Factoring cash value benefits into your estate planning can provide your beneficiaries with security and a means to pay debts and taxes.
Cash Value Insurance Estate Benefits
If you set up a life insurance policy with yourself as the insured and a friend or family member as the beneficiary, it may be counted as part of your estate and subject to estate tax. If you list your beneficiary as the policy holder, the policy may avoid estate tax. All cash value insurance policies provide a death benefit to the beneficiary, but some include the funds from the cash value account as well. Spending or using your cash value account may decrease the death benefit along with the account balance, so you may wish to leave it alone. Transferring your life insurance benefits or policy as a gift may not legally remove it from the estate for three years. The government generally uses fair market value to establish whether gifts are subject to taxes, and a gift may be tax-free depending on the amount and circumstances.
Uses for Your Cash Value Policy Benefit
Beneficiaries can use your policy's benefit to pay funeral expenses, estate taxes and related costs. You can establish a policy to provide for a spouse or children who may not have sufficient income on their own, to pay off a mortgage or child's educational loan. A family member or business partner might use the funds to pay business debts, consolidate ownership or cover operating expenses. If you leave the family home, business or other physical property to one beneficiary, a death benefit can provide equal monetary value to any others.
Proper Estate Planning
A cash value life insurance policy can establish an estate if you don't already have one. Be aware of any state taxes or regulations (such as an inheritance tax) that may affect your beneficiaries, as well as federal estate tax laws. Insurance gets more expensive the later you buy it, and cash value accounts take time to build. To take advantage of the benefits, you need to plan years, if not a decade or more, ahead. If you're making more immediate plans, term life insurance may be a better option, which you may be able to determine if you understand the difference between term and cash value life insurance.