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Life Insurance Planning

Life Insurance Planning


In developing a sound estate plan, consideration should be given to incorporating life insurance as part of the overall plan to achieve income tax and estate tax minimization benefits. 

Term insurance (which provides a death benefit if you pass within a specified term of years) can provide for burial expenses, college tuition, and health care expenses for a surviving spouse in the event of an untimely death.  While helpful for such purposes, it is not generally used to achieve tax benefits.


Permanent life insurance can guarantee that your family receives a specified dollar amount on your passing and has the potential to minimize both income taxes and estate taxes.  If the ownership of the insurance policy is properly structured, your beneficiaries will receive the death benefit both income and estate tax free (this is the same for a term insurance policy).  With permanent life insurance, you may also achieve tax-deferred growth of cash inside the policy and tax-free loans may be taken from the policy for cash flow needs. 


Use of insurance can also provide the liquidity necessary to pay estate taxes which may arise at death.  Otherwise, assets of the estate may need to be sold in undesirable circumstances to have the liquidity to pay the estate tax burden.

In order to ensure that the insurance proceeds are kept outside of your taxable estate (so that they are not potentially taxed at a 40% rate), individuals typically own their insurance policies in an irrevocable life insurance trust (“ILIT”).  You can transfer your existing life insurance policies into an ILIT, but unless they are sold to the ILIT for fair market value, you must survive for 3 years from the date of transfer to have the death benefit excluded from your taxable estate.  The best practice is to make a cash gift to the ILIT to purchase the insurance policy or policies (which can be single-life policies or survivorship policies which pay the death benefit on the death of the survivor of the insureds).  The ILIT would be the owner and beneficiary of the policy or policies. When the insured dies, the death benefit will be collected by the trustee of the ILIT free of income or estate taxes, and the trustee can then use these assets for the benefit of your heirs.

Diversified asset allocation and tax-free portfolio rebalancing can also be achieved through variable universal life (“VUL”) policies which offer a multitude of investment options.  These may include a bond fund, real estate fund, and a large-cap stock fund.  The growth of the cash value inside of the VUL policy is determined by the performance of the underlying portfolio selected.  Reallocations within the policy are not taxable, so if you rebalance your investments, taxes will not be triggered on profits taken as the positions are sold and reinvested.

Life insurance can also be an alternative or addition to contributions to retirement plans.  If you contributed the maximum amount to your 401(k) and IRA this year, you may invest in a life insurance policy to obtain additional tax-deferred (or tax free) growth.  There are no restrictions on how much you can invest into permanent life insurance policies.  Further, if you have a taxable estate, every $1 spent on life insurance premiums will only effectively cost $0.60 given an estate tax rate of 40%.  If you have a taxable estate and were to keep and reinvest the $1 outside of an insurance policy, the $1 and any future appreciation would be taxed at a 40% rate upon your passing.


In addition to assisting in the establishment of ILITs to hold insurance policies, Guerra TWP assists clients in more sophisticated and creative insurance planning strategies, including premium financed arrangements, split-dollar insurance planning, inter-generational life insurance planning techniques and private placement life insurance.  Please contact us if you are interested in learning more about one or more of the foregoing strategies. 

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