Estate Protection Through Life Insurance

Many of us own houses; some of us own businesses; a few own other sizeable assets.   In most cases, we want our heirs to receive these assets intact and in entirety.  Life insurance facilitates estate protection.

How assets are imperiled by an owner’s death

For an astounding real-life example of an estate dwindling to 10% of its initial value, have a look at “How to Manage Life Insurance Assets,” then continue reading this page.

Estate taxes

The old adage states that two things are inescapable: death and taxes; and in this country, the former elicits the latter: estate taxes are among the most onerous taxes we face.  Federal taxes alone usually exceed 50% after the exclusion.

When an estate does not include enough liquid assets to pay off its own taxes, assets must be sold and the revenues used to pay off the taxes.  Thus, businesses, houses, etc. are removed from the estate, and the inheritance available to the intended heirs is considerably less than the decedent left behind.

Estate division

Oftentimes, a decedent has multiple heirs for whom to provide, but his or her assets are insufficiently liquid to be distributed as he or she would wish.  For example, a business owner whose wealth is invested chiefly in his business cannot divide his estate even-handedly among his children without liquidating the company.

How life insurance protects an estate

Paying estate taxes

The obvious role that life insurance plays in estate protection is to provide enough funds to cover the estate taxes upon a benefactor’s death.  (Permanent life insurance is the obvious choice for such a financial plan.)  But there’s more…

Avoiding estate taxes

One of the reasons that life insurance is so appealing is that proceeds from life insurance are generally exempt from taxes.*

All of the money you spend on a life insurance policy reduces what’s left for your estate and so avoids being taxed when you die.  Then when your life insurance policy’s death benefit arrives, it’s as though your money returns, in greater amount, and still avoids being taxed as part of your estate!

A death benefit is a lot of money, and that signifies a lot of taxes avoided.

Keeping assets intact

Just as life insurance proceeds are used to pay off estate taxes, they can provide the funds needed to facilitate the sale/purchase of large assets so that they pass to the intended recipient(s) without depriving any other heir of an inheritance.

For a detailed explanation of this idea, read how life insurance is used to facilitate a buy/sell agreement.

*Chances are, your life insurance proceeds can be entirely tax-free.  See “Being Tax-wise” for details.