You might be surprised to hear that insurance policies are valuable tools in estate planning. Here are 5 ways that insurance can be used to optimize an estate plan.
1. Support for Dependents
For parents with young children or other dependents, ensuring there is enough money to provide for them is essential. Life insurance can provide a lump sum of cash to fund the cost of future care. Furthermore, a beneficiary can be named on the policy, which keeps the proceeds out of the parent’s estate, with these prime benefits:
- avoiding probate fees; and
- protecting the funds from claims by the deceased parent’s creditors; this is especially valuable for parents involved in private businesses or riskier lifestyles.
2. Paying Taxes and Debts
Most wealthier individuals will face tax debts on their deaths due to the “deemed disposition” under the Income Tax Act that triggers capital gains tax.
The individual’s estate will require liquid assets to pay any tax liabilities. If liquid assets are insufficient, life insurance can provide the necessary liquidity.
Life insurance can also fund other liabilities such as debts and mortgages outstanding at the individual’s death.
3. Mitigating Wills Variation Claims
The Wills Estates and Succession Act allows a deceased’s spouse or child to apply to the court to alter a Will if they can show that the Will does not adequately provide for them. However, an individual may want to benefit their spouse more than their children, or benefit one child to the exclusion of others. This situation frequently arises in blended families.
If the life insurance policy is paid to a named beneficiary, it will not be part of the deceased’s estate and thus not subject to wills variation claims. Life insurance policies can be helpful to fulfill the intent of preferring a spouse or a child by directing the proceeds to that specific named beneficiary outside of the Will.
4. Estate Equalization
If an individual’s net worth primarily consists of a single large asset (such as land or a business), and they desire to pass the largest asset to a single child/beneficiary, the outcome may be an unequal or unfair division of the estate.
Life insurance can be used to provide an additional liquid asset, which can be left to the other children, to achieve equalization.
5. Charitable Donations
As mentioned, individuals may face significant tax consequences as death. Tax costs can be offset by making a charitable donation at death. Individuals can gift assets out of their estate to fund the donation or appoint a charity as the beneficiary of a life insurance policy.