Life Insurance

The Role of Life Insurance in Estate Planning

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Life insurance and estate planning go hand in hand. Many people remember to create a will and add beneficiaries for investment accounts and other assets. But they often underestimate how powerful of a resource life insurance can be in leaving a lasting legacy that impacts your family, friends, and charitable organizations.

Here are five life insurance strategies for estate planning that maximize both the amount of wealth you leave behind, as well as the amount you protect from taxes.

Avoid estate tax

Life insurance is important at any age, whether you’re a primary breadwinner, a stay-at-home parent, a caretaker, or a retiree. Not only can a policy provide a death benefit to those you leave behind, but life insurance can also create an immediate estate. And in the eyes of the IRS, that cash benefit is typically separate from the rest of your estate you leave behind, which could include cash savings, investments, and other assets. 

All of those assets may be subject to a federal estate tax (and potentially a state estate tax, depending on where you live). Life insurance is typically separate from your estate, giving your heirs tax-free income to use however they please.

Cover your final expenses

Final expense insurance is a type of permanent life insurance that covers costs like a funeral and burial. After all, the average funeral in the U.S. costs between $7,000 and $10,000. That can eat up a huge chunk of savings no matter what stage of life you’re in, whether you have a young family or have already retired. 

A smaller policy dedicated solely to final expenses could be a good option for older individuals who don’t want to pay high premiums for a huge policy, especially if they have other assets to leave behind for their family. But a traditional term or whole life insurance policy can also give your beneficiaries the cash they need to help cover those final expenses. They can gauge the best way to budget and use the funds, depending on other existing expenses left behind.

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Provide quick financial support

In order to truly use life insurance as an estate planning tool, you must calculate how much coverage you need. This varies depending on where you are in life. Maybe you have a large mortgage you’d like to pay off for your family, or want to ensure your retired spouse still lives comfortably beyond your Social Security check. Or maybe you want to cover any medical expenses that may be weighing on your family.

One of the greatest benefits of using life insurance for estate planning is that funds are disbursed quickly after your passing, especially compared to other assets that could go through the estate’s executor. The timeline varies depending on the insurance company, but it normally takes around 30 days to pay out the death benefit once a claim is filed. That means your family could have plenty of time to keep up with the bills and pay for final expenses without accruing late fees.

Avoid probate

Another major benefit of life insurance in estate planning is that the death benefit can completely avoid the probate process. Depending on your state and the size of an individual’s estate, an estate may go through probate, even when you have a will and an executor in place. The local court oversees the process to make sure all of your assets are disbursed properly. While this is a good thing to make sure your intentions are properly executed, it does slow down the amount of time it takes to get assets distributed to your family.

A life insurance death benefit skips probate and is executed directly between your beneficiary and the life insurance company. Plus, probate proceedings are typically made public, so anyone can see who received an inheritance. Life insurance policies, on the other hand, remain private.

Provide inheritance for all children 

A final life insurance strategy for estate planning is typically intended to leave behind funds for your grown children, particularly if you’re in a blended family. Oftentimes, you want to leave behind most (if not all) of your assets to your spouse, especially if you want to make sure they have enough to live off of in retirement. This, however, may cause a problem for blended families where each spouse has his or her own children separately.

When the surviving spouse passes away, without proper planning, their remaining assets generally go to their surviving children – not those of the spouse who passed away first. You can use a life insurance policy to pass on funds directly to your children, then leave other assets to your spouse. It’s a win-win that gives you peace of mind that you’re truly leaving something behind for everyone you love.

Life insurance is a smart estate planning tool to keep in your back pocket. It can provide solutions to a number of issues, whether it’s covering your final expenses, or avoiding the bureaucratic red tape that comes with the probate process.

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The information and content provided herein is for informational purposes only, and it is not to be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Any testimonials, opinions, advice, product or service offers, or other information or content made available here by third parties are solely those of their respective providers and not of Ethos which does not guarantee the accuracy, completeness, reliability or usefulness of such. You should consult with an attorney or other professional to determine what may be best for your individual needs. Ethos is not a fiduciary and does not make any guarantee, warranty, or other promise as to any results that may be obtained from using our content. To the maximum extent permitted by law, Ethos disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses.


Is life insurance part of an estate?

Life insurance is not typically part of an estate plan, but is a great thing to include alongside an estate plan to help protect your loved ones. When purchasing life insurance, you designate a beneficiary and can help guarantee a direct payout, streamlining financial support without the delays associated with probate. This distinction allows for a more efficient and timely transfer of funds to intended recipients, offering a straightforward process during a challenging time.

What are the benefits of life insurance for an estate?

Life insurance can provide prompt liquidity, safeguards assets, and negates the necessity to sell valuable property for estate-related costs. This helps to ensure efficient financial support for beneficiaries, allowing the estate to maintain its integrity without resorting to asset liquidation.

What is the beneficiary of an estate in insurance?

The life insurance beneficiary is the appointed recipient, helping to ensure financial assistance for loved ones following the insured's passing away. This designated individual receives the policy's benefits, offering crucial support during a challenging time.

Does life insurance go to the estate or beneficiary after death?

Life insurance funds go directly to designated beneficiaries, avoiding the complexities of probate and helping to ensure quick financial assistance. This streamlined process expedites the distribution of funds to loved ones, providing immediate financial support during a challenging time. The direct payout to beneficiaries is a key advantage, simplifying the financial aspect. If there are no surviving beneficiaries at the time of the insured’s death, the death benefit will go to the estate of the insured.

Can I make my estate the beneficiary of my life insurance?

Yes, you can name your estate as the beneficiary, but consider the impact on fund distribution efficiency and involvement in the probate process. Evaluate the pros and cons carefully for informed decisions.

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