There are some people who may perceive estate planning as the equivalent of purchasing a life insurance policy. As in, something to ensure that your loved ones have money when you pass away. While life insurance may be one component of an estate plan, the concept of estate planning involves several strategies and tasks. These strategies are designed to protect what you have while you are alive and to provide for the proper disposition of your estate when you pass away.
What is life insurance?
Life insurance is a contract between you and an insurance company. During your lifetime, you make payments, called premiums, to the insurance company. In exchange for your premium payments, the insurance company pays a lump sum of money, called a death benefit, to your beneficiaries when you pass away. The different types of life insurance are listed below:
Term life: This type of insurance is the least expensive, and offers coverage for a specified amount of time. However, you may be able to extend coverage or convert to a permanent life insurance policy.
Permanent: As it sounds, this is permanent -- as in, these last for your entire lifetime. Types of permanent life insurance include the following:
- Universal
- Whole
- Variable universal
- Indexed universal
Final expenses: This is the lowest cost option, and thus, results in lower payouts.
What is an estate plan?
Estate planning is the result of assessing what’s most important to you and crafting legal, tax, and financial solutions so that no matter what happens in the future, you are in control of what happens. Estate planning includes tasks such as:
- Making a last will and testament
- Setting up trust(s)
- Creating a financial power of attorney
- Creating healthcare legal documents
- Implementing strategies to limit taxes on your estate
What are the main differences between life insurance and an estate plan?
Both are important
While life insurance can be used to cover funeral expenses, pay estate tax, or replace your income, the purchase of life insurance does not alone constitute estate planning. In addition to meeting your life insurance needs, you should also execute strategies necessary to ensure your estate and healthcare goals are covered when you are incapable of making decisions for yourself. Implementing the appropriate legal documents for your estate today will result in an easier transition to your loved ones in the future.
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