People who invest in life insurance often do so with the idea that they’re protecting loved ones in the event of their early death. The idea of easing their financial burden, especially while children are young, gives policyholders a sense of comfort that their family is protected should the unexpected happen.
As we age, the need for life insurance decreases, and existing policies may become something we consider to be part of the assets and wealth we’ve accumulated over our lifetime. However there are pros and cons to the type of life insurance you invest in, especially when it comes to estate planning.
Let’s quickly review the general differences between types of life insurance policies.
There are two main types of life insurance policies to invest in: term life insurance, and whole life insurance.
Most people have term life insurance policies. They pay into a policy with a (generally more affordable) fixed monthly premium.
A whole life insurance policy is life insurance that combines a savings plan along with insurance protection. This means your premiums will be higher than term-life insurance since you are also simultaneously investing in a savings plan with your policy, but policyholders can take the money out of their savings plan before their death to help with debt, retirement costs, etc.
Life Insurance and Estate Planning
Life insurance can be used to provide funds for the payment of estate taxes, estate settlement costs, or debt obligations after the policyholder’s death.
Making your life insurance policy part of your estate plan through an Irrevocable Life Insurance Trust (ILIT) will ensure that your policy is awarded to your loved ones at the time of your death instead of a hefty percentage being taxed and taken by the government.
So it’s safe to say that life insurance is likely a wise investment, but is a whole life insurance policy right for you? Let’s look at the benefits and disadvantages.
What to Know About Whole Life Insurance as Part of Your Estate Plan
- Whole life insurance can be used as income for the policyholder at retirement. The owner must convert the policy to an annuity or withdraw the cash value to access funds. Therefore people looking to prevent dipping into their existing nest egg during retirement will have more wealth from the rest of their estate plus what they’ve paid into the insurance policy to share with beneficiaries.
- Whole life insurance policies often include what you may think of as a savings plan (cash value) that can be used to pay off debts so your family doesn’t have to worry about paying them.
- Whole life insurance premiums are more expensive than term life insurance because they’re essentially both an insurance policy and a savings plan. An alternative to paying higher premiums is to purchase a lower-cost term life policy and use the money saved on lower premiums to invest elsewhere with the guidance of a trusted financial expert. This way your family will have access to that money if you pass away unexpectedly. With a whole life insurance policy, if you pass before the money is moved from the saving plan, you (and your estate) will lose it.
Every situation is different, and a whole life insurance policy can provide benefits for some people while costing others significantly in the long run. Life-long financial planning is complex, and it’s important to speak with an insurance agent and educate yourself about the options available to you. We recommend speaking to a certified financial professional before you decide to make any investments or changes to existing investments.
If you are ready to discuss how your life insurance policy can be best protected with an irrevocable trust, or you would like further information about how to best protect your family’s future with an estate plan. Reach out to the team at Smith Barid LLC today.