How insurance planning can help protect your legacy

Financial Planning

Insurance isn’t just about planning for life’s worst-case scenarios. It can play an active role in your overall financial planning strategy.

There are a variety of ways insurance — be it life, long-term care or disability plans — can protect or even contribute to your wealth in a tax-efficient way. Based upon the respective contingencies, these plans generate assets to protect or augment your legacy, provide income tax-free cash flow to fund long-term care or replace earned income lost to disability.

One insurance plan doesn’t fit all

There are as many types of insurance plans as there are clients. The types, amounts and structures of your policies should be designed around how you’d like your legacy to be carried on. Purchase of insurance should be reviewed from a planning, not transactional, perspective.

“Your insurance policy is unique and very individualized to your situation,” says Taylor Miller, senior vice president and national director of insurance premium financing at U.S. Bank Wealth Management. “Your estate plan, your legacy and your wishes after you’re gone must be taken into consideration.”

The most common need for insurance is providing cash when your estate is being settled, but the possibilities start there. Need to plan for the succession of your business? Insurance can provide your family or business partners with tax-free funds to help assure an effective succession of ownership among family members or transfers between partners.

For those in need of additional retirement income, life insurance can be a useful tool to pool wealth for later in life. And, if you’d like your legacy to include charitable giving, insurance can help you and your family pass on wealth to causes that you’ve selected.

“Your insurance policy is unique and very individualized to your situation. Your estate plan, legacy and wishes after you’re gone must be taken into consideration.”

Consider how to fund your premiums

Not only are insurance plans customizable, but how you choose to pay your premiums — the amount you pay for a given policy — can also be tailored.

“Your premiums can come from a variety of sources,” says Pat Edwards, a regional insurance specialist with U.S. Bancorp Investments. “I often joke that it’s not that people hate life insurance, it’s that they don’t want to pay for it. So, it’s a matter of finding the dollars that are the least painful to fund the premiums.”

The funding source may simply be cash. You may also free up cash by reducing holdings, or you may generate cash by selling existing stock portfolio positions. There can also be income available through assets gifted to family members, such as investment real estate. Liquidating assets is another option, though that may have tax implications.

Financing your premiums is another route if you’d like to avoid losing assets to pay large premiums. One example where this is an attractive solution is a couple who owns a business and whose family will be hit by a large estate tax based on the value of the business after they’re gone.

“They might need a large life insurance policy to pay for the estate tax coming their way,” Miller says. “Therefore, finding the necessary funds needed to pay high premiums can be a challenge. Financing can help by using business proceeds or loans to cover the premium. Life insurance premium finance is not for everyone, but, within the right set of circumstances, it is a fantastic tool to help the borrower maintain the assets they spent a lifetime accumulating.”

Review and customize your insurance

Regardless of the ways you’d like to plan for and protect your legacy, regularly include an insurance review with your quarterly portfolio review to make sure you’re staying on the best course of action for your goals.

Your portfolio review can also be an opportunity to review your existing insurance policies and identify risks or changes in the market. As time goes on, the performance of your policies will naturally fluctuate with interest rates. Other factors — who your beneficiaries are, tax threats, the competitiveness of the policies, etc. — may need reconsidering as well.

Ultimately, staying on top of your insurance policies is important because of their value. “A life insurance contract many times is a client’s largest unmanaged asset,” Edwards says.