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How Life Insurance Can Help with Estate Planning

Life insurance can be useful for many reasons. It is often seen as a way to replace a working spouse's income in order to make living easier for the surviving family members. A non-working spouse might want to get covered in order to pay for housekeeping and child care services if they die. It can also be used as a planning tool. There are many cases that you might want to have a policy to help your heirs as they settle an estate.

Help with Taxes

Life insurance proceeds are exempt from the federal income tax, as long as the beneficiary receives the proceeds after the insured person dies. The death benefit can be used by your heirs to help pay for inheritance taxes, rather than force them to sell assets like a home in order to pay for taxes on the estate. If you will be leaving significant assets behind (currently over $3.5 million), you may want to consider setting up a life insurance trust.

Make Inheritance Fairer

Some items are difficult to divide up. You may want a business or a house to be passed on to one of your heirs, rather than force your loved ones to sell the asset in order to distribute the house or business equitably. In cases like this, you might want to purchase coverage to provide cash to the heirs that will not be receiving the asset. For example, you may want to leave a house worth $250,000 to one of your children that has always wanted to live in the home. You can purchase $250,000 in life insurance to leave for your other child who does not get the house. This eliminates the need for your child to have to buy out the other child after your death.

Pay for Costs without Selling Assets

Burials and funeral expenses can be costly. If you die with debt or other financial claims against you, your estate will have to pay off any debts or claims against your estate before your heirs will receive anything. It may also incur administrative costs, probate costs, and legal fees. If you hire a bank to perform the duties of an executor, the bank will charge an executor's fee. Insurance will help you pay for any immediate expenses that your estate might have, and will prevent your loved ones from having to liquidate assets in order to pay for costs.