Benefits of estate planning with life insurance for seniors

Helping senior clients through estate planning requires a comprehensive strategy that includes consultations with their legal and tax advisors to ensure proper asset distribution, minimize tax liabilities and provide financial security to beneficiaries.

For financial advisors helping to navigate these complexities, it’s important to recognize the role that life insurance can play as a tool for achieving these objectives. By demonstrating the unique advantages of life insurance in the estate planning process, advisors can fortify their roles as trusted partners in navigating complex financial decisions and ultimately foster loyalty and attract new clientele through referrals.

Although the role of life insurance continues to evolve with changes in estate tax thresholds and rates, it continues to serve a vital purpose in estate planning. By providing an immediate, tax-free payout to beneficiaries, life insurance is essential for creating liquidity and safeguarding the financial security of loved ones. 

Maximizing benefits

Many seniors use life insurance to supplement their income during retirement by accessing the cash values of permanent policies. Unlike term life insurance, which might have lapsed at older ages, permanent life insurance policies can serve as a safety net to cover expenses following the death of a spouse. 

Permanent life insurance policies provide lifetime coverage and have a tax-deferred cash value component that a policy owner can access during their lifetime. If purchased early in life, this coverage can be less costly than term insurance in the long run. 

I’m currently working with a client who possesses a significant illiquid estate and consistently expresses regret for not securing permanent life insurance when he was younger and healthier. This is a valuable lesson for younger people who, as seniors, might be in the same situation.

Maintaining permanent life insurance after retirement also provides a financial nest egg for beneficiaries at a low cost compared to its value. The leverage of life insurance is well established. It provides an “exploding asset” at the death of the insured for pennies on the dollar. Life insurance benefits are especially critical for a surviving spouse who faces a reduction in Social Security benefits after their spouse’s death. A well-planned permanent life insurance policy can effectively replace this lost income, preserving the surviving spouse’s standard of living and peace of mind. 

When purchasing a life insurance policy, the policy owner designates beneficiaries and can change them at any time. In estate planning, a sizeable estate may place life insurance policies in an “irrevocable” trust to avoid having the death benefit included in the total estate value. However, life insurance death benefits generally pass without probate, provide privacy and are paid to beneficiaries quickly. 

Life insurance proceeds can be especially crucial for special needs children. This allows senior parents to provide for the security of those children who outlive them and can provide disabled heirs with financial security. However, to afford necessary health care without losing the child’s federal disability benefits, it may be wise to create a special needs trust with a friendly trustee. By integrating a life insurance policy into the estate plan, the owner ensures seamless asset distribution, protection of key beneficiaries and liquidity to cover any fees or taxes.

For seniors with large savings in conservative investments such as certificates of deposit, converting a portion of those investments, into a single-
premium life insurance policy can be beneficial. This approach maximizes the value of CDs, providing a larger, tax-free death benefit to beneficiaries, while also providing access to cash for emergencies. Many of these single premium life insurance policies have living benefits riders that allow for the death benefit to be paid out during the life of the insured to cover long-term health care needs. 

Seniors often hold CDs or large savings accounts as a buffer against health care needs and to pass to heirs if those needs never arise. A single premium life insurance strategy combines competitive earnings, liquidity and a leveraged death benefit, making it a versatile tool in estate planning.

Many retirees take required minimum distributions from individual retirement accounts, even when they don’t need the funds to cover their expenses. This income keeps accumulating in savings accounts over time. If a retiree is healthy enough to qualify, those RMD payments, or a portion of them, could be funneled into life insurance premiums that provide a tax-free liquid estate to heirs to help pay the “income in respect of a decedent” taxes that they will pay on the inherited IRA assets.

Maximizing value

Understanding and implementing life insurance best practices for senior estate planning is a must for financial advisors. By offering comprehensive guidance in concert with tax and legal teams, advisors can enhance their value proposition, strengthen client relationships and differentiate themselves in a competitive market. 

Most importantly, advisors should respect seniors’ wisdom, communicate clearly and behave ethically. By integrating life insurance into estate planning, advisors ensure financial security for policy owners during their lifetime, as well as stability for their beneficiaries. Seniors should work with a reputable life insurance agent who understands their unique needs and can tailor policies accordingly. With a professional reputation, such as your status as an MDRT member and commitment to addressing their unique needs, you can position yourself as the cornerstone of your senior clients’ financial security.

CLU, M.S. Ed., is the founding principal of The Beacon Retirement Group. He is a 35-year MDRT member with five Top of the Table and 21 Court of the Table qualifications. Contact him at [email protected].