How Can Life Insurance Help with Estate Planning?

by | Jul 19, 2023 | Estate Planning

Life insurance can be a valuable tool in the estate planning process – providing protection and cash when your loved ones need it most.

Many people ask us if life insurance should be a part of their estate planning. Our answer always depends on the individual circumstances and goals of our clients. But in most cases, we think that including life insurance in your estate plan is a smart choice. This can be particularly true for young families, business owners, and blended families

The right life insurance product can assist with:

  • Estate taxes
  • Final expenses
  • Probate
  • Equalizing an estate
  • Providing further support

Life Insurance for Young Families, Business Owners, and Blended Families

Life insurance as a part of estate planning can be very helpful for people in various situations:

  • Young families. If a young parent dies unexpectedly, money from life insurance can help raise and support the children left behind.
  • Business owners. You may have a buy-sell agreement with your partner, but your heirs need cash to pay for their part of the agreement – cash a life insurance payout can provide.
  • Blended families. Some of our clients have grown children from a former marriage and young children in a current marriage. Life insurance money can make it possible to leave funds for your grown children and still provide for your new children and wife.

Life Insurance Can Be There When You Need It Most

We work hard to design the best possible estate plans for our clients. Unfortunately, even the most comprehensive plan can still run into some possibly frustrating hurdles. Estate taxes become due in nine months. Probate can take much longer than we like. Funeral costs may be higher than anticipated.

When we encounter these common challenges, it can be extremely helpful to have easily accessible financial help. Life insurance can provide that help. Life insurance payouts are fairly straightforward, fast, and predictable. This money can serve as a bridge between the period immediately following the passing of a loved one and the time when the estate is finally resolved.

5 Key Benefits of Estate Planning with Life Insurance

Let’s take a closer look at some of the ways that estate planning with life insurance can make things easier for our loved ones: 

Life Insurance Can Help Pay Estate Taxes

Depending on the size of your estate, your heirs may owe estate tax to the federal and, possibly, state governments. The amount of estate tax you owe will depend on current laws, which do change periodically. What has remained fairly consistent is the nine-month timeline. Estate taxes are expected to be paid within nine months after the estate owner’s passing.

One of the goals of estate planning is to minimize the amount of estate tax you pay. But if the estate is big enough, there is no avoiding it completely. Sometimes, heirs are forced to sell estate assets to pay the tax, which is something we want to avoid if we can help it. 

Life insurance money can be used to pay estate taxes. The proceeds might be enough to cover all of the taxes. But even if they’re not, the life insurance money can offset what your heirs have to pay the government. 

Life Insurance Can Help Pay Final Expenses

For many people, particularly those with more modest estates, life insurance is a way to help heirs pay for final expenses. These can include funeral costs, income taxes, and any other expenses that arise after your passing.

The average funeral cost sits somewhere between $7,000 and $12,000 right now and is likely only going to increase in the future. Life insurance proceeds can help ensure that your loved ones are not left paying thousands of dollars for your funeral. 

The problem with final expenses is that they tend to be due right now. Your heirs may not get any income from the estate for months. But life insurance is different. Life insurance money is available a couple of weeks after the funeral (dependent on when you get the death certificate), which can be so helpful for those you leave behind. 

| Access our FREE Funeral Planning Guide here

Life Insurance Doesn’t Go Through Probate

If you have started the estate planning process, you have probably heard plenty about probate. It’s the typically time-consuming legal process of reviewing the assets and distributing them to the appropriate parties. Having a will is important, but probate is still necessary, especially if you have a large estate. There are other estate planning tools that we can use to help you avoid the worst of probate. But probate is often a reality that heirs have to deal with. 

Some assets are not subject to probate, though. Life insurance is typically one of them. The key here is that there is a beneficiary named. (Read more about the importance of keeping your beneficiaries up to date here.)

Assets with a beneficiary are not subject to probate. That’s part of what makes this kind of insurance so useful in estate planning. Even if we can’t avoid probate with all assets, having some that do avoid it provides much-needed help for loved ones.

Life Insurance Can Help Equalize an Estate

When there are multiple heirs to an estate, keeping everything fair can be tough. Assets don’t always divide easily. This isn’t true in every estate, but when it is, it can create real headaches for everyone. 

Life insurance proceeds are one possible way to equalize an estate and keep everyone relatively happy. The money can fill in the gaps in an estate that is hard to distribute evenly. 

For example, what if the estate has two heirs but only one family home? One heir wants to keep it and one wants to sell it. If the heir that wants the home doesn’t have the money to pay for half the value of the home, they could be forced to sell it. But, if there is a life insurance payout equal to half the value of the home, the other heir can take the money and be satisfied. 

| Read about one family’s nightmare situation where life insurance could have helped

Life Insurance Can Provide Additional Financial Support

If you have a loved one that relies on you and you want to continue to provide support after you are gone, life insurance can help. We can help you set up an arrangement where the life insurance payout provides ongoing financial assistance to a person of your choosing. Our team has extensive experience creating all types of trusts, something we can use on your behalf to guarantee a level of support you think is appropriate. 

Questions About Life Insurance and Estate Planning? We Can Help!

You have probably thrown away a hundred different life insurance offers that come unsolicited in the mail. You may already have a life insurance policy that you want to incorporate into your estate plan. Whatever your specific situation, we are ready to provide compassionate, knowledgeable guidance on life insurance and all other estate planning topics.

One of the best ways to learn more about how we can help is to come to an upcoming workshop. Get together with our attorneys and other people in situations similar to yours and learn about estate planning. It’s fun, informative, and most importantly, useful!

If you are ready to get started planning and know we’ll be a good fit for your family, please call our office to schedule an Initial Meeting. We would love to hear your story and help you protect your estate and your loved ones.