Although an estate plan should be fitted to your unique needs, there are some commonly utilized components when it comes to estate planning. Life insurance is one of those components. Most people choose to include at least one life insurance policy among their estate planning tools and strategies. While life insurance is a common addition to any estate plan, understanding life insurance policies and options can prove challenging.
The type of life insurance policy you decide to purchase will often depend, to a great degree, on the underlying reason for the policy. For this reason, you should always consult with your Texas estate planning attorney before making a life insurance purchase; however, a brief overview of the different options may be a good starting point.
Term and Whole Life Insurance Policies
Life insurance options are divided into two basic categories – term and whole life. Term life insurance is the least expensive but offers only death benefits. Whole life is typically more expensive but offers benefits beyond the standard death benefits.
The Most Common Life Insurance Options
The following list provides a brief overview of the most common life insurance options within the two categories:
Term life insurance-
Usually the least expensive when comparing equal death benefit coverages. Term life allows you to purchase a set amount of death benefits for a set period of time. This period is typically 10 to 30 years. During this time, the premiums remain fixed. The policy does not earn cash value, meaning you cannot borrow against it or defer premium payments. If the insured dies during the life of the policy the death benefit amount is paid out to the named beneficiary; however, if the insured outlives the policy or fails to make a premium payment no benefits are paid.
Basic whole life insurance-
Whole life insurance is also purchased for a specific benefit amount. However, instead of choosing a benefit term, as is the case with term insurance, your policy is good for the lifetime of the insured. Premium payments are usually fixed, meaning they will not change. With whole life insurance you also get a savings component, in addition to death benefits, and you will earn dividends from the insurance company. Finally, a while life policy has a guaranteed cash value that can be borrowed against in most cases.
Universal life insurance-
Universal life insurance is a type of whole life that is purchased for a specific coverage amount; however, unlike term or basic whole life, 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. Moreover, your policy will earn interest at a rate set by the insurance company. It then accumulates a cash value that can be borrowed against.
Variable life insurance-
Variable life insurance is also a type of whole life insurance that effectively combines life insurance with investing. Once your policy accumulates enough in cash value, those funds can be invested in stocks, bonds, or mutual funds. You also have premium flexibility with variable life. In other words, you can increase or decrease the amount you pay in premiums. That is, as long as you have sufficient cash value in the policy to do so.
Understanding life insurance often takes the assistance of an experienced attorney. If you have additional questions regarding which type of life insurance policy is best for your needs, contact the experienced Texas estate planning attorneys at The Mendel Law Firm, L.P. to schedule your appointment today.