Life insurance can be complex and confusing, not to mention full of unfamiliar terms. Let’s look at the basics of ‘term life insurance’ and the role it can play in estate planning.
Term life insurance is a policy that covers the policyholder for a fixed span of time and upon the death of the insured, assuming the manner of death is covered by the policy, pays the amount of the policy to the beneficiary that was named within the policy. Term life insurance may be purchased for periods of 1 to30 years.
The insurance is paid for with a premium paid by the policyholder. There are two types of premiums for term life insurance:
- Level term premiums which remain constant for the life of the policy.
- Annual renewable premiums which increase as you age.
Normally, level term premiums are higher than renewable premiums in the early years of the policy and lower in the later years when the renewable premiums are increased based on your age.
Term life insurance is normally the least expensive type of life insurance available. It is designed to meet temporary life insurance needs by providing protection for a specified period of time – which makes sense if you have financial needs that will diminish as you age, such as living expenses for spouses and children, mortgages or even a child’s college tuition.
But what happens after the term expires? Well, the idea behind term life insurance is to provide income to people who won’t have income if you are not there to provide it. So, theoretically, by the time your term policy expires, children will be adults and on their own, mortgages will be paid off and the children’s education completed. If you still want life insurance after the term of the policy, you will have to apply for a new policy.
Talk with an estate planning attorney to determine if term life insurance is right for your estate plan. Often, life insurance policies can provide immediate cash for the needs of the estate, such as paying debt, covering funeral expenses and other liquidity needs. Since life insurance policies have a named beneficiary, they avoid probate, the legal process that administers an estate, making them an attractive estate planning tool.