You can include life insurance in your estate plan to satisfy general objectives that apply to everyone. There are also a couple of ways that life insurance can be used to satisfy very specific, uncommon objectives, and we will provide an overview in this post.
Term Life Insurance
When you are a younger adult with a spouse and/or children depending on you, an income replacement vehicle is an absolute must. Most young families have not had the time to accumulate significant resources, and life insurance can fill the void.
If you are on a tight budget, you may be concerned about the premiums, and this is understandable. However, term life insurance is surprisingly affordable.
This insurance has no cash value, and as the name would indicate, it remains in effect for a particular prescribed term. You choose the length of the term when you take out the policy.
To provide an example, according to Policygenius.com, a 35-year-old Naperville woman would pay between $29 and $47 a month for $500,000 of coverage depending on her health.
Whole Life Insurance
The other type of life insurance that is most commonly used his whole life. This is permanent coverage that will remain active as long as you continue to pay the premiums. When you make payments, the policy develops a cash value, and there is a guaranteed rate of return.
You can withdraw the cash value, and you can take loans against it. This coverage will provide income replacement if you pass away before your time, and if you live an ordinary lifespan, it can bolster your legacy.
Because the policy has a cash value, the payments are much higher than term life insurance premiums. The average cost for a $250,000 death benefit for a woman that is between 35 and 45 would be in the $245 to $349 range.
Small business partners are faced with an estate planning challenge. When a partner dies, what happens to their share? Clearly, it would be part of their estate, but the surviving owner would have no say in the decision-making process with regard to the utilization of the ownership interest.
A buy-sell agreement can provide a solution when these circumstances exist. The partners would take out insurance policies on one another that pay a death benefit that is equal to the value of an ownership share.
When one partner dies, the money would be used to buy the ownership interest from the estate of the deceased partner. This is the cross purchase plan, and there is also an equity interest plan that works in the same manner, but the business as an entity purchases the life insurance.
Insurance can also be used to balance inheritances. To explain through the use of a simple example, let’s say that Bill owns a thriving steakhouse, and his daughter Melissa is the general manager. He is going to leave the business to Melissa, and it is his most valuable asset.
His other child, John, decided to become a teacher and football coach after he graduated from college, and he lives in another state. Bill wants to leave equal inheritances to each of his children.
As a response, he could take out a life insurance policy and make John the beneficiary. The death benefit would be equal to the value of the business, and Bill can go forward with the knowledge that his children will receive equal inheritances.
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