There are people that do not have estate plans because they have limited resources, and they don’t think that it is worth the trouble. If you do not have anyone depending on you financially, this may make sense on the surface, but there are other reasons to have a basic plan in place.
However, if you are married, the situation is different. The responsibility you have to your family is even greater if you have a child or multiple children.
You can’t create money out of thin air to make sure that your family would be okay financially if something happens to you, but life insurance can provide a solution.
Whole Life Insurance
Whole life insurance is one of the two forms of coverage that are most widely utilized. This is considered to be permanent life insurance, because it never expires.
When you pay the premiums, the policy accumulates cash value, and this can be viewed as a tax-deferred savings account of sorts. There is a rate of return that is locked in from the start, and it is variable depending on the details of the policy you choose.
If you have this type of insurance policy, you can take withdrawals when the cash value reaches a certain point, and you can take a loan against the policy. The policy is essentially an investment instrument that will pay a death benefit, and the premiums are relatively significant.
Term Life Insurance
You may want to protect your loved ones without making a costly long-term financial commitment. Under these circumstances, you can opt for term life insurance.
As the name would indicate, the coverage remains in effect for particular prescribed term. The cost of the premium will remain consistent over that period of time. A younger person will pay lower premiums than an older counterpart.
To give you an idea, the average cost for a 20 year term policy with a $500,000 death benefit purchased by a 35-year-old man that is residing in Los Angeles is between $28 and $45 a month.
It should be noted that the gender and the health of the applicant is factored in when the cost of the premium is being determined.
Irrevocable Life Insurance Trust
While we are on the subject of life insurance, we should touch upon the value of a legal device called the irrevocable life insurance trust (ILIT). For the most part, these trusts are used by people that are exposed to estate taxes.
There is a federal estate tax that people all over the country can be impacted by, and there are a dozen states with state-level estate taxes.
The exclusion is the amount that can be transferred before the tax would kick in. On the federal level, the exclusion is $11.7 million, and there are state-level exclusions that are as low as $1 million.
Someone that is concerned about an estate tax could create and fund an ILIT, and the trustee could use the funds to purchase a life insurance policy. It is also possible to convey an existing policy into an irrevocable life insurance trust.
If you create an ILIT, the trust would be the beneficiary of the policy, and you would name a beneficiary of the trust. After your passing, the proceeds would be transferred to the trust, and the trustee could distribute assets to the beneficiary.
The assets in the trust would not be part of your estate, so this can be an effective part of an estate tax efficiency strategy.
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