Life Insurance Provisions Are A Component of Estate Planning - By: Stephen Daniels

Estate planning involves many factors, not the least of which is having life insurance to protect your kin from financial turmoil after your passing. Without support, there can be major ramifications for your family at a difficult time when they might also be faced with a host of problems including probate fees, taxes and squabbling over assets with other relatives. An estate plan is designed to protect and distribute your wealth after death.

Financial planning and estate planning are different yet intertwined. A good financial plan covers budgeting, savings and investments. It may involve debt reduction and often also focuses on retirement. An estate plan, on the other hand, is a prearrangement of one's financial and administrative affairs that will take effect after death. It is, in essence, a post-mortem continuation of a financial plan.

Life insurance is universally regarded as an important aspect of a sound estate plan for most people. For dependents who relied upon the deceased for a livelihood, it provides income. For heirs of high-wealth individuals, a life insurance trust is designed to exclude its value from an estate, thereby lowering taxes. An estate plan that does not include an insurance provision could lack liquidity.

There are many types of life insurance. Whole life insurance policies not only provide a death benefit, but also may be borrowed against or withdrawn from during one's life. The least complicated and most affordable insurance is called term life. It has a set expiration date, no investment account and pays out a specific amount to the designee upon death of the insured. Premiums are generally considerably lower because, when the term is over, the coverage ceases, regardless of the health of the insured.

Permanent life includes whole, variable and universal varieties. These entail a death benefit while providing a tax-deferred cash account. Benefits may include right of early withdrawal, receipt of dividends, fixed premiums and the ability to manage and invest cash through multiple accounts. While riskier, permanent life polices offer more flexibility and don't expire, as term policies do.

Another option ideal for those nearing retirement, or not needing the funds in the foreseeable future, is an annuity. There are both "fixed and variable" annuities. A fixed annuity provides a regular stream of income for a retiree or their heir(s). Funded either by a lump sum or payments, a fixed annuity provides a regular payout, while a variable annuity does not, but may offer higher returns. An annuity allows money to grow tax-free until dispersal, when the earnings will be taxed like ordinary income for the investor. However, for heirs, like any other life insurance policy, this inheritance is subject to federal, state and local laws regarding inheritance taxes. This type of life insurance also allows wealthier individuals to hold assets in a tax-deferred state and also protects them from litigation.

People who are married, have young children, own a business or possess a large estate should carry life insurance. The amount of the policy depends on income, savings, investments, time to retirement, number of dependents and inflation.

While estate planning is vital for wealthier persons with a lot at stake, people of limited means also stand to benefit from a sensible plan. Locking in retirement income, providing for dependents upon death and distributing assets as intended are all accomplished with an estate plan. There is a mountain of information about estate and financial plans, life insurance and annuities on the Internet. However, it is recommended that you visit a professional estate planner. Their expertise and experience are intangibles that no amount of Internet research can match.

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