Life insurance contracts are the unselfish benefit because it’s really the beneficiaries that benefit when you die. Those that purchase life insurance may not benefit from it
Life insurance is probably something you think you need when you are younger — when you have dependents and more debts. However, many experts have argued that you should only buy life insurance when you need it and as a result, they suggest that you should only buy term insurance. On the other hand, we believe that estate planning reasons to purchase life insurance are much more varied. Estate planning is simply not complete without considering life insurance. When considering insurance as part of your estate plan, it is so important that you consider the following main issues.
1. Do you need insurance?
Just like mashed potatoes and corn, or strawberries and whipped cream, life insurance, and estate planning go really well together. As we said, the most obvious reason why people buy life insurance is to protect their dependents. However, there are other equally important reasons why you might want to have life insurance:
- To cover taxes at death on illiquid assets
- To pay off debts
- To cover final expenses like funeral expenses, and lawyer’s and executor’s fees
- To provide income for your dependents
- To leave a larger estate for your beneficiaries
- To create a pool of cash to allow your executor to make things equal for your beneficiaries when some things can’t be divided
- To help corporations and business arrangements remain viable
- To help businesses cope with the loss of key people.
Obviously, this list is not exhaustive but it does represent some of the key uses of life insurance in the estate planning process.
2. The right amount of life insurance
Once you have identified why you need insurance, you then need to know the right amount of insurance. This is one of the most important steps in planning for life insurance. Determining the right amount is not always easy. We think it’s more of an art than a science. You need enough to meet your goals, but you don’t necessarily want to buy more than you need. When in doubt, get help from a professional advisor.
3. The right type of life insurance
The appropriate type of life insurance to use is the next main issue to consider. There are basically two kinds of life insurance: temporary insurance and permanent insurance.
- Another name for temporary insurance is term insurance. Term insurance is the most cost-effective type of insurance. It is designed to protect you for only a temporary period of time. As you get older, term insurance gets more expensive. Once you reach 70 or 80 years of age, you will not be able to get any term insurance coverage.
- The second type of insurance is permanent insurance. Permanent insurance stays in force until you die. As long as you pay the premiums, your permanent life insurance policy remains an asset in your estate planning. The benefit with permanent insurance is a price that is fixed over your lifetime, unlike term insurance where the price increases as you get older. There are three basic types of permanent insurance: Term to 100, Whole Life, and Universal Life.
Living insurance is a more selfish type of insurance because it pays you before you die. Two good examples of this are Long Term Care insurance and Critical Illness insurance.
Which type of insurance is best for you?
The answer is found in your reason for buying insurance in the first place. For example, if you want insurance to pay off your mortgage so your family is not burdened with debt, then term insurance is probably all you need. On the other hand, if you want insurance to create a bigger estate for your heirs, then a permanent policy is probably more appropriate.
4. Be Sure to Shop around
As with anything else in life, not all life insurance products are created equally. That is especially true when it comes to price. Once you have a basic idea of what type of life insurance you are in need of and how much you need, it is critically important to shop around for the best deal. In the event that you are unsure of how to accomplish that, then seeking advice from an independent insurance broker who can shop around for you would be your best option.
Remember that life insurance is a very unselfish financial tool. We call it unselfish because the greatest benefit typically comes after you die. Life insurance money does not benefit you as much as it benefits other people – usually the people you love most.
Begin the process of securing your estate for future generations!