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Making the Most of Life Insurance as an Estate Planning Tool
Life insurance is an effective way to protect your family in the event of your untimely death. It can replace income and give your family the ability to cover mortgage payments, the costs of education, medical bills, or other general expenses. Thus, a life insurance policy can be a crucial part of many estate plans.
Below we review the various types of life insurance plans and how you can use them in your estate planning efforts.
Types of life insurance
There are three main types of life insurance:
- Term: Term insurance covers a specified amount of years (5, 10, 20, etc.). The policyholder pays monthly or yearly premiums. The policy can have an option for the holder to extend it past the end of the term, but the rate and renewal terms may be different than the terms of the initial policy. The benefit of term life insurance is that it allows you to purchase what you need. Elderly people, for example, are more likely to purchase term life insurance with the understanding that they likely will not need to be insured for decades.
- Whole life: This form of life insurance offers death benefits to policyholders, while also having an investment element. The policy remains active so long as someone pays the premiums. The goal is to have the investment aspect of the policy’s value cover the premiums. The policy stays in place for a person’s whole life. The cash value gradually increases, and that growth is tax-deferred.
- Variable: Variable life insurance policies are a form of whole life insurance. The policyholder can make investment choices and share in the rewards and risks of investing premium payments. Returns on the investment component are more volatile than standard whole life policies. You also cannot borrow against the cash value of the policy.
Choosing the best option for you
Regardless of the policy type you choose, life insurance can offer a sizeable return versus the amount you pay in premiums. This payout can be a critical source of money for your family to replace your earnings after your passing. You may also use it to manage aspects of a business transition, such as share buyouts, after your death.
A skilled attorney will work with you to choose the best life insurance option. But once you have made your choice, consider a life insurance trust. Transferring ownership of your policy into such a trust allows you to ensure your life insurance benefits get passed down tax-free to your beneficiaries, as the policy may longer count as part of your taxable estate.
For more information on choosing a life insurance policy and specific estate planning strategies associated with life insurance, meet with an experienced California estate planning attorney.
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