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The Right Type of Insurance for Estate Planning

estate planning insurance concept

At one point or another, it’s in your best interest to begin planning your will and living testament. That includes estate planning, but did you know that life insurance plays a large factor in the preparation of these documents? 

It’s true, just ask these San Jose estate planning lawyers. When life insurance pays out, it’s often used to cover estate taxes and any gift tax laws. No two policies are the same, though. Here are the types of life insurance that can fit your estate planning needs.

Pure Estate Tax Liquidity – Universal

In this case, you would little estate and primarily need to focus on inflation as well as interest rates. Say you owned a fraction of a large apartment complex, or instance, and wanted to pass that on to your child. You would want to ensure your life insurance policy covers the estate taxes associated with the property you own.

You could also pick up a current assumption universal life policy, which would help protect against inflation while helping to provide a decent cash value. Simply go over your policy each year to account for changing interest rates or if your health changes, and your estate planning is financially covered. 

Larger Liquid Estate – Whole and Irrevocable Trust

If you own a large estate, possibly including marketable assets, then life insurance can become a wealth transfer asset. Pick up a participating whole life policy with increasing death benefits, set the premiums based on annual gift tax exclusions, and possibly roll some of the credit into the policy.

While you might not need life insurance in this scenario, it can help you from a tax-advantage standpoint while ensuring there’s money left behind for your oved ones. Life insurance benefits are income tax free, and aren’t included in an estate if their held in an irrevocable trust

Enormous Liquid Estate – Whole and Irrevocable Trust

The larger your estate becomes, the more tax you can expect to pay in the end. Like the larger estate, a participating whole life policy as well as an irrevocable trust will help counteract the tax while providing cash and assets for your children. 

There’s also a misconception at this level that individuals should save their gift tax credits. Imagine the gift was $5 million, for instance. Using it sooner than later, through purchasing life insurance premiums over the years, allows it to increase in value.

If the final value is $8 million, that additional $3 million is not counted with the estate. The initial gift of $5 million is, however. Also keep in mind that depreciated gifts are still counted at their original value. So, choose wisely when selecting the type of asset you whish to gift. 

What About Term Insurance?

Term insurance is an excellent option if you only need it for a specific period. Heading back to the apartment real estate investment, imagine that the plan of the investment was to buy you back out in 10 years for a profit. 

A term policy of ten years ensures your taxes are handled in the event of your death between that time period. You can choose a buy sell life insurance agreement, as well, which details how your assets should be handled in death and disability. Either way, these options keep you ahead of estate tax costs.