Insurance

The role of insurance in estate planning

Life insurance is an unselfish benefit. Those that purchase life insurance may not benefit from it. It’s the beneficiaries that really benefit from life insurance. Life insurance is one of the few assets that transfer to beneficiaries completely tax-free. As a result, insurance can be a great tool in the estate planning process.

When you think of life insurance, you probably think it is something you need when you are younger — when you have dependents and more debts. Many experts have argued that you should only buy life insurance when you need it and as a result, they suggest that you should only buy term insurance. However, we believe that the estate planning reasons to purchase life insurance are much more varied.

When considering insurance as part of your estate plan, it is so important that you consider four key issues.

1. Do you need insurance?

Just like cereal and milk or strawberries and whipped cream, life insurance and estate planning go really well together. As we said, the most obvious reason why people buy life insurance is to protect their dependents. However, there are other equally important reasons why you might want to have life insurance:

  • To cover taxes at death on illiquid assets

  • To pay off debts

  • To cover final expenses like funeral expenses, and lawyer’s and executor’s fees

  • To provide income for your dependents

  • To leave a larger estate for your beneficiaries

  • To create a pool of cash to allow your executor to make things equal for your beneficiaries when some things can’t be divided

  • To help corporations and business arrangements remain viable

  • To help businesses cope with the loss of key people.

Obviously, this list is not exhaustive but it does represent some of the key uses of life insurance in the estate planning process.

2. The right amount of life insurance

Once you know why you need insurance, you then need to know the right amount of insurance. This is one of the most important steps in planning for life insurance. Determining the right amount is not always easy. We think it’s more of an art than a science. You need enough to meet your goals, but you don’t necessarily want to buy more than you need. When in doubt, get help from a professional advisor.

3. The right type of life insurance

The next issue to consider is the appropriate type of life insurance to use. Basically, there are two kinds of life insurance: temporary insurance and permanent insurance.

  • Another name for temporary insurance is term insurance. Term insurance is the most cost effective type of insurance. It is designed to protect you for only a temporary period of time. As you get older, term insurance gets more expensive. Once you reach 70 or 80 years of age, you will not be able to get any term insurance coverage.

  • The second type of insurance is permanent insurance. Permanent insurance stays in force until you die. As long as you pay the premiums, your permanent life insurance policy remains an asset in your estate planning. The benefit with permanent insurance is a price that is fixed over your lifetime unlike term insurance where the price increases as you get older. There are three basic types of permanent insurance: Term to 100, Whole Life, and Universal Life.

Living Insurance

Life insurance contracts are the unselfish benefit because it’s really the beneficiaries that benefit when you die. Living insurance is a more selfish type of insurance because it pay you before you die. Two good examples of this are Long Term Care insurance and Critical Illness insurance.

Which type of insurance is best for you? The answer is found in your reason for buying insurance in the first place. For example, if you want insurance to pay off your mortgage so your family is not burdened with debt, then term insurance is probably all you need. On the other hand, if you want insurance to create a bigger estate for your heirs, then a permanent policy is probably more appropriate.

4. Shop around

Just like anything else in life, not all life insurance products are created equally. That is especially true when it comes to price. Once you have an idea of what type of life insurance you need and how much you need, it is critically important to shop around for the best deal. If you are not sure how to accomplish that, then seek advice from an independent insurance broker who can shop around for you.

Remember that life insurance is a very unselfish financial tool. We call it unselfish because the greatest benefit typically comes after you die. Life insurance money does not benefit you as much as it benefits other people – usually the people you love most.

Comments

  1. Josh Tward

    One of the things to be aware of when it comes to “permanent” insurance is that permanent does not necessarily mean that your premiums are locked in & level for life.

    Permanent insurance can still have ongoing & Escalating term insurance type costs; even increasing on a Yearly basis. However some of those policies would still be classified as permanent because of other policy features.

    • Jim Yih

      Great comment Josh! Thanks for the added information.

  2. My Own Advisor

    Nice post Jim. Your first line said it all – life insurance is never for you, it’s for others.

    • Jim Yih

      Thanks for stopping by! I appreciate the support!

  3. youngandthrifty

    Great post. I remember when I read The Wealthy Barber, they explained this really well… that unless you have dependents or people you want to be unselfish to, it doesn’t really make sense to pay for life insurance.

    • Jim Yih

      Ahhhhh! The Wealthy Barber. I am looking forward to his upcoming sequel … the Wealthy Barber Returns.

      As much as I agree that insurance should only be bought if you need it, there are many circumstances where in makes sense even if you don’t need it for the traditional reasons.

      Thanks for your continued support!

    • Brian Poncelet

      The Wealthy Barber was a good book but…

      He talked about RRSPs (government makes the rules and changes them often)All the RRSPs do in general, is defer taxes.

      Little talk about taxes! (see above)

      Rates of return I believe of over 10%!?

      Saving 10% of your income is great advice. If people just did this we would be in must better shape.

  4. Brian Poncelet

    Hi Jim,

    How about more money in retirement and less taxes and better protection with life insurance.

    I wrote a story awhile ago about insured annuities.

    http://www.milliondollarjourney.com/how-annuities-work.htm

    In a nutshell, you need to get aleast 6% guaranteed for life (at 65) to do better.

    Also, besides annuities, there is a number of other things one can do to pay less taxes and have more money in retirement using insurance.

    cheers,

    Brian

  5. financial retirement planning

    Each issuer will have their own set of qualifying conditions. Typically these would include heart disease and diabetes. Some issuers include smoking.

    • Brian Poncelet, CFP

      This person does not seem to understand how insurance works. In Canada, if one was a smoker the actuary (for meaning see below)
      sets the prices. An actuary is a business professional who deals with the financial impact of risk and uncertainty.

      Since an actuary works from the same tables, prices in many cases is the same, it just depends on the profit the insurance company wants to make.

      So the statement:

      “Each issuer will have their own set of qualifying conditions. Typically these would include heart disease and diabetes. Some issuers include smoking.”

      Is wrong.

      Getting medical information first then comparing it the tables will determine what the insurance company can offer.

Leave a reply

Your email address will not be published. Required fields are marked*