How do life insurance policies contribute to estate planning?

• A. They eliminate estate taxes for the insured
• B. They provide liquidity to cover estate expenses upon death
• C. They automatically transfer ownership of assets
• D. They are a replacement for wills

Answer: (B)

Life insurance policies play a significant role in estate planning primarily by providing liquidity to cover estate expenses upon death. When an individual passes away, various costs arise, such as funeral expenses, taxes, debts, and administrative costs. Life insurance proceeds can be used to settle these expenses promptly, ensuring that the estate can be administered without undue financial strain on the beneficiaries.

This liquidity is crucial because, without it, beneficiaries may need to sell off assets quickly to cover these expenses, potentially at less than favorable prices. The immediate access to cash from the life insurance payout allows for a smoother estate settlement process, helping to preserve the value of the estate and ensuring that heirs receive their intended inheritance without delay.

The other options present various aspects of estate planning but do not accurately reflect the primary function of life insurance in this context. Estate taxes are not eliminated by life insurance, ownership of assets does not automatically transfer, and life insurance does not replace the need for a will, as a will is essential for outlining distribution of assets. Thus, the ability of life insurance to provide necessary funds at a critical time is what firmly establishes its importance in the realm of estate planning.