You likely already know about the importance of protecting your estate so you can protect your beneficiaries and assets, reduce estate taxes, and avoid probate. But have you given any thought to protecting your estate with life insurance? Combined with a will or trust, life insurance is an important component of your estate plan.
Want to know more? Read on to learn why you should protect your estate with life insurance.
Life Insurance Can Cover Estate Taxes
The federal government requires that beneficiaries pay taxes on their inheritance. Inheritance taxes must be paid within 9 months of a person’s death and can be a hefty sum. If your estate consists of assets that take time to liquidate, such as real estate, your beneficiaries will have to quickly come up with the funds to pay these taxes.
A life insurance policy can be a quick, tax-free way to cover these taxes. The funds are disbursed quickly, and your beneficiaries can use them to pay these taxes without waiting until the estate is fully liquidated.
Life Insurance May Reduce Estate Taxes
In 2020, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) went into effect. The new law effectively put an end to the so-called “stretch IRA.” Under the SECURE Act, most designated beneficiaries of inherited IRAs must withdraw all of the inherited account assets – causing a taxable event – within 10 years of the account owner’s death.
Given the new distribution requirements for inherited IRAs, you should consider whether it makes sense to invest in cash-value life insurance. By annually investing what you would otherwise put into tax-deferred retirement accounts into a cash-value life insurance contract, you can effectively move these funds into a tax-free, rather than tax-deferred, investment vehicle.
This strategy could minimize the income taxes you pay over your lifetime. And it could significantly reduce the tax bill imposed on your designated beneficiaries after your death because life insurance proceeds are income-tax-free.
It Can Cover Costs Until Estate Funds Are Released
An estate plan lays out a clear division of your assets. But even with a detailed plan, it takes some time to settle the estate and disburse the funds. If there are funeral costs, other debts that need to be settled immediately, and taxes, your beneficiaries may have to dip into their own funds to cover these costs until the estate is settled.
If your loved ones don’t have the means to cover these funds upfront, they don’t have many options. However, because life insurance funds are disbursed quickly, a life insurance policy can cover these immediate expenses, and your beneficiaries won’t have to pay them out of their pockets. These funds are also tax-free.
Life Insurance Can Protect Family Businesses
Suppose you own a business and leave it to your family after your death. In that case, there is a chance that some of them may not be interested in running the business and would rather be bought out by other family members.
These other family members may not have the financial means to do so, however.
Life insurance can help give these family members the means to buy out those family members who don’t want to manage the business.
It Can Pay Outstanding Debts
If you live in a community property state, your surviving spouse may be responsible for your debts. A whole life insurance policy will help your spouse pay these debts without having to wait until the estate goes through probate and is liquidated.
Will You Protect Your Estate with Life Insurance?
If you want to protect your estate with life insurance, now is the time to start exploring potential life insurance policies. Life insurance can go a long way in protecting your heirs and helping them cover expenses in the short term while the estate is settled.
If you’re ready to start estate planning, contact me today for a free consultation. I am an estate planning attorney in Northern Kentucky. And I can guide you on what you need to protect your estate, including life insurance.