Creative Uses for Life Insurance
Slightly more than half of Americans (52 percent) have a life insurance policy,1 and about 4 in
10 adults say they do not have enough life insurance coverage.2 That leaves about 100 million
Americans uninsured or underinsured when it comes to carrying life insurance.3
Because life insurance provides funds for surviving loved ones upon the insured's death, it can
play an integral part in estate planning. But beyond the traditional uses for life insurance such as
paying off debts and replacing lost income, there are other ways policyholders can use life
insurance for themselves and others throughout every stage of life.
Increased Interest in Life Insurance
The COVID-19 pandemic was a wake-up call for many Americans to prioritize their health and
prepare for the unexpected. It led to a surge in estate and business succession planning and an
increased interest in purchasing life insurance.
Even as the pandemic fades, interest in life insurance was at an all-time high last year
according to survey data from LIMRA and Life Happens, two nonprofit industry trade
associations. Younger Americans expressed the greatest desire to buy life insurance coverage
within the next year, with 47 percent of Gen Z adults and 49 percent of millennials -
representing 53 million adults - saying they either need to purchase life insurance or increase
their coverage.4
Lesser-Known Life Insurance Benefits
Clients typically think of life insurance as a tax-free lump sum that goes to their significant other
to pay miscellaneous expenses at their death or to provide for minor children.
While these are the main reasons people purchase life insurance, they can make a policy seem
less beneficial, and the payments more burdensome later in life when kids become adults and
retirement savings are large enough to absorb financial shocks.
But life insurance can do more than pay out a death benefit. That benefit can be put to some
creative uses as well. Lesser-known ways to use life insurance include the following:
- Funding a trust. Naming a trust as the beneficiary of a life insurance policy, rather than
naming an individual beneficiary or beneficiaries, can provide added estate planning
flexibility. Examples of trusts that can be funded with policy proceeds are a revocable
living trust, an irrevocable life insurance trust, a special needs trust, and a pet trust.
Trusts can be used to manage payouts to beneficiaries (human and nonhuman) and
have the added benefit of avoiding probate. Another potential way to use trusts for life
insurance planning is to split the death benefit from the policy between a trust for the
surviving spouse and a trust for children from a prior relationship in blended family
situations.
- Paying taxes and debts. For the most part, your debts do not just disappear when you
die. Additionally, death can trigger estate and income taxes that, if not planned for, can
impose large burdens on your heirs. Life insurance can be acquired so that the death
benefit can be used to pay taxes and other debts of the deceased owed upon death. By
using the death proceeds to pay the taxes and debts, the decedent's accounts and
property do not have to be liquidated to come up with the money. If the decedent owned
illiquid assets such as valuable collectibles, artwork, a thriving business, or a family farm,
having a source of cash to pay the taxes and debts can save the trouble and heartache
of parting with these assets just to satisfy a financial obligation.
- Equalizing inheritances. Sometimes people have illiquid assets (e.g., a family business
or home) that they may want to go to a specific child rather than to all the children
equally. However, people usually want each child to inherit the same overall value. If
there are no assets or few liquid assets in the estate, it may be challenging to divide
assets equally without selling them. This challenge can be solved with a life insurance
policy that pays beneficiaries who do not receive the specific illiquid asset the amounts
necessary to balance their inheritances.
- Charitable donations. Many people express regret on their deathbed that they worked
too much and did not do enough to help others. Others have been active philanthropists
and want to solidify their legacy with one final charitable gift. A new or existing life
insurance policy can be used, possibly in combination with a charitable trust, to donate
money to charity. However, in each case, it is best to communicate with the charity to
ensure all applicable procedures are followed.
- Paying final expenses. Outside of taxes and creditor claims, a client should have
money set aside to pay for final expenses such as funeral and burial costs, which can
easily run $8,000 to $10,000 or more.5 A specialized type of life insurance policy, known
as final expense life insurance, can be purchased to ensure survivors are not faced with
unexpected death expenses.
How to Fit Life Insurance into a Client's Plans
When addressing a client's goals and needs, it can be a mistake to silo financial planning,
retirement planning, wealth management, and estate planning. Viewing them as fitting into a
comprehensive plan can unlock creative strategies that work synergistically to provide greater
value to clients and new revenue streams for advisors.
The 100 million Americans facing a life insurance coverage gap points to a large unmet advisory
opportunity. Whether a client is buying coverage for the first time, purchasing new or additional
coverage, or looking for more value from a policy they bought years ago, life insurance can
benefit clients of all ages, lifestyles, and circumstances.
Please contact us to discuss uses for life insurance beyond a simple lump sum payment to
beneficiaries and how life insurance can fit into an estate plan.
MEREDITH | PC
4325 Windsor Centre Trail
Suite 400
Flower Mound Texas 75028
214-513-1013
This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.
You have received this newsletter because I believe you will find its content valuable. Please feel free to Contact Me if you have any questions about this or any matters relating to estate planning.
