Even if you do not have a large estate, through the careful use of life insurance and other insurance policies, it is possible to leave a sizable estate behind at the time of your death. Life insurance policies can create an "instant estate" and should be given full consideration by the attorney you choose to design your estate plan. Insurance is helpful particularly to large estates, for tax and estate accumulation purposes, and to very small estates, as for instance when a young family is dependent on the support of a single or primary breadwinner.

The Marriage of Insurance and Estate Planning

One of the very best things you can do for your family and loved ones is to plan for their financial security upon your death, especially an untimely and unexpected death. Estate planning is not just for the rich, but is a topic that should be visited by every responsible adult. One of the common misconceptions about estate planning is that it can only be done when an individual has amassed a large number of assets. This is false: through insurance planning a deceased person's estate can acquire "instant wealth."

There are many types of insurance policies that a person purchases in his or her lifetime. Perhaps the most common insurance policy is a life insurance policy. A life insurance policy is purchased to insure against loss upon the insured person's death. The proceeds of a life insurance policy are paid to a designated beneficiary (usually the insured's spouse or children or, frequently, to a trust).

Because the insurance industry is securely established and influential in this country, most states have statutes excluding life insurance proceeds from administration by the probate courts. Therefore, although creditors may seek to satisfy their claims from the assets of an estate, insurance proceeds are usually free from the reach of creditors.

When obtaining life insurance, there are many different varieties to select from. Very briefly, some features include:

• Whole-life insurance: Provides coverage during the entire life span of the insured and is payable at the time of the insured's death. "Whole-life insurance" also has varying premium payment options or a single-premium option. One benefit of "whole-life" policies is that they generally have a "cash surrender" value, and, if the policyholder decides to terminate the policy, he can surrender the policy and receive its cash surrender value. The holder of a "whole-life" policy may also pledge the policy as security for a loan.
• Straight or "ordinary" life insurance: The premium payments are paid throughout the entire life of an insured or until the insured reaches a pre-set, advanced age.
• Limited-payment life insurance: Premiums are payable for a set number of years, or, until the occurrence of a specified event. Under this option, the premiums are more costly than "straight" insurance; however, at the end of the payment period or the happening of the specified event, the policy can be "paid up", or the premiums may vanish. As an alternative, the death benefit can continue to increase to reflect increasing policy values.

Whatever the exact nature of the policy, if the insured dies during the effective period of the policy, the proceeds of that policy are payable to his or her designated beneficiary.

It is wise to know that there are means to control how payment is made upon the insured's death. That is, just because you have acquired a policy with payable proceeds of say $400,000, your beneficiary does not have to receive the $400,000 all at one time, as a "lump sum" payment. Instead, life insurance proceeds can be placed in a trust, wherein the trustee can pay out proceeds at regular intervals or can make payments to designated beneficiaries on an "as needed" basis. Benefits can also be limited to income only or other restrictions can be made to apply. A policy owner can also select from various "settlement options," with the insurance company. Placing proceeds in a trust, however, is usually more desirable than utilizing these settlement options, because it allows for more flexibility, and a trustee can have more investment power and general discretion than the insurer. As noted below, a trust can sometimes also offer various tax savings.

One final attraction of estate planning with life insurance is that the proceeds of a life insurance policy can pass to the stated beneficiaries free from the federal estate tax, as long as the insured does not retain any "incidents of ownership" at the time of his or her death. Incidents of ownership include the following:

• The right to change the beneficiary of the policy;
• The right to turn in the policy for a cash payout;
• The right to use the policy as security for a loan; and,
• The right to designate methods of payment under a settlement option.

By the use of proper trust planning, these powers can be held by a trustee, thus avoiding adverse tax consequences. A qualified estate planning attorney may be able to assist you in avoiding death taxes on the proceeds of your life insurance policy.

Conclusion

Although we have found that some of the greatest benefits of estate and tax planning using life insurance are obtained by affluent individuals, you do not have to be a wealthy person, or even elderly, to benefit. In fact, if you are young and fairly asset poor, you may need to carefully consider your estate-planning options even more so than a high net worth, older person. This is especially true if you have a family relying on your income.

Planning now for the unhappy event of an untimely death is a gift of love, a gift that can outlive you. Your family's financial needs can be provided for through carefully planned insurance policies. Higher net worth individuals can see considerable tax and asset accumulation advantages and can leave an even larger inheritance to their loved ones. An experienced estate-planning attorney can help you make wise decisions that will create funds for your family if you unexpectedly die, whatever your financial circumstances.

Our Experience with Estate Planning with Insurance

Mr. Gnatowsky is a licensed attorney at law in numerous states, an Accredited Estate Planner (AEP), and a Certified Public Accountant (CPA), whose practice focuses on estate planning and asset protection.

In addition to his law degree from the Washington and Lee University School of Law in Lexington, Virginia, he also holds a Master of Science in Financial Services (M.S.F.S.) degree from the Richard D. Irwin Graduate School of Management in Bryn Mawr, Pennsylvania. As an estate planning attorney, he has worked with numerous individuals and families over nearly two decades in the proper incorporation of life insurance into the estate planning process.