Insurance protects your income and assets.

This article provides an overview of insurance planning to help you make sure that you have the essential insurance elements of your estate and personal plan in place. The best estate financial plan can be useless if you are sick, disabled, or die and have inadequate insurance coverage. If the insurance on your assets is not adequate, a disaster, such as an accident or fire, could ruin you financially. In many cases, people spend too much money on the wrong insurance and don't have the minimum coverage they need. The following discussions will help you identify broad parameters of what you need so you can review it with your financial advisers, insurance agents, and others. If you don't have the necessary insurance in place, you'll never have the piece of mind your estate plan should give you.

Your financial security depends on your income and assets. Your assets can be secured through property and liability insurance, and your income can be secured through disability and life insurance. Because life insurance is the primary aspect of insurance that is addressed in estate planning, this chapter will focus almost entirely on life insurance planning. This focus, however, should not detract from the fact that you must have adequate insurance for all your risks to achieve your estate, financial, and personal goals.

You Must Have Proper Casualty and Property Insurance To Protect Your Assets

If you own a home, you must have homeowners' insurance to protect against fire, theft, burglary, a visitor being injured, and other risks. For your car, you must have automobile insurance. If you have a business, separate insurance for the business is necessary. For example, if you own a rental property, you must insure to protect your assets from claims of tenants and others.

OBSERVATION You should review your insurance coverage with your present insurance agent. Occasionally, perhaps every two or three years (or more frequently if circumstances change), obtain a second opinion by having another insurance agent review your coverage. If you consult with a financial planner as suggested above, he may be able to give you some suggestions on insurance too.

One of the most overlooked types of insurance, which can be quite important to protect your assets, is personal excess liability insurance (sometimes called umbrella coverage). This type of coverage insures over the limits on your automobile and homeowners' insurance. Many homeowners' insurance policies, for example, only insure up to a maximum of $300,000 to $500,000 of liability coverage. If you are sued for more, and many lawsuits begin with much larger claims (and even if many settle for less than the initial claim, some don't), your insurance won't cover more than its limit. The excess will come out of your assets. An umbrella liability policy will pick up where your homeowners' and automobile insurance stops. Most umbrella policies come in million dollar increments, but the cost is surprisingly affordable. Often, for perhaps no more than several hundred dollars, you may be able to obtain an additional million dollars of protection.

WARNING If you have business or investment interests, your homeowners' and umbrella coverage probably will not cover those risks. If you have a home-based business, check with your insurance agent. You may need, at a minimum, a rider (supplement to the main policy) to cover the business.

Disability and Health Insurance Are Critical

Disability and health insurance are vital to protect your financial future. Unfortunately for many, health insurance is not affordable or obtainable. The point of mentioning health insurance here is to complete the discussion of what a comprehensive estate plan must address. In some cases, if full health coverage is not affordable, you may be able to at least obtain coverage with a large deductible or just major medical coverage.

Disability insurance is too frequently overlooked. If you are ill and cannot work for a lengthy period of time, what will happen? Unless you have insurance, disability could be a disastrous financial burden. If the cost has been a factor, you can consider lengthening the waiting period. This is the period of time following the onset of illness or disability for which you must wait until you can collect. The longer the waiting period, the lower the premiums. If the prices you were quoted were too costly, consider lengthening the waiting period. Also, carefully review the insurance quote you received, and get second and third opinions. Are there any bells and whistles (extras) you can do without? The extras may sound good, but often they can add a substantial amount to your premiums. It's better to have a plain vanilla policy with a six month waiting period than no coverage at all.

To supplement your disability insurance coverage, you can consider obtaining or increasing your home equity line of credit. So long as you have the self control not to use it unnecessarily, a home equity line (and other lines of credit) can be of tremendous help in the event of an emergency. If you are sick for four months and took a six month waiting period on your disability policy, you won't receive any payments on the policy. However, your expenses will keep coming. If you lack other resources, the ability to tap a home equity line or checking account overdraft privilege to fund your living expenses can be invaluable.

