What many people don’t realize is that survivors face several types of financial difficulties after a salary earner’s death, besides the loss of income. Here are a few life situations that life insurance can help your heirs handle more easily.
Debts: Your debts don’t die after you pass away — they become your heirs’ responsibility. Debts can include auto loans, mortgages and other liabilities. Your survivors don’t have to pay off the mortgage immediately, but instead can take over the mortgage payments. However, a lender has the option of forcing survivors to pay off a home-equity loan immediately. If your survivors can’t afford to do that, they might have to sell the house. The same scenario holds for a vehicle, although lenders usually allow heirs to continue making car payments.Credit card loans don’t have to be paid unless the survivor is a spouse or a joint account holder.
Student loans don’t need to be paid off unless a survivor co-signed for the loan. Federal student loans are discharged upon the borrower’s death.
Need for Immediate Cash/Liquidity: Your estate might have assets, but they might not be readily accessible. Your heirs will probably need cash to pay administrative costs, appraisal fees, attorney fees and estate taxes. Life insurance can help. Unlike the proceeds of an estate, you can receive the benefit from a life insurance policy almost immediately. Beneficiaries do not pay taxes on the death benefit proceeds.
Life insurance also can provide liquidity when the policyholder is alive. Liquidity is the cash value of a permanent life insurance policy that accumulates tax free. A policyholder can access the cash value on a tax-free basis. The amount the policyholder can withdraw from a policy depends on how it is structured and how long the policyholder has been paying on the life insurance. Keep in mind there might be penalties for withdrawing cash value. In addition, cash value withdrawals can decrease the policy’s death benefit available to beneficiaries if the policyholder doesn’t pay the loan amount back before death.
Need for Substantial Amounts of Cash: Life is expensive and it can be difficult to save for the future. Many people also are living longer and are using more of their money in retirement. You may have expenses you thought you’d be able to pay from your salary or be able to pay from retirement savings, such as a child’s college costs or medical expenses. If you buy permanent or whole life insurance, you can tap into the accumulated cash value to pay these expenses.
Taxes: If you own a substantial amount of real estate or have a business, your heirs will likely have to pay taxes. If the cash needed to pay these taxes isn’t available, then they must sell the real estate or business. If the real estate market or business climate isn’t strong at the time of sale, your heirs could end up selling the property or business for less than it is worth. Having to sell a business can also create problems if the survivors needed the business to provide an income. Having cash to pay taxes buys them time to figure out the next best steps.
Business Continuation: One of the most important uses of life insurance aside from protecting heirs is protecting a business. Business owners can use life insurance to fund buy-sell agreements. In a buy-sell agreement, partners agree to buy each other’s interest in the event of death. Life insurance ensures the cash will be available to pay the deceased partner’s heirs for their interest in the business.
Avoiding Excessive Transfer Costs: Federal and state taxes, plus probate costs and attorney fees add up and can take a lot of time to figure out and take care of — especially when someone inherits property in more than one state. Life insurance not only helps pay these costs, but can be structured in a way to avoid those type of expenses and the delays and aggravation.
Charitable Giving: If you want to make a sizable gift to a favorite charity, organization, church or synagogue, donating to that entity through life insurance makes it easy. You might have ongoing expenses that can make it difficult to donate a substantial amount during your lifetime. When you buy life insurance and name the institution as beneficiary, you pay small premiums over time that will eventually amount to a generous bequest.