The Importance Of Leaving A Legacy

One of the most difficult conversations that I have with clients is about death and what will happen after they die. Of course, we leave the philosophical part of that question to more learned and religious people, but someone like me can address the practical part.

Planning for death, and the goals for the money thereafter, usually falls into one of two distinct strategies. One group of people wants the last check that they write to bounce, meaning that they do not want to leave any money to children, because they feel it is theirs to spend. Most parents who take this approach have successful children and are not worried about their future. The second group of people purposefully leaves money to those they care about. This doesn’t mean that the money goes only to their children. Some folks like leaving money to a church, their alma mater or some other meaningful organization or person. Neither one of these strategies is better than the other, but both have their complications, which I will discuss.

When we think about leaving a legacy, we think about life insurance. There are several types of life insurance. The first and most common type is term insurance. This type is typically the least expensive and it lasts only for a certain time, usually 20 years. You choose the amount of benefit that you want, which can range from $25,000 to $1 million, perhaps more. Premiums are paid on a regular basis for the duration of the term. Terms can range from 10 years to 30 years. Once the term has been attained, the policy is complete. If you do not pass away during the duration of the policy, then you paid for coverage but you do not receive the benefit. As a result, term insurance can be unpopular as you do not have anything to show for all of those premiums paid into the plan. What is the good news? The good news is that you didn’t die during the life of the policy!

Companies created permanent insurance to meet the needs of individuals looking for a permanent plan. There are several types of permanent insurance. You have likely heard about whole life insurance, but you may not have heard about universal life insurance. Without going into every detail, I will say that these plans offer cash value accumulation opportunities. The way that cash value grows differs from plan to plan, but the value here is that you have something to show for all of those premiums paid into the plan. You have an account available to you that you can use in retirement or what have you.

As you might imagine, these permanent policies are going to be more expensive than the term policy mentioned earlier. How much more expensive? That is going to depend on several factors like death benefit amount (the amount your heirs will receive at your death), your current health status as you do go through underwriting to obtain life insurance, and your age. The older and unhealthier someone is, the more expensive the plan is going to be.

Term insurance is like renting a house; you have a roof over your head to protect you, but you do not have any equity built up. On the other hand, permanent insurance is like buying a house; you have a home that you are building equity in. Much like a person’s preference of renting or buying, when choosing from the different types of life insurance, it’s all about preference and what is best for you personally.

The main advantage to life insurance is that it is tax-free to your beneficiaries. It can also be a tax-free distribution to you if you follow certain guidelines. Managing the tax ramifications is an important part of estate planning. Leaving your beneficiaries accounts, like an IRA or 401(k), leaves the tax bill to them at the time of your passing. Having life insurance, along with those accounts, allows for the next generation to also benefit from your hard work and planning. Life insurance can also help you pay for unexpected long-term care costs. Several life insurance plans offer long-term riders, which allow the policy holder to access a percentage of the death benefit in the event that they must go into a nursing home or assisted living facility, or if they need to receive care at home. Evaluating the details around these options is important to make sure you receive the benefits you are looking for. Of course, these additional benefits will increase the costs of the plan that you choose.

Life insurance isn’t the only way to pass money to the next generation and it isn’t for everyone. However, for those whom it works for, it can be a vital part to ensuring that your wealth is passed down to the next generation.