For some, estate planning can be looked upon as an exercise in letting the chips fall as they may. You create a will or a trust and the beneficiaries will receive whatever happens to be left after you are gone.
This is one perspective you can take, but there is an alternate approach. You can proactively endeavor to bolster your legacy through the use of life insurance.
Whole Life Insurance
There are a number of hybrid forms of insurance, but the two most commonly used forms are whole life insurance and term life. Whole life accumulates a cash value when you pay your premiums, and there is a minimum annual interest rate.
The cash value can be withdrawn from the policy, and you can alternately take a loan against it.
In a real sense, you get the best of both worlds with whole life insurance. There is a death benefit that will serve as a form of income replacement if you pass away, but you get something in return for your money while you are living.
The average premium for a $250,000 benefit for a man in good health between 45 and 55 years old who is a non-smoker is between $432 and $674 a month. For a male in the 35 to 45 age group, the average cost is in the $282-$432 range.
Term Life Insurance
The other type of coverage that is widely used is term life insurance, and this is the ideal form of coverage for people who want to protect their families for a prescribed period of time.
There is no cash value, and you decide on the term during which the policy will remain in place. Because there is nothing coming back unless you pass away during the term, the premiums are much lower than whole life insurance premiums.
To give you an idea of the premium you might pay, a 35-year-old woman obtaining $500,000 of coverage might pay between $18 and $29 a month depending on her health.
In addition to the more common uses for life insurance as an income replacement vehicle and/or a legacy enhancer, there are some other reasons why life insurance is used.
A buy-sell agreement can be used by business partners looking for an inheritance planning solution. To provide an example, let’s say that Lisa and Nicole own a successful restaurant. They agree on the value of a share in the business, and they take out life insurance policies.
The death benefits are equal to the value of a business share. When one partner dies, the other partner would use the proceeds to purchase the deceased partner’s share from their estate.
These agreements can also be used for exit purposes so the partners would have the ability to retire or step aside for some other reason. Life insurance does not necessarily have to be the source of funding.
Life insurance can also be used to balance inheritances. To use another example, let’s say that your son started working for your business full time after he graduated from college. He has been instrumental in its growth, and you are going to leave the company to your son.
You also have a daughter who has never been involved in your business, and you want to leave equal inheritances to your children. To accomplish this goal, you could make your daughter the beneficiary of a life insurance policy with a payout that is equal to the value of your company.
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