Choosing the right type of life insurance for your estate plan is far from easy, but it can be the difference between your children being left without the funds to pay a mortgage or college tuition and being able to provide housing and care for them.
Despite 75% of Americans owning a type of life insurance, the number of them who feel they don’t have enough coverage has doubled since 2010.
Did you know since COVID-19, 31% of Americans say they now want a life insurance policy after having no desire before?
You’re not alone if you find the whole conversation complex and overwhelming. In this guide, we’ll help you choose the right type of life insurance for your estate plan by explaining the key features and considerations.
If you need further advice, please contact our estate planning lawyers so we can help guide you towards structuring your assets to retain your family’s wealth.
How to Choose the Best Type of Life Insurance for You
Analyze Your Finances
The first step in choosing the right type of life insurance is to know:
- Your budget
- How much coverage do you need
You can only buy an insurance policy that you can afford, so you need to analyze your finances and see what room is left for your life insurance budget.
How Much Coverage Do You Need?
Many people underestimate how much life insurance coverage they need. While it may seem obvious to think about debts and mortgages, don’t forget child support, college tuition and funds to actually enjoy life to the full. What would your loved ones need support for if you passed away?
Forbes recommends a life insurance policy with a death benefit of 10x your annual salary.
On the flip side, you should think about what backups are already in place to protect your family. You might already be prepared if you have emergency funds, savings, and other insurance policies.
Understand What Affects Your Rates
- Life insurance companies will primarily consider health and age when determining your rate.
- The older you are, the higher the insurance rate tends to be.
- But it’s also affected by the type of policy you select and how large the death benefit is.
Speak to an Estate Planning Lawyer
Financial planners can be very helpful in long-term financial planning, but they can’t help you with estate plans. It’s recommended that you contact an estate planning lawyer or elder law attorney so they can advise you on the best overall route to take with choosing the right type of life insurance for your estate plan.
An estate planning lawyer can help you structure your assets (including your life insurance policies) to protect your family’s wealth from creditors and estate taxes.
A lawyer’s support can help you decide on a life insurance policy to meet your goals, from long-term care to whether you need to set up a trust to benefit your children.
Now, we need to look at the types of life insurance rates available:
Types of Life Insurances
Life insurance is split into two categories:
- Term life insurance
- Permanent life insurance
Term Life Insurance
- Term life insurance policies are considered the simplest and least expensive option.
- They last for a predetermined number of years. If you don’t die during that time, the policy expires without payout.
- Term life insurance is usually sold for policy lengths of one year or 5, 10, 20, 25 or 30 years.
- Coverage varies with each policy but often goes into the millions.
- To get a locked-in price, choose one with ‘level premium’.
- ‘Annually renewable’ term life policies allow you to renew every year.
Pros: Most accessible and flexible life insurance policies.
Cons: If you outlive your policy, there is no payout. There are no cash values, so it can’t be borrowed against.
Whole Life Insurance
- Lifelong coverage.
- Premiums generally stay the same, providing a guaranteed rate of return on the policy’s cash value.
- The death benefit amount doesn’t change.
- The cash value can be used for whatever you want – from emergencies to long-term care.
Pros: Lasts until you die, while building cash value.
Cons: More expensive than term life insurance, so it can be hard to access.
Other Types of Life Insurance Policies:
Variable Life Insurance
- Variable life insurance is linked to investment accounts (bonds and mutual funds).
- Typically fixed rate, with death benefit guaranteed.
- You can take partial cash value withdrawals or borrow against it.
Pros: Potential for considerable gains.
Cons: Hands-on management required. Fees and administrative charges.
Guaranteed Universal Life Insurance
- Guaranteed death benefit
- Premiums don’t change
- Little to no cash value
- You control the age you want the death benefit guaranteed.
Pros: Considered cheaper than whole life policies.
Cons: Missing any payment can result in a policy forfeit, with no cash value to take away.
Indexed Universal Life Insurance
- Links the policy’s cash value to a stock market value.
- Gains are determined by a formula.
Pros: Access to growing cash value, depending on stock market performance. Payments and death benefits are flexible.
Cons: Cash value doesn’t benefit from full stock market gains due to investment caps. Considerable management.
Final Expense Life Insurance
- Specialized life insurance to help cover the costs associated with your passing.
- Used in conjunction with Irrevocable Life Insurance Trusts (ILIT) in an estate plan.
Questions To Ask Yourself When Choosing a Life Insurance
- How old are you?
- How good is your health? Do you have any health concerns?
- What are your family’s financial needs and goals?
- How old are your children?
- Are you concerned about serious illnesses, or what happens if you’re incapacitated?
- What are your outgoing costs?
- What are your retirement goals and plans?
- Do you plan to have a college fund for your kids?
- How do you want to protect your kids if you pass away?
- Do you have any existing life insurance?
Hire an Estate Planning Attorney in St Petersburg & Riverview, FL
If you need support planning your estate and your life insurance policy, then our Florida estate planning attorneys can help. We can take care of the complicated work from asset protection to creating trusts.
Battaglia, Ross, Dicus & McQuaid, P.A. is U.S. News and World Reports Tier 1 law firm in Florida, specializing in Estate Planning & Probate since 1958. With award-winning, experienced estate planning attorneys, they can help you plan for the future today.