Although every estate plan should be uniquely designed and tailored to meet the needs and goals of the person creating the plan, there are some estate planning tools and strategies that can frequently be found in most estate plans. One of those tools is life insurance. Life insurance is a versatile estate planning tool that can help provide for loved ones, help you grow your estate assets, and even help cover the cost of your funeral and burial. The key to getting the maximum benefits out of your life insurance policy is knowing which type of life insurance you need. To help you with that, the Oklahoma City estate planning attorneys at Parman & Easterday explain the most common types of life insurance policies.
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. There is a variation of traditional term life insurance, referred to as “non-level” term. With this type of term insurance either the premiums rise over time to maintain the same death benefit (due to higher mortality costs as we get older), or the premiums remain the same and the death benefit 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 (cash value) and may 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. The higher premiums are used to offset the insured’s higher mortality costs later in life.
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. An additional benefit is that cash value that can often be borrowed against. 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. Another disadvantage is that if the policy earns less than initially projected by the company, there is a risk that the policy will deplete its cash value and the company may require you to pay higher premiums to keep the policy in force.
Variable Life Insurance
Variable life insurance (“VLI”) is also another variation of whole life insurance. Variable life truly combines life insurance with investing. In a VLI policy the owner assumes investment control of the cash value and directs the company to invest those funds 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. Again, to maintain your death benefit the cash values must support the coverage. If they do not, higher premiums – or lower death benefits – may be required.
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 Oklahoma City Estate Planning Attorneys
For additional information, please join us for an upcoming FREE seminar. If you have additional questions or concerns regarding the various types of life insurance that are available, or how life insurance might fit into your comprehensive estate plan, contact the experienced Oklahoma City estate planning attorneys at Parman & Easterday by calling 405-843-6100 to schedule your appointment today.
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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