Life insurance policies have three basic parties. First, there is the “insured,” whose life is insured by the policy. Second, there is the “owner”, who has the right to liquidate the policy, designate a beneficiary and exercise any contractual rights. Third, there is the “beneficiary,” who receives the policy’s proceeds upon the insured’s death.
There are, in turn, several types of life insurance policies (which an insurance person will undeniably try to sell you on at some point in your life). Let’s talk about a few of the more prominent types.
(1) Term Life insurance provides coverage for the life an insured for a specified amount of time — a “term.” If the insured dies during this period, the death benefit is paid out to the beneficiary. If the insured does not die, coverage on the life of the insured ceases.
(2) Whole Life insurance provides coverage for the remaining lifetime of the insured; but, unlike with term insurance, whole life insurance not only has a death benefit, but also an investment benefit. Whole Life insurance is typically designed so that level premiums are payable at regular intervals over the insured’s life expectancy. A portion of these premiums compensates the insurance company for the inherent risk in insuring the insured, while the balance of the premium is invested and accumulates a policy reserve amount which, through actuarial calculations, is determined to have a value equal to the face amount of the policy when the policy matures.
(3) Universal Life insurance generally permits the owner to pay an adjustable premium, within the confines of the contract. Such policies typically permit the owner to request that the death benefit amount be increased/decreased and to make death benefit elections.
The above is just a quick summary of the various types of some of the more common types of life insurance policies. For our purposes, it is important to realize that life insurance works hand-in-hand with estate planning, particularly trusts. As I said in a previous blog post, the most common type of trust is the self-declared revocable living trust, where an individual holds property, IN TRUST, for the benefit of another.
Coming full circle, a common estate planning technique is to make a life insurance policy’s beneficiary a revocable living trust, and to title the policy in the name of the trust. Under such an arrangement, an individual has flexibility to achieve numerous goals, such as probate and tax avoidance. Alternatively, irrevocable Life Insurance Trusts have their own pros and cons and may be more appropriate for an individual’s estate planning objectives.
If you have the foresight to purchase life insurance, then it is in your best interests to combine such life insurance planning with legal estate planning.