What Role Does Life Insurance Play in Estate Planning?

Estate planning can ensure that your assets will be distributed to your heirs according to your wishes after you pass away. When you create an estate plan, you will make important decisions about how your property, finances, and personal belongings will be managed and transferred to your loved ones. During the estate planning process, many people will focus on creating a will or establishing trusts. However, life insurance is an often overlooked but crucial aspect of estate planning. An attorney who understands how to address complex legal issues related to estates can provide guidance on the role that life insurance may play in an estate plan.

The Basics of Life Insurance

Life insurance is a contract between the policyholder and the insurance company. The policyholder will make regular premium payments, and the insurer will pay a benefit to the designated beneficiaries after the death of the policyholder. This financial protection can provide much-needed support for surviving family members during a difficult time.

There are two main types of life insurance: term life insurance and whole life insurance. Term life insurance will provide coverage for a specific period (usually 10-30 years), while whole life insurance offers lifelong coverage with an investment component known as cash value.

How Does Life Insurance Fit Into Estate Planning?

Life insurance can play several important roles in estate planning. It can offer benefits such as:

• Providing liquidity: When someone passes away, their assets may be tied up in various forms, such as real estate or investments that cannot be easily converted into cash. If there are immediate expenses or debts that need to be paid off, having a life insurance policy can provide quick access to funds without forcing loved ones to sell valuable assets at unfavorable prices.
• Covering estate taxes: Depending on the size of an estate and the current tax laws, federal or state estate taxes may apply upon a person’s death. These taxes can significantly reduce the amount that can be passed to beneficiaries. Life insurance can help cover these tax liabilities, ensuring that loved ones receive as many assets as possible.
• Equalizing inheritances: If a person has multiple heirs and wants to ensure that they receive equal inheritances, life insurance can be used to balance out any discrepancies. For example, if one child will inherit a family business, while another will receive primarily liquid assets, a life insurance policy can provide additional funds to the child receiving fewer tangible assets.
• Protecting business interests: For business owners, life insurance can be an essential tool for protecting their interests in case of an untimely death. A well-structured policy can provide the necessary funds for buyouts or other arrangements that allow the business to continue operating smoothly.

The Importance of Regularly Reviewing Your Life Insurance Policy

Estate planning is not a one-time event. Instead, it is an ongoing process, and your estate plan should be reviewed periodically as circumstances change. This includes regularly reviewing your life insurance policy to ensure it will meet your current needs and help you achieve your goals.

Life changes such as marriage, divorce, the birth of children or grandchildren, significant increases or decreases in wealth, and changes in health conditions may require you to make adjustments to your coverage amounts or beneficiary designations. By keeping your life insurance policy up-to-date with these changes, you can ensure that it continues to serve its intended purpose within your overall estate plan.

Contact Our Naperville Estate Planning Attorney for Life Insurance

If you are considering incorporating life insurance into your estate plan, or if need to determine the best steps you can take to protect your assets and ensure that they can be passed on to your beneficiaries, the Gierach Law Firm can provide the guidance and legal help you need. Our DuPage County estate planning lawyer will work with you to make sure your estate plan meets your family’s needs. Contact us at 630-756-1160 to set up a consultation today.