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How Life Insurance Enhances Your Estate Plan

Posted on August 3, 2021 by

Margaret Amsden

Margaret Amsden

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Life insurance can be a valuable planning tool, but common misconceptions about policy management cause many policy owners to miss significant opportunities.

According to insurance industry studies, as few as five out of six life insurance policies ever pay a death benefit. When you consider a typical business owner’s lifetime premium investment, this can be a significant financial loss. With the right knowledge and advice, you can maximize the policy benefit while reducing cost and risk.

What can go wrong with life insurance as an estate planning tool?

Life insurance, by some estimates, is a 20 trillion-dollar industry. Obviously, insurance companies have an obligation to their shareholders to remain profitable, maximizing their premiums while minimizing payouts. With that in mind, it’s important to understand your policy thoroughly to ensure you’re getting full value out of your life insurance contract. Here are some ways consumers miss out on their benefits:

  • Around 70% of insurance policies are never reviewed after purchase
  • Anywhere from 85% to 90% of policy owners have the wrong kind of insurance contract
  • A majority of insurance policies are not funded correctly
  • Too few policy owners have proper grace period or lapse alerts in place
  • Many policy owners fail to coordinate insurance portfolios with estate planning

Why have life insurance in the first place?

There are different kinds of life insurance policies that are designed to do more than just cover things like basic final expenses. Life insurance is useful in a wide variety of important wealth transfer applications including:

  • Funding buy-sell agreements
  • Providing estate liquidity for taxes
  • Providing an inheritance for those who have not created sufficient wealth during their lifetime
  • Other succession planning goals

If structured and held properly, life insurance payouts may be exempt from income and estate taxes, which can make a vital difference to both family and business beneficiaries. It is important to make sure the policy is not held within a taxable estate. In most cases, the best way to shield an insurance payout from excessive tax exposure is to hold the policy outside of the estate in an irrevocable trust.

A properly managed life insurance portfolio may also provide additional diversification advantages that can shield your wealth from market fluctuations. Additionally, permanent life insurance may also allow for tax-deferred growth and increased liquidity.

What is the best way to maximize estate planning benefits of life insurance?

The most important thing to do is make sure that you review your policy portfolio every few years. Financial circumstances change frequently, which is why it is critical to keep your policy details (and ownership or beneficiary changes) in full alignment with your personal and business goals.

When you hold big investments, it is likely that you review them frequently to analyze performance, evaluate your asset mix, and rebalance your holdings when necessary to maximize your returns. Your insurance portfolio deserves the same level of scrutiny, preferably with the help of a qualified advisor who understands the tax implications and makes sure that ownership is structured in a way that’s most advantageous for your individual situation.

The right advisor will help you determine the optimal premium structure and timing to maximize the value of your insurance portfolio and avoid overpayment for the ultimate benefits you want. They’ll also help you with financial analysis, reporting and due diligence research to be sure that the insurance carriers can keep their commitments to you when the time comes. This article is in no way a complete exploration of the advantages and intricacies of life insurance as an estate planning strategy. It is intended as a brief introduction to get you thinking about the subject and give you a frame of reference to start exploring an approach that’s best for you.

If you have questions about the estate planning implications of your insurance portfolio, Clayton & McKervey and Kapnick Insurance can help you evaluate various options for the best fit. We routinely help our clients make these kinds of choices both for the future of their businesses and the well-being of their loved ones.

Clayton & McKervey

Clayton & McKervey is a full-service CPA firm helping middle-market entrepreneurial companies compete in the global marketplace.  The firm is headquartered in metro Detroit and services clients throughout the world. Visit claytonmckervey.com or contact us today to learn more.

Kapnick Insurance

Founded in 1946, Kapnick Insurance is an independent professional advisory firm with Michigan roots and a global reach. Their 170+ employees provide expert guidance pertaining to business insurance, risk solutions, employee benefits, worksite well-being, and personal insurance to a vast and diverse base of clients worldwide. For over 75 years companies have looked to Kapnick as a trusted advisor, providing solutions that protect their operations and employees. Visit Kapnick.com to learn more.

*Written in collaboration with Tyler Horning – Principal at TDC Life

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Margaret Amsden

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Margaret leads the firm’s private client services group as the point person for individual, estate and succession planning tax strategies.

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