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How Can Whole Life Insurance Be Used for Estate Planning?
How can whole life insurance be used for estate planning? There are several ways: it can create an immediate estate, help your heirs pay estate tax, and help you divide assets equitably among those heirs. Let’s take a look at each of these in more detail.
Create an Immediate Estate
Help Your Heirs Pay Estate Tax
Divide Assets Equally Among Heirs
Give a Business Partner Buyout Money
Create an Immediate Estate for Your Heirs
Whole life insurance can create an immediate estate. If you want to leave your loved ones an inheritance but don’t have the cash on hand, life insurance solves that problem. When you buy a whole life policy, you name one or more beneficiaries and specify what percentage of the total death benefit you want them to have. This means you can split that death benefit between a spouse, children, grandchildren, or other heirs as you see fit.
Then, when you pass away, your heirs will need to file a claim. Once they do, your insurer will pay out the death benefit, income-tax-free, to the people you specified in the amounts you specified. That’s all there is to it. It’s a straightforward transaction that can’t be held up by probate or subject to debt collectors.
Your beneficiaries can use that money for anything. If you leave behind medical bills, for example, that money can pay it off. They can use it for funeral expenses, a family reunion, college tuition, or just paying the bills so they don’t have to leave their home after you pass away. There are zero restrictions on how they can use that money. That’s what makes it a wonderful last gift to your loved ones.
So, to recap, how can whole life insurance be used for estate planning? If you want to create an estate to leave your loved ones, there’s no faster or better way to do it than with life insurance.
Help Your Heirs Pay Estate Tax
If you have a high net worth, it’s possible that your heirs may have to pay estate tax in order to inherit it. As of 2023, the IRS estate tax exemption is $12.92 million. If your estate totals more than this, your heirs will owe income tax on the portion exceeding the exemption amount.
Just how much tax would they have to pay? 40%, as of 2023.
As an example, if your estate totals $20,000,000, that means your heirs would owe 40% income tax on $7,080,000. That tax would amount to $2,832,000. Do your heirs have that much cash available? Or would they have to sell some of what you left them in order to pay it?
Life insurance can help you avoid this situation. If you know how much your estate is worth, you and your financial advisor can estimate how much income tax your heirs will owe. You can then buy a life insurance policy with a face amount at or over that amount. Then, when you pass away, your beneficiaries will get an income-tax-free payout of cash they can use to pay any estate tax due. They won’t have to sell assets like a home, artwork, jewelry, cars, or other property to cover those taxes.
To recap, how can whole life insurance be used for estate planning? It can give your heirs the cash they need to pay the estate tax, allowing them to keep more of what you bequeathed them.
Divide Assets Equitably Among Heirs
If you own a business, property, farm, or other assets that are difficult to divide among your heirs, whole life insurance can help.
Let’s say you have an asset – a small business – that you want to leave to your children. But how do you divide it evenly among them? What if not all of the kids want to participate?
Life insurance can help make the split more equitable. You can buy a policy with a face amount equal to the value of the asset (or portion of the asset) you want to leave each child. The children who want a portion of the actual asset can be granted that asset, and a child or children who don’t want the actual asset can be given some or all of the life insurance death benefit.
For example, let’s say you have three kids and own a small business worth $2,000,000. Now let’s say two of your kids agree to step in and take ownership of the business after you’re gone. To give the third child an equal share of inheritance, you could buy a whole life insurance policy for $1,000,000. After your death, each child will now have an equal inheritance: an asset or payout worth $1,000,000.
To recap, how can whole life insurance be used for estate planning? It can compensate heirs who do not receive hard-to-divide assets like a house, a business, or a farm.
Give a Business Partner Buyout Money
Let’s go back to the scenario where you own a business with one or more partners. And let’s say none of your kids are interested in continuing with that business once you pass away. But your kids are still going to inherit your share of that business. So where does that leave your business partner(s)? With partners who don’t really want to be there, which isn’t a recipe for good business.
Life insurance can solve that problem.
If your business partner buys a life insurance policy on you (and makes the payments), he or she will get the death benefit payout when you pass away. Then can use that money to buy your share of the business from your heirs. That solves the problem for everyone in this scenario. Your kids – who don’t want to run the business – can accept the payout and be compensated fairly. Your business partner – who does want to keep the business – can run it as they see fit without the worry of having silent partners who aren’t invested or interested in that business.
To recap, how can whole life insurance be used for estate planning? It can give your business partner the money needed to buy out your heirs if they have no interest in that business.
How Can Whole Life Insurance Be Used for Estate Planning? Now You Know!
We’ve shown you three ways to use whole life insurance in estate planning. 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. Tell us what you’re looking to do, and we’ll find the insurance solution that helps you achieve it!
