Life Insurance as Part of Your Estate Plan
In estate planning, what we do revolves around your wealth, how it might grow in the future, and what you want to provide for your heirs. When you have substantial wealth and want to pass on substantial wealth, there are lots of options. Since estate planners are not clairvoyant, deciding which options to employ generally comes down to matching your needs and desires with the currently available tools. Many times, the tools we choose invoke a “hedging strategy” that helps balance the “what ifs” (what laws will be in effect when I die) with the certainties (that I will die).
An important hedging tool can be the purchase of life insurance. In this instance, we are referring to permanent life insurance (aka “whole” life insurance), as opposed to term life insurance. While term insurance is viewed as an expense, strategically designed life insurance is a financial instrument that is an investment in the future. This forward-focus must be recognized: you will not benefit from the insurance; it is for someone else. For anyone who has the wealth to design their estate plan around legacy assets, the key is that life insurance can protect against the erosion of the value of other assets in the estate while providing its own financial return.
Life insurance can help hedge against a loss of estate value in a number of ways. Changes in tax laws that affect income, capital gains, or estate taxes are possible every 4 to 8 years with government leader changes. Subsequent generations may be interested in entrepreneurial opportunities that would alter the liquidity of your estate, or a sudden, severe health issue could significantly decrease your estate’s value – not to mention, the simple math of generational divides means familial assets dilute over time. While none of these possibilities may bother you, life insurance can provide a cash infusion that bolsters generational wealth – the hedge that will fill any unexpected gaps.
Life insurance can also be used to support specific estate or business succession strategies. For example, if only 2 of 3 children are involved in a closely held business, their interests may diverge between growing the business and accessing distributions. The children’s interests can be “equalized” by giving the non-involved child cash from life insurance while giving the involved children the business. Life insurance proceeds can also pay the estate and capital gains taxes owed on retained assets, thereby significantly increasing the net-inheritance to beneficiaries. Since there is no asset as flexible as cash, life insurance creates options for the executor, which is always favorable.
Life insurance is unique: it does not compare to other assets in your estate. Because of this, it may be the appropriate way to meet your multi-generational estate planning goals. Choosing an investment that will so clearly generate options for your executor can be hard to argue against. If you are in the position to consider legacy planning, contact our office for a consultation about whether life insurance should have a place in your long-term planning.