For many people, life insurance plays an integral role in their estate plan. Exactly what role it plays, and how much life insurance is necessary, can be difficult to determine though. Moreover, both the type and amount of life insurance you need can change over the course of your lifetime.An Indianapolis estate planning attorney at Frank & Kraft helps you decide what type and how much life insurance is right for you.
Not All Life Insurance Is Created Equal
Deciding how much life insurance you need begins with understanding the various types of life insurance available. You will find that there are additional sub-categories and hybrids also available; however, the basic categories of life insurance include:
- Term Life Insurance — term life insurance is usually the simplest and least expensive type of life insurance. A term life insurance policy is purchased for a specific amount of coverage and a specific “term”, or period, usually 10 to 30 years. The premiums are usually fixed for the period of the policy. The policy has no cash value and, therefore, cannot be borrowed against. When the insured dies, the policy pays out to the named beneficiary. If the insured outlives the policy, or there is a lapse in premium payments, no benefits are paid. A variation of traditional term life insurance, referred to as “non-level” term, does not remain the same for the life of the policy. Either the premiums increase, or the payout decreases over the life of the policy.
- Whole Life Insurance – this type of life insurance is purchased in a specific coverage amount for the lifetime of the insured, hence the term “whole life.” Premium payments are usually fixed, meaning they will not change. Along with the insurance benefits you also get a savings component and will earn dividends from the insurance company. The policy will have a guaranteed cash value. Premiums will be higher than an equivalent amount of term life insurance.
- Universal Life Insurance – universal life insurance is also purchased for a specific coverage amount; however, you may have the option to increase the coverage amount later if certain conditions are met. In addition, you may be able to change your premium payment amount if you have accumulated enough cash value in the policy. Your policy will usually earn an interest at a rate set by the insurance company. Cash value that can often be borrowed against is one benefit to choosing universal life. One disadvantage to universal life is that, unlike whole life, it has a termination age. Although the termination age is usually not until age 95 or 100, if you live that long your loved ones won’t be entitled to any death benefits.
- Variable Life Insurance – variable life insurance is also another variation of whole life insurance. Variable life truly combines life insurance with investing. Once you accumulate savings, those savings can be invested in stocks, bonds, or mutual funds. You also have premium flexibility with variable life, meaning you can increase or decrease the amount you pay in premiums if you have sufficient cash value in the policy to do so. Variable life insurance offers the possibility of greater gains from the investment portion of your premiums, but also the possibility of greater losses.
- Final Expense Life Insurance – as the name implies, final expense life insurance is a specialized type of life insurance intended to help cover the costs associated with your death. It is only available to people of a certain age and usually terminates at a designated age. This type of life insurance is often used in conjunction with an Irrevocable Life Insurance Trust (ILIT) as part of a funeral planning component within an estate plan.
How Much Life Insurance Do I Need?
Deciding how much life insurance you need should consider a wide variety of factors – and those factors are likely to change over your lifetime. If you plan to pay for your funeral with a life insurance trust, for instance, you will need to purchase or designate a policy for that trust. For those who are using life insurance as a safety net to pay debts and provide for surviving loved ones, a common formula used to determine how much to purchase is as follows:
- Add up your current resources which include after-tax income and liquid assets.
- Add your expenses and debts to determine your existing financial obligation.
- Subtract your liquid assets from your financial obligations to arrive at your “coverage gap”
- The coverage gap amount represents the minimum amount of life insurance you need.
Contact an Indianapolis Estate Planning Attorney
For more information, please download our FREE estate planning worksheet. If you have additional questions or concerns about incorporating life insurance into your estate plan, contact an experienced Indianapolis estate planning attorney at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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