While Not Sexy, Life Insurance can Really Help with Estate and Financial Planning

US News’ recent article, “Pros and Cons of Whole Life Insurance,” says that life insurance is often an afterthought. In reality, life insurance should be one of the first considerations when people evaluate their financial picture. Life insurance—whether term or whole life—can be used to fulfill various planning goals.

Insurance products and terminologies can be confusing, just like investing and the game of cricket. First, decide whether term or permanent insurance is for you. Term life insurance is used to cover risks over a certain period of time—like to replace your income until you retire, cover the last few years of a mortgage, or pay for the kids’ college. After those are covered, you don’t need that coverage anymore.

Permanent or whole life insurance is typically more expensive than term and should be used for estate planning, leaving a legacy, transitioning ownership of a business, and covering burial expenses. The amount of face value, or death benefit, might be less than term because of premium costs, but the big difference is that whole life can allow for a buildup of cash value. If it’s held long enough, it can increase in value and face amount. This increase is usually tied to premium payments, dividends, and interest paid on the cash value. Life insurance can be confusing because whole-life policies can be offered in various forms by different insurance companies.

A policy owner may customize coverage and buy extra coverage. That’s called a rider.

Permanent life insurance has other benefits in addition to the death benefit. Depending on how the permanent life insurance policy is designed, it could provide tax-free income in the future. In addition, cash value life insurance can have products inside of the policy that can protect the cash value against any market loss.

The goal is not to depend on life insurance in general or on any one particular type of life insurance to solve all financial planning needs. Life insurance isn’t a “silver bullet” for all planning needs but is one tool among many to help people achieve their living and legacy goals.

Reference: US News (April 11, 2016) “Pros and Cons of Whole Life Insurance”

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