Almost inevitably, there are final expenses to pay and accounts to settle when a loved one dies. So, life insurance is an integral part of an estate plan, because it gives the personal representative funds to deal with these items. Certain kinds of life insurance benefits the purchasers during their lifetimes as well, because they build equity that can be tapped or borrowed against.
Quite frankly, there is little need for life insurance if one does not have assets and/or dependents to protect. So, many people purchase insurance when they buy homes, get married, or have children. Since these events tend to happen rather early in life, most people buy insurance in their 20s or 30s. That is a good thing, because as we age, premiums increase along with the likelihood of disqualifying health conditions.
Considerations When Buying Insurance
The old rule of thumb is that people should have ten times their annual income in life insurance. This rule obviously does not apply in all situations, especially if there is a stay-at-home parent in the house. Another shorthand rule is the 10-plus-100,000 formula: ten times annual income plus an additional $100,000 for children’s college expenses. A better rule, although it is still imperfect, is the DIME (Debt, Income, Mortgage, and Education) method. This exercise requires a bit more work, but by considering all four items that life insurance is supposed to protect, one may have a better idea how much coverage to purchase.
Another rule of thumb is to reconsider the amount of insurance every three or four years, because financial and family circumstances can change drastically in that amount of time.
Types of Insurance
The most basic type of insurance is term life. It pays a death benefit if the policyholder dies within the term, which is normally thirty years. Typically, the death payment is the only available benefit. Over 90 percent of such policies are level term life policies, which means that the premiums remain the same throughout the term. To accomplish this, the insurance company overcharges younger policyholders and these overpayments essentially subsidize the premium payments as the policyholders age. This extra money is how the policy builds a cash value. In decreasing term life insurance, the death benefit drops over time to compensate for the fact that the company makes less money in the later years of the term.
As the name implies, whole life insurance lasts for the policyholders’ whole lives, regardless of how long they live. There are three basic categories:
- Level: As described above, the payments remain the same even though the company could raise them in later years, because of the added risk.
- Universal: Also called adjustable life insurance, these kinds of policies are much more flexible. Policyholders who pass medical exams can increase their death benefits. Additionally, policyholders can shift funds from the cash value side of the ledger to the premiums side, if they experience unforeseen circumstances but want their policies to remain in force.
- Variable: Instead of a savings account, the added cash is an investment account. Obviously, these kinds of policies are considerably riskier than other types of life insurance.
Some companies also sell universal/variable policies that combine aspects of both vehicles.
Rely on Experienced Estate Planning Attorneys
Pre-estate planning, including life insurance, may be as important as estate planning. For a free consultation with an experienced estate planning attorney, contact Carrier Law.