Skip to content
Home » Life Insurance, Taxes and Estate Planning

Life Insurance, Taxes and Estate Planning

“In this world nothing can be said to be certain, except death and taxes.”

— Ben Franklin

What does death or taxes have to do with insurance? Well, when it comes to life insurance, a good bit.

Life insurance is a great compliment to estate planning and can help manage your taxes.

Proceeds of life insurance are included as part of the estate when still owned by the insured at death. However, the insured can choose to transfer all incidence of ownership during his or her lifetime normally through a life insurance trust. In doing so, one would avoid any potential estate tax and passes taxes free to beneficiaries of the trusts.

“It’s a good way to provide a source of ready cash for heirs to pay estate taxes on illiquid assets, such as property or businesses; or to allow wealth to pass to your heirs outside your estate,” says Kimberly Rosati, wealth planning consultant at Fidelity. Only the wealthiest estates pay the tax because it is levied only on the portion of an estate’s value that exceeds a specified exemption level — approximately $5.5 million per individual and about $10.9 million per married couple as of 2015.

In any event, be sure to write a will with the help of a professional to guarantee your assets and funding from insurance are used and distributed in the way you intended them. Writing a will on your own, without a deep understanding of the law behind it, can be risky.

Either way, the benefits of life insurance—term, whole, or otherwise—far outweigh the investment you’d put into it. Check out this infographic on what the average financial situation for a Gen Xer is and how life insurance will benefit you.

Following are just a few examples of benefits from life insurance in regards to estate planning:

  1. It provides immediate cash at death to pay funeral expenses, debts and more.
  2. The money provided can be made available to pay estate taxes and, by this, avoid the forced sale of an asset.
  3. Generally, life insurance proceeds payable to a named beneficiary pass to said beneficiary free of income tax.
  4. Proceeds from the policy provide funds that can be transferred to a trust created in the insured’s will for the benefit of, for example, minor children or elderly or handicapped relatives.
  5. When the insured owns a closely held business, life insurance proceeds may fund a buy-out of his or her interest, or key persons.

Looking for a quote on life insurance? Click here or call 334.263.5535 for a quote!