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.
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
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.
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.
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.
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
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.
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.
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