Life insurance is as common and important in an estate plan as the will. The roles of life insurance are many and can help provide financial support for your family after your death, it can help cover college or other educational purposes for a loved one, cover funeral expenses, and in some instances, life insurance has been used to fund retirement plans. Since many states still have estate taxes, but because the federal limit is at more than $5 million, finding a policy that serves your needs while still be affordable shouldn’t be too challenging. On the flip side, if you do have considerable wealth and certainly if you live in a state that has estate taxes, a life insurance policy can cover those taxes while not taking part of the policy’s value that you intended to leave to your loved ones.
Most people agree their primary objective is to provide for beneficiaries and because life insurance policies are traditionally quite versatile, they’re the obvious choice for many.
Why Life Insurance?
As mentioned, these types of financial tools are usually versatile and can be used in an estate plan as a way to pay off debt, replace income in some circumstances, estate liquidity and more. Just as there are many ways to use the value of the policy, there are just as many different types of policies. Pricing plays a role, but you’ll need to explore the various policies that might be available for you. Aside from that, here are a few distinctions in policy types:
Whole Life Insurance
This is sometimes referred to as “first to die” policies. It’s a group policy that pays the benefits to the surviving party upon the death of any of the group members. Its versatility comes in its ability to be either whole life or universal life and it can play a role in reducing taxes upon the death of the first spouse.
Survivorship Life Insurance Policy
These policies are sometimes called second-to-die policies. They share similarities with a joint life policy because it insures more than one person. The payout comes only after the death of the last party. These offer lower premiums and can be either universal life or whole life. Historically, they’ve been used by spouses or in some instances, a parent and child.
These policies are also used to cover the estate taxes mentioned above if the estate is sizeable. It can also be used for charitable giving.
You may also wish to consider an insurance trust. A revocable life insurance trust allows you to name the trust itself as the beneficiary with the option of rescinding the trust and rights of ownership if needed. Younger families will often select these because of their affordability.
The irrevocable life insurance trust excludes insurance proceeds from the estate of the first spouse to die and from the estate of the surviving spouse. In many instances, the spouse may be named the income beneficiary; however, he or she may have no rights or powers except in extraordinary circumstances.
As you can see, the possibilities are many. While we encourage most of our clients to consider life insurance, only you know what your concerns and needs are. There are many options available and finding one that’s affordable and serves your needs shouldn’t be a challenge. If you’d like to learn more about how life insurance plays a role in your specific estate planning efforts, contact our office today.