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Ask Jesse: How do you feel about keeping life insurance as a form of inheritance?

My husband and I are currently switching our life insurance policies from whole life to term, thus resulting in better coverage for the same premium. We are wondering how you felt about keeping our life insurance as a form of inheritance for our three children (our youngest has severe autism). We are in our lower 40’s.

I understand the premium will go up as we grow older but we want to insure that all of our children, especially our son with a disability, is covered. He also has a special needs trust. – a reader

I applaud you for taking the bull by the horns and thinking long-term. It is not often that people, when still younger, not only think about but make preparations for the care of their children, in the event of your death.

I think it is important for anyone, whatever their age, if they have dependents, to make sure to have a lawfully executed will with guardians set up for their dependents. So many people do not have this and, instead, leave it to the state to determine who gets what and who takes care of the children, if both parents are gone.

The purpose of life insurance is to make sure your children have something to take care of them for their support and maintenance when you die. It should actually be called “death insurance” or “care insurance” but that is beside the point.

Because you have a special needs child, it sounds like you have done the necessary estate planning to make sure he is cared for with a special needs trust. This trust can be funded with life insurance by naming the trust as beneficiary of the life insurance. The trustee would then disperse and manage the money according to the terms of the trust, while the other children would be named as beneficiaries and get the money outright (unless they are minors at the time).

If you did not have the trust set up by an estate planning attorney, I would highly recommend it and have them look at the methods of funding. Most trusts go unfunded and the last thing you would want is to have this special trust not funded properly and your child not benefit from your planning. An ounce of prevention is worth a pound of cure.

That said, while at this point you can fund with that life insurance, your goal should be to fund it with other assets developed over time so you don’t just have to rely on the life insurance–especially if that life insurance is the term insurance. While you could always reapply for term insurance, which is wise to do when the term gets close to being up, it would be good to have a real asset there to fund the trust if that life insurance is no longer available.

Thus, I do not think that it is necessary for you to keep both the whole life and the term policies going simultaneously, especially when you can get quite a bit more insurance for the price of the whole life with term insurance. The term should work just fine as long as you keep on the ball with estate planning.

Again, I would recommend you talk with an estate planning attorney in your state to make sure all i’s are dotted and t’s crossed.

Jesse Paine is a licensed attorney who owns his own law firm. He’s married to Crystal and is the numbers nerd of the team! If you have a question you’d like him to answer in a future column, you can submit it here.

The content of this column intended for informational use only and is not to be construed as providing legal, investing, accounting, or other professional advice. Your situation is factually specific and you should accordingly seek qualified professional counsel concerning your specific legal, investing or accounting needs.

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  • Suzanne says:

    I think it should be pointed out that if you develop a medical condition in the future, it may be difficult to buy another term life policy once your current term is up. Check to see if your policy has an automatic conversion provision that allows you to convert your term policy into something more long-term such as whole or universal life without medical underwriting, just in case. An independent, licensed life insurance agent can advise you on the pros and cons of the different types of life insurance.

  • Wait a sec — why is the premium going up as they get older? They can get a level term policy and have the premiums and the benefit locked in for the length of the policy, so 10 years or 20 years or whatever the term length is.

    The premium might not be so much with another company.

    Perhaps this is a special sort of policy since they are rolling over a whole life policy?

    Either way, it might be worthwhile to shop it around to another company just to make sure you are getting the best deal. Dave Ramsey recommends and we have had good success through that company, ourselves!

    • monique says:

      Once the term ends the new policy will be based on their age at the time of the new application. So 30 years from now they’ll be in their 70s and term insurance in your 70s is very expensive.

  • Natalie F says:

    Jessee gave good advice – but I agree with the comments above as well. We have combination term/whole insurance. We got combination term/whole because we could afford more term and wanted enough to have our son taken care of if needed. The whole is a smaller amount, but our insurance company is a co-op and pays out dividends. We use the dividends to purchase more whole insurance. As we get older, and our kids are less dependent on us, we will convert more term to whole. We can also draw on our insurance when we get older and are not required another physical at any point. I suggest Northwestern Mutual.

