Should I Include Life Insurance In My Estate Plan?

April 6, 2012

Each estate plan is as individual as the person who creates the plan. Having said that, one of the most common components to an estate plan is life insurance. Whether or not you should include life insurance as part of your estate plan will depend on a number of factors; however, there are some things you should take into account when making the decision.
Your age and health. Life insurance is less expensive to purchase when you are younger and healthy, meaning you should be able to lock in the best rates. This is also when most people need life insurance for wealth and income replacement -- before they have other estate assets that can be passed down in the event of death.
Know what kind you are buying. Life insurance falls into two basic types -- term and insurance with cash value such as whole life or universal life. Term insurance only provides a death benefit while insurance with a cash value component potentially earns cash value, as the term implies.
Know your objective. If you only want to provide a financial safety net to your family, sticking with term insurance is likely your best bet. Talk to a financial advisor if you are considering whole life insurance. It can be a complicated investment strategy, but there are benefits that are not available to term policy holders.
Decide how much you need. This can change over the years. If you are young and single, you may only need enough to cover debts and your funeral. As you age, you should factor in what it will cost to raise your children if you die before they reach the level of maturity when they will be able to fend for themselves.
Shop around. Just as with other types of insurance policies the policy rates can vary widely. Take your time and compare rates before you commit. You should also be certain you are dealing with a company that is secure, so look at their rating with AM Best or Standard and Poors.
Know when to terminate or convert. Life insurance is rarely the best way to invest your money, but when it comes time to collect, your loved ones will find that you have provided well for them. Review your financial portfolio and your needs on a regular basis not only with your financial adviser, but your attorney, as well. You may find that you no longer need to include a life insurance policy for wealth or income replacement, but it could be useful in your estate plan as protection from estate taxes, expenses of administration, or other financial burdens of which you may not be aware.

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