The Overlooked Role of Life Insurance in Estate Planning

In a previous post, I shared how I updated my estate plan after the birth of my daughter.  Not long after, I also increased my life insurance coverage.  I did this to ensure that if anything were to happen to me, my family would have the resources to cover major expenses like our mortgage and school tuition.

Today, I want to discuss why you might want to consider life insurance as part of your estate plan – regardless of your age.

Funeral Expenses and Short-Term Liquidity

Funerals are surprisingly expensive - often costing between $10,000 and $15,000 in the New York metro area.  These costs typically must be paid within days of death.  While heirs can pay funeral costs upfront (and later be reimbursed) or put them on a credit card, life insurance offers another solution.Life insurance benefits are usually paid out relatively quickly, often within two weeks to two months after filing a claim.  

Did you know? Some funeral homes also accept life insurance assignments, allowing the beneficiaries to direct a portion of the payout straight to the funeral home.  This eases the immediate financial burden on grieving families.

Covering Key Expenses

A common reason for purchasing life insurance is to cover major financial obligations like a mortgage.  Many people want to ensure that their family can stay in their home if they pass away unexpectedly.  Life insurance can also be crucial for replacing lost income, especially in single-income households.

Estate Equalization

Not all estate assets are easily divided.  If you are heavily invested in a family business or real estate, selling those assets quickly can be undesirable or impractical.

Life insurance can help equalize inheritances:

For example, if a parent wants to leave a business to one child, they might use life insurance proceeds to leave an equivalent value to other children.  Life insurance is also often used to fund buy-sell agreements, allowing surviving business partners or heirs to purchase the deceased’s share smoothly.

Liquidity for Estate Taxes, Debts, and Expenses

Life insurance provides instant liquidity to cover estate taxes, debts, or administrative expenses - without forcing the sale of valuable assets.  For instance, if your estate consists largely of real estate or an art collection and exceeds estate tax exemptions, you might otherwise have to sell these assets under pressure, often at a reduced price.

Reducing Estate Taxes

Unlike probate assets, life insurance proceeds typically pass directly to beneficiaries (or to a trust) outside of probate, maintaining privacy and efficiency.

Additionally, life insurance can be placed into an Irrevocable Life Insurance Trust (ILIT) to remove the policy from your taxable estate.  In New York, where the estate tax exemption is currently $7.16 million, an ILIT can save substantial amounts in taxes—potentially millions.

While ILITs can limit your ability to change beneficiaries, they also provide control over how and when beneficiaries receive funds and offer protection from creditors.

Providing for Children from Prior Marriages

Life insurance can also help balance the needs of children from current and prior relationships.  For example, a father with two children from a first marriage and two from a second marriage might designate his older children as life insurance beneficiaries. Meanwhile, the rest of his estate could pass to his current spouse, with the understanding that their shared children would inherit from her estate later.  

This can help avoid family conflict and ensure that all children are provided for.

Maintaining Privacy

One lesser-known advantage of life insurance is privacy.Unlike wills, which become public during probate (and are often reported on when celebrities die), life insurance passes directly and confidentially to the named beneficiaries or trust.  While an executor will need to disclose life insurance proceeds for estate tax reporting and accounting, the public typically won’t see the insurance details.

This can even allow for unequal inheritances without causing unnecessary friction among heirs.

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Incorporating life insurance into your estate plan can be crucial, enabling you to  preserve wealth and minimize taxes, and ensure that your loved ones have financial security when they need it most.   If you think this might apply to your situation, reach out to us for a consultation.  Let’s talk about how to best integrate life insurance into your overall estate planning strategy.

Out in the Community

The team at Michael J Greenberg, P.C. gathered recently at Bobby Vans Steakhouse for lunch.  

From left: Paralegal Chelsea Alvarez, Paralegal Thomas Fowler, Attorney Michael Greenberg, Paralegal Shayanne Washington, and Paralegal Dafne Polanco.

If you are a community group or work with social workers who need CEU credit and want to explore an educational session with Michael this coming fall, please visit: https://www.mjglawyers.com/community-resources