Any estate, large or small will have a need for cash to pay taxes, administration expenses, and debts of the decedent. Estate liquidity is also very important when it comes to keeping the decedent's business running and to also provide living expenses to the surviving spouse and any dependent children.
Life insurance proceeds can also be used to pay off large debts such as mortgages, cars and the like. In this way, the surviving spouse and dependent children will be less likely to need to alter their lifestyle.
Another use for life insurance is to meet lifetime objectives such as to purchase a business interest, to meet support obligations of a divorced parent, or to even provide funds for education for minor children of the deceased.
Life insurance can also provide income to replace the loss of income by the decedent. Finally, life insurance can be used as a means to accumulate wealth.
Since life insurance is the most commonly used estate liquidity source let’s take a closer look.
In basic terms, a life insurance policy is a contract. The person who owns it is the owner. The policy pays an amount(the face value) to the person who is named the beneficiary, when the person who is insured dies.
What are the different types of life insurance? There are two basic types-term insurance and cash value insurance.
Term Insurance
The essence of term insurance is simple. If the insured dies during the contract period, the company is financially obligated to pay the face value of the contract. If the insured does not die, the company owes nothing and the contract is terminated.
Most term insurance policies are renewable; the company must sell another year's insurance at the previously agreed-upon price, at the policy owner's option. Most term policies are renewable until age 65 or 100. The premium, (cost of the annually renewable term insurance policy), rises each year, reflecting the continuing increase in the likelihood of the insured's death. There are some term policies that have premiums that remain constant for 5, 10, or 20 years, and then increase to a higher rate until the termination date. And some term insurance premiums are guaranteed for one, three, five, or ten years. Then they can rise, up to a guaranteed maximum amount. Because they offer pure insurance protection, term insurance is usually the least expensive type of policy to purchase.
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