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Curious about how a life insurance policy might fit into your estate plan? Properly integrating life insurance into your estate plan can be a wise move to manage your assets effectively and alleviate financial burdens on your loved ones. However, this kind of strategy requires careful planning and thoughtful consideration. That’s where a knowledgeable estate planning lawyer comes in.

The skilled attorneys at Pennington Law, PLLC have the knowledge and experience to guide you through the process of integrating life insurance into your estate plan. Our legal team will review your situation and recommend estate planning strategies to benefit you now and in the future. Contact us today for a free consultation.

Reasons to Add Life Insurance to Your Estate Plan

Adding life insurance to your estate plan offers several compelling benefits. It provides financial security for your family or heirs by ensuring they receive immediate funds after your death. Life insurance also provides a way to leave a legacy. Whether it’s funding education for your children or donating to a charity, the payout from a life insurance policy can fulfill your wishes. Furthermore, life insurance can equalize inheritances among your heirs by providing liquid assets to one beneficiary while others receive physical assets like a home or business. This can prevent conflicts and facilitate the fair distribution of your estate.

Types of Life Insurance Used in Estate Planning

Life insurance can play a key role in estate planning. When planning your estate, incorporating life insurance can ensure your beneficiaries can replace lost income and have immediate access to funds for estate taxes, debts, or day-to-day needs. Here are some common types of life insurance used in estate planning:

  • Term life insurance – This type of insurance covers you for a specified period, such as 10, 20, or 30 years. If you pass away during the term, your beneficiaries receive the death benefit.
  • Whole life insurance – Unlike term insurance, whole life insurance covers your entire lifetime as long as you continue to pay the premiums. It also accumulates cash value over time, which you can borrow against if needed.
  • Universal life insurance – This flexible policy allows you to adjust your premiums and death benefits as your financial situation changes. Universal life insurance also has a cash value component that grows based on the interest rate set by your insurer.
  • Variable life insurance – This type of policy combines death protection with a savings account that you can invest in stocks, bonds, and mutual funds. The value of your policy can grow more significantly based on the investment performance, but it also comes with higher risk.
  • Survivorship life insurance – Also known as “second-to-die” insurance, this policy covers two people, typically spouses, and pays out after both have died. It is helpful for estate planning because it can cover estate taxes or provide for heirs before other assets are accessible.

An AZ estate planning lawyer from Pennington Law, PLLC can advise on each type of life insurance policy and which might work best for your circumstances.

What Costs Can Life Insurance Cover After Death?

Life insurance can cover a variety of costs after death. The most immediate expense it often addresses is funeral and burial costs. Life insurance proceeds can also settle any debts you leave behind, such as mortgages or credit card debts, so these obligations do not burden your family. Additionally, if you were the primary income earner, the policy can replace your income to help your family cover everyday living expenses and maintain their lifestyle. The funds from a life insurance policy can also support ongoing financial responsibilities, such as care for a dependent family member or business commitments.

Can Life Insurance Help Reduce Estate Taxes?

Yes, a life insurance policy can help you reduce estate taxes. If you own the insurance policy, the proceeds from the policy will be included in your estate and could be subject to estate taxes. However, if you set up an irrevocable life insurance trust (ILIT) and the trust owns the policy, the proceeds are not included in your estate and, therefore, are not subject to estate taxes. This setup can reduce the size of your taxable estate and allow you to leave a larger share of your assets to your heirs. An ILIT can also provide funds that your heirs can use to pay any estate taxes due, thereby preserving other estate assets.

Benefits of Life Insurance Trusts

Life insurance trusts like ILITs offer significant advantages for estate planning. By setting up an ILIT, you can keep the life insurance proceeds from counting toward your taxable estate, which can minimize estate taxes. These trusts also allow for more control over the insurance proceeds. For instance, you can set terms that dictate how and when your beneficiaries receive the money to protect the benefits from beneficiaries’ creditors or poor spending habits. Additionally, an ILIT can provide liquidity to your estate, which can be useful for paying estate taxes and other expenses directly without selling assets.

Life Insurance for Business Succession Planning

Incorporating life insurance into your business succession planning can secure the future of your business when you die. For instance, the proceeds from a life insurance policy can be used to buy out a deceased owner’s share of the business from their estate. This can promote a smooth transition and prevent conflicts among surviving owners or family members. Buying out ownership shares with life insurance proceeds can also ensure that your family is fairly compensated for their share of the business. Furthermore, life insurance can facilitate future business operations by providing the necessary funds to cover expenses and any debts the business may have incurred.

Mistakes to Avoid With Life Insurance

Life insurance can be a valuable part of your estate plan, but there are some common mistakes to avoid that can undermine the benefits. One frequent mistake is failing to keep your beneficiary designations updated. Life changes such as marriage, divorce, or the death of a beneficiary can make current designations outdated, which could lead to benefits being paid to unintended recipients. Another common error is not reviewing the policy regularly to ensure it still meets your needs, especially as financial situations and federal estate tax laws change. Lastly, owning the policy yourself rather than through a trust can subject the proceeds to estate taxes and reduce the amount your beneficiaries receive.

Why Choose Pennington Law, PLLC, for Estate Planning?

At Pennington Law, PLLC, we make the estate planning process easy to understand from start to finish. We know discussing end-of-life matters can be difficult, but our team approaches these conversations with sensitivity and honesty so you feel supported and informed every step of the way. Contact us today for a free case review with an experienced estate planning attorney.