One of the things you can do when you have seen a movie hundreds of times is let your mind wander while you are watching. You can consider the small details, get lost in your thoughts, then walk right back into the storyline without getting lost. Something like this happened the last time It’s A Wonderful Life was on tv. Slipping between Bedford Falls and Brandon, Mississippi, an important estate planning light bulb went off: George Bailey has an estate plan.
When George Bailey is so desperate for cash he asks mean old Mr. Potter for help, George reveals the only asset he has is a life insurance policy. Potter dismissively suggests George is worth more dead than alive. This throwaway remark gets George thinking about taking his life, which drives the plot forward. It also highlights an important character trait — George is a planner.
Through flashbacks we learn George planned to go to college, he planned a long honeymoon trip, he planned to conquer the world. But at pivotal points in his life, he sacrificed his own ambitions to save the family business, help his brother, and keep the evil Mr. Potter from taking over the entire town. The existence of a life insurance policy shows that George has never stopped planning.
Setting aside the fact that most life insurance policies are void if the insured commits suicide, or if George were to die, his life insurance policy could provide for his young family and keep the old Savings and Loan from going under. It’s a simple but effective estate plan. Many business owners and parents with young children include life insurance in their estate plans for these same reasons.
There are two different types of life insurance, term and whole.
Term life insurance covers you for a specific amount of time, often 10, 20, or 30 years. It is cheaper than whole life insurance because the insurance company will not have to pay out if you outlive the term of the plan.
Whole life insurance covers you for your whole life, so long as you keep paying your premiums. Because the insurance company will have to pay out, whole life insurance costs more, but many policies build up a tax-free pool of cash that can be borrowed against. 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.
In addition to serving as a safety net, life insurance policies can also provide some tax advantages. If your estate is large enough that you anticipate paying a hefty estate tax bill, but you lack sufficient liquid assets, life insurance can provide your loved ones the cash they need to pay your estate taxes without selling off property or other hard assets.
People who have large estates may also find it beneficial to set up an irrevocable life insurance trust (ILIT). 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 on to future generations.
Just like George Bailey, the world is better off with you in it, but it never hurts to plan ahead. No matter what stage of life you are in, life insurance is a versatile estate planning tool that should not be overlooked. The Palmer & Slay team can help you figure out how life insurance can help you meet your estate planning goals. Contact us today to schedule an initial consultation.