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Consider Life Insurance in Your Estate Plan

Krugliak, Wilkins, Griffiths & Dougherty Co., L.P.A.

I do not sell life insurance and I am by no means a life insurance expert.  However, I do know that there are various types of life insurance that you should consider when developing your estate plan.  Usually a decision whether to purchase life insurance is made based on your station in life as well as the benefits and costs of the life insurance.  There are really two main types of life insurance: term insurance and permanent insurance.      
TERM:
1. Term Life Insurance.  As compared to permanent insurance, depending on your age and health, term insurance is usually the cheapest and most basic type of life insurance.  Term life insurance allows you to purchase life insurance coverage for a specific amount of time.  If you do not pass away during that term, then the coverage ends and the premiums that have been paid will usually not be refunded.    There is no cash value or investment feature in this type of insurance.  This type of life insurance is usually purchased during certain periods of your life.  For example, this type of life insurance is very important when you have a mortgage or minor children in which an untimely death would be devastating to your family.  Upon death, the proceeds from term life insurance would be available to be used to alleviate some of the issues if you were to have an untimely death.

PERMANENT:
1. Whole Life Insurance.  This type of life insurance provides protection for your lifetime and is called permanent insurance.  The premium payment is usually established over your lifetime.  Part of the premium pays for the insurance and the other part of the premium is put into a separate investment account normally called cash value.  The insurance company handles this investment and may even guarantee a certain amount of return on your investment.  Whole life insurance is usually more expensive than term life insurance because of this investment feature, as well as coverage over your lifetime as opposed to only a certain period of time.  This insurance builds cash value which can be used to purchase additional insurance coverage, can be used as a retirement investment, or can be withdrawn as loans when cash is needed.  Upon your death, your beneficiary receives the death benefit less any amounts you have withdrawn as loans.
2. Variable Life Insurance.  Variable life insurance is also a permanent insurance which is similar to whole life insurance but it allows you to choose how the funds are invested in the cash account.  Based on your risk tolerance, you can have the cash value invested in aggressive investments or more conservative investments.  Depending on the return of the investments, this insurance builds cash value which can be used to purchase additional insurance coverage, can be used as a retirement investment, or can be withdrawn as loans when cash is needed.  Upon your death, your beneficiary receives the death benefit less any amounts withdrawn by you as loans.

There are other types of permanent insurance and sometimes a life insurance policy can combine both permanent and term life insurance if that would be beneficial to your specific situation. 

In planning your estate, life insurance can be very important to provide liquidity to your estate to pay estate taxes and estate expenses.  In addition, life insurance can be used to try to equalize distributions among your children.  For example, when one of your children is receiving an asset such as a piece of real estate or a business because that child is involved in the business, then life insurance can be purchased with your other child named as the beneficiary in order to somewhat equalize the distributions among your children. 

If you are the owner of the life insurance policy, on your death the life insurance proceeds are includable in your estate for federal estate tax purposes but not for Ohio estate tax purposes as long as a beneficiary is named.  Therefore, in certain situations, it may be important that the life insurance is owned by an irrevocable trust or by your children to make sure that the life insurance is not included in your estate for estate tax purposes.   

You should contact a life insurance professional who can explain all of these different life insurance options.  Your life insurance professional should work with your estate planning attorney to consider the benefits of life insurance and to determine who the owner and beneficiary of the life insurance should be if you determine that life insurance is beneficial in your estate plan.

NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.

 
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