Life insurance is probably the most important estate planning tool. It provides the estate with cash that it otherwise would not have. An estate needs cash for several reasons. First, it may be needed to pay for death taxes. A husband and wife estate of $10,900,000 (after 2016) without an estate planning trust will have to pay about $2,000,000 in death taxes and probate expense at the time of a surviving spouse's death. Also, husband and wife estates of over $5,450,000 (after 2016) will be subject to death taxes even with the basic trust. A discussion of estate planning for estates over $5,450,000 (after 2016) is beyond the scope of this booklet. If there is no cash, then assets of the estate must be sold to pay these expenses. Also, life insurance proceeds can be used to provide cash for the decedent's wife and children to pay living expenses, college tuition, and other needs.
There are three main types of life insurance. First, there is term insurance. It simply pays the face amount of insurance if the insured person dies. It has the lowest premium and is the least expensive type of insurance. Next there is whole life which has a higher premium. It builds up a cash value and should you cancel the policy you will be paid the cash value of the insurance policy. A relatively new type of insurance is called Universal life. It is similar to whole life.
For persons of considerable wealth there is a special type of trust called an Irrevocable Life Insurance Trust. Life insurance put in this type of trust will remain death tax free. However, this type of trust is very complicated and further discussion is beyond the scope of this booklet.
It is important that you use the services of an important that you use the services of an insurance agent experienced in estate planning. These experienced agents can be very helpful in working with you and your attorney in developing an estate plan that is custom tailored to your needs.