Insurance is at the bedrock of estate plannings. First, it reduces the risk of your estate getting wiped out by unforeseen events. Second, it has unique characteristics that allow for sophisticated planning.
Estate planning is all about making sure things are taken care of. Insurance is part of that process. Here are various different kinds of insurance and why you should consider having them:
Insurance on you:
Life insurance pays a death benefit to your beneficiary. This is an essential insurance for someone who has responsibilities, such as a family, but has not yet built resources sufficient to cover those in the event of a premature death. Disability insurance provides income to you in the event you can no longer work. Health insurance pays for medically necessary procedures and medications for you.
Insurance for your home:
Homeowner’s insurance covers the risk of fire or other damage to your residence. It also covers the contents of your home and liability to third parties who are injured in your home. A Renter’s policy covers only the contents and injuries. Typically, earthquakes and floods are risks that are not covered and require separate policies for protection. Title insurance protects you against the possibility of someone claiming that your home is actually theirs.
Auto, boat, and other insurance protect both the property and/or any liability that arises from your use of that property. Umbrella coverage goes on top of the other coverages. For example, if you have a $1 million umbrella and are in an auto accident, the claim would first go through your auto coverage (let’s assume $250,000) and then your umbrella. Umbrella coverage also covers negligence for actions you take unrelated to your home, auto, etc.
These coverages are important to preserve what you have built by protecting against losses from the destruction of the property and from liability that may arise from their use or ownership. However, life insurance can also be an excellent asset for use in estate planning because it has little value during your lifetime and then has great value at your death. For example, assume you want to get $5 million to your descendants. If you purchased a $5 million term policy, with a 20 year level premium, you would pay around $10,000 per year if you are age 50. However, even if you had no other assets, you would owe $1 million in estate taxes at your death if you died owning $5 million. However, if you had set up an irrevocable trust and had the trust buy the policy, it could be free from taxation at your death. The only taxable transfers to the trust would be the contributions for the premiums. However, even those premiums could be gift tax free. Thus, life insurance is a simple way to get a great deal of assets to the next generation tax-free.
A qualified estate planning attorney can help you take care of things so that you minimize your risks and accomplish your goals for you and your posterity.
Compliments of the McGee Law Firm, Attorney Brandon McGee
Written By: The American Academy of Estate Planning Attorneys
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