Whether you are single, have children, own a home, are sending a child to college or retired — you buy insurance for peace of mind. It is a safety net for you and your loved ones, but life insurance is not only a safety net, it plays an important role in estate planning, and it is important to choose a policy that meets your specific needs. While an estate planning attorney can help you put together a comprehensive estate plan to include life insurance, it helps to know the basics so you can make an informed decision.
The simplest type is life insurance policy is term life. It provides coverage for a specific period of time, the term, which can be one year or more. For the lowest initial cost, annual renewable term life insurance usually fits the bill. Premiums are particularly low for young people, but they increase each year as you grow older. Level term life insurance policies, on the other hand, offer premiums that are guaranteed not to increase for a set period of time, such as 10, 20 or 30 years.
When is a life insurance policy not just a life insurance policy? When it also offers a method for savings, such as permanent life insurance. This type of life insurance is intended to remain in force for your entire life. Policies offer insurance coverage as well as the potential to accumulate cash value.
As you might expect, permanent life insurance premiums are more expensive than term premiums because some of the money is put into a savings program. The longer the policy has been in force, the higher the cash value, since more money has been paid in and the cash value has earned interest, dividends or both. If you buy a policy today, your first annual premium is likely to be much higher for a permanent life policy than for term.
The premiums for permanent life insurance policies normally stay the same over the years. That extra premium paid in the early years of the permanent policy gets invested and grows, minus the amount your agent takes as a sales commission. The gain is tax-deferred if the policy is cashed in during your life. When you die, the proceeds are usually tax-free to your beneficiary, but are normally included in the value of your estate.
Life insurance plays a critical role in estate planning, and it is important to have the policy coordinated to the other elements within your estate plan. An estate planning attorney can work with you to build a comprehensive estate plan that meets the specific needs of your family.