Why did you purchase life insurance? Most people buy life insurance to provide a source of income for someone (e.g., a spouse, parent, or child) after they pass. Buying the policy was the first step. Now you’ll need to do a little more work to help the money you leave behind last.
You can never leave too much – or can you?
First, determine if the amount you’ll leave behind will be enough. Review your insurance needs annually, or more often if necessary. After a major life event (e.g., birth, death, marriage, divorce, job loss, etc.), it is also a good idea to review your coverage. If you think you may need more life insurance or that you may have too much, talk to an Arvest Wealth Management Client Advisor. They can recommend an appropriate amount of insurance for your situation–remember that you’re planning for your family’s future. Plus, if you’ve chosen a cash value life insurance policy that allows you to make investment decisions, they can help you allocate your cash value account so it aligns with your overall financial plan.
Can we talk?
If you’ve bought life insurance to support a bright future for your children, sit them down and talk about it. It’s a good idea to talk to your children about the value of money, but serious talks about life insurance proceeds and the family estate should likely wait until they’re older. Eighteen can be a good age, or slightly younger if you think your children are mature enough to handle it. Although you don’t want to dwell on the fact that Mom and Dad won’t always be around, you do want to help them understand:
- How much money they’ll receive at your passing, or at least that there will be sufficient funds for them to carry on, go to college, and so on
- Who will be in charge of the funds
- When the funds will be accessible and for what purposes
- What (if any) restrictions will be set in place
- Why this planning is necessary
Do you have specific desires as to how you want the money to be spent (e.g., college education)? Explain your reasons. You may find that your children want to respect your wishes instead of trying to find ways around them. If you have young children, you’ll need to appoint a guardian(s) in your will to care for them and manage their assets (including insurance proceeds), in case something should happen to you and/or your spouse. Small children won’t understand the financial details, and you don’t want to frighten them with talk of death. Instead, consider talking to the person(s) you have chosen as guardian(s) about your plans and wishes.
Did you name your spouse, a parent, or someone else as a beneficiary? Talk to them now to help them be prepared–don’t wait until a crisis arises. Among other things, you’ll want to discuss how the insurance proceeds might be invested and what they should be used for (e.g., home mortgage, children’s education, your final expenses). You should also talk about any financial plans you’ve already made (or plan to make) and tell them what life insurance policies you have and where all the important paperwork is located.
Revocable and irrevocable trusts
If you’re concerned about your beneficiaries’ spending habits, or that they might need help managing their inheritance, a trust may be the appropriate tool for you. A trust is a legal agreement in which you appoint a person or institution, called the trustee, to manage certain property (e.g., real estate, stock portfolios, life insurance proceeds) for the benefit of one or more beneficiaries. An attorney can help you set one up and a local Arvest Trust Officer can administer the trust. If the right type of trust is used, this can be an excellent way to plan for your beneficiary’s financial future.
Two basic types of trusts are used in conjunction with life insurance: revocable trusts and irrevocable life insurance trusts (ILITs). Revocable trusts come in many varieties and can be used for many purposes. Revocable trusts allow you to retain control over the trust and its assets, and even to terminate the trust if you so choose. You would generally name yourself as the trustee of a revocable trust while you’re alive and appoint someone else, such as a corporate trustee, as a successor trustee to carry out your wishes after you pass. The trustee is legally obligated to pay out the proceeds of the insurance policy, and any other assets in the trust, as specified in the trust agreement. Arvest can serve as a corporate trustee and has the experience and training necessary to administer the trust as outlined in your trust documents. You can feel confident knowing your wishes will be carried out as you intended and in accordance with your state’s laws. Keep in mind, assets owned by your revocable trust will be considered part of your taxable estate.
With an ILIT, however, you’ll enjoy certain tax benefits–the insurance proceeds and other assets in the trust aren’t considered part of your taxable estate. You don’t want your estate to pay unnecessary taxes, because this decreases the amount your heirs will ultimately receive. However, you must give up all rights and control over the trust–you can’t act as the trustee or make any decisions about how assets are invested. If it appears that you have influence over the trustee, or that the trustee is carrying out your wishes, the ILIT will be added back into your estate tax calculation. If you have a sizable estate, you may be able to minimize the potential tax burden with an ILIT.
If you want to learn more about life insurance and how to plan ahead for the proceeds, our team of investment professionals at Arvest Wealth Management is experienced and equipped to collaborate with your third-party tax and legal advisors to help plan, protect and administer your assets the way you envision. Find a local associate today.
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Arvest and its associates do not provide tax or legal advice.