How Life Insurance Can Make Life Easier

Hints for neatening up one of life’s loose ends

Life insurance. The very mention of the term conjures up images of smooth-talking salesmen and glossy brochures. The truth is that life insurance is about security. It provides a financial cushion to those closest to you so they can carry on seamlessly after you are gone. Life insurance can also make administering your estate easier, saving your loved ones time, money, and a lot of stress.

The simplest policies pay a lump sum upon your death. This money can be enormously useful in settling your affairs. For example, proceeds from the policy can help cover the costs of your funeral and burial arrangements. These expenses generally come up before an estate has even been opened. Sometimes a willing family member must front the funeral costs – which average about $7,000 – and then wait months to be reimbursed. With life insurance, the needed funds are available with minimal delay.

An insurance policy can also be a buffer against “death taxes.” For those of us without a spouse or children, the Maryland inheritance tax can eat into our estates. Any bequest you leave to a partner, niece or nephew, or a friend is subject to this 10% charge. If the bequest takes the form of a house or other illiquid asset, the tax can be difficult for the recipient to pay. They might have to tap into savings, invade a retirement account, or even mortgage the property just to pay the tax. Making this person the beneficiary of your life insurance, which is exempt from the inheritance tax, can provide the necessary capital to pay the tax straightaway.

If you are fortunate enough to have children, life insurance can provide for them in case you – and your income – are unexpectedly gone. For younger children (say, under the age of 30), establishing a trust under your will can help to ensure that their inheritance is managed wisely. A person you appoint, called the trustee, will spend the money for your children’s benefit according to the terms you state in your will. Funding the trust with life insurance will help provide the substantial funds needed to care for your children properly.

Many trusts permit the trustee to pay for a child’s health, education, and support, which could cover the cost of braces, a medical emergency, college, perhaps a semester abroad, a wedding, and day-to-day living expenses. The trust can even include a “spendthrift” clause to prevent possible creditors from placing a lien on the trust assets.

Just as important as having life insurance is keeping the beneficiary designation up to date. Upon your death, the payout will go to the person named on the policy, regardless of what your will might say. For example, your will may leave your entire estate to your spouse. But if your life insurance beneficiary is someone else, your spouse will have no right to the policy’s death benefit. Stories abound of an ex-partner, estranged sibling, or forgotten friend benefitting from an out-of-date beneficiary designation. When this happens, the harm to the intended recipient is often as much emotional as it is financial.

Author and artist Tamara Kulish said, “When everything is uncertain, everything that is important becomes clear.” Life insurance is a hedge against uncertainty. When used correctly, it can help make life easier for the people who are important to you. Speak with an estates and trusts attorney to find out more. t

Lee Carpenter is a partner at the Baltimore law firm of Niles, Barton & Wilmer and an adjunct professor at the University of Maryland Carey School of Law. He can be reached at 410-783-6349 or lcarpenter@nilesbarton.com. Learn more about LGBT estate planning at Mdlgbtestateplanning.com. This article is intended to provide general info, not specific legal advice.