Airbags Make Seat Belts Better

Do you really need airbags in your car? You’ve already got a seat belt and you click it every time (right?). In the event of an accident, your seat belt should work just fine and should keep you from going through the windshield. So, why the airbags too?

When I had my first child, my boss at the time approached me and asked if I had a life insurance policy. I didn’t, only because it was something I hadn’t thought of yet. I was sleeping for 2 hours at a time due to the screaming baby, so I wasn’t thinking about lots of things. Of course, I soon did the same thing most new parents do very soon after having their first child – I made an appointment with an insurance agent and bought life insurance for both me and my wife.

Most parents stop there, thinking they’ve done all they can to ensure that, should something happen to them, their spouse and / or their children will at least have adequate funds to maintain their current lifestyle…they click the seatbelt. An Irrevocable Life Insurance Trust (ILIT) makes having life insurance even more effective….like adding the airbag.

Parents who have an ILIT as the beneficiary of the life insurance policy, rather than their spouse or their children, have added an extra layer of protection for their families.

First, an ILIT keeps the dollars outside of the taxable estate, thus potentially lowering the estate tax bill and saving their heirs thousands of dollars. The proceeds from the insurance are kept in the trust for the benefit of the beneficiaries, rather than going directly to the beneficiaries. This not only keeps the funds out of the estate of the deceased, but also outside of the estates of the heirs, potentially saving future beneficiaries estate taxes as well.

Second, and another advantage of the proceeds being kept in trust, the assets are shielded from creditors in most circumstances. Thus, if my wife is later sued, gets into trouble with a creditor, or goes through a divorce from a later marriage, the assets in the ILIT from the life insurance are protected and are more likely to pass my children. She can generally use the assets as she sees fit, but creditors can’t get to them.

Finally, I can maintain control, at least in part, of the assets even after I die. I can control the circumstances under which the assets are distributed and when they are distributed. I can keep my children from getting the assets when they turn 18 (should I choose to do so), by setting ages or even education targets (like college graduation) at which time the money, or a portion of the money, is distributed. I can encourage positive behaviors (through distributions for starting a business) and discourage negative ones (eliminating distributions in the event of a criminal or a drug conviction).

For these reasons, among others, parents should consider transferring their life insurance policies to an ILIT. The additional protection is worth it. So are airbags.