When it comes to life insurance, most people think of it as a way to provide financial security for their loved ones. But did you know that life insurance can also be an important part of estate planning and federal estate tax? Don’t worry if this is news to you; we’re here to get you up to speed on the basics.
What is the Federal Estate Tax?
Federal estate taxes are taxes imposed on an individual’s assets at the time of their death. Assets can include anything from a car to real estate to investments. When these assets exceed certain amounts, they can be subject to federal estate tax at the time of death (or upon transfer). The amount of tax owed depends on how much value is transferred over the lifetime exclusion amount or “exemption” ($12.06 million per spouse in 2022). The exemption increases each year based on inflation, so if you have more than $12.06 million in assets, you may be subject to federal estate taxes (and your beneficiaries only have 9 months to come up with the money). The estate tax exemption also changes at or near the expiration of limits set by congress, the next round of changes are scheduled for 2025 and could bring significant change. Life Insurance provides an affordable way to offset some or all of these taxes to your family.
How Does Life Insurance Fit Into This?
Life insurance can be used as a way to help cover your federal estate taxes—or any other taxes imposed by the government—without having to dip into your own assets. You can use life insurance as a way of ensuring that your beneficiaries will have enough money available to pay off any outstanding debts or taxes due upon death without needing to liquidate other assets in order pay them off.
By taking out an insurance policy on yourself (or someone else whose death would result in estate taxes owed), you can ensure that your loved ones are taken care of while still being able to keep the rest of your assets intact.
What Kind Of Policy Should I Get?
The kind of policy you should get depends largely on your individual situation and needs. Generally speaking, term life insurance policies are the least expensive policy so you can cover as much of your survivor’s estate tax liability as possible without breaking the bank. Term life insurance can also be converted into permanent policies. With the pending estate tax legislation change in 2025, this makes it possible to spend less now while our lawmakers are sorting out the details, then you can make the best decisions once we have a clear direction going forward. No matter what kind of policy you decide on, make sure that it is sufficient enough to cover any potential future liabilities so that when the time comes for them to be paid off there will be money left over for your family or heirs.
When it comes down it, understanding how life insurance fits into an estate plan and how federal estate tax works is essential knowledge. By taking out an appropriate life insurance policy now, you can ensure that any potential future liabilities will be taken care of without dipping into existing assets or having an unwelcome surprise show up later on down the line. So don’t wait – you can quote, customize and buy the right kind of life insurance policy for your unique situation – all online and without an agent!