While every estate plan is as unique as the individual creating the plan, there are some common estate planning tools. Life insurance is one of those common tools. Young parents routinely purchase life insurance as a way to provide for minor children in the event something happens to them. A small business owner may purchase a policy to fund a buy-sell agreement while funeral planning often makes use of an irrevocable life insurance trust (ILIT). If you are considering the addition of a life insurance policy, the first thing you need to decide is what type of life insurance to purchase. To help with that decision, the Lincolnshire estate planning attorneys at Hedeker Law, Ltd. explain the various types of life insurance available.
Types of Life Insurance
Although insurers are continuously coming up with new hybrids or variations on the basic themes, the following types of life insurance are the most common options:
- Term Life Insurance — term life insurance is usually the simplest and least expensive type of life insurance. A term life insurance policy is purchased for a specific amount of coverage and a specific “term”, or period of time, usually 10 to 30 years. The premiums are usually fixed for the period of the policy. The policy has no cash value and, therefore, cannot be borrowed against. When the insured dies, the policy pays out to the named beneficiary. If the insured outlives the policy, or there is a lapse in premium payments, no benefits are paid. A variation of traditional term life insurance, referred to as “non-level” term, does not remain the same for the life of the policy. Either the premiums increase or the payout decreases over the life of the policy.
- Whole Life Insurance – this type of life insurance is purchased in a specific coverage amount for the lifetime of the insured, hence the term “whole life.” Premium payments are usually fixed, meaning they will not change. Along with the insurance benefits, you also get a savings component and will earn dividends from the insurance company. The policy will have a guaranteed cash value. Premiums will be higher than an equivalent amount of term life insurance.
- Universal Life Insurance – universal life insurance is also purchased for a specific coverage amount; however, you may have the option to increase the coverage amount later on if certain conditions are met. In addition, you may be able to change your premium payment amount if you have accumulated sufficient cash value in the policy. Your policy will usually earn interest at a rate set by the insurance company. Cash value that can often be borrowed against is one benefit to choosing universal life. One disadvantage to universal life is that, unlike whole life, it has a termination age. Although the termination age is usually not until age 95 or 100, if you live that long your loved ones won’t be entitled to any death benefits.
- Variable Life Insurance – variable life insurance is also another variation of whole life insurance. Variable life truly combines life insurance with investing. Once you accumulate savings, those savings can be invested in stocks, bonds, or mutual funds. You also have premium flexibility with variable life, meaning you can increase or decrease the amount you pay in premiums as long as you have sufficient cash value in the policy to do so. Variable life insurance offers the possibility of greater gains from the investment portion of your premiums, but also the possibility of greater losses.
- Final Expense Life Insurance – as the name implies, final expense life insurance is a specialized type of life insurance intended to help cover the costs associated with your death. It is only available to people of a certain age and usually terminates at a designated age. This type of life insurance is often used in conjunction with an Irrevocable Life Insurance Trust (ILIT) as part of a funeral planning component within an estate plan.
Contact Lincolnshire Estate Planning Attorneys
For more information, please join us for a FREE estate planning seminar. If you have additional questions or concerns regarding which type of life insurance is right for your purposes, contact the experienced Lincolnshire estate planning attorneys at Hedeker Law, Ltd. by calling (847) 913-5415 to schedule an appointment.