How Can Whole Life Insurance Be Used for Estate Planning?
Help Your Heirs Pay Estate Tax
If you have a high net worth, it’s possible that your heirs may have to pay estate tax in order to inherit it. As of 2023, the IRS estate tax exemption is $12.92 million. If your estate totals more than this, your heirs will owe income tax on the portion exceeding the exemption amount.
Just how much tax would they have to pay? 40%, as of 2023.
As an example, if your estate totals $20,000,000, that means your heirs would owe 40% income tax on $7,080,000. That tax would amount to $2,832,000. Do your heirs have that much cash available? Or would they have to sell some of what you left them in order to pay it?
Life insurance can help you avoid this situation. If you know how much your estate is worth, you and your financial advisor can estimate how much income tax your heirs will owe. You can then buy a life insurance policy with a face amount at or over that amount. Then, when you pass away, your beneficiaries will get an income-tax-free payout of cash they can use to pay any estate tax due. They won’t have to sell assets like a home, artwork, jewelry, cars, or other property to cover those taxes.
To recap, how can whole life insurance be used for estate planning? It can give your heirs the cash they need to pay the estate tax, allowing them to keep more of what you bequeathed them.
