Life insurance can be a powerful estate planning tool. There are several roles it can play in easing the burden of your passing on your loved ones. While many consider life insurance to simply be an income replacement when a loved one passes, there are other ways it fits into an estate plan:
1. To pay expenses while an estate is in probate.
Since life insurance pays benefits to a named beneficiary, it avoids probate, and therefore the funds can be accessed more quickly than property that must be probated. Probate is the legal process that ‘settles’ an estate, and it can tie up property for many months, but life insurance proceeds pass outside of this process unless one designates his or her estate as the beneficiary of the policy.
2. To pay funeral costs, debt and estate administration costs.
Life insurance policies can be used to pay the costs of funerals, as well as probate fees and other debt of the deceased when an estate may have assets that are not liquid, such as real estate.
3. To create a life insurance trust.
An irrevocable life insurance trust, or ILIT, can be a powerful estate planning tool. An ILIT is a holding device that owns your life insurance policy for you, removing it from your estate for both tax and creditor purposes. As its name suggests, the ILIT is irrevocable, which means once you have created this trust and funded it with an insurance policy, you may not take the policy back in your own name. But you can closely control many other aspects, such as naming the beneficiaries, the terms of the payment of benefits as well as choosing the trustee to manage the trust.
While a life insurance policy can have many advantages within an estate plan, it is important to work with an experienced and qualified estate planning attorney to ensure that it properly coordinates to other aspects of your plan.