A Few Non-Tax Reasons For Using Insurance In Estate Planning

Often life insurance is used to offset estate taxes when an individual with a large estate dies. There are actually many non-tax reasons to use life insurance in estate planning whether or not an individual has a large estate. Here are a few non-tax reasons for using life insurance in estate planning:

• Special Needs Planning (e.g. fund a special needs trust for a special needs child)



• Estate Equalization (e.g. ensure each child has an equal inheritance when an estate owns an asset that is not easy to divide equally, like a business)



• Charitable Giving (e.g. money set aside to be given to a favorite charity of the deceased person)



• Special Planning or Purposes (e.g. fund children's education or other specific purposes)



• Maintain Family Assets (e.g. family cabin expenses)



• Income Replacement When Children Are Minors (e.g. one spouse dies and children are still minors)



• Income Replacement For Children Of Dual-Income Households (e.g. spouse dies second income is required to survive financially.)



• Business Exit Strategies (e.g. buy-sell agreements)



• Enrich Estate Upon Death (e.g. wish children to have a larger inheritance)



• Pay Outstanding Debt Still Owed After Death (e.g. pay off mortgage on home)

As mentioned above, there are a lot of non-tax reasons to include insurance when doing estate planning.

Do Your Assets Match Your Estate Plan and How Healthy Are Your Assets?

We have found in reviewing many estate plans that a person's assets are not always coordinated with their estate plan thus undermining the plan and the effectiveness of the assets in fufilling the plan.

For example, parents might instruct their executor upon their deaths to set aside money for their children's educations. The parents' assets might consist mainly of retirement accounts. In following the estate plan, the executor would need to liquidate the retirement accounts to pay for the children's educations. In liquidating the retirement accounts, the parents' estate would be faced with paying potential penalties and forced taxes. Careful planning would enable the parents to fund educations while still preserving their retirement account tax status.

As another example, consider an individual who wants his estate to go to his children from his first marriage and still provide for his new spouse. When the assets are reviewed, the estate is real estate rich but cash poor. Without careful planning, the individual's executor might find it impossible to meet the needs of the surviving spouse while preserving the children's interests in the real estate.

We have also found in reviewing clients' assets that many clients' assets have become old and stale. For example, an insurance policy over five years old should be reviewed and possibly updated to take advantage of better premiums and better coverage. The same goes for investments. It is important to have your investments reviewed in order to ensure they are performing at their optimum capacity.

Here at Hughes Estate Group, we make sure our clients' assets match their estate plans. We also offer free evaluations to check the health of clients' assets. Getting estate planning documents in place is crucial. It is just as important to make sure your assets fit your plan and each asset is healthy to meet the needs of your plan.

AARP - Caveat Emptor

Via the Consumerist, Bloomberg reports today in AARP's Stealth Fees Often Sting Seniors with Costlier Insurancethat AARP collects hundreds of millions of dollars annually from insurers who pay for AARP's endorsement. $497.6 million was added to the premiums charged to AARP members according to AARP's financial statement.

"One AARP member found out through rate shapping that his AARP car insurance rate was twice the average.

A New York Life $50,000 permanent life insurance policy for a 65-year-old man available through AARP costs $286.17 a month, Maurer found. He says the same man can buy a $50,000 policy for 51 percent less from Cincinnati-based Columbus Life Insurance Co."

Are you covered?

Market Watch

According to a Wall Street Journal Market Watch article "Coming Up Short"(Dec 2 2008), 95% of Americans make it a priority to protect their kids by using seatbelts, but only 20% have enough life insurance for family protection.

American families are increasingly in danger of missing goals like paying off a mortgage, funding college education, or saving for a secure retirement.

Americans believe they have enough life insurance to protect their families. But studies show that on average, household breadwinners have enough life insurance to cover expenses for only four years.

People don’t buy life insurance even though most people understand the need for it.

Only about 20% of today’s private sector workers are covered by a defined benefits pension plan. Today’s economy demonstrates how quickly financial circumstances can change. Life insurance can mean the difference between secure retirement and one of constant struggle.

The cost of doing nothing can be enormous, insufficient insurance leaves families exposed to undue financial risk. Look at life insurance as an asset rather than an expense.

According to the Insurance Information Institute www.iii.org premium rates for individual term life insurance are expected to fall about 1% from 2007. The general downward trend began several decades ago. The III estimates the annual premium for a 40 year old male nonsmoker buying a $500,000, 20 year level term life policy in 2008 will be about $725. Rates for women and younger people are even lower.

Creative Uses of Life Insurance

Life Insurance is the least expensive and most flexible way to resolve a host of challenges faced by individuals doing their estate planning. Life insurance can be used to do the following:

• Pay taxes due at the death of the insured.
• Replace income no longer available at the death of the insured.
• Pay off the personal or business debts of the insured.
• Ensure the surviving spouse has sufficient income for the remainder of his or her life, especially where the bulk of the insured's estate is the personal residence or other assets that are difficult to liquidate or that do not generate income.
• Ensure that children will receive something, when everything else is going to the surviving spouse. Some people want to give everything to a spouse, but are afraid the spouse will remarry and the new spouse will eventually take everything, cutting out the children of the original marriage. Insurance can easily resolve this problem.
• Estate Equalization. A person may have a business he wants to give to one son. But what about the other son? Insurance solves the problem.
• Ensure long-term care. I am not talking about long-term care policies, but rather using traditional life insurance policies that can be accessed during the insured's life for any reason.
• Provide funds to charities or that nephew or some favorite cause, and still have the bulk of your assets go to the traditional heirs such as children.
• Transferring money to the insured's business partner to be used by the partner to pay the insured's family for the insured's interests in the business. This makes the surviving business partner happy, because it keeps the insured's spouse or family out of the business. And it makes the insured's family happy, because they are receiving the value of the insured's interest in the business without dealing with the insured's business partner. (A Buy-Sell Agreement.)
• Transfer money to a business to cover the costs of getting someone to replace the insured at the insured's death. (Key Employee Indemnification.)
• Reimburse a business for benefits paid to key employees (Recapture of Deferred Compensation Costs.)

There are numerous other creative uses of life insurance or life insurance in combination with annuities and other options that make life insurance the most efficient, least expensive way to resolve a host of challenges.