Life Insurance: The Oft-Forgotten Tool in Your Estate Planning Tool Belt

Hi. This is Barry Haimo. Welcome back to another dose of Bite-Sized Bits of Knowledge, where we give you a meaningful amount of information in a short amount of time. Today we’re talking about life insurance. But first, let’s zoom out and just recap on Basic Estate Planning 101.

Basic Estate Planning 101 typically includes four or five documents: the will, the power of attorney, the health care surrogate, the living will, and maybe a trust. We’ve talked about trusts before. We work with your CPAs. We work with your financial advisors to make sure that everything is in order and all of your professionals are communicating for you. For your benefit, to make sure everything is in order and nobody’s doing their own thing. Everybody’s talking.

Life insurance, which is the subject of the video today, is an often important part of planning. There is quite a few types of life insurance, but we’ll break it down into two today. 

Number one is there’s term. And number two is there’s like a permanent or whole life policy. A term life policy is basically you pay a premium for a certain amount of time, say 30 years. And if you pass away within that time frame, you’ll get the death benefit that you’ve contracted to receive. If you pass away after that period of time and you let the policy lapse, you will not get anything. Yes, you will have lost all of that money. Okay? 

Whereas the alternative is like a permanent or whole life policy where you’re going to pay a premium probably in most cases for the rest of your life, and there’s a cash value that builds in some way, and if you pass away, you get the death benefit.

Some of these policies let you borrow against the cash value during life. And that’s important for long-term care because, in most cases, the source of that long-term care insurance proceeds. It’s actually coming from life insurance now. So the difference is kind of a skeleton policy. They’re a cheaper term policy.

And the alternative is a whole-life permanent policy where you pay a greater amount, but it’s for the rest of your life. It can increase. The cash value can increase by a fixed amount. It can increase by being indexed with the market. There’s a lot of fancy wording that they put into these policies.

They can make them extremely complex, but they’re important. How are they important? Why are they important? Let’s talk about that. 

Number one, when you think of insurance, a common reason to have it is income replacement. So if you have a wife and kids and you’re the breadwinner – even if you’re not the breadwinner – you need money to make sure that your spouse and kids can at least get these kids out of the house and on their two feet. And so come up with a number, and do the math. 

What’s that going to be? Because if you don’t have it now, you’re going to need it later. And so if it’s $100,000, you need to get them from A to B out of the house on their own two feet, including school. Not including school, whatever it is that you prefer, if it’s $100,000, you get a $100,000 term policy, and that will cover it. 

That’s one reason income replacement is very important: number two, asset protection. Life insurance policies in Florida are exempt from creditors. So it’s another source of opportunity to put your assets or to put your money into a vehicle that is protected from credit. It can grow. 

Is it the best investment? No. Under no circumstances will any financial advisor tell you that this is the best investment vehicle. But it’s helpful to supplement in a diversified portfolio to put your money into a permanent whole-life policy.

One way to think about it is more of a deferred retirement planning benefit, a tax-free income source of income later. There’s a lot of ways that’s going to count when it comes to life insurance. Work with somebody who is extremely knowledgeable and experienced, and you’ll get a better policy to fix your needs.

So number one income replacement, number two is asset protection, and number three is estate tax planning. So historically, when the estate tax threshold was a million dollars 20 years ago, that meant that if you had over a million dollars in assets when you passed away, then a significant percentage, now it’s 40%, will go to taxes above a million dollars. Now it’s eleven and a half million dollars; you can double it if you’re married. Very few people actually care about the estate tax, but it’s a political number.

We are in a significant deficit. We just borrowed another $2 trillion dollars. The Democrats want to lower, the Republicans want to keep it high. It’s going to change. And if it changes lower, you might get picked up in that.

And to the extent you get picked up in that, you may want to have life insurance to pay the tax. And the way to do that is to do it in a very special way and with a very special trust so that it doesn’t get included in the very thing you’re trying to avoid. So the state tax planning, asset protection, income replacement are very important reasons to consider life insurance in your estate plan. Make sure you work with your financial advisor. Make sure it’s all integrated into the plan.

A lot of mistakes happen. We’ll talk about it later. Into the top three mistakes that people make when it comes to planning or to the top three mistakes that people make when it comes to insurance. So this is just basic stuff to understand. We’re happy to explain more.

We value your feedback. Give us a call. We’re happy to help you. We look forward to working with you. Thank you for stopping by, and stay tuned for more.