Why Life Insurance is Important to Building Your Estate

Is life insurance part of an estate? Yes. In fact, life insurance creates an immediate estate — which translates to immediate liquidity for time-sensitive expenses as funeral, burial, cemetery and cremation costs. 

But estate building is not typically an urgent thought for younger people or those who consider themselves to be a beacon of health.  Oftentimes, folks are first introduced to life insurance by way of their employer’s group policy. Although, numerous other events cause consideration for electing into an individual policy, including marriage, having children, buying property, switching jobs, starting a business, caring for aging parents or someone with a disability, and retirement.

Of course, not all life insurance policies are the same. Here’s what you need to know about building your estate.

Term vs. Whole Life Insurance

The two most popular types of life insurance are term and whole. Term life is the preferred option for people who are on the younger side of the spectrum, and is designed to protect those who will be responsible for final expenses in the event of your untimely death:

• Policies available in set terms: 10, 15, 20 or 30 years
• Beneficiaries paid only if you die before the expiration of the term
• Benefits typically range between $250K and $1million
• Policies do not increase in value over time
• No cash value if you outlive your term
• Premiums paid monthly
• Affordable, especially when elected early in life (e.g. $30/mo)
• Considered a sound investment with significant returns

Whole life tends to appeal to those considering retirement and is designed to ensure final expenses are provided for and that loved ones receive an inheritance:

• Policies are valid until your death, as long as premiums are paid
• Beneficiaries paid after you die
• Policies increase in value over time and accumulate on a tax-deferred basis
• Premiums paid monthly
• Costly, especially when elected later in life (e.g. $300/mo)
• Considered a fair investment with moderate returns

Other types of life insurance include: 

• Burial insurance; designed to cover final expenses (also called final expense insurance)
• Universal life; also serves as a mechanism for savings
• Variable life; includes risk and the potential for higher returns
• Key person insurance; protects company, partners and employees (also called business life)

Common Mistakes With Estate Planning

If you’re single with no dependents and no debt, you may not need to invest in life insurance at this juncture; otherwise, it’s a no-brainer. Talking with your agent will help you figure out what type of and how much coverage you should get, and help you stay clear of common mistakes when estate planning.

If your mortgage will sunset in 20 years and your kids will finish their education around the same time, you’d be wise to get a plan that coincides with or extends beyond your anticipated major milestones. 

Keep documents up to date

As your family tree changes and grows, be sure to keep your estate documents current. Review your will every five to seven years and consider updating your health care power of attorney and financial power of attorney every three.

When you update the beneficiaries named in your will, remember to make the same updates to other prospective estate assets such as your retirement plan, annuities and, of course, your life insurance policy. This is important because these documents override your will.

Think about tax implications

Life insurance death benefits are not subject to state and federal taxes, but there are implications for high net worth individuals. In 2020, any portion of an individual’s estate in excess of $11.58 million (double for married couples) is subject to a 40% estate tax. Plan to talk with a tax professional about assets of your estate.

Consider engaging an attorney

With laws being complex and nuanced, consider engaging an attorney when creating your comprehensive estate plan. No one wants their plans jeopardized after death, especially as a result of technicalities. 

There are many effective ways to build your personal estate, and life insurance is not only one of the easiest but it can also be the most affordable. When you’re ready to discuss your options, give us a call — the Independent Insurance Associates team is ready to assist!