How does life insurance play a key role in estate planning?

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How does life insurance play a key role in estate planning?

There are five ways life insurance plays a crucial role in estate planning.

With life insurance, you can ensure that your loved ones will have the means to carry on after you. However, life insurance can play a crucial role in estate planning and can also assist with asset management and distribution. Passing on an estate can include several complications depending on your situation and the number of assets.

Using life insurance wisely can assist with the following:

  1. Final charges
  2. Estate taxes
  3. Estate equivalence
  4. Business buyout 
  5. Special purposes
  6. Probate avoidance 

Here’s a closer look at how life insurance plays a crucial role in estate planning.

Final charges for life insurance in Estate planning

Your loved ones might incur some costs after your passing. These may consist of the following:

  • Funeral costs – According to a trade organization, the average funeral costs over $7,000. The price goes even higher when you factor in the price of a burial vault.
  • A few debts – When you pass away, your estate will be responsible for paying your debts. Therefore, those obligations can lower the number of assets left over for your heirs.
  • Taxes on final income – The government demands payment of any unpaid taxes from the past and taxes due for the year you pass away.

In addition to helping pay for these expenses, life insurance can provide a stream of money that beneficiaries can utilize to pay other debts without using up estate assets or resources. This may be highly advantageous if the estate owns real estate or other assets that can’t be rapidly or readily converted to cash.

Estate taxes

Depending on the size of the estate, there may be taxes due on an inheritance. How much and at what rate has been somewhat of a moving target over time?

Estate equivalence

What if there are several heirs to an inheritance, but the assets can’t divide up so simply?

For illustration, imagine a mother passing away and leaving her two sons and daughter a beach house worth $600,000. The sons live far away and want to sell it immediately. The daughter desperately wants to keep it. To compensate the sons — and avoid a family rift — the daughter would have to pay them $400,000. What if she doesn’t have the money?

Business buyout

If you are a business owner or co-owner, your passing could present challenges for those continuing the business after you, whether family or business partners. Proceeds from a life insurance policy can help ease that situation.

Many partnerships and new businesses create plans to deal with the loss of a person whose knowledge or skills are essential to the project. This is frequently handled by creating a buy-sell agreement, which is a contract that specifies how the share of a departing founder or partner in a company should be sold or transferred to other stakeholders. Life insurance is often used to fund such an agreement.

Particular purposes: Divorce, child support, more

Additionally, life insurance proceeds can be earmarked for a specific purpose, like divorce obligations for spousal or child support. Or, death-benefit proceeds can be dedicated to continuing support for a loved one, like a minor, a child with special needs, or an aging adult.

One uses the creation of the trust to address these directed purposes. These kinds of agreements place assets under the care of a trustee for the benefit of a beneficiary. For example, one can fund the trust with a life insurance policy for a specified objective, such as maintaining alimony payments, providing financial support for a child until a certain age, or covering the costs of caring for a loved one with special needs.

There are numerous trusts, each with benefits and drawbacks regarding taxes, probate, and other issues. Many choose to speak with financial experts about their possibilities and how they might fit into their unique situations and aspirations.

Probate avoidance

One settles a decedent’s assets by distributing them through the probate process. Even when a will and comprehensive estate plan is in place, it is a complicated procedure.

However, if there is payment to the insurance to a designated beneficiary, then probate should be avoided. Additionally, whereas the probate process is public, the price can remain private.


These are some of the most typical applications for life insurance in estate planning. However, countless additional uses are as diverse and wide-ranging as every person’s unique circumstances and objectives.

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