Estate planning allows you to ensure that your loved ones are financially protected and your assets are appropriately distributed amongst those you choose. Your estate consists of many things; your house, car, any shares that you own, and, of course, money.
Understanding Life Insurance and Estate Planning
Life insurance is an arrangement where you agree to pay a premium to an insurer, in exchange for the insurer to pay a set sum of money to your dependents or nominees in the event of your incapacitation or death.
Life insurance offers a lot of protection to families; young couples with kids where the father is the only breadwinner are often those who are most commonly subscribing to these policies. In the event of the untimely death of the father, the wife and kids would still have the means to survive.
However, while the concept of life insurance was first conceived to protect families, with time it has also become a tool for investors to safeguard their wealth. Life insurance forms a key component of people’s estates, as it ensures that a good chunk of monetary benefit is passed to their beneficiaries in the smoothest way possible, as we’ll explain more below.
As such, you’ll find that many people include life insurance policies as a part of their estate planning.
How Life Insurance Benefits Estate Planning
First and foremost are the tax benefits. Unlike other types of assets, payouts from life insurance are not subject to tax and, because it is a form of private arrangement with the insurer, there are very few legal roadblocks.
Other assets, like real estate, will attract all manner of taxes, stamp duties, and expenses, but there’s a very good chance your insurance payout will have zero applicable deductibles. Moreover, one of the key terms in life insurance policies is that only the named beneficiaries have rights to the payout. This offers protection from creditors, as other assets can still be seized by authorities in the event of any unfulfilled liabilities by the deceased.
Life insurance policies would also similarly be protected by unjust claimants who could initiate disputes for other assets, but since an insurance policy specifically names a beneficiary that has been nominated by the deceased themselves, raising a dispute is near impossible.
Another benefit is the immediate and convenient payout, which could go a long way in making things more manageable for the deceased’s family. These funds can be used to pay funeral expenses, settle mortgages and debts, and set up fixed income for the future.
In fact, it is that liquidity that allows the family to be able to manage many types of expenses and liabilities however they might see fit. Knowing that your family would have a sizable amount of cash on hand in the event something were to happen to you would offer a great deal of relief, to both you and your family.
Types Of Life Insurance Policies
There are two main types of life insurance policies, term insurance and universal life insurance. Both have their own features and which you choose depends on your financial circumstances, such as affordability and long-term goals.
Term Insurance
With term insurance, you’re basically just paying for coverage. Premium payments are made annually, and the cost goes up with each passing year as you get older. Your family would only be entitled to a payout in the event of your death, provided you continue to purchase coverage until that time.
Unlike universal life insurance, there is no accumulation of cash as you keep paying premiums year after year. Once you stop paying, the only thing that changes is that you will no longer have coverage and everything you’ve paid so far will go to the insurer.
Term insurance comes in different shapes and forms, with different types of benefits. While they do offer some form of protection, depending on the payout amount, you could end up paying more than your family gets by the time of your death.
Universal Life Insurance
Universal life insurance offers coverage in the event of death, along with offering subscribers a savings plan. The premiums for universal life insurance can be a bit more expensive than term life insurance, but you need to account for the fact that there is coverage being offered, which offers a payout in the event of death, AND a savings plan which would understandably require an additional contribution.
Subscribers can also enjoy a payout if and when the policy is terminated and can even borrow money against the cash value accumulation, at an interest, of course. The more expensive premiums notwithstanding, universal life insurance offers a lot more in terms of protection and return and is more ideally suited for estate planning.
Consult With A Trusted Financial Advisor!
It's understandable if you’re still a bit unsure how you should tackle your estate planning. Luckily, there are many experts who you can speak to, especially when it comes to insurance planning.
What’s important is that you make an accurate assessment of your current financial circumstances and assets. Only then can you sit down and strategize. For example, if you’re a business owner, then it might be in your best interests to have an irrevocable life insurance trust in place so that the coverage and benefits are tied to your business.
An untrained individual cannot account for all the different strategies and tools that are at your disposal under the current legal and tax framework. This is why speaking to an expert could go a long way in ensuring that your assets are properly protected and that your family is well-provided for, even after you are gone.
