Life Insurance is one of the best and most common ways to protect your family or business in the event of a death. Life insurance is a contract between an insurance policyholder and an insurance company to pay a specific amount to one or more beneficiaries if the insured individual passes away. This life insurance payout, or “proceeds,” is intended to provide financial stability to those left behind and is typically used to pay outstanding debts of the policyholder, as well as medical and funeral costs. Policyholders pay a monthly premium to ensure coverage over a specific amount of time. The insurance premium is dependent on several factors, including age, gender, occupation, hobbies, medical history, and where you live and travel to frequently.
Even though this explanation makes it seem simple, consumers often get confused with the sea of options that are presented once they begin shopping for life insurance. This discussion will focus on helping you address important questions which should be taken into consideration when deciding which life insurance policy is right for you and your family.
Different Types of Life Insurance
With the growing number of insurance products available to the average consumer, it can be an extremely involved research project just to make sense of each different types of life insurance out there. This is where a qualified financial planning professional or estate planning attorney can be worth their weight in gold. A professional who is knowledgeable about the different types of life insurance will be able to assess your personal situation and recommend a form of life insurance based on your unique situation. Within Lawhorn CPA Group, we work with a team of professionals qualified in their respective fields to the benefit of the client in these decision-making processes. We regularly work in conjunction with the expertise of lawyers, tax attorneys, certified financial planners, multi-credentialed insurance agents, and qualified investment advisers to benefit our clients. The following will give you a basic insight into the different types of insurance and what they mean for you.
Term Life Insurance
Term life insurance is the most basic and affordable type of life insurance. This type of insurance offers coverage for a specific time frame where benefits are paid out only during the coverage period. It’s important to mention that if a premium payment is missed or they stop altogether, the life insurance coverage stops as well. Term insurance premium payments will increase with age and are usually more appropriate to meet short-term life insurance needs of 15 years or less.
Whole Life Insurance
While term life insurance is considered temporary, Whole Life insurance, sometimes referred to “ordinary” or “straight” life insurance, is a permanent insurance vehicle offering guaranteed minimum cash values, producing coverage over an entire lifetime of the policyholder. Whole Life insurance is more rigid than term insurance and doesn’t allow policyholders to deviate from their original level of coverage within the same contract. While life insurance policies are meant to pay out or “endow” a cash value upon policy maturity. Some policies allow for an annual dividend based on unused premiums and are paid out tax-free in cash. These can also be used to buy additional coverage or to pay future premium payments.
Universal Life Insurance
Universal Life insurance, or UL, is another type of cash value life insurance and is also considered a permanent insurance covering the policyholder’s entire lifetime. UL differs from Whole Life primarily due to who carries the burden of the risk. With Whole Life insurance the insurance company carries much of the risk; however, with UL the policyholder assumes nearly all risks due to the lack of guarantees. Universal Life insurance offers more flexibility than that of Whole Life and allows the policyholder to increase or decrease the coverage amount. Universal Life will usually have several death benefit options, allowing you to choose between a higher cash value death benefit or a death benefit equal to the face coverage of the policy plus its cash value.
Variable Life Insurance
Variable Life insurance is available in both Whole and Universal and acts very similar to their predecessors, except that a portion of the annual premium is used to fund cash value growth in variable sub-accounts like mutual funds or bonds that you choose. These types of life insurance products do carry certain risks as they are tied to the financial market and, therefore, require that you be willing to lose the value of the account.
Irrevocable Life Insurance Trust
No matter which type of insurance you choose, you can use that policy to fund an irrevocable life insurance trust or ILIT. An ILIT allows a grantor to set up a trust during their lifetime and exempt it from estate taxes. These trusts can then be used to provide liquidity for estate taxes that are due upon the grantor’s death. When looking to set up the trust, an accountant provides additional financial leadership in this area, as to how best to set aside monies needed to make sure the trust is established and exempt. This is an additional financial asset to establish when estate planning.
Get Professional Advice
Deciding which type of life insurance you should purchase ultimately relies on both your short and long-term financial goals. The difference between buying a Term policy or Whole is essentially akin to renting your life insurance or buying it. When speaking with your accounting professional, ask them if your current policy is in line with your other financial and tax planning strategies. Consult your tax planning professional, and you can be assured that you are getting unbiased information and that it will ultimately meet your overall financial objectives. Lawhorn CPA Group and our corresponding team of qualified experts is always ready to offer professional advice and recommendations to help you and your business meet its financial goals. Contact us online HERE or at 865-212-4867 today to discuss how your current life insurance fits into your overall tax planning strategy.