The purchase of life insurance requires consideration of a number of factors, including costs and terms; type of insurance plan; and how much to purchase. In terms of estate planning, another consideration is whether a life insurance policy can be a good vehicle for passing on one's wealth. And, if so, how?
One vehicle people sometimes use in estate plannin is the irrevocable life insurance trust. These are trusts which are non-amendable which are made the owner and beneficiary of one or more life insurance policies. When the insured individual dies, the appointed trustee invests the proceeds and manages the trust for its beneficiaries.
Putting a life insurance policy in a trust removes it from one's estate, meaning the proceeds of the policy or policies will not be subject to estate tax. When placed in trust, one can set the terms on which funds are distributed to beneficiaries without incurring tax penalties. This can prevent beneficiaries, often children, from spending the proceeds unwisely.
Another benefit of irrevocable life insurance trusts is that they can prevent beneficiaries from having to sell real estate or businesses in order to satisfy debtors of the estate.
One important thing in setting up an irrevocable life insurance trust is to do so well in advance. The reason is that, under tax law, there is a three-year look-back period, so that if one places assets in the trust within three years of death, they are considered part of one's estate.
Planning ahead is a good idea anyway, since it helps one to get going on one's overall estate plan well in advance.
Source: MSN Money, "8 ways to save on life insurance," Stacy Johnson, June 25, 2012