Life Insurance For Families: Must Read in 2021

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Life Insurance For Families

Life insurance for families is a critical asset for most estates. It’s a guaranteed, quick source of funds to pay the various costs that come up. Even if you plan well, substantial federal estate tax may be due.

This can present a serious problem when the estate has big non-liquid assets, like real estate or a business.

What Life Insurance For Families Can Prevent?

Insurance can prevent a distressed sale of assets to raise cash for taxes under time pressure.

Family business owners often underestimate what their companies are worth (at least for estate tax purposes).

As we’ve seen, another way to protect a family-owned business is to execute a shareholders’ agreement whereby the surviving owners have the right to purchase the dead partner’s shares.

There are different details to these deals, but a common point is that funds must be available to honor the agreement; there are life insurance policies designed specifically to generate them.

A major advantage of life insurance is the income-tax-free transfer of proceeds to the beneficiary.

This is widely known to the public. What the public doesn’t always appreciate is that the insurance proceeds can be included in a dead person’s estate if that dead person owned the policy—and even though someone else got the money!

For example, Mom owns a life policy on Dad, with the children as beneficiaries.

She is careful to pay premiums with her own separate funds so that Dad won’t somehow be deemed by the IRS to have strings attached, and the proceeds, therefore, will not be included in his taxable estate.

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At Dad’s death, the insurance money goes directly to the children, exactly as planned. No estate tax is due.

But Mom has made a taxable gift to the kids, for federal purposes, because she gave them the policy proceeds! And if the kids put up part of that money to help Mom with the gift tax—if any is actually due and payable—then they will be deemed to have made a taxable gift to Mom.

Life insurance proceeds pass to a spouse income and estate tax-free (as can all other assets). If the insured person owns the policy upon death, the death benefit is included in the taxable estate (just like all other assets).

If children or trusts own the policy, then neither the policy, cash value nor death benefit is included in the taxable estate.

The proceeds are likewise included if the policy owner names his “estate” as beneficiary. That beneficiary designation is also a bad idea because it exposes the policy proceeds to creditors of the estate, which would not otherwise happen.

Wills and trusts created within wills are always under jurisdiction of the local probate court. If you leave life insurance proceeds to a trust for your children, the probate court will probably become involved with the proceeds.

Unlike term life insurance—which has no value after a set period of time (its term)—some forms of life insurance build a cash equity value over time. These include:

  • whole life;
  • universal life;
  • blended whole/universal life;
  • interest-sensitive whole life;
  • variable life;
  • variable universal life; and
  • variable blended whole/universal life.

In most cases, premiums start higher than term insurance—but they stay level…and the policy accumulates a redeemable cash value as time goes on. This kind of insurance makes sense if you:

  • are accumulating cash for the future;
  • need coverage for more than 15 years;
  • are in a high tax bracket; or
  • are over 35 when you buy your first policy.
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The most common of these kinds of insurance is whole life. Whole life insurance is a permanent form of insurance protection that combines a death benefit with cash value accumulations.

In a whole life policy, the face amount is constant—and this amount will be paid if the insured person dies at any time while the policy is in effect.

Whole life insurance is usually used as a form of level protection during income-producing years.

At retirement, many people then use the accumulated cash value to supplement retirement income. This gradually reduces the death benefit.

The whole life plays an important role in financial planning for many families. In addition to the death benefit or eventual return of cash value, the policy has some other significant features.

During a financial emergency, policy loans may be available. Some whole life policies also pay dividends.

The policy owner has options as to how dividends will be received. They can be taken in cash or applied toward premium payments.

They can also be held by the insurance company and earn interest— then be transferred later. Finally, they may also be used to buy additional amounts of whole life insurance or one-year term insurance additions.

After a whole life policy has a cash value, certain values are guaranteed upon the lapse or surrender of the policy. Any of these options (which are known as nonforfeiture options) may be elected by the owner if a premium is in default.

The net surrender value is the cash value, plus the present value of dividend accumulations and additions, minus any outstanding policy loans.

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Outstanding loans that are subtracted from the surrender value will include any interest or other amounts charged against the policy.

Whole life is preferred to other kinds of life insurance by most people because it combines protection and savings—two major factors in the financial plans of most families.


Annuities combine elements of insurance and fixed-income investment—and offer some tax advantages.

Essentially, you agree to pay a certain amount of money to an insurance company, either in a lump sum or several payments. After a period of time, the company agrees to make a series of payments to you.

The earnings on the annuity are not taxed until you actually receive your distributions… and you arrange to receive these when you’re older. With a fixed annuity, you have no choice of investments but you are guaranteed a certain return on your investment.

Also, the fixed rate is usually only fixed for the initial period of the annuity and may be reset thereafter. In a variable annuity, you typically have certain limited investment choices.


Face it: It’s hard to take control of family money issues when there’s more than one person involved. It only takes one dead relative and one distant— but very alive and combative—one to pose a problem.

As we’ve seen in this chapter, investing in the family is critical to your family’s continued health and longevity. And there are lots of ways to do it.