Term life insurance usually makes sense, especially if you have a young family that will need financial support if you die. But sometimes you need to leave something extra behind for adult heirs, and in these situations, permanent life insurance might be the best choice.
Term life insurance covers you for a certain number of years. If you’re getting term life insurance quotes, you’ll find that annual premiums are relatively inexpensive because the coverage is temporary and the policy has no value once the term ends.
Permanent life insurance, such as whole life and universal life, covers you for your entire life and features an investment component known as “cash value,” which builds over time. You can borrow against the cash value — for example, to supplement retirement savings.
Permanent life insurance is more complicated than term life. You should work with a trusted and objective financial advisor to help you understand the options and choose the right policy. A fee-only advisor does not earn commissions on financial products and can provide an objective analysis.
Here are reasons you might be someone who needs life insurance, especially a permanent life insurance policy.
1. You want to spend your retirement money but still leave an inheritance.
If you want to leave a legacy to your kids or a charity no matter how much money you spend in retirement, a permanent life insurance policy is worth considering; it’s a particularly effective way to pass wealth on to the next generation. While property and heirlooms can be hard to divide and their value may fluctuate according to the market, a permanent life insurance policy pays a tax-free death benefit in cash to the beneficiaries.
2. You want to leave equal inheritances to your children.
Suppose you own a piece of property and only one of your three adult kids is interested in inheriting it. You could leave the property to that child and compensate the other two by naming them as beneficiaries on a life insurance policy that provides a payout for each that’s equal to the property value.
Life insurance can also be used to equalize inheritances if you pass a family business on to some but not all of your children.
3. You have a lifelong dependent, such as a special-needs child.
Permanent life insurance is often an essential financial tool for parents of children with special needs who will require support for the rest of their lives. A permanent life insurance policy can help fund a special-needs life insurance trust for the child. You appoint a trustee to manage the money in the trust, and name the trust and trustee as the beneficiary of the policy, not your child. Work with an estate attorney and life insurance agent on how to word the beneficiary designation.
In this situation, it’s wise to seek help from an attorney and financial advisor with experience in special-needs planning. You can get referrals and information from groups such as the Special Needs Alliance and the Academy of Special Needs Planners.
4. You want to ensure your family has money for your funeral.
Some life insurance companies sell permanent life policies in smaller amounts — less than $50,000 — that are designed to cover funeral costs, debts and any other final obligations. In 2014, the median cost of a funeral was $7,181 with burial and $6,078 with cremation, according to the National Funeral Directors Association.
If you like the idea of planning the details of your own funeral, there’s a life insurance policy for that, too: a “pre-need” life insurance policy, which you buy directly from a funeral home. You choose the items for your funeral (casket, flowers and so on) and purchase a policy to pay for the cost. Many funeral homes will guarantee the prices on what you choose. People buy these policies to save their families from having to make hurried choices and to ensure there’s money immediately available for the funeral.
In most states you may name the funeral home as beneficiary of a pre-need policy. If you do so, stipulate that the designation is only to the extent “as its interests may appear,” which indicates that the money for the funeral home is limited to the amount owed for its services. Name a friend or family member as contingent beneficiary to receive any proceeds left over.
Some states forbid naming a funeral home as beneficiary of a pre-need policy, in which case you should choose a trusted friend or family member. The beneficiary then fills out a form to sign the proceeds over to the funeral home.
5. Your estate is taxable.
Life insurance can help your heirs pay estate taxes if they’re inheriting a large estate, valued over $5.43 million for a single person or $10.86 million for a married couple in 2015. Without the payout, your heirs might have to sell off property or liquidate a business to pay federal estate taxes. Even if they had planned to sell the property or business, a tax deadline could force them to sell at a discount.
Although not everybody needs permanent life insurance, a permanent policy can be the most effective choice to accomplish certain financial goals. Keep in mind that permanent life insurance policies can be complex and come with many decisions to make. Talk to a financial advisor to understand your options and make sure a permanent policy is the right choice for you.
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