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How Does Life Insurance Factor Into Estate Planning?

The Elder & Disability Law Firm, APC May 17, 2023

The primary goal of estate planning is to provide for your loved ones when you’re gone, although there are several other considerations to be weighed. For instance, you may wish to ensure someone can make your financial and healthcare decisions if you before incapacitated. This can be achieved through a financial power of attorney, an advance health care directive, and a living will.  

Those undertaking the estate planning process often ask about the role of life insurance. Life insurance has the benefit of not being subject to probate. When you pass on, your beneficiary or beneficiaries will receive the funds almost immediately. You can also designate the funds to go into your trust so that it can be used to cover end-of-life obligations such as taxes, funeral and burial expenses, and outstanding debts.  

For all your estate planning questions and needs, including life insurance, in or around Redlands, California, contact The Elder & Disability Law Firm, APC. An estate planning attorney will review your financial circumstances and wishes for your loved ones to design an estate plan to provide peace of mind for you and your loved ones. The firm serves clients in neighboring communities, including Rancho Cucamonga, Riverside, and Palm Springs, California. 

How Life Insurance Works

First, it’s important to review how life insurance works. There are basically two types of life insurance policies – term and whole or universal. Term life insurance “terms out” after a certain period, say five to ten years. The younger you are and the smaller your chances of death, the cheaper the premium will be, but when the policy reaches its term, you will have to requalify health- and age-wise, and invariably your premium will rise.  

Whole life also requires age and health qualifications, but it doesn’t term out and includes a savings element. Your premium will, at the least, partially fund a “whole” element, that is, an accumulation of savings. At some point, you can cash out of your policy and withdraw what’s been accumulated.   

Using Life Insurance in Estate Planning

Depending on your age and health, you can purchase term or whole life insurance and apply it to your estate planning. The younger and healthier you are when you apply, the lower the premium will be, but remember that term policies expire and need to be renewed, and that can be a challenge as you age. That being said, a life insurance policy can serve several estate planning goals, including:  

  • Transferring funds to beneficiaries outside of probate. Life insurance policies are not subject to probate, so your loved ones do not have to wait for court proceedings to finish to receive what you designate for them.  

  • Paying off debts and taxes. A life insurance policy can be included in a living trust so the trustee can use the funds to pay off any taxes or debts owed.   

  • Equalizing your estate distribution. You may want to leave assets to one beneficiary, such as real property, and use a life insurance policy to equalize your distribution to another beneficiary or beneficiaries.  

  • Paying for health care or funeral/burial costs. A life insurance policy can also relieve your loved ones of the burden of paying for your final expenses.  

  • Transferring business ownership. If you’re a partner in a business, a life insurance policy can help transfer your share in the business through a buy-sell agreement or other arrangement. 

Understanding Your Estate Planning Options

Everyone’s situation is unique, and life insurance can play an essential role in a comprehensive estate plan that takes every loved one into account while factoring in debts, business interests, final costs, and more.  

To create an estate plan that covers all the bases, or to review and update one, contact The Elder & Disability Law Firm, APC, if you’re in or around Redlands, California. The attorney can help individuals and families of all ages. Reach out today with all your questions and concerns.