Fraud Blocker 5 Reasons Why Life Insurance Should Be in Your Estate Plan

5 Reasons Why Life Insurance Should Be in Your Estate Plan

by | Oct 10, 2013

Life Insurance is Your Family's Swiss Army Knife.

5 Reasons Why Life Insurance Should Be in Your Estate Plan

 

By: Barry E. Haimo, Esq.
October 10, 2013

Assets can be tangible property, such as cash, cars, stocks and bonds, computers, stamp collections, jewelry and your 60 inch flat screen television. They can also be intangible, such as copyright protected work, business interests and even future property interests. In fact, there’s many competing definitions of what exactly constitutes an asset. For example, the definition of an “asset” for accounting purposes under the generally accepted accounting principles (GAAP) are not completely adopted by other bodies of law and/or philosophies of banking and finance, etc. For purposes of this post, however, an “asset” is something that can help you and your family. One really versatile asset is the focus of this post — life insurance.

Life insurance is definitely an asset that you want to make a point to understand. Here’s a concise explanation of a few critical points. I hope it prompts you to call your trusted adviser and schedule a meeting to educate yourself further. Hopefully he or she works closely with an estate attorney to ensure that your team of professionals are working together efficiently and effectively on your behalf.

Point No. 1 – Family – Yes, everyone knows that the fundamental root of life insurance is one or more beneficiaries’ guaranteed receipt of a relatively large amount of money upon the death of the insured. This money is known as death benefits. Some experienced and very intelligent professionals argue that life insurance is critical to anyone that cannot self-insure, which in our economy, is about 99% of people in the United States. Self-insuring means that you can ensure that the future of your family’s finances are very secure. This may be via investments and/or other business interests. This viewpoint is flawed in at least one critical way because it overlooks some of the advantages set forth below, which cannot and should not be overlooked to anyone, including the wealthiest 1%. The  bottom line is that life insurance enables you to leverage your available cash to ensure that your family receives a relatively large cash injection to provide for them after you’ve passed on.

Point No. 2 – Investment Following the Great Recession, our markets are extremely tense and uncertain. The markets are up because companies are operating extremely lean and interest rates are at rock bottom. The deficit is unbelievably staggering and our government is currently shut down. All but the elite should be diversified in such a volatile economy, and a fantastic way to diversify your portfolio of assets is to invest in life insurance. This is because most life insurance policies offers certainty where there otherwise is none. With certain permanent polices, the upside is fixed at an relatively attractive rate regardless of how the market performs. These policies offer conservative returns with no risk and should seriously be considered. The

Point No. 3 – Asset Protection Life insurance represents an asset protection vehicle. Click here to learn what a creditor is. Asset protection is ultra-critical in the litigious world that we live in. You are aware that people can sue for anything and probably recover if their case will be sufficiently disruptive. The business model looks like this: attorneys know the probability of favorably settling cases so they are willing to advance all clients’ fees and costs in exchange for a handsome contingency fee. They shuffle some paper and push some buttons, and they are very good at it. I guarantee that either you or someone you know has experienced this issue first hand. In Florida, there are many asset protection vehicles available to protect your family’s money and property. Using your house (primary residence) is a fantastic avenue because of Florida’s protective homestead laws. Investing in annuities and taking advantage of qualified retirement accounts also protects assets from pesky creditors. Florida’s public policy is to protect families’ inheritance following death so its laws also protect life insurance. Not only can you ensure your families’ finances are provided for and are safe when you’ve passed on; it’s also safe during life. In light of the above, this benefit should not be ignored.

Point No. 4 – Estate Taxes – It is fundamental that proceeds of large life insurance policies are used to pay estate taxes that may become due nine months after death. Again, you’re leveraging available cash to yield a relatively large amount of money in return. That being said, currently you have to have over $5,250,000 (or double if you’re married) to trigger the estate tax in the United States right now. This amount is referred to as the “Unified Credit”. This isn’t affecting a lot of people presently, but this is a politically heated issue that can change as often as our political leaders change their positions. Therefore, it’s important to understand now that if you’re total net worth (everything you own) is over a $1,000,000 dollars, your estate may be captured upon death if the political winds relating to estate taxes change adversely. To paint a picture, if the United States Treasury knocks at your door for estate tax due, they will want 35% of the value of your net worth! It has been as high as 55% in recent years. That’s a lot of money to acquire in a window of nine months. If your estate isn’t liquid, you may share many affluent and well known peoples’ pain after being forced to part ways with cherished assets to pay the tax debt.

Point No. 5 – Accessibility – Traditional IRAs and Roth IRAs are fantastic retirement planning vehicles. They let you invest pre and post-tax income and defer and/or avoid subsequent taxes entirely. As mentioned above, these plans are asset protected. However, consistent with Newton’s third law of motion, there’s a catch. You cannot withdraw that money or property until you reach the ripe age of 59.5. Thereafter, you’re required to take annual distributions in a certain amount depending on your age. If you withdraw money earlier or fail to make necessary distributions, you are hit with a fairly unpleasant penalty and/or tax. It should be noted that high income earners do not even qualify for these beneficial plans if they make over $127,000 or $188,000 (depending on their tax classification). To overcome these restrictions, high income earners utilize life insurance. With certain policies, your cash value build up is asset protected and you can freely draw from it against your death benefits. In addition, there is no tax or penalty for early withdrawals or unscheduled distributions.

Bottom Line

The bottom line is that all estate plans should consider incorporating life insurance unless it does not make sense. Financial planners and estate attorneys should work hand in hand to accomplish all of their clients’ objectives. Because of the versatility and applicability offered by life insurance, it is sometimes referred to as a Swiss Army Knife.

 


Author:
Barry E. Haimo, Esq.
Haimo Law
Strategic Planning With Purpose
Email: barry@haimolaw.com
LinkedIn: http://www.linkedin.com/in/bhaimo
Google+: https://plus.google.com/u/0/+BarryEHaimoLaw/posts
YouTube: http://www.youtube.com/user/haimolawtv

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