New York Estate Planning & Elder Law Blog
Estate planning often involves discussions about investments and other forms of financial planning. Inevitably, life insurance will likely enter the discussion as well. However, when considering life insurance as an estate planning strategy, it is important to understand the limitations that come with life insurance. These limitations often depend on the type of policy you are considering, but reviewing your life insurance options with your estate planning attorney can help you make an informed decision about what – if any – life insurance is right for you.
Choosing the Right Policy
There are several different types of life insurance policies available, most falling into the category of either whole-life or term life insurance. Deciding which type of policy will best meet your needs and goals is an important first step into understanding exactly where life insurance fits into your estate plan.
Whole-life insurance policies typically operate by collecting monthly premium payments from the insured in exchange for a guaranteed set payout upon death. Usually these policies have a cash value that will increase with the amount of premiums you have paid into the policy. You may be able to borrow against the cash value of the policy or even withdraw the policy early, usually accompanied by a fee for doing so. These policies sometimes offer investment options to help grow the cash value in addition to your premiums.
Term life insurance covers you if you were to pass away during the term of the policy, which varies depending on the policy. If you outlive the term of the policy, then you and the beneficiaries will receive nothing. You typically cannot borrow against these types of policies, but because they will eventually expire and you may outlive their term then their premiums can be cheaper than whole-life policies.
Insurance as an Investment
When considering life insurance and figuring out which type of policy is right for you, it is important to remember that life insurance cannot take the place of sound financial investments. If you look at life insurance solely as an investment opportunity, you are liable to be disappointed. While life insurance can certainly help cover costs associated with your death and provide some financial security for beneficiaries, it should not take the place of other investment strategies that can provide even greater financial security for beneficiaries.
For instance, term life policies are a good idea to help cover loved ones’ financial needs before your personal assets are enough to provide for them. Whole-life policies are a better idea for those looking to obtain an influx of cash in the future. With either of these policies, you will likely want to keep the policy as simple as possible. If your policy is too complex, then you may find the power of your premiums stretched thin in the long run. In such cases, using the money devoted to premiums to make other sound financial investments might produce a better result for you. You may not even find a need for life insurance. If you have followed a sound financial planning strategy, you may be secure enough by virtue of the assets your financial planning has enabled you to obtain. An experienced estate planning attorney can help you understand how life insurance might fit into your estate planning strategy.