How to use life insurance in modern estate planning


In the past, life insurance was traditionally used in estate planning to pay for or protect against estate taxes.

With exemption having been raised to reasonably high limits (approximately $11.7 million per person federally and $5.93 million per person statewide for New York), we now use life insurance for other ways.

Income taxes

In 2020, Congress passed the Secure Act, which in part required beneficiaries inherited of IRAs to withdraw these funds over a 10-year period. This 10-year period reduced what amounted to a life expectancy withdrawal period and cut the amount of time an individual had to withdraw the IRA substantially.

Consequently, because IRAs are now much higher, beneficiaries of IRAs are now paying not only more in taxes, but are likely being moved to new tax brackets as a result. The resulting tax could be punitive to the beneficiary. As a result, we are now using life insurance, which is income tax free, to protect against potential income tax problems.

Long-term care costs

Long-term care insurance is a great way to protect assets or income in case of long-term care needs. It is not the only measure to protect assets, indeed I could argue it is not the best. We are now recommending and using life insurance as a means to protect against long-term care costs. How is that so, you might ask? Well, traditional long-term care insurance only pays if someone goes into a long-term care facility.

There is about a 50% chance that you will utilize long-term care to any measurable benefit. Life insurance will pay out at your death, giving you a 100% chance of a return on your investment. If long-term care is required, life insurance proceeds pays the estate back for any funds used for long-term care. This is even more effective in the modern age where we are finding clients with many hundreds of thousands of dollars in IRAs would or could be used for long-term care costs at a much lower rate of taxation.

Estate substitution techniques

We are finding more and more clients retiring with large retirement accounts, often in the millions of dollars. This means that, there will be substantial taxes to be paid by the families and the client. In an effort to minimize those taxes, we use what is called an estate substitution technique.

The client purchases a life insurance policy utilizing the retirement funds to pay the annual or monthly premiums. We start to draw down the retirement accounts by paying the premiums and paying the taxes during the client’s lifetime. At the time of death, we have drawn down some of the retirement while leaving a tax-free life insurance policy for the beneficiaries.

Blended families

Blended families create a whole set of challenges when doing an estate plan. Aside from the potential personality conflicts, we have issues of leaving assets to ensure goals of all parties are meet. In an effort to protect children of a spouse in a blended family, we will often use life insurance directed to the children of the first person to die. This ensures that all children receive an inheritance, not just the children of the last surviving spouse.

In all, life insurance is a useful resource on handling estate planning issues, We recommend looking into some type of permanent insurance if the situation calls for it.

Robert K. Hilton, is an attorney with the law firm of Hilton Estate & Elder Law, LLC, with offices in Utica, Boonville, Rome, Syracuse, Lowville and Gouverneur. He has more than 25 years of legal experience and currently concentrates in estate planning matters, including Wills, Powers of Attorney, Health Care Proxies, Revocable and Irrevocable Trusts, Asset Protection, Nursing Home/Medicaid planning and related litigation issues. He can be reached at 315-624-9600 for free initial, confidential consultation. Visit us on the web at:


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