Life insurance can provide critical financial protection for the people who depend on you or help you achieve other estate planning goals. But to serve its intended purpose, the coverage amount, policy type, ownership structure and beneficiary designations must all be carefully considered.
Determine how much coverage you need
There’s no universal formula for calculating the appropriate amount of life insurance. Your needs depend on your income, debts, family responsibilities, assets and long-term objectives. Begin by estimating the financial obligations that might remain after your death. These may include:
- Funeral and other final expenses,
- Mortgage balances and other debts,
- Income replacement for a surviving spouse or partner,
- Child care and education costs,
- Support for a dependent with special needs, and
- A desired inheritance or charitable gift.
Next, subtract resources available to meet those obligations, such as savings, investments, retirement benefits and existing insurance policies. The difference can provide a starting point for determining how much additional coverage you need.
Warning: Don’t assume employer-provided insurance is sufficient. Group coverage is often limited to a multiple of salary and may end when you leave your job.
Select coverage that matches your objectives
Term life insurance generally provides coverage for a specified period and may be appropriate for temporary needs, such as replacing income during your working years or paying off a mortgage. It typically costs less initially than permanent coverage.
Permanent insurance, such as whole life and universal life, is designed to remain in force for life as long as the required premiums are paid. It may also accumulate cash value. This type of policy can be useful when the need for coverage is expected to continue indefinitely, such as providing estate liquidity, supporting a lifelong dependent or funding a legacy.
Affordability matters. A policy offers little protection if rising premiums or changing circumstances may make it difficult to keep the coverage in force. Review policy guarantees, projected values, fees and premium requirements carefully before you buy.
Coordinate life insurance with your estate plan
Life insurance can replace income, equalize assets among children active and inactive in a family business, provide cash to pay estate tax, or serve as a vehicle for passing leveraged funds free of estate tax.
Policy proceeds generally aren’t subject to income tax. But if you own the policy, the proceeds will be included in your taxable estate. If your estate is large enough that estate taxes are a concern, some or all of the proceeds could be subject to estate tax.
Ownership depends on several factors, including who has the right to name the beneficiaries of the proceeds. Generally, to reap maximum tax benefits, you must sacrifice some control and flexibility as well as some ease and cost of administration.
Determining who should own the life insurance policy is a complex task because there are many possible owners, including you or your spouse, your children, your business, or an irrevocable life insurance trust (ILIT).
An ILIT can own one or more policies on your life, and it manages and distributes policy proceeds according to the terms you establish when you set up the trust. The trust keeps insurance proceeds, which could otherwise be subject to estate tax, out of your estate (and possibly your spouse’s). You can’t retain any powers over the policy, such as the right to change the beneficiary. The trust can be designed to make a loan to your estate to meet liquidity needs, such as paying estate tax.
To choose the best owner, consider why you want the insurance, such as to replace income, to provide liquidity or to transfer wealth to your heirs. You must also determine the importance of tax implications, control, flexibility, and ease and cost of administration.
Review your coverage
Life insurance shouldn’t be a “set it and forget it” decision. Many factors affect your need for life insurance, and these factors change over time. To make sure you’re not over- or underinsured, review your insurance needs periodically — especially when your life circumstances change. We can help you assess whether you have sufficient life insurance coverage for your needs and goals.
Theus Law Offices specializes in a complete range of estate planning and elder law services, including wills, trusts, probate, successions, estate administration, and probate litigation. If you need a Louisiana wills and trusts lawyer or succession attorney in Alexandria, Lafayette, Lake Charles, Baton Rouge, New Orleans, Shreveport, Monroe, or elsewhere in Central Louisiana, let our certified estate planning specialist and probate lawyers help you.
