Have for-sale signs recently piqued your interest? Are chiming wedding bells or clattering rattles and teething toys in your forecast? If so, it may be time to install the ultimate safety net, better known as a life insurance policy. Ensuring you’re financially prepared to buy life insurance is an essential first step.
If you don’t have a will, or if your estate is not organized before you die, the value of your assets could depreciate. In other cases, your estate could end up in the wrong hands. That’s why before purchasing a life insurance policy, it is essential to ask yourself these pressing questions.
1. What are the tax implications of the death benefit?
The death benefit is the amount of money your beneficiary will receive if you pass away. Generally speaking, death benefits aren’t taxed before being paid out to your heirs. However, it can count towards your estate tax.
One of the issues to remember is that estate tax limits can fluctuate year to year, so you’ll want to research estate tax limits accordingly. Despite common misconceptions, most people don’t reach the monetary limit where they’ll have to worry about the estate tax.
If you think that a death benefit could affect your beneficiary’s estate, however, you should speak with an estate planning attorney like wh Law, who can advise you on everything you need to know to get started.
2. What’s the difference between term and permanent life insurance?
In its simplest form, term life insurance provides coverage for a specific period, and permanent insurance covers you your entire life. The main difference between the two types of policies depends on how long you want coverage. If you don’t expect to live past the age where term becomes too expensive (usually around 65), it may be best to settle for term life insurance at first.
However, if there is even any chance that something will happen before this point–or before retirement age when your income goes down significantly–then it might make more sense to invest in a permanent policy instead. One thing to remember, however, is that life insurance is different from final expense insurance. In general, before deciding which type of policy would work better for you or your family, you should consult with a life insurance agent and discuss your specific needs.
3. Who should be the beneficiary?
Death is inevitable. To ensure that your loved ones are taken care of in the event of your passing, you must select a beneficiary for your life insurance policy before you purchase it. Your beneficiaries will be entitled to the proceeds from the policy and can use those funds as they see fit. Although, a beneficiary may encounter restrictions on how much or when they receive payments. A few common examples of beneficiaries that people choose include spouses, parents, or friends.
Spouses as beneficiaries
Typically, a policyholder names their spouse as the beneficiary in their life insurance policy, as these individuals usually assume responsibility for caring for the children should a tragedy occur.
However, before naming your spouse as a beneficiary, make sure this decision won’t impact any other insurance policies they may already have. For example, some spouses might rely on survivor benefits from Social Security, which means having life insurance over and above what they receive from SS can affect how much money they receive after their spouse’s death.
Parents as beneficiaries
Another choice for your beneficiary is your parents. Parents are named beneficiaries because they will have a vested interest in caring for your children if something happens to you.
However, one thing to keep in mind is that sometimes, parents might not be willing or able to assume this responsibility and feel pressured into taking care of grandkids when they’re still grieving over their tragic loss. So, before deciding which beneficiary would work best, be sure to speak with those you are considering naming so that they agree and aren’t taken off guard if you pass away.
Friends as beneficiaries
While less common, many people choose to name their friends as beneficiaries. Policyholders may deem that these chosen families are best equipped to distribute assets in a way that will honor their memory.
However, before naming your friend as a beneficiary, there are some things you need to consider first:
- Will the person understand what’s involved?
- Do they have any potential conflicts with other insurance policies or financial obligations (such as kids)?
- Is there anything worth noting about them personally and professionally?
4. What happens if the beneficiary passes away simultaneously?
When purchasing a life insurance policy, it’s easy for small details to fall by the wayside. After all, planning for an event that has yet to take place is no small feat. Though this decision rests on a rocky foundation of assumptions and what-ifs, you don’t want to forget that sometimes, a life insurance policyholder and beneficiaries might pass away at the same time.
If you and your beneficiary happen to die simultaneously, you should have a second beneficiary named as a backup. A second beneficiary will only be able to claim the benefits if something happens to the primary beneficiary.
5. Can minor children receive the death benefit?
Unfortunately, minor children aren’t eligible to receive the death benefit. However, there is a way around this. To make sure your minor children receive the death benefit, you, as the policyholder, can set up a trust for the minor children before you die so that the money is protected.
If you have children under the age of 18 that you want to have access to your death benefit when you die, you’ll want to contact an attorney to help you set up your trust. While a trust isn’t necessarily complicated, it does require the expertise of an estate planning attorney that can walk you through the ins and outs of how to get it started.
Before you go
If you want to make sure that your family is taken care of after the death, it’s crucial to have an adequate life insurance policy. Make sure you look for a policy that fits with what you need and get it in place as soon as possible. It’s never too late to find the right life insurance policy for you and your family.