A lot of people who do not have estate plans in place say that they have not taken action because they do not have sufficient assets. Life insurance can provide a solution, and we will provide the details in this post.
Whole Life Insurance
The two most prominent types of life insurance are whole life insurance and term life. When you have whole life insurance, a portion is set aside as an interest-earning savings component. This is typically referred to as the policy’s “cash value.”
When the funding reaches a certain point, you can withdraw all or some of the cash value, and you can take loans against it. As a result, whole life insurance provides a death benefit while it simultaneously serves as an investment vehicle.
If you are a healthy 35-year-old man who is a non-smoker, the average monthly premium for a $250,000 death benefit would be somewhere between $282 and $432. For a woman of the same age, the average cost is in the $245-$349 range.
Term life insurance is the ideal income replacement vehicle for people that have not had enough time to accumulate significant resources. This type of coverage has no cash value, and as the name would indicate, it is in place for a particular length of time.
You decide on the length of the term when you take out the policy, and the premium will stay constant during that interim. However, if the term expires and you are still alive, you got nothing for your money except peace of mind.
Yes, it is likely that you will survive the term, but when you are protecting the people that you love the most, the security is priceless. The good news is that term life insurance is much less expensive than whole life.
A 35-year-old female that is living in Charlotte, North Carolina can get a 25 year term life insurance policy with a half-million dollar death benefit for somewhere between $25 and $40 a month.
Aside from the income replacement angle, life insurance can be used for some other purposes, and inheritance balancing is one of them. The best way to explain is through a simple example.
Let’s say that you are a chef. You have owned your own restaurant for years, and it is very successful. You have a daughter and a son, and your son worked in the business while he was in high school.
After graduation from culinary school, your son works full-time with you in the restaurant. As the years pass, he earns a lot of sweat equity, and you decide that you want to leave the restaurant to him in your estate plan.
Meanwhile, your daughter embarked on a different career path, you want to leave equal inheritances to your children. To balance the inheritances, you could make your daughter the beneficiary of a life insurance policy with a payout equal to the value of the business.
Partners in small businesses can use buy-sell agreements for succession and estate planning purposes. The partners would determine the value of a share of the business, and they would take out life insurance policies with a benefit that is equal to a business share.
When one partner dies, the life insurance proceeds would be used to purchase the deceased owner’s interest in the business from the estate. These agreements can also be used to facilitate exits while the owners are living, and insurance does not have to be the source of the funding.
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