The estate is distinct from the deceased family's members. Most people name their family members as nominees of their life insurance policies. In such a case, the life insurance proceeds would be paid to the members of the family. However, if the estate has insufficient funds to pay expenses and debts, the personal representative may be forced to liquidate some of the assets of the estate notwithstanding that it was the deceased's intention to leave tham as a legacy to his loved ones under his will. In other words, the family members may have sufficient funds but the estate may not. In this regard life insurance proceeds can fund the estate for the purpose of paying funeral and testamentry expenses, include probate and administration costs, lawyers fees and so on ; medical expenses which may have been incurred prior to death ; any outstanding debts, including loans relating to motor vehicles and credit cards ; and outstanding taxes.
Life insurance proceeds are also increasingly becoming the source of funding for middle-income families that create education-trusts for their children and maintenance trust for their dependants. The advantage of having insuranced-funded trusts is that you are not required to set aside any cash during your lifetime. Insurance also plays an important role in the estate planning of business owners in the following ways:
1. Life insurance helps to fund the acquisition of the business interests of an outgoing partner under a buy-sell agreement.
2. Providing family members who will not be inheriting any shares in the business with alternative inheritence or financial gifts.
3. Softening the impact on business finances resulting from the loss of a key employee.
4. Life insurance ensures that the estate has sufficient funds to settle any loans taken for working capital or to fund the acquisition of shares in the business during his lifetime;
5. Ensuring that the estate of the business owner has sufficient funds to pay personal debts, outstanding taxes, estate administration costs and other expenses. Insufficient funds can sometimes leave the family with no other option but to sell the business.
At times, insurance proceeds may be insufficient to cover the living expenses of family member, perhaps because the policy owner was underinsured or the insured-cum-policy owner suffered disability and most of the proceeds were used up during his lifetime. In this regard, it is important to understand the terms of the policy you own. In addition, it os not uncommon for the family's breadwinner to have the msot coverage and the non working spouse to be underinsured. If the latter is struck down by critical illness, the family will be faced with a dreadful choice of liquidating their assets to pay the medical bills which may ampunt to hundreds of thousands or giving up on the treatment.
Insurance is important because living and dying is expensive. Many of us may be under the misguided impression that we are richer than we truly are. It is frightening when you realise that once your bank loans and other liabilities have been taken into account, your net assets are not as much as you presumed. It is not uncommon not to underestimate the amount of funding one's estate and family members require. You may have purchased insurance for say $1,000,000 when the amount needed is probably $2,000,000 or more. To ensure that sufficient funding is in place to meet the financial needs of your family and yourself, you may need to ascertain the net value of your assets (that is, assets minus liabilities) and have in place a mechanism to fund the shortfall. A financial wealth assessment by qualified financial planners may be helpful. This process includes gathering information, analysis and feedback from the financial planners.
