Understanding Estate Taxes
20. Life insurance (inexpensive way to pay estate taxes)
As you can see, life insurance can be a very inexpensive way to pay estate taxes. Based on their ages and health, it would only cost $118,328 in insurance premium for Frank and Betty to purchase $450,000 in life insurance-enough to pay all the estate taxes.
In this example, every dollar spent in insurance premium will pay $3.80 in estate taxes. That's excellent leverage! And insurance proceeds are available immediately to provide the cash necessary to pay estate taxes and other expenses, which prevents other assets from having to be liquidated.
Remember, if you purchase the life insurance policy yourself, that would just increase the value of your estate and the amount of estate taxes you would have to pay. But if you set up an irrevocable life insurance trust and have it purchase the insurance policy for you, the insurance will not be included in your taxable estate when you die.
Now, let's look briefly at some other ways to reduce your taxable estate-and your estate taxes.