Life Insurance Can Fill In Holes In Your Estate Plan
A recent article in the “AARP Bulletin,” titled “7 Things to Know About Term Life Insurance,” Tamara E. Holmes, October, 2023, brought to mind several ways in which life insurance, in this case term life insurance, can, among other things, plug up holes in an estate plan.
Term life insurance, as the name implies, runs for a period of years. You might, for instance take out a policy for ten years level term, twenty years level term and so on. Level term means the premium will remain the same for that period of time. You decide the benefit. The benefit will remain the same for the term also.
Term life insurance does not have a cash value during the insured’s life which actually sometimes can be a benefit since, for instance, when Medicaid calculations are made regarding assets needing to be “spent down” before you qualify for benefits, term life insurance is not included against the insured but, on death, the beneficiary still receives the policy proceeds which can go to the named beneficiary without claim by the government under estate recovery. The critical thing for you or someone on your behalf to remember is to continue to pay the premiums and also be sure an individual is named and not your estate. To return to the original subject, the AARP article focused on how term life insurance is different from other types of life insurance, primarily whole life i.e. the type with value during life, what kinds of term policies can you buy, how big a benefit do you need, what else can affect a policy’s cost, where do you go to buy insurance, and how do you know a company will make good on their policy. The article is worth reading.
There are several other points specific to estate planning and estate administration I would make in favor of term life insurance since, for the right client, it can come to the rescue to handle some very diverse issues. Note that I am referring to “regular” term life policies not necessarily the type marketed on TV that say they are available to everyone and pay only a few thousand dollars in benefit. Regular term life insurance policies typically require a medical review and can, for healthier applicants provide some substantial benefits.
Here are a few examples of how term life insurance could work
- Term life insurance can handle the problem I refer to as the “neglected
beneficiary.” Where you have a more distant relative or someone who is
not a relative but someone you want to benefit at the time of your passing,
term life insurance can come in handy to fill in the gaps. Because it is not
included in the Will other beneficiaries may not feel their inheritance is
impacted. - “Special beneficiaries” might benefit by being named as beneficiary of your
term life insurance and this may be in addition to inheritance under the Will.
These are individuals such as a child who has provided assistance greater
than that provided by other family members. It is less likely that other
beneficiaries would be offended with an additional benefit being provided to
other beneficiaries since it does not impact their inheritance as residuary
beneficiaries under the Will. - An additional benefit of life insurance both for the named beneficiary and for
the overall estate is that life insurance is one asset not subject in
Pennsylvania to Inheritance Tax on the death of the insured. If the
beneficiary is someone other than a spouse, child or sibling of the insured
this can be a substantial savings from the 15% inheritance tax that would
otherwise be due. - Life insurance can be used to pay off debt that could otherwise haunt
spouses or children of the decedent. It is often used in divorce proceedings
to provide for children or former spouses and to pay for funerals. - Another benefit in my experience is that the benefit is typically for a specific
amount commonly expressed in thousands – $20,000, $50,000 and so on –
which can on passing, make it easier to access quickly than other assets
that require more complicated forms and procedures.On the downside life insurance, as we age, of course becomes more
expensive. One mitigating factor is that, as people live longer, premiums
have generally remained stable or decreased. Health complications can
render an applicant uninsurable. However, this long standing product may
be worth a second look.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.