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 lifeinsurance you need begins with understanding the various types of lifeinsurance available. You will find that there are additional sub-categories andhybrids also available; however, the basic categories of life insuranceinclude:
- TermLife Insurance — term lifeinsurance is usually the simplest and least expensive type of life insurance. Aterm life insurance policy is purchased for a specific amount of coverage and aspecific “term”, or period, usually 10 to 30 years. The premiums are usuallyfixed for the period of the policy. The policy has no cash value and,therefore, cannot be borrowed against. When the insured dies, the policy paysout to the named beneficiary. If the insured outlives the policy, or there is alapse in premium payments, no benefits are paid. A variation of traditionalterm life insurance, referred to as “non-level” term, does not remain the samefor the life of the policy. Either the premiums increase, or the payoutdecreases over the life of the policy.
- WholeLife Insurance – this type oflife insurance is purchased in a specific coverage amount for the lifetime ofthe insured, hence the term “whole life.” Premium payments are usually fixed,meaning they will not change. Along with the insurance benefits you also get asavings component and will earn dividends from the insurance company. Thepolicy will have a guaranteed cash value. Premiums will be higher than anequivalent amount of term life insurance.
- UniversalLife Insurance – universallife insurance is also purchased for a specific coverage amount; however, youmay have the option to increase the coverage amount later if certain conditionsare met. In addition, you may be able to change your premium payment amount ifyou have accumulated enough cash value in the policy. Your policy will usuallyearn an interest at a rate set by the insurance company. Cash value that canoften be borrowed against is one benefit to choosing universal life. Onedisadvantage to universal life is that, unlike whole life, it has a terminationage. Although the termination age is usually not until age 95 or 100, if youlive that long your loved ones won’t be entitled to any death benefits.
- VariableLife Insurance – variable lifeinsurance is also another variation of whole life insurance. Variable lifetruly combines life insurance with investing. Once you accumulate savings,those savings can be invested in stocks, bonds, or mutual funds. You also havepremium flexibility with variable life, meaning you can increase or decreasethe amount you pay in premiums if you have sufficient cash value in the policyto do so. Variable life insurance offers the possibility of greater gains fromthe investment portion of your premiums, but also the possibility of greaterlosses.
- FinalExpense Life Insurance – as thename implies, final expense life insurance is a specialized type of lifeinsurance intended to help cover the costs associated with your death. It isonly available to people of a certain age and usually terminates at adesignated age. This type of life insurance is often used in conjunction withan Irrevocable Life Insurance Trust (ILIT) as part of a funeral planningcomponent within an estate plan.
How Much Life Insurance Do I Need?
Deciding how much lifeinsurance you need should consider a wide variety of factors – and thosefactors are likely to change over your lifetime. If you plan to pay for yourfuneral with a life insurance trust, for instance, you will need to purchase ordesignate a policy for that trust. For those who are using life insurance as asafety net to pay debts and provide forsurviving loved ones, a common formula used to determine how much to purchaseis 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 orconcerns about incorporating life insurance into your estate plan, contact anexperienced Indianapolis estate planning attorney at Frank & Kraft by calling (317) 684-1100 to schedule anappointment.
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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