Today the competitive life insurance market has driven prices down to the point where it makes no sense not to own some form of life insurance.
There are far too many forms of life insurance available today to cover in this article so we will only deal with two basic forms; Traditional life insurance typically used to cover estates and/or assets, and Final Expense insurance often call “Burial Insurance”. The key concept to remember with any form of life or health related insurance is the younger you are when you purchase it the cheaper it is and the easier it is to qualify for. Too many individuals wait until something happens and then they see the need for these insurance products when all-too-often they will no longer qualify for it. The wise individual sees the potential need before it becomes a necessity.
Traditional Life Insurance
Traditional life insurance plays a fundamental role in estate planning. An estate is basically everything you own. Life insurance can provide the necessary liquidity to cover estate needs when the covered individual passes away.
When a person passes away their estate goes into probate. If there is a lawful will in place then the estate is probated in accordance with the directions of the will. If there is no lawful will in place, then the estate is considered intestate and the courts probate the estate in accordance with their individual governing laws. In either case the estate will have at least court costs and other legal costs to bear. If you have no lawful will and you planned on leaving some of your estate to anyone outside of your immediate family members, i.e. a charity, it will most likely not happen without a will. Life insurance under current laws passes to the beneficiaries without going through probate. This means a charity can be the beneficiary of your life insurance if you so choose with or without a will. And, as long as the life insurance beneficiary is not the estate of the deceased the benefit will also pass tax-free.
Life Insurance a Bridge to an Estate
Suppose you want to leave an estate to your loved ones, but have not had enough time to build that estate yet. Life insurance can provide a bridge to an estate before the estate has had time to build. When you’re young, your most valuable asset is your personal ability to earn income. This is called your potential human capital. As time goes by, you invest, save and build assets that take the place of your potential human capital so that when retirement comes, you have investment capital and other assets as well.
What happens if a young breadwinner were to die pre-maturely and leave behind a spouse with young children? The breadwinner can still care for their family after they have gone with a well-designed life insurance plan. This life insurance becomes their bridge to an estate. Once one has a well-designed life insurance plan in place, they have an estate for their loved ones. If they die pre-maturely or live to retirement, they have provided an estate regardless. In fact, a well-designed life insurance plan can also provide assets or income during retirement. I cannot think of any excuse for wage earner members of a family to go without life insurance such as this if they qualify. Since premium costs are lower now than ever before, one can leverage large sums of insurance with a relatively small amount of premium.
Although there are some extremely complex methods to determine the amount of life insurance for someone in the above example, you can use a much more simple calculation to get an idea of your need. Most professionals will consider 8 to 10 times your yearly income as the amount that will be enough life insurance to cover income replacement. If you earn $50,000 a year, $500,000 will be your rough estimate. $500,000 invested properly by your beneficiaries can continue their life at or near their current lifestyle indefinitely. If your particular personal situation is more complex, then please consult a professional that is trained in the proper methods of life insurance analysis.
Pay Taxes with Life Insurance
In many cases taxes may be due when someone passes away. Many times the estate is locked up with illiquid assets. Life insurance can be used to provide money to pay taxes and debts that may be due in a time that is most likely filled with all kinds of other stresses. When someone dies life does not stop and debts and taxes will still be due. While life insurance does pass to your beneficiaries tax-free, other assets such as investments or real property may not. If there are taxes due on investments, the beneficiaries may have to pay them. Is that what the estate owner desired, probably not! With a little planning all of the taxes can be provided for through a well-designed life insurance plan.
Final Expense Insurance
One of the primary issues facing a family immediately when a loved one passes away is liquidity. There may be sufficient assets to cover many different items within someone’s estate such as debts and taxes. However, it may take considerable time and effort to get to those assets. The primary need at this time is for at least enough liquidity or the cash to pay for the final expenses which will usually run $7,500 or more on average just for all of the procedures related to burial. Where will that money come from? Final Expense insurance is designed with this specific purpose in mind. Many funeral homes will actually allow you to sign over the proceeds of the insurance to them. They can then manage all of the expenses related to the funeral and burial and then return to you any monies left after all final expenses have been covered.
Another important use for this type of insurance is for temporary social security replacement. What happens when a husband and wife are retired, each receiving social security which when combined is the primary sources of income within the household, and then one of them passes away? Usually social security payments are cut down by a third to one-half when this happens. Since there are probably still going to be some expenses related to both individuals for some time, there needs to be some form of temporary income replacement. This is where Final Expense insurance can help. If the death benefit from the insurance was set up to be equal to or greater than the individual’s yearly income that had passed away, this could provide a full year’s social security income or more for the surviving spouse to cover related life expenses.
The importance of social security income cannot be overstated. Without social security income it has estimated by AARP that 1 out of 2 retired individuals could slip below the poverty line here in America.
Final Expense insurance is a ‘Whole Life’ product. Whole Life products can retain and build cash value. This gives the owner a number of advantages, such as the ability to stop paying premiums resulting in having a reduced amount of paid-up life insurance based upon the remaining cash value in the policy. Policy loans are also typically available with cash value type policies. Cash can exceed the death benefit at some point in the life of the insured.
Final Expense insurance can be relatively easy to qualify for. In many cases individuals who have been declined elsewhere can get this type of insurance.
Many grandparents wish to leave a legacy for the grandchildren that can impact the children’s lives well into their future. How would enough money to go to college work using life insurance? Either of the forms of life insurance discussed here can be used as a legacy device.
While some look at life insurance as necessary evil. In reality there are tremendous opportunities to reduce taxes and liabilities, increase assets, provide an estate for one’s loved ones, or create a legacy for your children and grandchildren through the proper use of a well-designed life insurance plan. Remember though, this is only part of a properly designed and executed estate plan.