How life insurance can present estate planning complications

There comes a time in many people's lives when they decide it's time to start taking things like their career, finances and even long-term planning a bit more seriously. For many people this happens after marriage, the birth of a child or even the death of a loved one.

One of the first objectives of those armed with this sense of purpose is to secure a life insurance policy such that in the event of their untimely death, their surviving loved ones will have the necessary means at their disposal to cover everyday expenses, family goals and, of course, burial costs.

As good of an idea as it is to secure a life insurance policy, it's important to understand that it can present certain complications from a purely estate planning perspective.

First and foremost, you must consider that when it comes to calculating any estate taxes owed, the government will include the value of everything held in your name. As you might have already guessed, this includes the life insurance policy.

This reality is certainly nothing to dismiss, as life insurance policies typically provide beneficiaries with hundreds of thousands -- if not millions -- in death benefits, meaning tax liability could be substantial.

Second, life insurance on its own doesn't necessarily grant the owner much leeway in terms of deciding who gets what, where and at what time. In other words, the owner can typically only designate the beneficiaries, meaning someone who is potentially very young and/or not the most reliable with money may suddenly receive a sizeable influx of cash.

The good news is that anyone who owns a life insurance policy can help remedy both of these problems by executing what is known as an irrevocable life insurance trust, an invaluable estate planning tool we'll examine in our next post.

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