It is a simple, fast, and better way to leave money to your loved ones. The payout is guaranteed, free from probate and debt collectors, and income-tax-free.
Read more about how life insurance creates an immediate estate here.Get a Free Quote Now
There is no faster or better way to create an estate to leave your loved ones than to do it with life insurance. With whole life, you can also build assets for your own lifetime. Your policy can give your heirs the cash they need to pay any estate tax, allowing them to keep more of the legacy you leave behind for them.
Your death benefit can compensate heirs who do not receive difficult-to-divide assets like a house, business, or farm.
And unlike a will, the death benefit you leave behind cannot be held up by probate or directed to someone else, ensuring your loved ones will be protected no matter what. Want to learn more or get a quote? You can do so here on our website or give us a call at (800)521-7873. Let us help you build your estate today!