Life insurance is an important part of estate planning. What is life insurance? In general, life insurance is a contract agreement between you and an insurance company. In exchange for monthly payments, the company provides a lump sum payment to the beneficiaries upon the death of the insurer. There are two main types of life insurance, term life insurance and whole life insurance. Insurance is usually chosen based on the owners goals, needs and preferences.
Term life insurance provides protection for a period of time, such as 10, 20 or 30 years and is usually less costly than whole life insurance. This life insurance is most likely used to cover loss of the job in the case of the death of a loved one, ensuring that goals such as paying off the house mortgage, college expenses and other financial goals are met.
Whole life insurance is permanent life insurance designed to provide insurance throughout the owner’s lifetime and because of this it is usually more expensive. This type of insurance has a cash value and can be used to compile tax-deferred savings.
When deciding who should own the life insurance policy it is important to understand the rights of the owner. It is also important when purchasing a life insurance policy to accept advice from a trusted professional. Both spouses should have policies to ensure the financial security of the family in the event of death. The owner of the policy can change beneficiaries, the address, the policy death benefit, and the payment. The owner can also cancel or surrender the policy and withdraw cash accumulation value from whole life polices.
When naming the beneficiaries of your life insurance policy it is important to not take this lightly and make sure you understand all the implications. For instance, if you name a minor child as your beneficiary, the insurance company will not pay the proceeds to the child unless you have created a trust or made legal arrangements with someone to manage the money. If not the court will appoint a guardian to handle the insurance money until the child is of age which is usually 18 or 21 depending on the state you live in. This process is costly, so it is a good idea to think these things through before naming a beneficiary. It is also important to remember that you can change your beneficiary at any time. Please contact Andrews & Arbenz if you have questions about how your life insurance policy effects your estate planning goals or information about setting up a living trust to provide the protection you need for your estate.