    • beth b says:

      My husband works for Northwestern Mutual and it’s a fantastic company. Rock solid. So much that he can’t purchase any of their policies (above and beyond the employee one) because of a health condition.

      Anyway, we have whole life policies on both our boys and for one of my policies. I’m not convinced mine was the best purchase but we’re keeping it since we’ve already plugged so much money into it. We also have a term for my husband and myself. Because of the health problems my husband experienced we’ve put a great deal of thought into my financial future if something were to happen to him. Sounds like the original poster is doing a good job of thinking this through as well.

  • Margy says:

    We chose a combo of term and variable. In 30 years, our mortgage will be paid, and our kids will be grown. We won’t need as much insurance in 30 years. If you choose whole/universal/variable, you can get locked in now at young rate for life. It can potentially be an investment vehicle as well. You always have a death benefit, but as the investsments grow, your policy will be worth even more. And starting young on that type of policy is a good idea so you can reap the rewards of compounding. So once our term expires (hopefully if it’s never used!) we will then have a policy that will offer a death benefit, and if things go as planned, have a considerable cash value (which you could potentially use prior to your own death). We looked around at rates, and found the best at Farmers in California. Once term is up it’s up, and you may not be able to renew at a reasonable price. Locking in now on a whole or other such policy maybe something you want to do, as it wouldn’t make as much sense later when your term is up.

  • Ryan says:

    I thought i might offer a bit of a different perspective. I regularly work with clients on their life insurance in situations such as this. It is impossible to tell from the information you gave whether or not Whole life insurance is appropriate. What is of primary importance is that you two have enough death benefit to replace your income should you die prematurely. Fortunately for your family, this is not very likely- but we plan for consequences not probability. Therefore, you should get the amount of death benefit on your husband (and you) that it would take to replace the income he (you) would otherwise be earning if he were alive. Once you know that amount, you simply must do an analysis of your cash flow to determine if there is enough money to acquire a portion of whole life- I doubt you can afford all of the death benefit you should have to be all whole life- few people can. However, I would strongly discourage you from expecting to reapply for m0re term insurance when your current term expires. Term insurance is designed by insurance companies not to pay a claim. So if your health changes, or you are near your life expectancy, getting more term life (or whole life for that matter) may not be an option. To plan on this is not a good idea. And if you are hoping to have term insurance pay a claim at or near your life expectancy (if you could somehow keep your term or reapply and get more until then) you will end up paying significantly more than if you had kept your whole life insurance. What almost always happens with term insurance though, is that the term usually expires and the policy holder will die outside of the term (98% of the time). If you want a death benefit paid out at your death, you should consider a participating whole life policy. It is one of the best ways to guarantee that assets will be left for you heirs at your death. Whole life insurance can be a great product but it can also be a disaster. I agree with Mr. Paine that you should definitely speak with an estate planning attorney, but you should also speak with someone who is very knowledgeable about life insurance (probably a few because there are a lot of bad insurance agents/financial planners). I would also speak with at least one financial professional who recommends/understands participating whole life insurance (Guardian, Northwestern, MassMutual, Ohio National). You have a unique situation (everyone does!) so you should make sure that your advisers are working together to design a situation that is right for you. Good luck and nice job mom for thinking about your kids and taking care of these difficult planning decisions.

  • Susan says:

    We had whole life and changed it to term too. When our kids were home, we had mortage insurance and term. Now we are older and dont have a need for the insurance, kids are raised. Our house is paid off, getting close to retiring.

  • Christy says:

    Please take the advice about having the insurance money go directly into the special needs trust. If your child has severe autism, they will most likely rely on Medicaid and other publicly funded services at some point in their life. If they inherit money from you, they will no longer be eligible for their benefits.

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