Types of Life Insurance and How They Can Be Used in Estate Planning
Many people first encounter life insurance when they start a full-time job and are offered coverage through their employer’s group plan. It is an easy decision to make—and one that often receives little attention afterward. But as your financial and family circumstances evolve, your coverage is worth revisiting.
What Is Life Insurance?
In general terms, life insurance is an agreement between you and an insurance company. You pay premiums over time and, in return, after you pass away, the company pays a lump sum of money (death benefit) to the people you choose (beneficiaries). This benefit is designed to help your loved ones cover expenses and replace the financial support you provide.
When coordinated with your estate plan, the right type of life insurance can provide you with peace of mind and meaningful financial protection for your loved ones if you die unexpectedly. Because there are several types of life insurance available, it is important to understand the primary options and how they differ.
Types of Life Insurance
- Term life insurance. Term life insurance provides coverage for a specific period (term), such as 10, 20, or 30 years. If you die during the term, the policy pays a death benefit to your beneficiaries. If you outlive the term, the coverage ends, and no benefit is paid. Term life insurance is generally the most affordable type. It is often used to provide financial protection during key years, such as while you are raising a family or paying off a mortgage.
- Whole life insurance. Whole life insurance covers your entire lifetime, as long as you keep paying the premiums. Premiums are typically higher than term life insurance premiums but are usually designed to remain the same over time. Unlike term insurance, whole life insurance also builds cash value (money that grows inside the policy over the years). In many policies, you can access the cash value through a policy loan or a withdrawal. If you cancel (surrender) the policy, you may receive the remaining cash value after any fees and outstanding loans are deducted.
- Universal life insurance. Universal life (UL) insurance is a type of permanent life insurance that can last your entire life as long as the policy stays adequately funded. It includes a death benefit and a cash value account that can grow over time. A key feature of UL insurance is flexibility: within certain limits, you may be able to adjust your premium payments and, in some cases, the death benefit. The cash value typically grows based on an interest rate (or other crediting method) set by the insurer and may help cover the policy’s ongoing costs. If the cash value becomes too low or insufficient premiums are paid, the policy can lapse, leaving you without coverage.
- Variable life insurance. Variable life (VL) insurance is a form of permanent life insurance with a cash value that you invest in options offered by the insurer, typically funds similar to stock or bond mutual funds. Because the cash value is tied to investment performance, it can fluctuate, and poor performance can reduce the cash value and sometimes the death benefit. Some VL policies include a minimum death benefit, but it may depend on meeting certain requirements, such as paying sufficient premiums and limiting loans or withdrawals. Death benefits are generally income tax-exempt for beneficiaries, and cash value growth is typically tax-deferred while it remains in the policy.
- Variable universal life insurance. Variable universal life (VUL) insurance is a type of permanent life insurance that combines features of both variable and universal life insurance. Depending on the policy, it may offer
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- flexible premiums (within limits),
- adjustable death benefits (within limits),
- the ability to choose how the policy’s cash value is invested from options offered by the insurer,
- the ability to borrow against the cash value, or
- the ability to make partial withdrawals.
- Survivorship life insurance. Survivorship life insurance, sometimes called “second-to-die” life insurance, covers two individuals, most often a married couple. Instead of paying a benefit when the first person dies, the policy pays the death benefit only after both have passed away. These policies are often used in estate planning because the need for funds typically arises after both individuals are gone. For example, the death benefit can help cover estate taxes or other expenses, allowing heirs to keep assets, such as a family home, rather than having to sell them. Survivorship policies can be term, whole, universal, or variable, depending on your family’s goals.
Which Type of Insurance Is Best for Me?
With so many options available, choosing the right type of insurance can feel overwhelming. The best choice depends on your stage of life, financial situation, and long-term goals.
For example, a young couple just starting out may choose term insurance as an affordable way to provide financial protection, such as paying off a mortgage or replacing income if one spouse dies.
A middle-aged professional with a family may consider a longer-term policy or permanent coverage, such as whole life insurance, to ensure a death benefit will be available even if future health changes make new coverage difficult to obtain.
For individuals with significant assets, such as a business or real estate, life insurance can provide liquidity to help fund a buyout or pay estate taxes. In these cases, policies that cover two people, such as survivorship insurance, may be appropriate.
Ultimately, life insurance is not one-size-fits-all. Working with your insurance professional, financial advisor, and estate planning attorney can help you identify your risks and select coverage that aligns with your overall plan. Insurance can be complex, but you do not have to navigate it alone. Coleman Law can help you as you plan your legacy. We would love to talk to you about how we can help you in this process. Click here to request your free consultation today!
