For those beginning to plan for retirement, life insurance often seems like an attractive option. Before you fill out the application and begin paying premiums for years, determine whether to choose other estate planning tools instead or in addition. If you already have life insurance, now may be a great time to re-evaluate your estate planning goals and needs on top of life insurance.
What Is Life Insurance?
Life insurance gives your chosen beneficiary a lump sum payout of money when you pass away. Like other types of insurance, insurance companies sell life insurance policies to customers after they complete applications. The customers pay premiums over the policy length. In return, the insurance company will pay beneficiaries after customers’ deaths.
Are There Different Types of Life Insurance?
Yes, there are several basic types of life insurance offered by insurers, including term, whole life, and universal life. Term life insurance lasts for a set time period, during which you pay monthly premiums. The payout value of the policy is set at the beginning. If the term ends while you are alive, the insurance company no longer has to pay. Parents of younger children often opt for term life insurance that will last until the children pass age 18.
Whole life insurance continues for your entire life, as the name implies. You will have set premiums that increase the cash value of the policy payout over time. You may be able to borrow against the value of the policy, and after you pass away your beneficiary receives the remaining value. Universal life insurance is similar, but these policies allow you more flexibility in premium amounts and investment opportunities.
What Happens If You Pass Away While Holding Life Insurance?
If you pass away while holding life insurance, your executor or family members will need to contact the insurance company and notify it of your death. They will need to provide proof of death, such as a death certificate. The insurance company will determine whether you have followed the policy terms (for example, some policies have exclusions related to manner of death). If you followed the terms, the company will send a check to your designated beneficiary. Make sure to update your beneficiary designation if the original beneficiary passes away. Otherwise the insurance payout will go to your estate.
What Are the Limitations of Life Insurance?
Unlike in a will, you cannot allocate portions of a life insurance payout to various relatives. You choose one beneficiary who gets the whole lump sum. As a result, you may want to sign a will in addition to or instead of life insurance. Another option is to name your trust as the beneficiary of the policy, so that the trustee can collect the proceeds and pay them out to the beneficiaries you have named in your trust.
Further, many people cannot easily obtain life insurance. Premiums tend to be prohibitively expensive for people with pre-existing health conditions and older people. Insurance companies may not even consider their applications. If you cannot reasonably get life insurance, consider other estate planning and investment methods such as wills, trusts, and IRAs.
Planning your estate? Angela Klenk, Esq. and the team at Beach Cities Estate Law couple personalized attention to your estate plan with big law firm experience for a winning combination to give you peace of mind. To schedule a case evaluation, visit Beach Cities Estate Law online or call Angela’s office at (424) 400-2125.