Life Insurance: Protecting Today’s Assets and Tomorrow’s Heirs

Many people obtain life insurance when they first have children and then forget about it, except for when the premium bill comes due. But an effective financial plan includes reexamining your life insurance needs at different points in your life.

Estimate Your Needs
Before purchasing life insurance, look at your annual income. Then tack on one-time expenses, such as a mortgage, debt, and college tuition for your children. Also remember to factor in your final costs — estate taxes, potential uninsured medical costs, and funeral expenses.

Another factor to consider when purchasing life insurance is whether to use it for investment purposes. Because an insurance policy is tax-deferred, it may offer a higher rate of return than some other investments in the long run. However, keep in mind that management fees can be expensive.

Choices, Choices
Next, figure out which type of life insurance is best for you. Many younger people opt for term insurance because of its relatively inexpensive cost. The policy is written for a set period of time and may be renewed (although the premiums usually increase each time you renew).

Whole life insurance combines life insurance coverage with a tax-deferred savings vehicle, and is generally more expensive than term. You pay the premiums and receive a fixed death benefit. Part of each premium accrues as cash value and you may be able to borrow against the accumulated cash fund tax-free.

Estate Planning
Some people use life insurance to create an irrevocable life insurance trust to transfer wealth. This type of trust helps to preserve assets because the death benefit is not subject to estate taxes. And since the federal estate taxes currently start taking a bite out of estates that are greater than $1,500,000, it may be worth your while to consider this option if you’re affluent.

This type of trust also offers the benefit of flexibility. For example, it may be set up to allow a surviving spouse to receive regular payments from the insurance policy or to set aside assets for a minor. Drawbacks are that you lose control over the policy, insurance premiums could be expensive, and you’ll most likely pay legal fees to create and maintain the trust.

Different life insurance policies and their costs, terms, and restrictions can be confusing. Consider working with a financial or insurance professional to determine which type of life insurance best fits your needs.

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