No matter your net worth, life insurance is one of the best estate planning tools. For clients with low solvency, life insurance provides a safety net. It ensures that if your time comes sooner rather than later, you will be able to take care of the loved ones you leave behind. Clients with a very high net worth find life insurance useful because it provides a lump sum of cash upon death. It is typical for those clients to have a lot of personal and real property, but little cash on hand. This means that upon the death of the individual, some of those assets must be sold quickly in order to provide cash to pay estate taxes, executor fees, and other administration fees.
In either case, life insurance is shielded from creditors. This means that even if you die with $500K of debt, your $500K life insurance will jump those creditors and land in the pockets of your loved ones. An estate planning attorney will recommend you do not make your life insurance payable to the estate, because this might subject the proceeds to creditors.
Life insurance will always pass income tax free, and can pass estate tax free depending on how you set it up. For example, one way to avoid estate taxes is to give away all incidents of ownership during your lifetime. This means that although you can continue to pay the premiums, you do not have any control to change the beneficiary, or how it is paid out. You basically give up all rights to control the policy.
The bottom line is that this insurance policy will 1) avoid creditors; 2) Avoid income taxes (and possibly estate taxes); 3) Avoid probate; 4) allow you to retain control (but then it is subject to estate tax); and 5) provide cash to administer your estate and pay taxes. A good estate plan will almost always incorporate some form of life insurance into the mix. If your estate planning attorney has not setup a life insurance plan, you should ask why. Click Here to see why you should find an attorney and the common goals of estate planning.