Demystifying Life Insurance

Life insurance is a fundamental aspect of financial planning that most people will need at some point in their lives. It plays a crucial role in safeguarding your family’s future, securing business interests, and ensuring a smooth wealth transfer. Whether you’re just starting to explore life insurance options or looking to optimize your existing coverage, understanding the nuances of the policies will help you make informed decisions that align with your goals and priorities.

The two main types of life insurance are term and permanent.

• Term Life Insurance: Provides coverage for a specified period, typically ranging from 10 to 30 years. If you pass away during the term, your beneficiaries will receive the death benefit. Term life insurance is typically more affordable than permanent life insurance and is well suited for individuals looking for temporary coverage such as to replace lost income or cover debt obligations.
• Permanent Life Insurance: Unlike term life insurance, permanent life insurance provides coverage for your entire life, as long as you continue to pay the premiums. Permanent life insurance provides a cash value component, which grows tax deferred and can be accessed through withdrawals or loans. There are several types of permanent life insurance including whole life, universal life, and variable life insurance.

When determining how much life insurance coverage you need, consider the following factors:

• Debt Relief: Consider the debts and financial obligations you would want to settle to alleviate the burden on your loved ones.
• Income Replacement: Assess the portion of your current income that would be needed to sustain your family’s standard of living in your absence.
• Retirement Savings: Review your current retirement plan contributions from both you and your employer. Since your surviving spouse might not have the financial flexibility to increase their retirement savings, it’s important to consider whether life insurance is needed to help fill this gap.
• Education Funding: Decide if you want life insurance proceeds to fund your children’s college education. Your surviving spouse might not have the financial means to make further 529 plan contributions or cover college expenses.
• Business Continuity: Key person life insurance and buy-sell agreements can protect your business. Additionally, consider life insurance to support your family in the event they are unable to monetize the business.
• Future Financial Goals: Consider additional financial goals such as charitable contributions or providing assistance to family members.
• Estate Planning: Life insurance can be used to pay estate taxes, equalize inheritances, or fulfill charitable bequests. It is important to have the appropriate amount of liquidity among estate assets so heirs are not forced to make liquidation decisions that may not be tax efficient.

Evaluating what life insurance coverage you need requires a comprehensive assessment of various factors. By addressing these considerations, you can tailor your life insurance coverage to suit your family’s specific needs and provide financial security for their future. If you find yourself experiencing any of the factors above, it is essential to regularly review your situation and adjust your coverage as your financial and family circumstances evolve.

Life insurance proceeds will be paid to the beneficiary or beneficiaries you have designated on the policy. It is important that you regularly review and update your beneficiary designations to reflect changes in your circumstances and ensure your intentions are fulfilled. Instructions provided through your will or trust will not override the beneficiary designation on the policy.

Life insurance is often a key element of a strategic estate plan. If you are projected to have a taxable estate at death, life insurance proceeds can be used to pay the tax liability to preserve other assets for your heirs. Without life insurance, families with a large real estate holding or an illiquid family business might be forced to sell a portion of these assets to settle the estate tax liability.

Currently, the federal gift and estate tax exemption stands at $13.61 million per person. However, beginning in 2026, the federal gift and estate tax exemption is set to revert to $5 million per person, indexed for inflation. Many states also have estate tax exclusions set at a much lower level. For example, Oregon has an estate tax threshold of $1 million, and any amount exceeding this threshold is taxed at a rate of 10% to 16%.

If life insurance is part of your estate plan, it may make sense to have the policies owned by an Irrevocable Life Insurance Trust (ILIT). Individually owned life insurance can be included in your gross estate. However, a properly drafted and executed ILIT will remove this asset from your estate and allow you to transfer additional wealth to your heirs or charity.

By gaining an understanding of how life insurance works, you can make informed decisions to ensure the financial security of your loved ones in the event of your passing. While Aldrich Wealth does not sell insurance, we are here to guide you through the evaluation and education process. If you are concerned about your risk or have existing coverage and want to determine if it’s appropriate, we can help you find an insurance consultant who can objectively review your coverage to ensure you have adequate protection.