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How Life Insurance Can Preserve Your Estate and Legacy

by Scott G on November 5, 2012 · 1 comment

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Estate Preservation with Life Insurance

Contingent on your net worth, leaving a large inherence can be problematic to your heirs if you are subject to estate taxes (federal or state).  A good portion of your assets could be going toward taxes instead of to your beneficiaries.  In addition to estate taxes, your heirs may need time to liquidate your estate so they are not forced to do a “fire sale” of your assets if you were to suddenly pass.  An effective tool many wealthy individuals now use to combat this estate planning issue is life insurance.  By purchasing life insurance for estate planning, you are essentially paying pennies on the dollar now, to ensure when you pass, (or when the second spouse passes) the policy will pay the full dollar out to cover the estate taxes for your heirs.

Types of Policies

Typically for estate planning, most individuals will procure a permanent life policy.  This is to ensure that you can’t out live the policy.  However, there are some individuals who just need protection for a certain amount of time, such as for the next 10, 15 or 20 years.  In these situations a term life insurance policy would probably be a better option since it will be less expensive.

Second-to-Die or Survivorship Insurance

Since a married couple can usually pass their assets on to the spouse without any tax consequences, the tax problems occur when the 2nd spouse passes away.  A type of permanent life insurance often used by the wealthy to protect their heirs is a Second-to-Die or Survivorship Life Insurance.  A Second- to-Die or Survivorship life policy pays the lump sum death benefit upon the death of the second spouse or partner.  Additionally, a Survivorship policy is typically a lot less expensive than obtaining two separate policies.

Don’t Forget to Setup a Trust

In order for this estate planning strategy to be implemented effectively, most financial and legal advisors will advise that you set up the ownership of the life insurance in a trust.  By setting up the trust successfully with your attorney, you can avoid income tax and estate taxes on the life insurance payout money.

An important note, when shopping for permanent life insurance is to make sure the agent sends you an illustration which will show the guaranteed and non-guaranteed elements of the policy.

Costs For Life Insurance

Here is an example of how much life insurance costs, using life insurance rates as of October, 2012 with American General Life (AIG).

(Your rates will depend on each your evidence of insurability and the insurance company’s underwriting guidelines)

A 40 year old male who is at the Preferred Plus rate class in class in Texas seeking a $500k policy.

Term Life: 10 year term: $25.11 a month  15 year term= $30.96 a month  20 year term= $36.36 a month and a 30 year term= $62.01 a month

Permanent Life (using a no-lapse guarantee universal life policy guaranteed to age 121): $233.67 a month

Survivorship Life or Second-to-Die (assuming husband and wife are both 40 years of age at the Preferred Plus rate class): $130.92 month


As you can see life insurance can be a great estate planning instrument.  By purchasing a great life insurance policy, you and your heirs will have the peace of minding knowing that your assets you worked so hard for throughout your life will be preserved for the next generation, and your legacy will continue on long after your gone.

Disclaimer:  The state and federal laws can change regularly.  For any current tax and legal guidance please consult with an accountant or attorney.  The material in this article is not tax or legal advice and is not a replacement for tax or legal counsel.


Jenny Smith March 19, 2013 at 5:00 pm

Great information here. Life insurance can be a huge pain to understand. Thank you for breaking it down clearly and addressing issues that many people may not have considered.

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