8 Reasons You Should Add Life Insurance to Your Estate Planning

Life insurance can add several benefits to your estate plan and cover your bases more thoroughly. Rawpixel.com/Shutterstock

Many people tend to look at life insurance as an unnecessary extra expense. They may not understand that life insurance can add several benefits to their estate plan and cover their bases more thoroughly.

Here are eight reasons to consider adding life insurance to your estate plans.

1. It Can Enable Your Spouse and Family to Survive

Settling an estate usually takes eight months or more. MoneyGeek states that federal estate taxes, and some states with estate taxes, require paying them within nine months.

If the estate settlement takes longer than expected, your spouse may need to sell the property and other assets to pay the taxes. Because they are usually paid quickly, life insurance proceeds can prevent it.

During that time, your spouse and any children still at home need a way to meet their daily expenses. Before settling the estate, they are still responsible for their daily needs, school bills, mortgage or rent payments, taxes, medical expenses, utilities, vehicle upkeep, and more. Proceeds from the policy will enable them to maintain their usual standard of living.

2. It Can Pay Off Your Debts

You can use life insurance proceeds to pay off any remaining debts at the time of your death. The money can pay off a mortgage or two, credit card debt, car loans, building costs, hospital bills, and more.

3. It Can Be Used as a Loan

When you need extra money to pay a bill, you can borrow some of the cash value from a whole-life policy if you have had the policy for several years. You do not have to repay the money, but you are charged interest, which reduces the face value. Taking out all the available cash value will cancel the policy.

4. It Can Balance Your Assets

You may want to give a large portion of your estate to one of your heirs, such as real estate, which would not leave a similar amount to another child. Yet, you feel you need to give roughly equal amounts. Schwab says that life insurance can make up the difference.

Buying a life insurance policy large enough to equal the value given to the other child or children can help them be happy—and not apt to challenge your will. Since a life insurance policy does not go through probate—if you have named beneficiaries—it could be an ideal solution.

5. It Can Reduce Your Estate Taxes

Depending on where you live, your estate may need to pay federal (if it is more than $13.61 million) and state estate taxes. If a life insurance policy does not have named beneficiaries and it goes to the estate, you will owe taxes on that money.

An alternative method Prudential suggested is creating an irrevocable life insurance trust (ILIT) and buying a life insurance policy to put into the trust. The trust will name the beneficiaries, and the money goes to them after you die.

Prudential also warns that if you take an existing life insurance policy and put it into the trust, there is a three-year lookback period. If the policy is paid out within three years of putting it into the trust, the money gets counted as part of your estate.

6. It Can Meet Immediate Business Needs

Forbes mentions that if you own a business, the insurance proceeds can enable the business to continue. The money can be used to hire new personnel, buy supplies, pay off loans, etc. It can also prevent your spouse from having to sell it quickly for the bottom dollar. If you have a partnership, the proceeds can buy out your portion.

7. It Can Help Pay for Long-Term Care

Insurance policies for long-term care can be rather expensive. There is also the issue that it is unknown if you will ever need it.

Some life insurance companies offer long-term care riders on the policy. NerdWallet says these riders use some of the face value to cover long-term care needs but may not pay as much as a regular long-term care policy. If you do not need it, you still have the benefit of being able to give your heirs the full face value of the policy.

8. It Can Cover Your End-of-Life Costs

While no one knows how they will die years ahead of time, incurring a lot of medical bills before they pass is common. There are also funeral and burial expenses. Life insurance can help cover these costs, so that your spouse and other dependents are not kept in debt for years trying to pay them off.

An alternative would be to buy a burial plot and coffin in advance and pay fees to open the site. Or you could purchase burial insurance.

How to Buy Life Insurance

There are two basic life insurance policies: term and whole life. All other forms add some frills.

Term life insurance is purchased for one to 30 years. The cost increases each time you renew it. It gets very costly as you approach your senior years.

A whole-life policy costs considerably more, but provides a level premium and can last your life. It builds a cash value over time, which can be sizeable, depending on the size of the policy.

Because of the cash value aspect, estate-planning purposes require a whole-life policy. As you plan on how much coverage you might need, consider your income, the needs of the family in the next few years, business needs, and possible healthcare costs. Get several life insurance quotes before buying because costs vary considerably. An estate planning attorney can advise you on the best ways to fit life insurance into your situation.

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