Insurance News Net

Dec 01, 2024

Print Share

The role of life insurance in estate planning and wealth transfer

Life insurance has long played a crucial role in estate planning and wealth transfer. Its evolution has addressed two primary challenges: creating an estate when liquidity is insufficient to support the needs of an insured’s survivors and preserving an estate in the face of illiquidity, which may occur in large estates or business succession scenarios.

 

Life insurance traditionally was viewed mainly as a tool for providing death benefits. Today, it has expanded far beyond this original purpose. It is now often leveraged for its tax advantages, even when there isn’t a significant need for insurance coverage. This expanded role underscores the importance of understanding various strategies and considerations involved in using life insurance. For insurance agents and financial advisors, this represents an opportunity to offer more comprehensive planning strategies and solidify client relationships.

 

Simple needs, simple solutions

 

In the fundamental case of creating an estate, life insurance remains a staple of financial planning. This need should be calculated based on cash flow requirements and the liquidity necessary to meet survivors’ needs. Providing this essential service goes beyond typical investment management and is crucial to holistic estate and financial planning.

 

Estate planning decisions significantly impact life insurance benefits. Initiating these conversations ensures that insurance policy decisions align seamlessly with an individual’s overall financial picture.

 

Life insurance offers flexibility in estate planning that few other financial instruments can match. Policies can be adjusted over time to reflect changing circumstances such as increases in estate value, changes in tax laws or shifts in family dynamics. This adaptability allows for ongoing optimization of the estate plan. A holistic view of the client’s financial situation is crucial when selecting life insurance products. Factors to consider include the duration of coverage needed, the client’s saving and investment discipline, and their ability to fund a policy long-term.

 

Immediate liquidity

 

A crucial aspect of estate planning is ensuring sufficient liquidity to meet various financial obligations that arise upon the death of an individual. These obligations can include estate taxes, outstanding debts, business continuation needs and providing for surviving family members. A life insurance policy held outside the estate with a death benefit sufficient to cover these obligations allows beneficiaries to inherit assets without the need to sell them hastily.

 

Life insurance provides an immediate source of cash upon the death of the insured. This is particularly valuable in estates that are asset rich but cash poor.

 

[…]

Read more: The role of life insurance in estate planning and wealth transfer

[Steve Lockshin for Insurance News Net]