Why Estate Liquidity Through Life Insurance Is Best- Part I
In my opinion, life Insurance is the most efficient and least expensive way to obtain the cash needed to settle an estate, hands down! Out of the four potential methods to accomplish estate liquidity, only the use of life insurance avoids selling estate assets, borrowing, or maintaining large amounts of cash.
So what is estate liquidity anyway? It is, essentially, the availability of property in an estate that is readily convertible to cash. Examples of this would be cash itself, savings accounts, bonds, marketable securities, and of course, life insurance. The extent for which liquidity is needed has numerous considerations involving taxes, probate expenses, and other administrative costs, which are not the focus of this discussion.
Of the four ways of obtaining cash for estate liquidity, the first requires you to “sell” enough of the estate assets to meet the cash needs. This often requires ‘forced sales’ of the most liquid property in the estate which will often be allocated to pay taxes, administrative costs, and satisfy other immediate cash needs. The family will then often inherit assets of poorer quality and those least able to convert to cash, which could potentially, lead to disastrous financial results.
The second method is for you to actually have to “borrow” the necessary cash. The first potential problem with this is, the amount needed to be borrowed might not be of a sufficient amount. Even if you are able to obtain a large enough loan, it would still have to be paid back over time with interest. This does not solve the problem but merely postpones it. Overall, the use of a ‘loan’ may end up being even more expensive or simply a greater loss than even the ‘forced sale method’.
A third method is to “maintain sufficient cash or liquid investments” on-hand to provide the immediate cash needs of the estate. This method is not always easy as most people do not often think this far ahead, or have the financial means to have that large amount of money available. They would be better off if they had put some or all of the risk upon an insurance company to fulfill such an obligation which brings us to the fourth and, in my opinion, best method… using life insurance for liquid cash needs.
In the first method, we see that the estate is “depleted” by the amount of assets that must be sold. In the second method, the estate goes into “debt” and must repay any loans and interest due. The third method to create estate liquidity, uses “100% dollar-for-dollar” funds from your pocket to provide cash needs. The last method, the use of “life insurance”, can use as little as 2-4% of your principal-sum/current income to fund the obligations of the future liquid cash needs!
In Part II, I will enumerate the advantages of using life insurance to create estate liquidity. At this point, you can see why life insurance is potentially much more than income/mortgage protection, or college/business loan collateral. It can and should be seen as one of the great financial wonders of the world if we take the time to look into everything it can accomplish.
About the author: Kyle McDonald holds FIC, FICF, FSCP® & CLTC designations. His viewpoint on life insurance is simple, “Anyone with a family must have life insurance. In the end, life insurance is for others you care about, not you.” He is ready to help you and your family get the best option available. Contact Kyle today at 1-800-651-1953 or KMcDonald@Pivot.com.