Using Life Insurance for Estate Planning Purposes

Written by , May 4, 2012

Using Life Insurance for Estate Planning PurposesThere are many different ways that people do their estate planning. Generally speaking, estate planning is how a person plans to pass on their accumulated wealth to family and heirs after they die. A significant amount of wealth can be passed along by naming beneficiaries to their investment accounts, 401(k)s and IRAs, by writing a well, as well as holding homes and other real property jointly with whomever the property should pass to.

Another important way of estate planning, although it’s often overlooked, is using a life insurance policy for estate planning purposes. Some types of life insurance policies even have an investment or “cash value” to supplement the “death benefit” that is the hallmark of every life insurance policy.

Here is some insurance advice to consider about using life insurance for estate planning purposes.

  • Term Life Insurance. Note that term life insurance policies do not have investment or “cash out” value. Instead, term life insurance policies provide a specified amount of coverage for a pre-determined length of coverage. But so long as the insured individual keeps a term policy in effect, there will always be a death benefit that will be paid to that person’s heirs or estate.
  • Whole Life Insurance. Whole life insurance policies are perhaps the most common way to incorporate life insurance into an estate plan. There are many different variations on whole life insurance policies, but they generally incorporate several common elements. One of these elements is that those policies have an investment element which allows the insured to borrow against their policy, which means that the insured has additional ways to invest for the benefit of their heirs. Of course, whole life insurance policies also have death benefit elements, which means that there will be assets that will pass to the insured person’s estate upon the insured person’s death.
  • Universal Life Insurance. Universal life insurance coverage is similar to whole life insurance, with an additional level of flexibility in that the insured party has the option of changing their coverage amounts and types from time to time. Some universal life policies also have something resembling an annuity benefit so that the covered party’s beneficiaries can receive a guaranteed monthly income amount. Universal life insurance also has traditional death benefits.
  • Other Considerations. Of course, depending upon your life situation, you might only want to keep life insurance for so long as you have children that are directly dependent upon you for financial support. For example, if your children have graduated college by the time you’re 45 years old, you might decide that rather than continuing to pay life insurance premiums, you’d find it better to invest those amounts to benefit your future heirs.
  • Regardless of how you incorporate a life insurance policy into your estate planning, make sure to take a broad view of your estate planning, and balance the benefits of your life insurance policies with your other estate planning elements.

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