When planning for the future of your estate, life insurance plays a valuable role. Choosing the right type ensures your family’s finances are protected after you are gone. Life insurance can also help you plan your taxes for the future, as benefits paid out to your estate or beneficiary are not subject to income tax. As you plan for your family’s future, consider the following types of life insurance.
Term insurance refers to a plan that only covers a certain period of time, usually 5, 10, or 20 years. For this reason, your beneficiary will only receive the benefit from this type of insurance if you pass during the specified time period (or “term”). Most frequently, this type of insurance is used to cover a short-term expense, such as debt coverage or income supplementation. Term insurance can usually be renewed after the term is up, though every renewal gets more expensive.
According to Toronto’s Shane Dubin, Senior Vice President, Investment Advisor & Portfolio Manager at Dubin Wealth Management, term insurance is the cheapest form of life insurance, though renewals can increase the price. He suggests using term insurance for shorter-term estate needs including paying off a mortgage or as income replacement.
Permanent insurance, on the other hand, offers lifetime coverage. As long as your insurance premiums are paid, your beneficiary will receive a death benefit upon your passing. Most types of permanent insurance are tax-exempt, allowing any funds added to the policy to grow tax-free. These policies have a cash value, also referred to as a cash-surrender value. Though it is more expensive outright, you may save money in the long run over having to renew a term insurance policy.
Many families choose permanent insurance when estate planning for a number of reasons. Shane Dubin notes that it is convenient for covering estate liabilities, including taxes or existing mortgages. He also explains that permanent insurance is an intelligent choice for diversifying your assets with tax advanced strategies. You can use your policy to set up a fund for your beneficiaries, facilitate a business succession, or even make a tax-deductible donation to a charity after you pass.
When choosing what type of life insurance to purchase as you plan your estate, always seek the advice of a trusted wealth management professional. They will guide you to the option that best fits your family’s needs, lifestyle, and future plans.