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Thursday, February 16, 2017

Why Life Insurance Belongs In Your Estate Plan

In our previous post we mentioned life insurance is a must have for new or soon-to-be parents, but it is such an important and versatile estate planning tool, that it deserves a full post of its own.

The Basics

There are two different types of life insurance, term and permanent.

Term life insurance only covers you for a specific amount of time, often 10, 20, or 30 years. It is cheaper than permanent life insurance because the insurance company may never have to pay out since you may outlive the term of the plan.

Permanent life insurance covers you for the rest of your life, so long as you keep paying your premiums. Because the insurance company will have to pay out, permanent life insurance costs more, but many policies build up a tax-free pool of cash that can be borrowed against or even used to pay future premiums.  

Why Is Life Insurance Useful

If you have people that are counting on you to provide for them, life insurance is a must-have.

Many people buy term insurance that covers the period of years their children are minors, and provides enough money that it would pay off their mortgage or send their kids to college if they passed away.

Business owners often buy term insurance for a period of years that covers the time they expect to own their own business so that if they die suddenly there is cash available to keep the business afloat until a new owner takes over.

If you have a loved one with special needs, life insurance can be a way to fund a special needs trust.

There are also many tax advantages of incorporating life insurance into your estate plan.

Life insurance payouts are income tax free, so they are an excellent tool to use if you want to make sure there is money available to cover your funeral and burial costs.

If your estate is large enough that you expect to be taxed, but lacks liquid assets, an irrevocable life insurance trust (ILIT) can provide your loved ones the cash they need to pay your estate taxes without selling off property or other hard assets. This is a rather advanced estate planning technique that you should hire an experienced estate planning attorney to implement.

Tips For Insurance Shopping

If you have other insurance, such as car or homeowners insurance, you can check with your insurance agent to see if they also offer life insurance. Oftentimes there is a discount for bundling all of your policies with one company.

But don’t hesitate to shop around or use an online tool that compares the policies offered by many different insurance companies. Just be wary of an offer that seems too good to be true from a company that is not well established. You don’t want the company insuring you to go out of business!

Most life insurance policies require you to get a health exam, which they will pay for, before insuring you. The better health you are in, the lower your rate will be. This is why it is a good thing for couples who are planning on getting pregnant to get insured well before the baby is due. Pregnancy weight (and guys, we are talking to you too since many partners gain some sympathy pounds) can make you seem in poorer heath than you actually are, which raises your rates.

If you aren’t in the best of health, but you are really interested in buying term life insurance, you can check with your employer, union, or trade association to see if they offer group term life insurance. In these plans, which are less flexible than individual plans, the risk the insurance company will have to pay out is more spread out, so they might be willing to insure you at a lower rate than would be offered to you individually.

It’s Not For Everyone

Although life insurance is a great tool, not everyone needs it. If you don’t have dependents, and you don’t expect your estate to be taxes, it would probably be a waste of money for you to carry life insurance.

If you have questions about whether life insurance is something you should consider buying, talk with your insurance broker or an experienced estate planning attorney.



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| Phone: 803-594-4453
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