We work hard to gather wealth to provide financial security for our loved ones, however there are unforeseen events that could hinder or frustrate our plans for the future, making it essential for us to build reserve against unanticipated events. One of such reserves could be taking a life insurance policy or establishing an estate plan.
Life insurance is a widely known concept, at least to those who have thought about the future at some point and who have assets to leave behind for family members.
A Life Insurance is a contract between a person (the “insured/policy holder”) and an insurance institution (the “insurer”), where the insurer promises to pay a named beneficiary, a sum of money (the “benefits”) upon the death of the insured. Benefits could also be paid on a life insurance policy that is triggered by terminal illness or a permanent disability. A payment (the “Premium”) is usually made to the insurance institution monthly or as otherwise agreed, for the maintenance of the life insurance policy.
Now, while life insurance may be used to provide for the family on the death of its benefactor as described above, the proceeds under a life insurance policy may also provide immediate cash for estate taxes. Therefore, to understand life insurance in estate planning, estate planning and trusts, of which people are much less aware of, must also be explained.
Simply put, estate planning is the plan for disposal of an individual’s estate according to his/her wishes before or after death. Estate planning is administered in several ways but most commonly through Wills and Trusts.
A Will is simply a written declaration or statement by a person (the “Testator”) naming one or more persons, human or entity, as beneficiaries of his/her property after death. Another person or persons are also named in the Will as executors of the Estate with property to be distributed after the Testator’s death.
A Trust on the other hand is a legal arrangement where an individual (the “Settlor”) gives control of his/her property to another, advisably an institution (the “Trustee”) by transferring legal title of his/her assets to the Trustee, for the benefit of beneficiaries to the Trust.
Benefits of Life insurance in Estate Planning
Life insurance in Estate Planning is particularly beneficial in the following instances:
• Benefits of the life insurance policy may be useful to pay funeral and associated expenses. This is in view of the difficulty which may be encountered in connection with liquidating the assets of the Estate in time to meet such expenses. However, Trusts are more useful in achieving this benefit due to long probate process involved in Wills.
• Secondly, the benefits under a life insurance policy can be used to cover the costs of settling an Estate. Such costs may be a combination of costs of paying assessed estate taxes and legal fees associated with distributing Trust assets and obtaining probate for Wills.