A life insurance policy is likely to play an integral role in your estate plan. While life insurance can be a valuable estate planning tool, the key to getting the most out of your life insurance policy is knowing which type of insurance is right for you and how it fits into your plan. Toward that end, a Londonderry estate planning attorney at DeBruyckere Law Offices explains your life insurance options.
Life Insurance Options
The type of policy you need will depend on a variety of factors, including the purpose of the policy, your financial status, and your stage in life. While there are some hybrids and variations of the basic types of life insurance policies available, the basic types include:
- Term Life Insurance — Term life insurance is usually the simplest and least expensive type of life insurance. A term life insurance policy is purchased for a specific amount of coverage and a specific “term”, or period of time, usually 10 to 30 years. The premiums are usually fixed for the period of the policy. The policy has no cash value and, therefore, cannot be borrowed against. When the insured dies, the policy pays out to the named beneficiary. If the insured outlives the policy, or there is a lapse in premium payments, no benefits are paid. A variation of traditional term life insurance, referred to as “non-level” term, does not remain the same for the life of the policy. Either the premiums increase, or the payout decreases over the life of the policy.
- Whole Life Insurance – this type of life insurance is purchased in a specific coverage amount for the lifetime of the insured, hence the term “whole life.” Premium payments are usually fixed, meaning they will not change. Along with the insurance benefits, you also get a savings component and will earn dividends from the insurance company. The policy will have a guaranteed cash value. Premiums will be higher than an equivalent amount of term life insurance.
- Universal Life Insurance – Universal life insurance is also purchased for a specific coverage amount; however, you may have the option to increase the coverage amount later if certain conditions are met. In addition, you may be able to change your premium payment amount if you have accumulated sufficient cash value in the policy. Your policy will usually earn interest at a rate set by the insurance company. Cash value that can often be borrowed against is one benefit to choosing universal life. One disadvantage to universal life is that, unlike whole life, it has a termination age. The policy may not terminate until you reach age 95 or even 100; however, if you live that long your loved ones won’t be entitled to any death benefits.
- Variable Life Insurance – variable life insurance is also another variation of whole life insurance. Variable life truly combines life insurance with investing. Once you accumulate savings, those savings can be invested in stocks, bonds, or mutual funds. You also have premium flexibility with variable life, meaning you can increase or decrease the amount you pay in premiums as long as you have sufficient cash value in the policy to do so. Variable life insurance offers the possibility of greater gains from the investment portion of your premiums, but also the possibility of greater losses.
- Final Expense Life Insurance – as the name implies, final expense life insurance is a specialized type of life insurance intended to help cover the costs associated with your death. It is only available to people of a certain age and usually terminates at a designated age. This type of life insurance is often used in conjunction with an Irrevocable Life Insurance Trust (ILIT) as part of a funeral planning component within an estate plan.
Contact A Londonderry Estate Planning Attorney
For more information, please join us for an upcoming FREE seminar. If you have additional questions about how life insurance fits into your estate plan, contact the Londonderry estate planning attorneys at DeBruyckere Law Offices by calling (603) 894-4141 or (978) 969-0331 to schedule an appointment.
Ideally, you should purchase a life insurance policy when you are still young and lock in the premium amount.
Yes. In fact, a common estate planning option is to create an Irrevocable life Insurance Trust that can pay your funeral expenses.
The proceeds of a life insurance policy do not go through probate, meaning they can provide immediate funds to your loved ones after your death.