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Life insurance policies can be an important part of your estate plan, but choosing to buy life insurance and how to plan with it will differ for everyone based upon assets, income, age, and family structure.The type of life insurance policy determines the role life insurance plays in your estate plan.
What Are the Benefits of Term vs. Whole Life Insurance?
Term life insurance is typically set for 10, 20, or 30 years but does not build a cash value or have an investment component. Term insurance only provides a death benefit if the insured dies before the expiration of the policy. This may suit a parent or business.
A parent can invest in this policy to provide stability for the family upon their death with the intention of replacing their salary to cover expenses associated with raising a family, such as mortgage payments, childcare and education.
For a business with multiple owners, a term policy can fund a buy-sell agreement to allow the co-owners to buy out the estate for the deceased owner’s share of the business. If an individual is the sole owner of a business, a term policy provides some leverage during the period after the owner’s death to negotiate a sale or find new leadership.
Term policies can keep a family or business afloat if a key player dies and the family or business needs time to adapt. Even though term policies do not have cash value, they can be an integral part of the plan and should be disclosed to your estate planning attorney.
In contrast, whole life insurance policies have a cash value that can be accessed during life in addition to the death benefit. Financial planning may include a policy that allows for income tax-free growth in a policy that can be borrowed against throughout your life.
In a taxable estate, life insurance policies are often used for easy access to liquidity to pay estate taxes.
Does Life Insurance Count Toward Estate Tax?
Regardless of the type of policy, the death benefit of the life insurance policy is countable towards your gross taxable estate, which in New York, is taxable when the estate is over $7.16 million. So, if the estate is already at $6 million and there is a $2 million dollar life insurance policy, the total estate will be $8 million and will be taxable.
To protect against this, the ownership of the policy can be placed into an irrevocable life insurance trust (ILIT), which will remove the death benefit from the taxable estate and either eliminate or reduce the amount of tax owed. Removing the death benefit from the taxable estate will enhance liquidity after death to pay estate expenses, often preventing an executor or trustee from having to sell a property or other non-liquid assets. Hasty sales may result in less advantageous terms.
Life insurance is also commonly used for funeral expenses. Some whole or term policies can cover funeral expenses, but there are also policies designed for sole purpose. Funeral policies can be purchased with an insurance carrier or the funeral home of your choice.
Planning with life insurance requires the advice of competent insurance professionals and estate planning attorneys to ensure the most advantageous outcome for you and your beneficiaries.
By Britt Burner, Esq. & Erin Cullen
Britt Burner, Esq. is a Managing Partner at Burner Prudenti Law, P.C. focusing her practice areas on Estate Planning and Elder Law. Erin Cullen is a graduate of the Maurice A. Dean School of Law at Hofstra University. Burner Prudenti Law, P.C. serves clients from New York City to the east end of Long Island with offices located in East Setauket, Westhampton Beach, Manhattan, and East Hampton.
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