Life Insurance and Estate Planning
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Transcript of Life Insurance and Estate Planning
Life Insurance and
Estate Planning How insurance strengthen your estate
plan
By Richard B Schneider
Protecting Families Through Estate Planning
Estate Planning for Oregon and SW Washington
2
Most people feel that they
should purchase at least one life
insurance policy and that life
insurance should play a role in
their estate plan. Beyond those
two basic propositions, most
people are unsure of how to
approach life insurance.
How much life insurance do you need?
What type of life insurance should you purchase?
How does life insurance fit into your estate plan?
Do you need an additional policy if you own an interest in
a business?
All of these are valid questions that you should know the
answers to before you sit down to create your estate plan.
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Although each estate plan is as unique as the creator of the
plan, there are some general answers to life insurance
questions that can provide you with a starting point.
What is life insurance?
A life insurance policy is a contract between you and an insurer.
As the owner of the policy, you pay premiums in return for
which the company agrees to pay out a specific sum of money
to your chosen beneficiary upon your death. In some cases, a
life insurance policy will pay out after the expiration of a set
period of time even if the insured has not died prior to that
time.
What are the basic types of life
insurance?
There are two basic types of life insurance – term and whole
life. Within the category of whole life, there are also a number
of variations and hybrids.
Term life insurance is the simplest type of life insurance. With a
term policy, you pay an annual premium that pays for death
benefits and nothing more. A term life insurance policy has no
cash value and does not have an investment component to it.
Insurance has a number
of uses as an estate
planning tool. It helps
protect and preserve
your estate, giving you
more to pass on to your
loved ones. It also has
special characteristics
that allow you to
position your estate for
sophisticated estate
planning.
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As a general rule, the premiums will increase as you age and
you may have to re-apply/re-qualify for coverage after the
expiration of the term; however, there are some term policies
that have declining premiums and benefits and/or that
guarantee renewal.
A term policy provides immediate coverage at no risk to the
policy holder. Usually, a term life insurance policy is less
expensive than a whole life policy, which makes it a good choice
for young couples who are primarily concerned with providing
income replacement in the event of an unexpected death.
Whole life insurance, on the other hand, both provides death
benefits and accumulates a cash value. In a whole life policy,
part of your premium is used to pay for your death benefit
protection and the rest is invested or saved. As time goes by,
your policy’s cash value will increase.
You can borrow against that cash value or take it out if you
terminate the policy. Although whole life premiums are usually
significantly higher than a term policy, unlike a term policy, the
rates will never go up and the policy never expires. Because
there are so many variations within the whole life category, it is
crucial that you carefully read the terms of a policy before
agreeing to purchase the policy.
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How much life insurance do I need?
Before you make a final decision about which type of life
insurance policy to purchase, you need to decide how much
insurance you need. Not surprisingly, experts disagree about
how you should go about calculating how much life insurance
you should purchase; however, a simple approach looks like
this:
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Funeral and burial expenses
Consider the cost of burial and funeral. Some people
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to paying funeral and burial costs to ensure that they
are covered. Check with local funeral homes for a
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Debts
Add up all of your fixed debts such as your mortgage
loan, student loans, car payments and any other
significant debts for which you are liable.
Education
This can be difficult to estimate because you need to
consider what it will cost at the time your children
enter college. If they are young, this can be hard to
predict; however, experts estimate that college
expenses are increasing at about five percent per
year.
The term "estate
planning" usually calls
to mind the process of
creating a Will,
establishing a Living
Trust, or naming a
guardian for young
children. One piece of
the estate planning
puzzle that might not
be readily apparent,
though, is insurance.
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Income replacement
This can also be tricky because it depends on various
factors. Since you have already covered major debts
and education, consider how much of your income
your family still needs to survive. If you are a two
income family, the calculations will be different than if
you are a one income family. In addition, your age at
the time you purchase the policy will greatly affect the
calculations.
.
Once you have all of the numbers down, add them together and
then adjust them for any special circumstances that warrant an
adjustment.
For example, do you have a pension coming or a large
inheritance that might warrant a lesser life insurance amount?
On the other end of the spectrum, do you have a special needs
child that will require more than the average amount of
financial support in the years to come warranting an increase in
the amount of life insurance you purchase?
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Living Trusts: Calculating the
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A Living Trust is a very versatile estate
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8
FREE WORKSHOP
Business Interests
If you own a small business, either as a sole proprietor or as a
partner, you may also need to add an additional policy that
covers your business interests. If you are a sole proprietor, you
may be personally liable for some of the business debts. In the
event of your
death, you need to
be sure that those
debts are covered.
If you have
business partners,
you may need a life
insurance policy
that will ensure
that funds are
available to cover
the costs involved
in a buy-sell
agreement entered into by the partners. A buy-sell agreement
essentially ensures that if you die, your interest in the business
will be purchased by the remaining partners at a pre-
determined price. This way, your family members are not stuck
trying to figure out what to do with your business after your
death.
The estate planning
process presents a
number of
opportunities for using
asset protection
strategies to protect
yourself and your loved
ones.
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Incorporating Life Insurance
into Your Estate Plan
Once you have decided how much life insurance you need and
what type of policy (or policies) you need, you will need to
incorporate those decisions into your estate plan. For example,
if you decided to purchase a separate life insurance policy for
your funeral expenses, you may take that decision one step
further and create a funeral trust that you fund with the policy.
University of Minnesota –Life Insurance in Estate Planning
Kiplinger – How Much Life Insurance Do You Need?
For information and/or comments on this article, please write to
About the Author
Law Offices of Richard B. Schneider,
LLC – Estate Planning & Asset
Protection Attorneys Portland OR
Before devoting his professional
efforts exclusively to estate planning,
Mr. Schneider spent over fifteen
years working on Wall Street for
major law firms and investment
banks. After graduating from law
school, he practiced general civil law
in New York City for five years,
specializing in business transactions,
financings and corporate matters. He
also represented major investment
banking firms in mortgage trading
and real estate-related matters.
Among his clients were international
shipping companies, commercial and
investment banks and institutional
lenders, including General Electric
Capital Corporation, Salomon
Brothers and Merrill Lynch.
2455 NW Marshall St, Suite 11 Portland, OR 97210 Phone: (503) 241-1215
Fax: (503) 241-1216