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Wednesday, August 15, 2018

It’s A Wonderful Life… Insurance

The Frank Capra’s Christmas classic It’s a Wonderful Life was recently on tv as part of some sort of “Christmas in July” promotion, and I happened to catch the part where mean old Mr. Potter suggests that George Bailey is worth more dead than alive because all he has to his name is a $500 life insurance policy.

Setting aside the fact that most policies are void if the insured commits suicide, there’s a lot of folks in the world who are worth more financially after they are dead than while they were alive thanks to life insurance. The reason why draws you back to one of the lessons learned in Bedford Falls - you can’t overestimate the value of your life because the impact your life has on your loved ones and the world around you is far greater than you know.

Hopefully insurance companies appreciate this despite the fact that putting a value on a person’s life is precisely the business they are in. This is probably not a good thing to think about too deeply unless you want to have an existential crisis, but it is a good thing to consider as you are making an estate plan. Based on the different reasons people buy life insurance it seems like this is happening.

Most people buy their first life insurance policy when they have a child. If the policyholder dies, the policy should cover final expense, pay off any outstanding debts, and perhaps provide the child with the beginnings of a college fund. While this is the most common reason people get life insurance, it is not the only reason.

For some people, a whole life policy can act as a safety net while they are alive. Whole life policies, which, as their name suggest, last the policyholders whole life, build up a cash value that can be borrowed against in case of an emergency. Depending on the policy, it may also be possible to use the built up funds to pay future premiums so the risk of the policy lapsing for non-payment disappears.

Other people find that setting up an irrevocable life insurance trust (ILIT) is beneficial for tax purposes. An ILIT is a trust that buys and owns life insurance, and because it is not a person, it does not have to pay estate taxes on the proceeds of the policies it owns, making it a great way to pass assets tax-free. In addition, the person setting up the trust can dictate how the proceeds are to be used. These trusts are less important now that the estate tax exemption has been increased to over $11 million per person, but if the exemption amount is lowered in the future, will be useful.

Life insurance is versatile estate planning tool that can be used for different purposes at different times in your life.


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