I’m a huge believer in life insurance. For me personally, being properly insured is a top priority, and I suggest the same to many of my clients, particularly those who don’t have an abundance of liquid assets available or who simply value certainty.
I have several farming clients in the Central Valley. For their families, they often use life insurance to help with the transition from one farming generation to another. If this move is done correctly with life insurance, it provides funds that are not subject to estate taxes and can help farming heirs buy out (at least in part) a farm estate from siblings who don’t want to be in the business of farming.
Successful Farming’s recent article, “Using Life Insurance in Estate Planning,” quotes David Bau, a University of Minnesota Extension educator based in Worthington, Minnesota. He says, “Life insurance is expensive, but it’s still a very good tool in the process. The farming heirs can have insurance on their parents, and they can use that money to buy out the estate.” Therefore, life insurance can be a tool to provide some fairness to the process and keep the farming business viable.
The need for life insurance extends far beyond the agricultural community. For instance, business owners and well compensated executives are very important candidates for proper life insurance coverage, due to the costs associated with their departure such as loss of productivity, revenue, goodwill, and the costs of replacing the key person or transitioning the business for sale.
Parents with minor children must also obtain proper life insurance coverage to replace their lost future income in the event something happens to them while their children are still young.
Their are several types of life insurance. Term insurance covers death risk and increases in cost, as the covered person ages. Whole and universal life policies include a savings component, offer lifetime coverage, and often grow in value over time.
Life insurance has many uses, including the following:
Paying estate taxes. Even though few families are likely to be hit by estate taxes with the federal tax reform, some states also have estate taxes;
Paying off debts, estate settlement costs and funeral expenses;
Savings in whole life policies can be borrowed to cover retirement or nursing home costs for the older generation (but it reduces the proceeds that might go to heirs); and
Providing an inheritance to non-farm heirs.
To get the benefits of life insurance, do some careful planning with an experienced attorney or ethical insurance agent to avoid the common pitfalls. For example, if you don’t want insurance proceeds to be included in a taxable estate, the heirs or a trust created for their benefit needs to own the policy. The use of life insurance for paying estate taxes also really isn’t helpful for families whose assets may not be worth as much as the over $11 million individual / $22 million couple can now pass to a new generation tax-free. It should instead be part of an estate planning process designed to provide a fair transition to a new generation.
For most of us, we need to do estate planning with a qualified advisor to be certain that what we’ve worked hard to attain is passed on to the next generation.
Reference: Successful Farming (October 5, 2018) “Using Life Insurance in Estate Planning”