A well-crafted estate plan helps you prepare for any number of possibilities—just like insurance does. In addition to having conversations around things like health care proxies and distributing property, individuals should be talking to their advisors about insurance planning as part of the estate planning process. Estate planning is largely about making sure that what you’ve earned is eventually passed on to the people you love. Insurance planning can help you preserve those assets while you’re alive, and give your loved ones some financial breathing room once you are gone.
When financial advisers talk to clients about insurance and estate planning, life insurance is generally a big part of the conversation. Having life insurance isn’t an absolute necessity for everyone at every stage of life. People who have no dependents and who are financially secure may decide to go without it. But in many cases, maintaining a life insurance policy is a financially sound decision. There’s peace of mind in knowing that the death benefit your policy pays out guarantees your beneficiaries will have a source of income after you’re gone.
From an estate planning standpoint, life insurance is a useful tool in a few ways. One of the biggest benefits is the speed with which heirs can access death benefits. Settling an estate is a long process. The timeline is largely determined by the probate court, and the decedent’s debts and taxes have to be paid before heirs can access any estate assets. So it may take many months or even more than a year before your heirs see any of the money that you left for them.
Life insurance death benefits can provide financial support for your loved ones until your estate is settled. Specifics vary by company, but life insurance companies generally pay out death benefits within a month or two of receiving claims. The beneficiary or beneficiaries of your life insurance policy can use your death benefit to pay funeral costs, cover their own living expenses and even pay any estate taxes your estate owes. (That’s especially important because estate taxes may be due before heirs can access estate assets.)
Speaking of estate tax planning: If your surviving family doesn’t need the insurance benefit as replacement income to maintain their standard of living, life insurance can be used as a way of passing money to your heirs without adding to your estate’s tax burden. As long as your life insurance policy doesn’t belong to you at the time of your death—which can be accomplished using an irrevocable life insurance trust (ILIT)—its value doesn’t count as part of your taxable estate. That’s especially important for residents of states that impose their own estate taxes, including Massachusetts. While the federal estate tax exemption is high (more than $12 million per person for 2022), the Massachusetts estate tax exemption is just $1 million.
Say a Massachusetts resident dies with an estate worth $900,000 and a life insurance policy worth $200,000. As long as their policy names living beneficiaries or is owned by an ILIT, that $200,000 can be passed to their heirs without triggering estate taxes. (If, however, the policyholder named their spouse as sole beneficiary and their spouse died just before them, the benefit would be paid to the estate and would trigger the tax. Those kinds of unpredictable events are one reason why policyholders often choose ILITs.)
Life insurance is just one element of insurance planning to think about around estate planning. Another thing financial advisers and estate planners often talk about with clients is planning around healthcare costs. Your well-planned and well-funded estate plans can be decimated by an unexpected illness or accident if you don’t have adequate insurance in place. Being proactive about long-term care planning is essential. Nursing-home care costs thousands of dollars per month, and some people need that level of care for many years.
In addition to maintaining medical insurance, buying long-term care insurance is something you may want to consider and discuss with your advisers. Without this kind of insurance, affording future care may require you to either pay out of pocket (taking money out of your estate) or drastically spend down your assets to qualify for Medicaid, or MassHealth in Massachusetts. Long-term care insurance policies can cover everything from occasional in-home help to nursing-home care. Hopefully you’ll never need to access those benefits. But if you do, having long-term care insurance can be a big relief and let you keep your savings and estate plans intact.
People in certain circumstances may also want to consider disability insurance while estate planning. If you’re the sole breadwinner and are in or nearing your peak earning years, becoming disabled would significantly alter your general financial plans and estate plans. Social Security disability benefits only go so far. Disability insurance isn’t something that makes sense for everyone, but it may be something to discuss with your advisors.
Like the estate planning process in general, insurance planning is highly individual. Questions like whether you need life insurance, how much life insurance you need and whether you should buy LTC insurance depend on your phase of life, family situation and overall financial picture and goals. Lean on advisors you trust to help you weigh all the options and decide what feels right to you.
Sachetta, LLC works with people at all stages of the estate planning process. Insurance planning is one important part of the conversation as we help clients create estate plans that meet their specific goals. Contact us today!
Joseph Sachetta, CFP®, CPA/PFS, MBA, MST, For over 40 years, Joe has worked in finance and accounting. He is a Certified Financial Planner, and a Certified Public Accountant. Joe’s passion lies with helping his clients strike a balance between living for today and saving for tomorrow.