Life insurance is a key component to most estate plans, and its most common use is as a vehicle of income replacement. This is very important because these days most families are built around the expectation of two incomes. If you were to pass away unexpectedly and your income was to vanish, would your family be able to maintain its standard of living without some kind of influx of financial support?
Life insurance fills this potential void, and once you have your life insurance coverage in place it is important to review it as time goes on. People invariably step up their lifestyles as they move along a career path and their expenses increase, and of course as your family grows your financial responsibilities will grow as well. So it is very likely you will need to add to your coverage as time passes and you enter different stages of life.
Replacing lost income is just one of the ways life insurance can be helpful when you are planning your estate. Among other things, it is also used to balance inheritances your children will receive. Here’s an example to demonstrate what is meant by this strategy.
Let’s say you are the sole proprietor of a very successful business and its value represents your most significant asset by a large margin. You have two daughters named Melissa and Amy. Amy has worked in the business all of her adult life and she has a passion for it. Melissa chose a different path and has no connection to the business. You have decided to leave the business to Amy, but you want to provide each of your daughters with an equal inheritance.
You could balance the inheritances by taking out a life insurance policy on yourself that is valued at the same amount as the worth of the business. You make Melissa the beneficiary, and when you pass away each of your daughters will receive an inheritance of equal value.
So, as this example shows, if you want to treat your children equally in dividing your estate, life insurance is a powerful planning strategy to accomplish that goal.
Larry Parman
President and Founding Attorney
Parman & Easterday
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