There are Many Life Insurance Options in Estate and Financial Planning

Estate planning will always involve consideration of life insurance.  Life insurance can, among other objectives, create liquidity to pay estate taxes and settlement expenses, replace lost income for spouses and dependents, and protect an estate against loss. There are two main types of insurance: term and permanent. These two main alternatives differ on how long there is coverage and whether or not the policy includes a cash value.

Term Life Insurance

Term life insurance is the simplest, and probably the most common type of insurance. The purchase of insurance is for a set number of years, and the policy owner has coverage only for those years. In general, premiums remain level for the term. If the insured dies during the term, the beneficiaries receive a death benefit. Once the term ends, however, coverage ends. Some policies are "guaranteed renewable,"  meaning the owner can renew the policy for another term without having another medical exam, but premiums typically  increase. Some term policies also allow you to convert a term policy into permanent insurance.

Term insurance is usually purchased to cover a short- to medium-term need, such as a mortgage or a dependent's education costs.  Level term insurance keeps the premiums and death benefit the same over the policy term,  but there are other options. If the need for insurance will decrease over time, deceasing term insurance offers a reducing death benefit  over the term. Most consumers encounter these when buying a home or car, to ensure payment of the debt at death.  Conversely, if your need for insurance will increase over time, you can purchase increasing term insurance in which your premiums and death benefit rise over the term.

Permanent Life Insurance 

There are many different types of permanent life insurance (also called cash value insurance), but the four main types are whole life, universal life, variable life, and universal variable life. All permanent life insurance policies provide coverage for life (or for as long as you pay premiums). The other feature of permanent insurance is that in addition to paying a death benefit, the policy builds a cash value, which can be used as collateral for a loan or withdrawn from the account. A portion of the premium payments goes into a separate cash account that grows over time. Loans or withdrawals reduce the death benefit, but offer liquidity option in estate and financial planning. Many of these policies offer the option to add the cash value to the death benefit upon the death of the insuredfor an additional cost.  Each types of permanent life insurance has its own specific features and variations:

• Whole life insurance. With whole life insurance, the owner pays a set premium and receive a set death benefit. In addition, the cash value is guaranteed. Whole life insurance is a good option if an owner  is seeking stable premium payments, cash value, and a death benefit.

• Universal life insurance. Universal life insurance offers flexible premiums, cash value, and death benefit. The main feature of universal life insurance is the ability to use accumulated cash value to pay premiums. A policy may lapse, however, if the cash value does not grow sufficiently to support premium payments. Universal life also offers the option to change the death benefit, although, depending upon the policy, the insured may have to go through the underwriting process again. Universal life insurance is a good option if an owner is worried about the ability to pay premiums in the future and wants the ability to change premiums and  death benefit amounts as circumstances change.

• Variable life insurance. Variable life insurance offers the ability to invest cash value. The premium payments are usually  level, but an owner can direct the cash value payments into subaccounts that are similar to mutual funds. The cash value and  death benefit will vary depending on the performance of the accounts, although some policies may contain a guaranteed minimum for each. Variable life insurance is appropriate if an owner is using the policy as an investment and wants to control investment options. Variable life is better for younger buyers who can afford to take more risks.

• Variable universal life insurance. As the name suggests, variable universal life insurance combines the flexible premiums of universal life insurance with the investment choices of variable life insurance. There is no guaranteed minimum cash value, but most policies have a minimum guaranteed death benefit provided the premiums are paid for a set number of years. Like universal life insurance, the owner may be able to change the death benefit, but again the insured might have to go through the underwriting process again. Variable universal life insurance is a good option for young purchasers who want an investment option and flexibility with premium payments.