Life Insurance To Protect Your Loved Ones, Create an Estate, Pay Taxes, or Help Your Business Survive

Life insurance can provide a host of very important benefits. You should carefully evaluate your needs and determine what type of insurance you need. Consult several insurance agents, consider the low-load insurance products, and other options. Don't blindly jump to a no-loan product. If you need the help and guidance of a professional, an experienced insurance agent could be important. If you prefer, there are also fee only financial planners who can help you evaluate insurance products and your needs independently. For the name of a fee only financial planner in your area call the NAPFA (888) FEE ONLY or (888) 333-6659.

PLANNING TIP Don't underestimate the value of having an insurance professional as part of your estate planning team.

The starting point should be your local library. There are many good financial books and magazines that provide worksheets and analysis to help you make these decisions. Consulting current financial magazines and newsletters is essential because the nature of insurance products can change, and the stability and ratings of different insurance companies can also change. Never buy insurance without checking into the ratings of the insurance company.

PLANNING TIP According to Glenn S. Daily, a fee only insurance consultant in New York City, you should exercise caution when applying rules of thumb to determine your life insurance needs. Using a simple approach of multiplying your take home pay by a specific figure is often dangerous. It doesn't take into account what types of assets you have, how many children you have, and other important personal financial facts. When evaluating your insurance needs, the ideal approach is to hire a consultant or financial planner.

Pure Insurance Need

If your family has only a modest estate or young children whose financial welfare would be endangered by the loss of the family breadwinner, a pure or traditional insurance need must be filled. This is the type of need that should consider projections of the income needs of the survivors. If you or your spouse should die, where will the money come from to care for your family? How will a one wager earner family pay for college costs? Adequate insurance coverage is essential to having your estate plan complete. Without it even the best will and other documents will do little to help. If your resources are limited, term insurance can be an excellent and inexpensive way to protect your loved ones. If you can get the insurance through a group plan, it may even be less expensive.

Pay Estate Tax

If your estate includes assets like real estate, art work, or a family business that may be difficult to sell quickly, insurance can provide ready cash for family expenses or to pay any estate tax to avoid a forced sale of valuable assets at low prices. Second to die or survivors insurance is an excellent vehicle, in the appropriate circumstances, to fund the payment of estate tax. This is because the credit shelter trust and the unlimited marital deduction eliminate any tax on the first death, so the tax is only due on the death of the second spouse. If you are in a position to purchase this type of insurance, it would be inappropriate not to retain professional tax and estate planning services.

Insulate Assets from Creditors

The cash value of an insurance policy held in an irrevocable trust (explained below) where there was no fraudulent transfer in establishing the trust should have a measure of protection from malpractice claimants and other creditors.

WARNING If you are concerned about claims, creditors, or malpractice claims, you need to get help from a professional estate planner who has experience in asset protection planning. The suggestions elsewhere in this book that you need professional advise when the assets in your estate reach a certain value do not apply to this situation. If liabilities and lawsuits are a concern, you need to get professional assistance no matter what the size of your estate.

Non-married Partner

If you have a non-married partner you wish to protect or provide for, insurance becomes extremely important. If your estate could possibly exceed the $600,000 unified credit (the amount you are able to gift without incurring a federal estate tax), insurance is critical because you cannot avoid tax by using the unlimited estate tax marital deduction. Also, state inheritance or estate taxes can be quite costly because you are unlikely to qualify for reduced rates many states provide on bequests to spouses. These tax concepts are explained in greater detail in Chap. 10. Other complications also affect planning for a non-married partner. For example, state property laws are very different for non-married partners than they are for married couples. You need to get assistance from an estate planning specialist.

Diversification of Investments

A permanent insurance product, which has a growing cash value, can have important investment characteristics. For many taxpayers who are unwilling to stray from municipal bonds and Treasuries, the investment of assets in an insurance policy will help diversify their portfolio.

"Prepay" Inheritance so Other Assets Can Be Retained and Spent

Many older taxpayers become uncomfortable making large gifts to reduce their estate out of concern for having adequate resources to provide for their own needs in later life. Often the insurance premiums to fund the estimated tax look far more palatable than the substantial reduction of the estate to eliminate the tax. Instead of giving away large amounts of money to reduce your estate, you can spend smaller amounts of money to purchase insurance to pay the tax that will be due on the estate.