Using Life Insurance as Part of Your Estate Plan

Life insurance can play a few key roles in an estate plan, depending on your age and situation in life. 

There are two main types of life insurance: term and permanent. Term life insurance is the simplest: You buy a policy for a set number of years and you have coverage with a death benefit if you die during that period. Permanent life insurance policies provide coverage for life (or for as long as you pay premiums). In addition to paying a death benefit, the policy builds a cash value, which can be used as collateral for a loan or withdrawn from the account. “Whole life,” “universal life,” “variable life” and “variable universal life” are different types of permanent insurance. 

When children are young, life insurance can provide funds to a surviving spouse and children to help make up for lost income and pay for schooling. Typically, a term life insurance policy will work well for this purpose. 

Once you retire, you may no longer need life insurance. If your spouse or other dependents won't lose any income when you die, life insurance may not be necessary and your premiums may be better spent on other things. However, more and more people are carrying debt into retirement. In this case, a life insurance policy can be used to pay off that debt once you die. This may allow your heirs to keep a house that might otherwise have to be sold to pay off the debt. Life insurance can also be used to pay off an outstanding mortgage. 

It may better to have a permanent life policy in retirement because the cash value can be used to provide income to the retirees or to pay long-term care costs. There are also hybrid long-term care insurance and life insurance products that can be used for this purpose. 

Because life insurance passes outside of probate, it can also provide heirs needed funds more quickly than assets passing through probate. Life insurance can be used to pay for funerals and other final expenses. While most families do not have to pay federal estate tax, life insurance can be used to pay state estate taxes. 

To make sure you use life insurance effectively as part of your estate plan, you should consult with your attorney.