As you start to plan your estate, you may wonder what the effective differences are between a life insurance policy and an inheritance. After all, isn’t a $100,000 life insurance policy the same as inheriting $100,000?
In fact, life insurance policy payouts and inheritance have some differences that you may want to be aware of. Most of these differences make life insurance more beneficial than a traditional inheritance.
Life Insurance Pays Out More at a Fraction of the Cost
First, the obvious: a life insurance policy will pay out money regardless of how much you put into it. Even if you’ve only paid the first premium for your life insurance policy, it’s still going to pay out the amount that you signed up for. Thus, life insurance is guaranteed money as long as you continue to pay out the premium.
If you want to create an investment, whole life insurance policies let you create life insurance that’s also an asset.
Life Insurance Will Always Pay to Specific Beneficiaries
While a will can be contested (and often is) based on the laws of inheritance, a life insurance policy is always going to pay out to the beneficiaries that you set.
Unless fraud or abuse is alleged, your life insurance policy does not need to be considered fair: your life insurance is going to go to whoever you put on the forms. This gives you additional peace of mind, knowing that the money will go to where it should go.
Life Insurance Sidesteps Probate
An inheritance usually needs to go through the process of probate, which means it has to go through the estate and then eventually be paid out to those who inherit it. Life insurance does not need to do this. Life insurance will be paid out immediately upon being processed, rather than potentially being caught up in the estate for a lengthy amount of time. This takes care of your family faster.
This is especially important because life insurance policies are frequently used to pay for final expenses. While an inheritance may not come in time to pay for these things — thus putting your family under an undue amount of financial strain — a life insurance policy will.
Life Insurance Doesn’t Need to be Used for Debts
Before an inheritance can be paid out, your debts will be deducted from it. If you owe money in loans, for instance, it’s possible your family could inherit nothing at all: the money has to go to debts first.
A life insurance policy isn’t like this. Because a life insurance policy isn’t included within the estate itself, it will be paid directly to beneficiaries as though it was their money. Even if you had many debts, those debts are not going to need to be paid through the life insurance policy. In fact, the estate could be totally insolvent and your life insurance would still pay out.
Life Insurance Isn’t Taxed
Life insurance is not considered to be taxable income in the way that an inheritance can be taxed. While there are ways to avoid inheritance tax (such as through a trust), these taxes can be considerable if your estate is large. By using life insurance instead, the death benefit can go entirely to your family members.
While it’s important to leave inheritance to your children, spouse, and other family members, life insurance actually fills this need quite nicely. Life insurance has many advantages over a traditional inheritance, while also being available for very low monthly payments. For more information about what life insurance can do for your family planning, contact theFamily Insurance Centers.