So often, when people consider life insurance they are thinking about it solely as a tool to replace income or pay final bills. As a working mom, I have life insurance so my family can have a lump sum of cash to replace my income should something happen to me. Many of my senior adult clients have kept some life insurance after their retirement so that their surviving family members will have the cash needed to pay final medical expenses or to afford a funeral. However, income replacement and cash for final bills are not the only reasons to have life insurance. You should consider how life insurance can be used in other ways.
First, life insurance can be used to create liquidity to divide your estate between your loved ones. If you have invested mainly in real estate, then dividing your assets between your loved ones after life may be very difficult. Children whom you meant to gift with rentals, may be forced to either sell the rental and divide the equity, or to mortgage the property in order to keep it. What was meant to be a gift is converted into a weight because there was not enough cash to divide between your loved ones. Life insurance can be leveraged to create the liquidity to balance out the distribution between your loved ones. Now, instead of having to mortgage the property, one child can receive your gift of real estate while a different child can take cash to balance out the transaction -- and no one is left under the unexpected weight of a mortgage.
Second, life insurance can be used to create liquidity for a loved one who has special needs. If you have a loved one or family member or loved one who is disabled and needs government assistance, then there are strict rules about what they can own. An inheritance from you, even a small one, directly to a special needs person may mean that this person loses needed assistance, such as a housing allowance or Medicaid coverage. Instead, you can create a special needs trust. Such a trust protects the inheritance you leave, and ensures that is it properly used for you loved one, without your loved one losing the assistance they need to live. There are, of course, many ways to fund a special needs trust -- including by directly gifting the special needs trust assets from your estate plan. However, I recommend using life insurance because you can leverage a small payment, over time, to create a sizable gift of cash that goes immediately to support your special needs person. There is little to no delay through a probate or trust administration process, and your loved one immediately gets the support they need.
Third, life insurance can be used to create liquidity for charity. Sometimes I have clients tell me they want to get rid of their life insurance policy. Maybe they do not feel they need it anymore, or maybe the small premium is simply a cost that they feel is wasted. This same individual, though, that tells me about the wonderful things they are doing to support the community. They share their love for volunteering, or a particular organization. I love hearing about the passions of my clients, and so I ask them how they can continue to invest in these charities after they have passed away. Many people have never considered that they can invest in these passions through their estate plan, and continue their volunteer work even after they have passed away. One way of doing this is to maintain a life insurance policy that you might otherwise cancel and have it pay directly to the charity of your choosing. The small policy that you might think is not worth paying a few hundred a year for, could be very worthwhile if leveraged into a lump sum of cash for the charity of your choice. It could change lives for generations. You can use life insurance to leave a legacy of giving.
Life insurance has many uses beyond just replacing income or paying your final bills. It can be leveraged as a gift to the next generation, to care for your loved ones and to continue to support the things you are passionate about. It can be the gift of liquidity your loved ones need to carry out your legacy.
Cassandra Jones is an elder law and family law attorney in Gardnerville. She can be reached at 782-0040.