Life insurance is a common addition to a comprehensive estate plan given the numerous different estate planning goals that can be achieved with the help of a life insurance policy. September is “National Life Insurance Month” in the United States, making it a great time to review your life insurance policies and discuss how they fit into your estate plan with your Missouri estate planning attorney.
The Role of Life Insurance in Your Estate Plan
The basic concept behind life insurance is to provide a cash benefit to a beneficiary in the event of the death of the insured. As such, life insurance has long played a role in the average estate plan, particularly for younger planners who have yet to amass a valuable estate. Life insurance allows you the peace of mind of knowing that your loved ones will receive a lump sum of money in the event of your death even if you don’t have much in the way of actual assets to leave behind for them. While this is the traditional role of life insurance in an estate plan, there are a wide variety of other ways in which you plan can benefit from a life insurance policy, including things such as providing funding for a buy/sell agreement if you own a small business or for your funeral and burial through the use of an irrevocable funeral trust. Given the numerous important roles a life insurance policy might play in your estate plan, it only makes sense to educate yourself about the various different types of life insurance available.
Types of Life Insurance Explained
Before you decide which type of life insurance is best for your needs, be sure to discuss your options with your Missouri estate planning attorney as well as your financial planner. In the meantime, the following summaries provide some basic information about the different types of life insurance policies:
- Term Life Insurance – the simplest, most affordable, and most basic, type of life insurance. Offers a death benefit and nothing more. Term life insurance has no cash value. Coverage is purchased for a specific period of time (ie: 15, 20, 30 years). Premiums are usually low and do not change over the life of the policy. A variable of traditional term insurance is an increasing or decreasing term policy where the death benefit goes up or down. A decreasing term life insurance policy is often purchased to cover a mortgage payment because the payoff will decrease over time. An increasing term policy is often a good idea for young parents whose financial needs will increase over time.
- Whole Life Insurance – the simplest type of permanent life insurance. Premiums remain the same. Provides a cash value that grows tax-deferred. Growth is slow at first because the majority of the premium goes toward paying for the insurance and any agent fees, but can increase significantly in value later on and may provide dividends to the policyholder. Policyholder may borrow against the cash value.
- Universal Life Insurance – permanent life insurance that provides both a death benefit and a cash value. More flexible than traditional whole life because the policyholder get to decide how much of the premium goes toward the policy’s death benefit, and how much will go toward the policy’s cash value. May borrow against the cash value.
- Variable Life Insurance – permanent life insurance. Policyholder may choose how to invest the cash value of the insurance. Therefore, the cash value can grow much more than with whole or universal insurance; however, there is also more risk involved. Because of the investment options the death benefit can go up or down but will not go below a preset guaranteed amount.
- Variable Universal Life Insurance – basically the same as variable life insurance except there is no guaranteed minimum death benefit amount.
- Survivorship Life Insurance – more than one person is insured. May be set up to pay out as “first to die” or “last to die.” Premiums are usually higher than for a single insured but less than purchasing too separate policies. In addition, underwriting requirements may be less strict, particularly if at least one insured is in very good health.
- Final Expense Life Insurance – as the name implies, this type of life insurance is intended to cover burial expenses of the insured. Usually purchased by seniors. Coverage is usually relatively low – around $15,000 so premiums are correspondingly low. Often used to fund an Irrevocable Life Insurance Trust (ILIT).
Your estate plan should be reviewed and revised on a regular basis. Why not celebrate National Life Insurance Month by taking the time to review your plan and make sure you have sufficient life insurance coverage to handle your estate planning needs and goals.
If you have additional questions or concerns about life insurance and how it fits into your estate plan, contact the experienced Missouri estate planning attorneys at Amen, Gantner & Capriano, Your Estate Matters, LLC by calling (314) 966-8077 to schedule an appointment.
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