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Have you thought about how life insurance can fit into your estate plan? Many people in New Jersey buy life insurance to provide financial protection for their families, but they don’t always consider how it works alongside wills, trusts, and other planning tools. The truth is, life insurance can be a powerful way to support your loved ones and help carry out your wishes if it’s used the right way.
How Life Insurance Supports Your Estate Plan
Life insurance offers more than just income replacement. It’s also a tool to transfer wealth, provide liquidity, and give your family breathing room during a difficult time.
In New Jersey, life insurance proceeds can help:
- Pay off debts, medical bills, or funeral costs
- Replace lost income for a spouse or dependents
- Cover estate administration expenses or taxes
- Keep a family home or business from being sold under pressure
If your estate includes illiquid assets like real estate, insurance can prevent your heirs from needing to sell off property just to pay expenses. It can also be used to equalize inheritances if one child is receiving a family business and another is not.
Term vs. Permanent Life Insurance: What’s the Difference?
There are two primary types of life insurance: term and permanent. Both have a role in estate planning, but they serve different needs.
- Term life insurance provides coverage for a fixed period (such as 10, 20, or 30 years). It tends to be more affordable but doesn’t build cash value.
- Permanent life insurance includes whole life and universal life. These policies last for your lifetime and may build a cash reserve that you can borrow against or use during your life.
If your goal is to provide a short-term safety net—say, until your mortgage is paid off or your kids finish college—term coverage may be a good fit. If you’re thinking about long-term estate tax planning, charitable giving, or creating liquidity no matter when you pass, permanent insurance might make more sense.
Avoiding Probate With Life Insurance
One of the primary benefits of life insurance is that it typically bypasses probate. When you name a beneficiary on your policy, the death benefit goes directly to that person, usually within a few weeks.
This means:
- Your loved ones get faster access to funds
- There’s no waiting on the court to release money
- The proceeds remain private and don’t become part of public probate records
However, these benefits only apply if your beneficiary designations are up to date. If you forget to name someone, or you name your estate as the beneficiary, the proceeds may get tied up in probate. We’ll help you keep your designations current and aligned with the rest of your estate plan.
Life Insurance and Estate Taxes in New Jersey
New Jersey does not currently impose a state-level estate tax, but it does have an inheritance tax that applies in some cases. The good news is that life insurance proceeds are exempt from this tax, as long as they are paid directly to a named beneficiary.
Here’s how it works:
- If you name a beneficiary on your life insurance policy, the payout goes directly to that person and is not taxed.
- If you don’t name a beneficiary, or you name your estate as the beneficiary, the proceeds become part of the estate. Any distribution from the estate to a non-immediate family member may then be subject to inheritance tax.
So, while the policy itself can help provide financial relief, the way you structure your beneficiary designations matters.
It’s also worth noting that for larger estates, life insurance proceeds may be counted toward your total taxable estate for federal estate tax purposes. We can help you explore planning tools, such as trusts, that may reduce or eliminate that exposure.
Using an Irrevocable Life Insurance Trust (ILIT)
One way to reduce tax exposure is through an Irrevocable Life Insurance Trust (ILIT). With this setup, the trust owns the policy, not you. That means the death benefit doesn’t count toward your taxable estate.
An ILIT can:
- Keep the policy proceeds outside your estate for tax purposes
- Give you more control over how and when beneficiaries receive the money
- Help preserve eligibility for Medicaid or other needs-based programs if structured properly
ILITs are best used when your estate is large, your beneficiaries need long-term support, or you want to avoid triggering inheritance tax for extended family. We’ll work with you to decide if this type of trust fits your goals.
How We Can Help You Make Life Insurance Work for You
Life insurance is just one piece of the estate planning puzzle. We help families across New Jersey understand how their policy fits into their broader goals, whether that means updating beneficiaries, setting up a trust, or coordinating coverage with a will or living trust. If you already have a policy in place, we’ll review it with you and make sure it still meets your needs. If you’re just starting out, we can help you explore your options.
Make Life Insurance Work for Your Family’s Future
Life insurance can be a valuable part of your estate plan, but only if it’s set up with your broader goals in mind. If you’re ready to review your current plan or explore your options, we can help. Contact Bozanian McGregor, LLC today to schedule a consultation and start planning with confidence.