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Role of Life Insurance in Estate Planning

by Jeffrey Asher, Estate Planning Expert
September 10, 2015

Question: What role does life insurance play in estate planning?

Answer: Life insurance can play a tremendous role in estate planning.  For example, life insurance can provide liquidity to pay off the mortgage after the death of one of the spouses.  Sometimes called “mortgage insurance”, life insurance can help ensure that the surviving spouse won’t have to deal with the mortgage, or other expenses, following the death of a spouse.
When a family has young, school-age children, life insurance can help the working spouse pay for help with the children and the house in the event the stay-at-home spouse dies.  In reality, the working spouse would not be able to quit his/her job and take care of the family at the death of the stay-at-home spouse.  In that instance, life insurance can help pay for a caregiver, nanny, or other help, for the children and the house, allowing the working spouse to keep his/her job.
Life insurance can also provide liquidity to pay estate taxes for an estate that is cash poor.  For example:  an estate is comprised of valuable real estate, a business, other tangible personal property, but very little in bank accounts, etc.  If there is an estate tax to pay, the family might have to sell the real estate or the business or some of the tangible personal property.  But, if there is a life insurance policy, the family could use that money to pay the estate taxes.
Life insurance can also ensure that children and grandchildren have money set aside for school, weddings, the purchase of a first home, or other big expenses.  As an investment for future generations, life insurance can provide a very large return on investment, when you accept the fact that someone else is going to be the beneficiary of that return.
In sum, life insurance can play an important role in estate planning.  But, that means you must plan for your life insurance.  You may not have known it until now, but the value of life insurance may be included in your taxable estate, thus included in the calculation of estate taxes.  This means that buying life insurance to pay for eventual estate taxes may, in fact, increase those estate taxes.  However, if you create a proper “life insurance trust” and own your life insurance within the “life insurance trust”, your life insurance will not be included in your taxable estate.  Thus, potentially saving thousands of dollars in estate taxes.  That is why it is important to discuss your estate planning, and your life insurance planning, with a qualified estate planning attorney.

Jeffrey Asher is a prominent Trusts & Estates and Elder Law attorney in Westchester County and New York City. Mr. Asher concentrates primarily in the areas of Estate Planning, Probate and Estate Administration, Elder Law, Medicaid Planning, and Special Needs Planning. Mr. Asher provides comprehensive legal services, tailored to meet your specific needs.

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