Life insurance can play a significant role in your estate plan as it provides a solution to a wide range of potential objectives. In general, life insurance serves one of two purposes: either to create an estate for your heirs or to preserve your existing estate. Generally, life insurance premiums are not tax deductible but the benefit paid to the estate (probate may apply) or a beneficiary (probate would not apply) is also not subject to income tax.
(For explanations of the insurance solutions discussed on this page, please see our section on Understanding Insurance.)
Some common reasons you may wish to use life insurance include:
While term life insurance can be used to fund a short-term estate need such as paying off an outstanding mortgage or protecting the estate against an immediate shortfall, universal or whole life insurance is the preferred option when the insurance is for estate purposes.
Examples include having a life insurance policy that would cover estate taxes on death (capital gains generated due to the deemed disposition rules) or the ability to leave bequests without the advent of taxes payable.
As with all insurance products that are used for estate planning purposes, a thorough cost-benefit analysis should be performed in order to assess the appropriateness of the strategy.
The amount of coverage you require will depend on your estate objectives and current financial status. As you age, you may find that the level of coverage you require declines or perhaps changes from short-term to permanent coverage. Determining exactly how much and what type of insurance is most suitable for your situation can be best assessed through the preparation of a financial plan and the aid of a life-licensed advisor.