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Life insurance for estate planning: 5 things it can help you accomplish

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Life insurance is one of the most important planning tools you can use to prevent your loved ones from facing financial stress after you die. The money typically provides a tax-free benefit to your heirs, and they can use it for any purpose, including paying for their daily expenses and your funeral costs.

You also can use life insurance for estate planning. Specifically, permanent life insurance can help you accomplish goals like paying estate taxes, creating generational wealth, resolving inheritance inequities and providing for a special needs heir.

Since the two main types of permanent life insurance—whole life and universal life—do not expire after a certain number of years like term life insurance does, you can feel confident that your beneficiaries will receive a payout as long as the contract is in force when you die. A permanent policy offers living benefits that can support your estate plan, too.

Here's an overview of the estate planning strategies that permanent life insurance can help you accomplish.

Use life insurance to reduce estate tax liability

Your estate may owe taxes if your total taxable assets are larger than the lifetime exclusion in the year you die. The lifetime exclusion is $13.61 million per person in 2024. Under current law, this exclusion amount will be adjusted for inflation annually through 2025, and in 2026, it will reset to $5 million (adjusted for inflation).

Many wealthy families facing estate taxes choose to create an irrevocable life insurance trust (ILIT) that owns and is the beneficiary of a permanent life insurance policy. This arrangement may prevent the death benefit from being included in the decedent's taxable estate. It also can protect the death benefit from the trust beneficiary's creditors.

A qualified estate planning attorney can help you draw up the documents that govern this type of trust, which can't be changed once created. Thrivent Trust Company can serve as trustee of your ILIT should you choose to create one.

Death benefits can create generational wealth

You may be able to provide financial security for your children and grandchildren through the life insurance death benefit you leave them in an ILIT. Using life insurance to cover estate taxes means you'll be preserving the part of their inheritance that could otherwise be reduced by up to 40% under the federal estate tax (and possibly more if your state has an estate or inheritance tax).1

By passing on the full value of assets such as investments, real estate and even a family business, your heirs will have more opportunities to spread your family's values, do good in their communities and pursue big dreams. The right estate planning documents and financial tools can help you create the kind of generational wealth that can fund these opportunities and set boundaries that ensure your heirs honor your legacy.

Resolve inheritance inequities

Many people want to leave an equal inheritance to each of their heirs but feel like they can't do so without liquidating important assets, which can create large tax responsibilities (on top of potentially not being the most desired option). For example, if much of your wealth is tied up in your family's main home and the family business, it could seem unbalanced to simply leave one asset to each child and call it a day—especially if you have more than two children. Plus, liquidating would mean neither asset would continue to stay in the family.

You might consider leaving the assets jointly to your children to share equally. However, this could create conflict if they don't agree on how to run the business, if one of them wants nothing to do with it, or if one is happy to take it over but can't afford to buy out the other's share.

As an alternative, you could leave each asset—in this case, the home and the business—to whoever wants them and will carry out your intentions for them. Your other children, then, could be set up to receive an equivalent value from the proceeds of your life insurance policy.

Life insurance proceeds can fund a special needs trust

The death benefit from a permanent life insurance policy can provide for a disabled minor or adult child or another dependent who will need caregiving and financial support when you die. You can use it to fund a special needs trust that helps your dependent financially while preserving their eligibility for needs-based government benefits, such as Social Security, Supplemental Security Income or Medicare/Medicaid.

In addition to life insurance, you can fund a special needs trust with assets such as cash, investments, retirement plan benefits and real estate. A trustee that you choose, such as an attorney, friend, relative or trust company, will take distributions from the trust to pay for items and services that support the beneficiary's quality of life according to the rules detailed in the trust documents. Distributions could pay for education, travel and recreation, assistive and electronic equipment, out-of-pocket medical expenses, in-home care and more.

Access living benefits, such as cash value

While we often think about estate planning in terms of things that will happen after we die, a permanent life insurance contract's living benefits also can be part of your estate plan.

Depending on the contract, permanent life insurance contracts can accumulate cash value when the insurance company sets aside a portion of the premium payments and adds an annual rate of growth. This rate may depend on the performance of certain investments you choose, or it may be guaranteed by the insurance company.

You can access the contract's cash value during your lifetime for various purposes. If you don't mind reducing the contract's death benefit, you can use your cash value to create a stream of retirement income, part of which may not be taxable. You also may be able to borrow against your cash value regardless of your credit or financial situation and repay the loan with interest to keep your full death benefit intact.2

Some contracts also may pay dividends, though dividends are never guaranteed. Dividends can be taken as cash, used to pay premiums or used to buy more insurance.

Move forward with your plan

Life insurance can be an important tool serving many purposes within a holistic financial plan—not just for you but also for your loved ones. Planning for tomorrow can help you feel reassurance today.

Connect with a financial advisor to learn more about life insurance and gain insight into the flexibility and protection it could provide.

1 Under current tax law [IRC Sec. 101(a)(1)], death proceeds are generally excludable from the beneficiary's gross income. However, death proceeds may be subject to state and federal estate and/or inheritance tax.

2 Loans and surrenders will decrease the death proceeds and the value available to pay insurance costs which may cause the contract to terminate without value. Surrenders may generate an income tax liability and charges may apply. A significant taxable event can occur if a contract terminates with outstanding debt. Contact your tax advisor for further details. Loaned values may accumulate at a lower rate than unloaned values.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

Guarantees based on the financial strength and claims paying ability of Thrivent.

Thrivent financial advisors and professionals have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.

Thrivent is not connected with or endorsed by the U.S. government or the federal Medicare program.

Trust and investment management accounts and services offered by Thrivent Trust Company are not insured by the FDIC or any other federal government agency, are not deposits or other obligations of, nor guaranteed by Thrivent Trust Company or its affiliates, and are subject to investment risk, including possible loss of the principal amount invested.

Trust and investment management accounts and services offered by Thrivent Trust Company, a subsidiary of Thrivent is the marketing name for Thrivent Financial for Lutherans and an affiliate of Thrivent Investment Management Inc. Neither Thrivent Investment Management Inc., a FINRA and SIPC member, nor its associated person(s) is offering any product hereby. Certain Thrivent Investment Management Inc. associated persons refer prospective clients to Thrivent Trust Company.

Coverage may terminate prior to the maturity date even if scheduled premiums are paid in a timely manner.

Life insurance contracts have exclusions, limitations and terms under which the benefits may be reduced, or the contract may be discontinued. For costs and complete details of coverage, contact your licensed insurance agent/producer.

Hypothetical examples are for illustrative purposes. May not be representative of actual results.

If requested, a licensed insurance agent/producer may contact you and financial solutions, including insurance may be solicited.