Life Insurance and Estate Planning go together perfectly. You really can’t (or shouldn’t) have one without the other. Just like peanut butter and jelly… and I love me a good PB&J… yum.
But until about 6 years ago, I had never given life insurance (or estate planning) much thought. My Wife’s Grandfather was a career New York Life Agent, so she had brought up the topic of buying life insurance a few times, but it never went anywhere.
Then a couple of things happened.
First, we got pregnant with our first child. Knowing that we were soon going to be supporting another person in this world got us really thinking about what would happen to our son if something catastrophic happened to one of us. It was around this same time that we started thinking about putting together our initial estate plan.
Second, I joined a networking group with an insurance agent that I trusted. That agent, named Dave, was able to answer all of my questions about insurance and find a policy that worked for my Wife and I. We were able to secure enough coverage to make sure that our son and future children would be covered if something ever happened to us.
What is Life Insurance?
Before we get into why life insurance is such an important part of estate planning, let’s take a step back and talk about what life insurance is.
Simply put, life insurance is a contract that you enter into with an insurance company. Someone owns the policy (and pays the premiums), there is a beneficiary of the policy, and someone is named as the insured.
When the insured dies, assuming all the premiums have been paid in a timely fashion, the life insurance company will pay out a death benefit to the beneficiary of the policy.
Before I go any farther, I want to be clear that life insurance policies can be complicated. This blog post should not be construed as an offer to sell life insurance. You can only purchase life insurance through a properly licensed agent in your state.
As an example, let’s say you purchase a $1 million policy on the life of your spouse. Before issuing that contract, the insurance company is likely going to ask for medical records and information about your spouse, and will probably schedule an in-person exam to draw blood, get a urine sample, etc.
If you are young and in good health, you can get a policy without too much trouble or expense. As you get older, the premiums become much more expensive. The insurance company will also look to other risk factors, such as your diet, whether you exercise, your health history, whether you are a smoker, whether you have a history of heart disease or cancer in your family, etc. Personally, I follow a strict, plant-based vegan diet. As a result, I was able to purchase an extension to my current life insurance policy for about the same rate now that I originally paid for the same coverage 5 years ago.
How Can Life Insurance Benefit Your Estate Plan?
One of the biggest reasons that young couples come to see me is to put a plan in place that will protect their children if something were to happen to them.
As part of that planning, we will draw up guardianship paperwork to make sure that their kids do not have to be placed in foster care, and instead will be raised by the people who my client’s choose, with the values that my client’s pass on through our legacy planning process.
But to have a proper estate plan, especially when you are worried about taking care of your children, you have to properly fund your plan.
Some people have enough financial assets so that life insurance is not necessary – but this is a very small segment of the population. For everyone else, life insurance is a necessary part of estate planning.
The life insurance proceeds will be used to replace your income, pay off the mortgage to your house and other debts, provide for your children’s education, and ensure that the people you choose to care for your children have the funds necessary to raise your kids comfortably and in the way you would have wanted.
Essentially, life can be stressful enough for kids, especially in the aftermath of losing one or two parents. You will purchase enough life insurance to make sure that your children and your spouse will not have the additional burden of worrying about finances as well.
When Should You Purchase Life Insurance?
You should purchase life insurance as soon as you possibly can. The reason for this is that life insurance gets more expensive the older you get. Life insurance companies base the premiums they charge based on mortality tables that show your life expectancy based on your current age and sex.
The older you get the smaller your life expectancy. For this reason, many companies will stop issuing policies after the insured reaches a certain age, or if they do issue a policy, it is cost prohibitive to obtain.
My only caveat to this is that if you are living an unhealthy lifestyle now, you may want to get a short-term policy in place now, then change some of your personal habits things up before you re-apply for longer-term coverage.
If you are a smoker, for example, you should stop smoking. If you are overweight, you should consider changing your diet or starting an exercise program (or both) to lose the pounds. If you have high cholesterol and blood pressure, consider transitioning towards a plant-based diet to help reduce those risk factors.
After you have gotten your weight down and your cholesterol and/or blood pressure are at normal levels, you can re-apply for coverage and save yourself potentially lots of money.
What are the Different Types of Life Insurance?
I’m not an expert in life insurance by any means. These are, to be honest, very complicated financial products.
The type of life insurance that my wife and I purchased is called term life insurance. It’s the easiest to understand and the least expensive option. You can typically purchase a term policy through an independent insurance agent or sometimes through your employer with a group policy.
For a more detailed analysis of the different types of life insurance plans, here are some resources from independent sources:
5 Common Life Insurance Mistakes (in terms of your Estate Plan)
Even if you do the right thing and buy some life insurance, I’ve seen many people make these common life insurance mistakes:
- List your kids as beneficiary on the policy. Many people list their spouse as the primary beneficiary, which is appropriate, and then list the children as “contingent beneficiaries”. This is a big mistake. Read more about why on this page.
- Get inadequate coverage. Life insurance is relatively cheap. And most people need more than they think they do. You want to make sure you can replace your income, cover education costs for your children, pay off your mortgage, and provide support for your children until they turn 18. And then, you also will want to potentially leave something in trust for your kids after they become adults. Run the numbers and you will see that you need more insurance than you initially thought.
- Getting too much coverage. On the flip side, you don’t want to get too much insurance. Many insurance agents are more than happy to sell you as much coverage as possible. Be realistic and get enough to cover your family and children if something happens to you, but you don’t need to set your kids up for an early retirement after they graduate college.
- Procrastinating. As I mentioned before, the cost of insurance goes up as you get older. Don’t wait. Get it as soon as you possibly can. Now that I’m north of 40, I’ve had several friends get a cancer diagnosis within the past several years, and a parent in my son’s kindergarten just had heart surgery. Either of those will pretty much kill your shot to get adequate life insurance. Don’t wait.
- Not Shopping Around. Premiums for life insurance can vary wildly by company. You want to make sure that you find an agent that can shop your policy around to numerous companies to get you the best rate. We can help by giving you a referral to a non-biased and trusted independent agent who can help you find the best deal.
What About Life Insurance Trusts?
There are lots of complicated estate planning strategies that involve what are called Irrevocable Life Insurance Trusts or “ILIT’s”. These are strategies that use trusts to own life insurance policies and therefore decrease or eliminate your exposure to estate taxes.
However, this is a discussion that goes beyond the scope of this post. If you have a very large estate (over $5 million) and have a need for these types of trusts, you would be best served to contact us at (919) 883-4861 to schedule a wealth planning session.
Final Thoughts on Life Insurance and Your Estate Plan
For many of you, life insurance is a vital and essential part of your estate plan. You will need this insurance to make sure that your kids and spouse are taken care of if something happens to you.
During the estate planning process, we will talk to you about life insurance and are happy to give you referrals to agents that we know and trust (we do not receive any financial compensation if you decide to purchase insurance through our recommended vendors).
If you have additional questions, please feel free to contact us to schedule your wealth planning session at (919) 883-4861 or fill out our contact form.