Life Insurance: Protecting Today's Assets and Tomorrow's Heirs

Many people obtain life insurance when they first have children and then forget about it, except for when the premium bill comes due. But an effective financial plan includes reexamining your life insurance needs continually throughout your life to ensure the assets you've accumulated are protected and to provide additional opportunities to create wealth.

Estimate Your Needs

Before assessing your insurance needs, look at your annual income. Then tack on one-time expenses, such as a mortgage, debt, and college tuition bills for your children. Remember to consider the amount you still need to invest to fund your retirement. Also factor in your final costs — estate taxes, potential uninsured medical costs, and funeral expenses.

Another factor to consider when purchasing life insurance is whether to also use it to help complement your savings efforts. Because some types of life insurance have a tax-deferred savings component, it may offer you an additional way to save for the future.

Choices, Choices

Next, figure out which type of life insurance is best for you. Many younger people opt for term insurance because of its relatively inexpensive cost. The policy is written for a set period of time and may be renewed (although the premiums usually increase each time you renew).

Mature investors may wish to consider a permanent policy, which combines life insurance coverage with a tax-deferred savings vehicle and is generally more expensive than term. You pay the premiums and receive a fixed death benefit that might potentially rise depending on the policy's cash value. Part of each premium accrues as cash value, and you may be able to borrow against the accumulated cash tax free.

In addition to the broad categories of term and permanent, there are a variety of other life insurance choices available — any of which might be appropriate for your situation.

Estate Planning

Some people use life insurance to fund an irrevocable life insurance trust to either create or transfer wealth for future generations, fund estate tax liabilities, or to help manage small business succession issues. This type of trust helps to preserve assets because, if drafted and executed properly, the death benefit is not subject to estate taxes. It also offers the benefit of flexibility. For example, it may be set up to allow a surviving spouse to receive regular payments from the insurance policy or to set aside assets for a minor. Drawbacks are that you lose control over the policy, insurance premiums could be expensive, and you'll most likely pay legal fees to create and maintain the trust.

Seek Qualified Help

Different life insurance policies and their costs, terms, and restrictions can be confusing. Consider working with a financial or insurance professional to determine which type of life insurance best fits your needs. At a minimum, be sure to include your life insurance needs whenever you review your overall financial planning needs regardless of your age.

The policy is subject to substantial fees and charges. Death benefit guarantees are subject to the claims-paying ability of the issuing life insurance company. Loans will reduce the policy’s death benefit, cash surrender value and will have tax consequences of the policy lapses.

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