Putting life insurance to work
Over the last several months, this column has been addressing and exploring the various forms, as well as needs for, what is probably the most valuable financial tool for your family’s estate planning needs. Life insurance. We have also touched on just a few of its more well-known uses and benefits. No matter what your gut reaction or prejudices may be, it is just too important not to fully understand not only how it works, but more importantly how, through some thoughtful planning, it can be put to work for your family. While we have just scratched the surface, hopefully I have shared enough insight so as to whet your appetite and at the very least, get you to putting some serious thought into the subject and the possibilities. If so, seeking out professional advice to as to your specific needs and wants as well as reviewing current plans (if any) would be the next logical step.
Without guidance from those who have an intimate knowledge, many of the benefits available could be quickly negated to a large degree without proper ownership of your policy(s). This may sound a bit nit-picky from a layman’s perspective. It is nonetheless something that needs to be addressed and done properly in the context of your goals and your plans ultimate success. Yes, there are times when it can be as easy as just having the policy in your name and paying for it directly. But, this is often not always the best approach. You may be thinking, “Just how much can this really matter?”
I will point out a prime example and an all too common error where policies are simply sold rather than recommended and then implemented as part of an overall strategy. This is when large face amount policies are owned individually. The drawback to this is that the entire proceeds of the policy will be includable in the ultimate value of your estate. Therefore, in effect, what you have done in this case is to significantly increase the amount used to tally the federal estate tax on your IRS form 706 that will be due within 9 months of your passing. Most of us would fully agree that we have paid our fair share of taxes to Uncle Sam during our lifetimes and feel little need, let alone desire pay any more than we already have as we depart. Without removing the value of life insurance proceeds from our estates, it is quite possible to end up paying out 40 percent of the proceeds as tax and leaving just 60 percent to be used by our heirs. At least to me anyway, it makes absolutely no sense to pay good money for premiums to be squandered in this manner. And, you end up leaving much less liquidity than you had originally signed up for and the result could cause some serious difficulties to or even de-rail your entire plan.
This is but one example of where it most definitely pays to work with those who possess the knowledge, experience, and tools to help you structure all that you strive to do for your family in best manner possible. Meaning, you are not only getting the most bang for your buck, but you are also doing so within the context of the least amount of hassle and headaches. For yourself now and for your heirs down the road.
In the next column, I will pass along a couple of the most accepted ways in which to own policies designed to benefit your estate plan. They are both straightforward, easily implemented, and manageable approaches.
Dennis Foster has been helping Families with Financial and Estate Planning needs for 25 years. He welcomes comments and questions and can be reached at 605-887-7069 or firstname.lastname@example.org.