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by Brad Bakken, Financial Advisor
One thing people often overlook is the importance of including life insurance in their legacy planning.
Most people don’t realize that if their legacy includes qualified money like IRA or 401(k) dollars, that’s 100 percent taxable when they or their beneficiaries receive it. If they receive it in a lump sum, it’s not very tax-efficient, because it’s taxed as ordinary income, so federal and state income taxes could potentially eat up 35 to 40 percent of that right off the top.
Instead, it may make sense to take partial distributions each year for a period of time. That strategy may delay or reduce the tax liability of those distributions. Additionally, putting some of those distributions into a life insurance policy will provide a tax-free benefit to beneficiaries upon the death of the insured.
When it comes to insurance, the younger we are, the more affordable it is, but I also talk about it with clients during their distribution planning. With clients who are already retired, one of the questions I ask is whether it’s important for them to leave a legacy or leave something to their kids and/or grandkids. If the answer is yes, we’ll often start talking about using life insurance inside their estate plan.
After someone reaches their 60s and 70s, it can still be a good time to buy life insurance. It’s a different mindset. When we’re in our 20s and 30s and getting married, paying a mortgage and having kids, we realize we need life insurance for an income replacement. When we’re near or in retirement age, life insurance isn’t used to replace income; it is used to leverage your legacy on a tax-favorable basis.
I can also work with clients and their tax and legal advisors to set up an irrevocable life insurance trust so the life insurance does not count as part of the estate and is not subject to federal and state estate taxes. That’s especially important if you own property, such as farmland or a lake home.
Call me, and I’ll help you and your family set up the right life insurance plan.
This article is from the January 2017 issue of the Bell Wealth Newsletter. Download the full issue or check out the newsletter archive.
Products and services offered through Bell Insurance are: Not FDIC Insured | No Bank Guarantee | May Lose Value | Not A Deposit | Not Insured by Any Federal Government Agency