For many people, life insurance plays an important role in their estate plan. In fact, life insurance often serves several roles in a comprehensive estate plan. Each year, National Life Insurance Month is celebrated in September in the United States, making now an opportune time for you to review your life insurance needs and update your current estate plan.
Taking the Mystery Out of Life Insurance Options
A life insurance policy can help to accomplish a number of different goals within your estate plan. The challenge is to know which type of policy to purchase for which type of goal. In order to figure that out, it is necessary to have a thorough understanding of the various different types of life insurance options. Ultimately, you should always consult with your California estate planning attorney and your financial planner before actually purchasing a life insurance policy; however, it may be beneficial in the meantime to learn more about your options.
- Term Life Insurance
- Simplest and most basic
- Only provides a death benefit
- Purchased for a specific “term” – usually 15, 20, 25, or 30 years
- Premiums are low and remain the same throughout the policy
- Good for young married couples and/or parents who are concerned about providing for loved ones in the event of their death
- Decreasing or Increasing Term Life Insurance
- Variant of basic term insurance
- Death benefit decreases and policy ends when benefit reaches zero OR
- Death benefit increases over the term of the policy
- Premium usually remains the same
- Decreasing term insurance is often purchased to pay off a mortgage
- Increasing term insurance is often purchased by a young parent
- Whole Life Insurance
- Simplest type of permanent life insurance
- Offers a death benefit and a cash value
- Cash value grows tax-deferred – only taxed when withdrawn
- Value grows slowly because in the beginning the premium goes to paying for insurance and fees. Later on, the cash value will increase considerably.
- Premiums remain the same
- Can borrow against the cash value
- Some policies pay dividends
- Universal Life Insurance
- Provides a death benefit and a cash value
- Cash value grows tax-deferred
- More flexible than whole life because the policyholder can increase/decrease the amount that goes to the cash value versus death benefit – with certain limits
- Can borrow against cash value
- Variable Life Insurance
- Similar to whole life and universal life
- Offers a death benefit and a cash value
- Policyholder can invest in a wide range of investment options
- Potential for faster growth BUT also much riskier
- Death benefit will fluctuate but will not fall below a guaranteed minimum amount
- Variable Universal Life Insurance
- Similar to Variable life insurance
- Death benefit and cash value
- Opportunity to invest the cash value in various investment options
- Death benefit will fluctuate
- No minimum guaranteed death benefit
- Survivorship Life Insurance
- More than one insured – ie: husband and wife
- More expensive than a single policy but usually less expensive than purchasing two separate policies
- “First to die” or “Last to die” – meaning the policy will may pay our when the first person dies or when the last person dies, depending on the policy.
- Final Expense Life Insurance
- Also referred to as “burial insurance”
- Intended to cover the costs of a funeral and burial
- Usually sold to seniors
- Limited benefits ($10,000 – $20,000 usually)
- Premiums are relatively low
- Often used to fund an Irrevocable Life Insurance Trust (ILIT)
Be sure to celebrate National Life Insurance Month by sitting down with your California estate planning attorney and reviewing your estate plan and your current life insurance policies to see if it is time to make any revisions of your overall plan and/or your life insurance coverage.
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