Life insurance is a contract between the insurer and an individual in which a benefit is paid to a beneficiary if a covered event occurs. Life insurance is a valuable estate planning tool, but how much do you really know about this complex subject? We discuss five items that many people are not aware of when it comes to life insurance and estate planning:
1. Life insurance policies are not covered in wills or probate.
Since a life insurance policy is a contract and has designated beneficiaries, the policy would not be left to anyone via a will or trust, nor would it be included in probate.
2. There are two basic types of life insurance policies – whole life and term insurance.
Whole life policies pay a stated, fixed amount on your death, and part of your premium goes toward building cash value from investments made by the insurance company. Term insurance provides a benefit, usually a lump sum payment, if a covered event occurs.
3. The cost of life insurance is not normally tax deductible.
Many assume that since health insurance premiums are deductible, that life insurance premiums are tax deductible as well. Unfortunately, this is not the case. Life insurance premiums are only deductible in certain cases of self-employment.
4. A higher priced life insurance policy is not always the best choice.
A policy that is more expensive may not necessarily offer additional benefits or extra coverage. For example, whole life insurance, which combines life insurance with an investment that builds up cash value, may be up to eight times more expensive than a term life policy. This money may be better spent in an alternate investment, such as a retirement account.
5. Stay at home spouses may need coverage as well as the ‘breadwinner’.
Have you seen the cost of childcare and household services lately? Don’t discount the value of the services a homemaker or stay at home spouse provides.
Consulting with an estate planning lawyer helps you determine how life insurance can fit into your estate planning needs and build a comprehensive plan that eases the burden of your passing on your loved ones.