Often times, the mention of life insurance can scare even the most rational folks away. But when it comes to estate planning (and elder planning), life insurance potentially has a significant role to play. The use of insurance will depend on the circumstances, but the idea of life insurance shouldn’t be discarded at first blush.
A lot of folks I’ve spoken with over the years have the common misconception that the only purpose of life insurance is to take care of a catastrophic loss during our younger years, perhaps when we are raising a family. Sure, life insurance at this stage makes complete sense, and a large term policy (20-30 years) is often affordable.
But as we age and approach retirement, life insurance takes on a new role, one with several substantial benefits:
- Tax Benefits: Life insurance passes income tax free, PA inheritance tax free, and possibly estate tax free if structured properly. In Pennsylvania, inheritance taxes are otherwise paid on all other assets generally. Your heirs will thank you for having to pay fewer taxes.
- Liquidity: Heavy on real estate and retirement funds, but short on cash? Liquidity is vital in order to pay off debts, taxes, mortgages, final expenses, etc. Life insurance can provide near-instant liquidity to your heirs and Executor when you pass away.
- Blended Family Balancing: Life insurance is a good tool to use when dealing with a blended family–for instance, you want to leave your second spouse in good shape, leave him/her the house outright, but don’t want to risk your kids from the first marriage getting cut out. Use life insurance to ensure your kids get an inheritance immediately, while taking care of your spouse. This is just one of many examples where insurance can be creatively used to solve a dilemma.
- Death Benefit: If you’re looking to enhance your legacy and maximize the wealth you leave, life insurance can fill that desire. Whole life insurance policies do not expire, unlike term policies. No matter how long you live, and if you run out of money otherwise, there will still be an inheritance for your heirs.
- An Investment: Certain life insurance policies act as an investment, and this combined with the tax benefits, is a sure winner. For folks with mandatory required minimum distributions (RMD’s) that do not need the RMD’s, a popular idea is to use the RMD to fund a life insurance policy, effectively “arbitraging” your estate and instantly creating a larger inheritance (and legacy).
- Long-Term Care Protection: Some life insurance policies offer the ability for you to use the death benefit towards your long-term care costs if needed. This includes home health care, assisted living, and nursing homes. Unlike traditional long-term care insurance, there is a death benefit waiting for your heirs if you never need care. If you currently have life insurance, chances are your policy does not have this type of protection.
- SECURE Act Replacement: In 2020, the SECURE Act passed, and it changed the way inherited IRA’s work. Previously, heirs could take distributions over their lifetime (“Stretch”) but that has been mostly reduced to a 10-year distribution rule. Life insurance can essentially replicate the lifetime distribution scheme that folks greatly desired as a legacy plan for their loved ones.
Now, this doesn’t come without a cost and it isn’t for everyone. But there are many folks out there, perhaps you, where life insurance fits into your plan. If you’ve dismissed the idea before but want to give it another look, let me know and we can set up a consultation to determine the best way to proceed with your plan. Call the office at (215) 706-0200 or email anne@JawAtLaw.com to schedule a consultation.