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A Comprehensive Guide to Life Insurance & Estate Planning

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Life insurance is one of the most important tools in estate planning. It provides a financial safety net during unforeseen accidents and tragedies. Furthermore, if properly set up, life insurance policies can be pivotal in preserving and distributing wealth.

May 3, 2024
Author: NCH

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In this blog, we’ll explore life insurance’s role in estate planning and discuss the two primary kinds of policies you can use to secure your family’s future. 

Read on to learn everything you need to know about life insurance and estate planning. 

What is Estate Planning?

Estate planning is the process of determining how your assets will be distributed after your passing. The primary goal of estate planning is to create a plan ensuring that your finances will be managed according to your wishes. 

It’s common for families to have disputes over who gets what. Without a clear estate plan, these arguments can lead to extensive legal battles, causing emotional and financial strain on your loved ones. 

There are several components to a comprehensive estate plan: 

  • Wills & trusts
  • Durable Power of Attorney (POA)
  • Beneficiary Designation
  • Letter of Intent
  • Healthcare Power of Attorney (HCPA)
  • Guardianship Designation

Each component we’ve mentioned plays a specific role in ensuring efficient wealth transfer. 

For example, wills and trusts allow you to name your executor, a legal representative who will oversee your assets. On the other hand, beneficiary designation outlines who will receive your retirement accounts, such as your 401k and IRA. 

Together, they create a framework that safeguards your interests and the future of your loved ones. 

Life Insurance & Estate Planning

One of the primary roles that life insurance plays in estate planning is beneficiary designation. Most policies allow people to name primary and secondary beneficiaries. 

Your primary beneficiaries will be the first to receive your death benefit. If they cannot or refuse to accept it, it will go to your secondary beneficiary.

Life insurance can also give your surviving family immediate liquidity. Once you pass away, your beneficiaries will receive your insurance payout without going through probate processes. 

Immediate liquidity is important, especially since an estate cannot be settled if the deceased still has financial obligations to fulfill. So, instead of waiting for lengthy probate processes, the beneficiaries can use the death benefit they received to handle outstanding debts immediately. 

Lastly, life insurance policies can provide you with long-term care coverage. Chronic illnesses can easily exhaust your estate. Fortunately, you can get long-term care without draining your assets by picking a comprehensive premium. 

Term or Universal Life Insurance: Understanding The Difference

You can use two primary types of policies in estate planning: term and universal life insurance.

Term insurance policies offer you a death benefit if you pass away within the policy’s term, which typically ranges from five to 30 years. They’re purchased annually, meaning you’ll have to repurchase it once it expires. 

This type of life insurance is generally cheaper. However, its costs typically increase over time, which may not be cost-efficient in the long run. 

Conversely, universal or whole life insurance offers perpetual coverage, meaning you can receive a death benefit whenever you die as long as the policy is paid. 

In addition, this type of policy has a cash value component that grows tax-deferred over time. You can access the cash value you’ve built through a life insurance policy loan and use it for emergencies.

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The additional savings plan makes universal insurance much more expensive than term policies. 

Choosing The Perfect Policy

Which life insurance is better, term or universal? The answer depends on your specific needs and financial goals. Both policies have unique advantages and disadvantages. 

That said, we recommend you consider the following factors when choosing the right policy:

Income 

Your income is the first factor when choosing a life insurance policy. Are you the primary provider in your home?

 If so, it would be best for you to get a policy offering immediate financial support to your family. This way, you don’t have to worry about them transitioning after your passing. 

Healthcare Costs

It’s difficult to predict what you’ll need later in life, but one thing is for sure: healthcare is not cheap. 

Nowadays, getting quality care without using up all your savings is challenging. Because of this, we recommend you look for a policy with additional benefits, such as healthcare coverage. 

Family Size

Think about your family; how many of them rely on you financially? Depending on the size of your family, it may be better to look for a policy with multiple beneficiaries or to get multiple premiums. 

Maximizing Tax Efficiency

Although most death benefits are tax-free, there’s still a chance that they may be subject to estate tax. These scenarios typically happen when the payee exceeds the threshold for tax exemption. To prevent this, we recommend placing your life insurance into a trust. 

When you put your policy into a trust, you effectively remove it from your estate. This means that your death benefit will no longer be part of your taxable assets, potentially reducing the tax liabilities your beneficiaries may face. 

Moreover, trusts provide an extra layer of protection to your life insurance. Once you transfer your policy into a trust, it will be shielded from claims made against your estate. Creditors will not be allowed to access the funds held within your trust, ensuring that your beneficiaries will receive the full benefit of your life insurance and estate planning. 

Start Planning For The Future

In conclusion, life insurance is fundamental in creating a comprehensive estate plan. If structured properly, these policies can serve as a safety net and key instrument for preserving and distributing wealth. 

Start planning for your future and contact NCH today. NCH is one of Nevada’s leading estate planning service providers. Our independent legal counsel will help you develop an estate plan tailored to your family’s needs and goals. 

To learn more about our services, visit our website here or call us at 1-800-508-1729 to schedule an initial consultation. 

Disclaimer: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.



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