Life insurance has helped many people provide for their loved ones in their envisioned way. Part of protecting your loved ones when you pass away is making sure that you have a proper estate plan in place. Another aspect is making sure that the right amount of money is available to carry out your goals for their futures. As an estate planning attorney in Austin, I advise clients about their life insurance needs as part of a comprehensive life and legacy plan.
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Many different types of people can benefit from having adequate life insurance coverage. Here are a few of the most common groups:
Suppose you own a business and want to leave it to some but not all of your children. A life insurance policy can provide cash to the children who are not receiving an interest in the business. Parents can thus equalize the value of each child’s inheritance. A surviving business partner can also use life insurance proceeds to buy the deceased partner’s interest from their family. Thereby, the deceased partner’s loved ones get vital funds. And, with sufficient insurance, the surviving partner does not take money from the business or their own pocket. The company can therefore continue uninterrupted.
A life insurance policy can help pay for the expenses of raising children after their parents are deceased. This reduces their guardian’s financial burden. Life insurance can also provide for a surviving parent if the deceased parent was the family’s primary source of income.
A life insurance policy can provide money for continuing care for family members with long-term disabling health conditions. However, suppose they are currently receiving or eligible for government assistance. In that case, you must exercise additional caution when providing them with funds from life insurance, so the family member is not disqualified from receiving those benefits.
A life insurance policy is an effective way to fund your charitable endeavors. It allows you to maintain other accounts or property that you may want to leave to your loved ones. Life insurance can enable you to leave a more significant gift to the charity at your death than you would have if you had been making lifetime contributions.
If your total asset value is more than the lifetime exclusion amount at your death, estate tax may be due. Life insurance can provide your loved ones with cash to pay the tax. This cash can be beneficial to pay the taxes if you have illiquid assets.
If you have a life insurance policy, you must complete the beneficiary designation according to your overall wishes. Below are some examples of the results when you list certain classes of beneficiaries.
Suppose you do not fill out the beneficiary designation before you die. In that case, the death benefit will distribute according to the policy agreement’s default rules. These may give the proceeds to your spouse or heirs, as defined by the plan agreement or applicable state law. Alternatively, in default, the proceeds may distribute to your estate. This will require your loved ones to go through the costly, time-consuming public probate process.
Depending on your family situation, you may be inclined to leave the money to your minor child or grandchild. You could do this efficiently through life insurance. However, a minor cannot legally own or control their money. Therefore, a court would have to select someone to hold the funds on the minor’s behalf until they reach majority. At that time, the agent will turn the funds in full over to the beneficiary. The very young adult beneficiary would spend it however they choose with no protections.
While an adult can receive the money from the life insurance policy immediately, this solution may still not be ideal. After the beneficiary gets the money, they can spend it on whatever they choose. But a divorcing spouse could take some or all of it. Alternatively, a creditor could collect it for an outstanding debt or judgment. Depending on the individual, the money may not last long.
With this option, you direct the life insurance proceeds to pay to the trustee of a trust. You instruct the trustee to distribute the funds according to your intentions within the trust. You can protect the funds from creditors, divorcing spouses, and potential financial predators. As such, a trust provides you with greater assurance that the beneficiary will benefit from the life insurance proceeds.
For the philanthropically inclined, naming a charity as a beneficiary means that the death benefit will immediately pay to the charity upon your death. This timing can be helpful if the charity needs the money quickly or for a large project.
Schedule a strategy session today to discuss your estate plan. If you already have life insurance, we can review the beneficiary designation to make sure it fits your ultimate goals. If you do not have life insurance, we are happy to provide you with some referrals. We are also available to meet with you and your other advisors. Together we can ensure that your comprehensive financial and estate plans are working as they should.
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14425 Falcon Head Blvd
Austin, TX 78738