Life Insurance as an Estate Planning Tool

Posted in Personal Insurance


WTPhelan has been in the insurance business for many years, and we wish to share an observation that few people considering an estate plan ever have presented to them.   If one were to compare two families with the exact same estate size but one family chose to implement life insurance while the other family decides not to carry life insurance, here is what happens (from many years of observation):

The couple with life insurance in place, as they acquire more free time, will pursue interests they enjoy (traveling, dining, boating, theatre, second home, etc.) because they are certain they are leaving an income, estate and gift tax-free benefit to their heirs.  Their estate is guaranteed and protected.  The other couple (without life insurance) frets, after all their hard work, they will not leave enough to those they love (children, grandchildren, beneficiaries, etc.).  The couple without life insurance will not pursue the activities and passions they rightfully have earned and deserve; they do not want to diminish the size of their estate.  WTPhelan has witnessed the above occur firsthand.  Permanent life insurance allows one the ability to protect their children and grandchildren’s future financial security without relinquishing control of their assets today.  Many couples, given people are living longer, are simply too young to relinquish control of their assets.  They wish to observe how their children and grandchildren grow and mature.  They also feel the need to protect the next generations’ financial future.  That is exactly what an Irrevocable Life Insurance Trust can accomplish.  The couple retains control of their assets while protecting the future generation from shrinkage due to eventual estate taxes due.  When the estate tax is due, the income, gift and estate tax-free life insurance benefit is there to pay Uncle Sam, thereby allowing your heirs to inherit your estate intact.

Life Insurance as an Estate Planning tool

Most people wish to leave their estate to family members, friends or relatives.  Some may face an estate tax before their money is received by those they have chosen to share in their estate.  When the surviving spouse dies, the designated heirs inherit the estate.  However, within nine months of the death of that surviving spouse, there potentially is a federal estate tax due (in addition to a MA estate tax).  After using up your combined Unified Credit, dependent upon the size of your estate, your heirs (children, relatives, friends, etc.) can face a tax of between 35 to 50% of your assets that exceed the Unified Credit.

Why life insurance?

Each spouse may make a tax-free gift, to each child, relative or beneficiary, up to $13,000 annually.  If you have two children, you may gift up to a total of $52,000 annually.  By creating an Irrevocable Life Insurance Trust and having the trust apply for and own a life insurance contract, the proceeds are received income, estate and gift tax-free by your children, relatives or beneficiaries.  In addition, assuming you currently face an estate tax of 45%, $5,850 of each $13,000 is being subsidized by the federal government.  In other words, if neither of you make an annual gift, then 45% of that money ($5,850) is already earmarked for Uncle Sam.  The government is subsidizing (by as much as 50%) this estate planning tool that will deliver an income, gift and estate tax free gift to your chosen heirs.  Each year one does not make a gift, you lose that gifting capability outright.  The sooner you implement a life insurance trust, the younger the age you “save” and the lower the premium you contractually guarantee for gifting purposes.  In other words, you may leverage more life insurance benefit today, through your annual gifts, versus deferring your decision down the road.  Next year your premium will be higher (as we get older) for the same exact benefit amount and so on into the future.  Your leveraging capability decreases annually by deferring your decision. 

Individual or survivorship life insurance?

The federal government delays the collection of estate tax until the death of the surviving spouse.  Survivorship life insurance, which pays a death benefit after the death of the surviving spouse, allows you to leverage a larger life insurance benefit amount through your annual gifts.  Survivorship life is significantly less expensive when compared to leveraging individual life coverage.  Survivorship funding is roughly half the cost to fund when compared with individual life.  The survivorship benefit is received by your children and grandchildren (or heirs) exactly when the federal and state estate tax is due, at the death of the surviving spouse.  If you feel a liquidity need for either spouse, at the death of the first, you may consider some individual life benefit to address that need.  In addition, some clients feel their own longevity (past family history) is not as positive as their spouse’s.  They would like some individual benefit to provide liquidity for their spouse or allow certain assets to be passed to their children at the first death.  Many clients implement a “blend” of both survivorship and individual.  Survivorship life insurance allows you to best leverage your estate for the eventual estate tax due.

Life insurance is one of the most viable estate planning tools available today.  We would welcome the opportunity to discuss your life insurance need with you and your advisors.


David L. Ramsey

Mr. Ramsey is one of the Principals at WTPhelan & Company.