Life

Life Insurance

The Role Of Life Insurance In Estate Planning

Estate shrinkage is closely related to estate liquidity or the lack of liquidity. A certain amount of liquidity is needed to meet estate settlement costs that cause the shrinkage. Those conside-rations cannot be discussed in a vacuum; they must be applied, in concrete terms, to the estate owner's own situation. By performing an estate liquidity analysis, we can help the estate owner ascertain the liquidity necessary to meet estate settlement costs, the value of his present assets in liquid form, and the cash deficit, if any.

If a cash deficit is found, additional funds must be made available to fund the deficit. Absent sufficient liquidity, the estate owner may well have to liquidate other properties, most likely at a loss, thus frustrating his broad estate planning objectives. To obviate this, the value of life insurance is well known.

The various “types” of life insurance coverage and the “advantages” of life insurance in providing sufficient liquidity to meet estate settlement costs are considered below.

Types of Life Insurance Coverage

Term Insurance
Insurance that provides protection only for a specified period of time. For example 5, 10, 15, 20 years. The premium may be fixed and guaranteed for the entire term of years or fixed for a limited number of years with expected increases at specified dates.

Whole Life
Life insurance which provides coverage for an individual's whole life, rather than a specified term. A savings component, called cash value or loan value, builds over time and can be used for wealth accumulation. see also variable life, universal life, term insurance, and combination plans.

Combination Plans
Life insurance policies that combine features of term life and whole life.

Universal Life
Life insurance which combines the low-cost protection of term insurance with a savings component that is invested in a tax-deferred account, the cash value of which may be available for a loan to the policyholder.

Variable Life
Life insurance for which the amount of the payments is determined by the performance of the underlying investments chosen by the policyholder. Agents selling such policies must be Registered Representatives of a broker/dealer licensed by the NASD and registered with the SEC.

Second-to-Die Insurance
A form of insurance which pays a death benefit only upon the death of the last surviving insured person. Often used by a married couple in estate planning. May be either universal or variable life.

1035 exchange
A tax-sheltered exchange of cash value from one life insurance policy to another. This allows an individual to avoid capital gains or losses in the first policy as long as the second policy is of greater or equal cost.

Single-Premium Life Insurance
Whole life insurance requiring one initial lump sum payment.


Advantages of the Life Insurance Plan for Meeting Estate Settlement Costs

  1. Insurance Avoids Losses from Forced Sale of Estate Assets
    Losses through the sacrificial sale of estate assets to meet tax and other charges will never defeat the estate plans of the person who has provided sufficient life insurance to meet promptly the liabilities his estate will face.
  2. Insurance Meets the Estate Transfer Liabilities Without Borrowing
    Instead of leaving the executor to pay interest on the estate costs, and ultimately pay the principal sum too, the estate owner pays the "interest" in the form of life insurance premiums while he lives and the principal never comes due.
  3. Insurance Avoids the Need for Cash or Liquid Securities
    The sale of securities at death may generate an income tax liability that depletes the proceeds available for estate liquidity. Life insurance avoids this problem.
  4. Insurance Pays the Estate Liabilities FOR the Estate Instead of FROM the
    Estate
    The debt created automatically by virtue of and at the time of death is offset by a credit created by the same event. The life insurance premiums—not the estate assets—will pay the charges.
  5. Insurance Guarantees the Full Amount of Cash Whenever Death Occurs
    The insurance plan removes the uncertainties, which must inevitably surround any other plan of meeting these charges—the uncertainties of the future and of death.
  6. Insurance Helps the Executor Carry Out the Estate Plan
    With the estate free of "encumbrances," with an opportunity to await favorable conditions for the sale of assets, the executor can carry out the estate plan as the owner would have it carried out.
  7. Insurance Enables the Estate to Take Advantage of Tax Discounts
    Instead of burdening the estate with penalties for delayed payment, the insurance plan makes it possible to take advantage of the discounts allowed by some states.
  8. Insurance is an Economical Plan for Meeting Estate Costs
    "Estate" dollars are needed to meet these estate liabilities, and nowhere else can "estate" dollars be purchased as cheaply as under the insurance plan.
  9. Insurance Finances the Estate Liabilities on the Installment Plan
    Income and property taxes are paid in installments year by year. The life insurance plan makes it possible to pay estate liabilities the same way. And if death occurs after only one premium has been paid, the remainder of the charges will be paid by life insurance.
  10. 10. Insurance Is the Only Certain Solution to the Problem of Estate Costs
    Other plans to meet these costs are difficult and uncertain; but the insurance plan, properly arranged, solves the problem —it is a “self-completing program”.