There are two basic forms of life insurance: Term
and Whole Life.
Characteristics
Term Life Insurance: This is also called
temporary life insurance. Term life insurance is purchased to provide a
sum of money to the beneficiary upon the death of the insured. If
the insured is still living at the end of the term of the insurance, no
benefit is ever paid. This makes term insurance less expensive than other
forms discussed below as the insurance company may never have to pay the
death benefit on the insured. Death benefits paid to beneficiaries other
than the insured's estate are free of federal income and estate taxation.
Whole Life Insurance: This is also called
permanent life insurance. Whole life insurance pays a sum of money to the
beneficiary upon the death of the insured. It is permanent in that it will
provide the benefit when the insured dies or reaches the age of 100 years,
whichever comes first. This makes whole life insurance more expensive than
other forms discussed above as the insurance company knows that it will
eventually have to pay the death benefit on the insured. Death benefits
paid to beneficiaries other than the insured's estate are free of federal
income and estate taxation.
There are other types of insurance that all fall
under the category of whole (permanent) life insurance and should be
viewed in the same context as whole life:
- Variable Life Insurance
- Universal Life Insurance
- Variable Universal Life Insurance
Strategies
Term life insurance is best used for
financial security during the asset accumulation period of life-the period
prior to retirement. It can provide financial security for the beneficiary
in the event of the untimely death of the insured, before the insured has
been able to accumulate the assets needed on behalf of the beneficiary.
Whole life insurance is best used for
estate planning purposes during the asset dispersion period of life-the
period after retirement. Remember that death benefits paid to
beneficiaries other than the insured's estate are free of federal income
and estate taxation. Using funds in the insured's current estate that
would be subject to estate tax upon the insured's death, the insured can
purchase a policy that will provide a sum of money to the beneficiary free
of estate taxation upon the insured's death. This death benefit can be
used to provide financial security directly or can be used to pay the
estate taxes owed on other assets remaining in the estate and subject to
estate taxation.
Reminders:
- While whole life insurance can be used for
estate planning, it probably is not the most efficient estate planning
tool for you to use. If you will have estate tax liability, you should
develop a comprehensive estate plan with qualified tax and estate
planning professionals.
- Estate tax planning is needed only for those
estates that will be subject to estate taxation upon the owner's death.
See the Estate
page under the Taxation section of this Web site for the current levels
of assets where federal estate taxation begins. (Be aware that while you
may not have estate tax planning issues, you may have
other estate planning issues that warrant consulting licensed estate
planning professionals.)
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