There is a lot of confusion about the value of life insurance and how it can fit into an estate plan. In general, life insurance is a valid tool for anyone to protect their family financially against unforeseen accidents or illnesses. But if you have a family with young children and don’t have significant assets or savings, life insurance is an essential part of your estate plan to provide for their future.
What Type of Life Insurance is Best for Your Estate Plan?
There are two basic types of life insurance policies: term and whole life. Term life insurance is just like it sounds, for a specific time such as 15, 20 or even 30 years. Whole life insurance is just that, for the whole lifetime and never expires, as long as you continue to make the payments.
Term life insurance is cheaper, but whole life does accumulate a cash value and it probably is best for your estate plan if you can afford it. Otherwise, a term policy that is long enough to cover your children until they are 18 would be better than no policy at all.
Using Trusts with Your Life Insurance Policy
Some parents will simply name their children as direct beneficiaries of the insurance policy, but this is not ideal in many cases. If they are minors, they will need a court appointed guardian to manage the funds if you have not named one in your will. There are ways to avoid this step, and still guarantee wise management of insurance proceeds.
If you have a living trust one of the easiest ways to ‘fund’ your trust is to name the trust itself as the beneficiary of your life insurance policy. What this means is that the insurance proceeds would be transferred directly to the trust, and then distributed or managed according to the terms of the trust by the trustee (usually the surviving spouse or close relative).
For example, if you have young children the trust could allocate a certain monthly amount or percentage of assets for their care and maintenance until they are 18 years old or older. The trustee would then disburse those funds regularly to the children’s surviving parent or guardian, which ensures they will have what they need. Your trustee can continue to manage those assets even after age 18 so that your children do not receive a lump sum payment which they may not know how to manage on their own.
For young couples, life insurance can be purchased at a reasonable cost, and is an ideal way to provide for your family’s future. This will give your estate a source of funds that can be used according to your own specific directions in the trust, under the guidance of your spouse or other trusted guardian.