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Life Insurance: A Component of any Estate Plan

by User Not Found | Apr 03, 2015

by Tom McGirr


Life insurance can play many roles in an estate plan whether you have a small estate or a very large one. Yet, it is often overlooked or misunderstood. Let’s explore a few ways life insurance can help you and your family.

Protecting Your Spouse or Partner
Young couples starting off life together often do not have a lot of extra money to spend, but having some life insurance can be extremely important. Often they have purchased their first home and have a mortgage. To protect each other, they should have enough insurance to cover at least a good portion of that loan in case one becomes incapacitated or dies prematurely. Mortgage cancellation policies are often proposed for this purpose, but they often are overpriced and may not be the best option. We recommend you consult with an advisor that sells all types of insurance before choosing mortgage cancellation insurance. You will likely get more bang for the buck.

Protecting Your Children
If you anticipate having children, consideration should be given to purchasing additional life insurance to insure ample funds are available for their care should the unthinkable happen. Recent statistics indicate that the cost of raising a child to age 18 is approximately $250,000 and that number does NOT count the cost of college!

Failure to address this potential need can create significant economic hurdles for your children and put an undue financial burden on any family member who volunteers to serve as their legal guardian upon your passing. The good news is that there is a wide range of reasonably priced policies to address this critical planning need. Our advisors at CB Financial Services can present you with lots of options from multiple companies to insure you are getting the right policy for the right price.

Make sure your estate plan has contingent trust provisions for your kids should Mom and Dad die prematurely. Columbia Bank Trust and Investment Services can serve as the trustee for your children insuring your estate assets are managed for their benefit. Remember to name that trust as the contingent beneficiary for the life insurance policies after your spouse. If you name the kids as beneficiaries, the funds would go to a conservatorship account until they reached 18 and at that point, the funds would be disbursed. That is probably not a good idea unless you happen to own the local Porsche dealership!

Protecting Your Investments
While most folks think of insurance solely as a way to address an unexpected crisis, some insurance products can play a role in your overall investment portfolio. Life insurance annuities can have guaranteed death benefits while providing current income and/or future growth. Most annuities have income tax deferral features. As with any investment, diversification is important and you do not want to have all your eggs in one basket, but that being said, insurance can be one or two of those eggs.

As your estate grows, so does the likelihood of death taxes. In Oregon, the threshold is only $1 million. In Washington, estates over $2 million are taxable. While Uncle Sam does not start in until the estate reaches $5.4 million, the tax rate is at 40% thereon. Death taxes are due 9 months after death. Selling assets to pay taxes may result in a fire sale and negate the desired distribution plan.

Life insurance offers a way to pay those taxes with leveraged dollars. However, it is very important to give consideration as to who owns the policy. If you own it, then the face amount is included in your taxable estate. Example: If you owned a $1 million policy and the estate tax was 40%, you just INCREASED your taxes by $400,000 effectively reducing the life insurance proceeds to $600,000. If you have the insurance owned by a special life insurance trust, the insurance proceeds are NOT included in your estate and can be used to pay taxes or pass on to the heirs without estate or income taxes.

Finally, if you are doing business succession plan and have a buy-sell agreement, consider funding it with insurance. The insurance will lessen the financial strain on the buyer by reducing the cash flow draw from the business and give the buyer peace of mind as he has money in the bank rather than a long-term contract and the possibility of default.

Columbia Bank’s Wealth Management professionals are ready to assist you with your estate planning, investment, private banking and insurance needs. Contact us today.


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