Life insurance is all about protection. It helps protect your loved ones against financial expenses if you pass away and gives your heirs flexibility in their future. Life insurance can also be a valuable estate planning tool for the management and distribution of your assets. In today’s blog, we’re discussing some of the benefits of adding life insurance to your estate plan.
Types of Life Insurance
There are two main types of life insurance: term life insurance and permanent life insurance. Term Insurance provides coverage for a fixed period of time. It’s purchased on an annual basis and is usually suited for those with finite, specific needs. The insurance premiums pay for the cost of the insurance, and no cash value accumulates. Examples of term insurance include fire, wind, auto insurance, medical insurance, or insurance to protect a minor child until they come of age.
Permanent Life Insurance includes policies that do not expire. The premiums go toward maintaining the policy’s death benefit and also building a cash value. Policy owners can borrow against or outright withdraw funds from that cash value. There are two primary types of permanent life insurance, whole life (coverage for the full lifetime of the insured, with savings growing at a guaranteed rate) and universal life (different premium structures and earnings based on market performance).
Benefits of Life Insurance
Life insurance can be used in a few different ways in estate planning, but the most common use is to provide extra financial support for loved ones. It can provide immediate funds to cover costs or replace lost income. Business owners can also use a life insurance policy to divide ownership of a family business and ensure a smooth transition in the event of a death in the family. Here are some additional benefits of including a life insurance policy in your estate planning:
- Universal life insurance can provide investment savings and can serve as collateral for a business loan or buy/sell agreement
- Those named on the policy can draw on the death benefit to cover long-term health care costs
- Policy owners can specify how the insurance proceeds will be used (ex: alimony, child support, funding a trust)
- Life insurance can provide financial support for an heir with special needs
- Insurance can offset any inheritance inequalities with a policy of a specific value
- Insurance proceeds avoid probate when going to a named beneficiary
- Death Benefits can be claimed immediately, which can be useful for paying expenses related to funerals and burials
- A life insurance payout can be used to pay estate taxes
- Life insurance proceeds are often tax-free
- Business owners can purchase life insurance on each other. If a business partner dies, the life insurance will provide funds that the surviving partner can use to purchase assets and keep the business intact.
Factors to Consider When Selecting a Life Insurance Policy
If you are trying to decide on the best type of life insurance for your estate plan, your choices will vary depending on the needs of your family. Factors to consider include: the size and structure of your family, your income and whether you’re the primary earner, covering established and future healthcare costs, and whether you want a life insurance policy for your business ownership and investments. You may also consider the creation of a trust to minimize estate taxes and ensure the proper distribution of your assets.
Have Additional Questions? Contact Our Estate Planning Experts
Life insurance can be a valuable estate-planning tool for those looking to secure their assets and protect their loved ones. An experienced estate planning attorney can walk you through the different life insurance options and help you select the best policy for your family. If you have questions about life insurance or would like to schedule an estate planning consultation, please reach out to Brian M. Douglas & Associates at (770) 933-9009 or via our online contact page. Our estate planning team would be happy to help.