Life insurance plays an important role in estate planning – it can not only act as an income replacement should the “bread winner” of the family die unexpectedly, but it can be used to help pay the estate administration costs, fund a buy/sell agreement in a partnership or help pay off debt. Life insurance can be complex and full of unfamiliar terms – even the basic types of policies aren’t familiar to the layperson:
Whole Life Policies: Whole life insurance combines a term policy with an investment component. The investment could be in bonds and money-market instruments or stocks. The policy builds cash value that you can borrow against.
Term Life Policies: A term policy is life coverage only. On the death of the insured it pays the face amount of the policy to the named beneficiary. You can buy term for periods of one year to 30 years.
For estate planning purposes, it would seem a whole life policy would be your best bet – but there are drawbacks to whole life policies:
1. Expense:
Whole life insurance is expensive: You’re paying not only for insurance, but also for the investment portion. While these policies do eventually have a cash value, it can take well over a decade to get to that point.
2. Your insurance company makes the investment choices, not you.
You lose the ability to select your own investment preferences with whole life insurance coverage.
3. Whole life policies are not known for their high returns.
Whole life insurance, while offering you cash build-up and tax deferred earnings, is not noted for its high return-on-investment, primarily due to fees, as well as conservative investing by the insurance company.
Talk with an estate planning attorney to determine the role of a life insurance policy in your estate plan to help guide you toward choosing the policy that will help you meet your needs.
Michael Robinson, Estate Planning Attorney
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