“Do we need life insurance if we don’t have kids?” This is something I hear a lot from childless couples who come into my office, and it’s a legitimate question. Life insurance isn’t just for taking care of your family—it’s also for preserving your legacy. Even if you don’t have kids or other heirs, life insurance can be used to ensure business assets don’t need to be liquidated when you pass away and charities won’t have to go through expensive probate processes to get any money you may have bequeathed to them. Most people have at least one thing they’d like to see continue even after they’re gone, be it a business or a charitable cause, and life insurance could potentially supply the funding for yours.
When you spend a lifetime accumulating wealth, but don’t have beneficiaries to leave it to, you can choose to do nothing and let the state decide what to do with your assets, or you could decide what happens to your assets by creating an estate plan. Life insurance can become a central part of that estate plan, which is why there are plenty of reasons to get it, even if you don’t have kids.
How Life Insurance Allows You to Maintain a Business or Charitable Foundation
Chances are you have a legacy project. You might have a business that will need to continue on, or a charity you’d like to support. If you simply provide for these things in your will, your funds could be used to pay your debts and estate taxes first. Part of the estate might even be liquidated to pay these costs, meaning you’ll be left with less to fund these legacy projects. Life insurance can be used to bypass probate and ensure those assets get passed on to your chosen heirs, your business, or a foundation. This is because life insurance is contractual, so it supersedes wills and intestate succession laws.
For a business: One of the most common reasons people use life insurance is to maintain a business they created. This is actually so common that there is a category of estate planning specifically for it called business continuation.
Life insurance is often used in business continuity by funding something called a “buy sell” agreement. The business buys a policy for one or all of its owners and makes itself the beneficiary. When the owner dies, the proceeds are used to continue the business. Businesses with more than one owner will frequently require all owners to take out a life insurance policy to ensure that their share of the business can be passed on properly. The goal is that the proceeds of the policy will be used to buy the decedent’s portion and give it to whomever the business designates.
In this case, it’s best to go with permanent insurance that grows in value since it’s likely the value of your business will increase as well. It’s important to keep up with the growth, so the value of the business doesn’t significantly exceed the proceeds on your policy after your death. The policy is there to purchase the business, but doesn’t guarantee a purchase price.
For a charity: While you can leave a bequest to charity in your will, it’s important to note that, between estate taxes and other beneficiaries, you might not have the money left over to fully fund it. Instead, if you want to leave money to charity, it’s far better to set up a trust for the charity and contribute policies to it while you’re still alive.
When a trust is set up to benefit a charity, the proceeds from that trust won’t be considered part of your taxable estate. Instead, they will be considered the assets of the trust as long as you have no control of the trust. You can also benefit while you’re still alive by gifting the life insurance to the charity and taking a deduction from that. Usually, you’re permitted to gift $15,000 per individual, per calendar year without having to pay a gift tax, but gifting an insurance policy to a qualified charitable organization is usually exempt from that limit. What’s more, you can take charitable contribution write-offs for both the initial donation of the policy and any premiums you pay for it in the future. At the time of your death, the charity would receive the benefit tax free. If you want to fund philanthropic efforts, life insurance can be a great way to do it.
Being childless isn’t necessarily a reason to eschew life insurance. Even those without beneficiaries have things they want to provide for after they’re gone. For more information on how to lower your taxes while funding a legacy with life insurance, contact a Howard Kaye advisor or call us today at 800-DIE-RICH.
