Estate Planning with Life Insurance
By using a Life Insurance Policy, one can create an effective and flexible estate planning tool.
With the aging of the world population, many are starting to think about how best to manage the succession to the next generation. Others have surpassed the hurdle and are discussing Estate Planning issues with their families at dinner tables or with advisors in offices around the world.
Much has been written and said about Private Foundations and Trusts as Estate Planning tools, but little is known about this 3rd option, namely Insurance Policy.
Here is how it works:
-One starts by transferring his assets, cash, portfolio of investments, a real estate or other to an insurance company;
-After the insurance company receives the assets, it will issue an insurance contract (policy);
-The user decides who will be named as beneficiaries in the insurance policy.
In principle, the benefits are quite similar to those obtained by using a Private Foundation or a Trust for estate planning.
There can be a considerable degree of flexibility in the drafting of the insurance policy, so wishes and desires of the policy holder can always be taken into account.
So in practice the terms of the policy, could include provisions such as, revocability and/or flexibility in the addition removal of beneficiaries. In addition, life coverage could be included or not. Beneficiaries could be individuals, companies, trusts or even private foundations.
However, distributions are not likely, while the policy holder is alive.
The policy holder can usually get access to cash by giving policy assets as collateral to a bank and receiving a loan from the bank.
The advantages of using a life insurance policy for estate planning purposes, might include:
-Confidentiality of the policy owner;
-Asset protection (the assets are no longer registered in the name of the user);
-Flexibility in making changes to the policy after the transfer of the assets;
-Estate planning (avoidance of forced heirship-rules, avoidance of probate, which means that the insurance company could arrange for distributions to be done quickly upon receipt of the death certificate).
In addition, tax advantages could also be obtained by fore-instance selecting a tax-friendly jurisdiction to administer the assets and their income.
Some of the disadvantages are:
-Depending on the their country of residence, the beneficiaries may be taxed on the receipt of the distributions from the insurance company;
-Also, the policy holder could be taxed when the assets are transferred to the insurance company.
In summary, a life insurance policy could serve as a good alternative estate planning tool for high net worth individuals.