Simple Ways to Understand How Life Insurance Works in Estate Planning

• Life insurance ensures immediate financial support for your beneficiaries, unlike assets like real estate or stocks that may take time to convert into cash.

• Term life is cost-effective with a fixed coverage duration, while whole life offers lifetime coverage and builds cash value.

• Premiums are eligible for deductions under Section 80C, and proceeds are usually tax-free under Section 10(10D).

• By selecting the right policy, designating the beneficiaries, and reviewing it regularly, you can align life insurance with your estate and legacy goals.

Estate planning is crucial to ensure that your assets are distributed as per your preferences. A key part of this process is life insurance, which ensures immediate liquidity and security for your beneficiaries in estate planning. By incorporating life insurance into your estate plan, you can preserve your wealth without the need to sell valuable assets. 

It serves as a strategic tool to ensure a smooth transition and transfer of your estate, assets, or property.

Life insurance safeguards your family members as beneficiaries for unexpected future situations. This is because life insurance provides instant liquidity and helps your family navigate finances in the event of an unexpected death. 

Life insurance is a crucial aspect of estate planning. However, it is usually ignored or not considered essential. Assets like real estate, stocks, and gold may not provide immediate financial support like life insurance. 

In case of sudden death, life insurance ensures that the family as beneficiaries get a disbursement, helping them secure their financial needs.

There are two types of life insurance policies in India: term life policy and whole life insurance. Term life insurance provides coverage for a specific time frame, and the premiums are often lower. A whole life policy covers lifetime protection and you can use it as an investment for cash value. 

To understand the key differences between term vs whole life insurance policies, check the table below. 

The two most crucial wealth transfer strategies to opt for when buying a life insurance policy are avoiding probate and minimising taxes. Probate is a time-consuming transfer process in which documentation and verification are carried out to pay the amount to the beneficiaries. 

General insurance policies provide the benefit of payout by bypassing the probation process. You must choose a life insurance policy that eliminates the probate process and allows beneficiaries to receive money quickly without delay.

Another strategy to opt for when buying a life insurance policy is tax-free benefits. Under Section 80C, you can claim a tax deduction up to ₹1.5 lakh per year on your insurance premiums. Additionally, for life insurance policies like unit-linked insurance plans (ULIPs), you can get tax-free maturity proceeds under Section 10(10D).

To add a life insurance policy to your estate planning in India, select the right policy and beneficiaries. 

1. Depending on your financial obligations, assess how much coverage you require

2. Choose the right policy, either term life or whole life coverage, after assessing the pros and cons of each

3. Select primary and contingent beneficiaries and regularly update their designation to reflect changes in policy

4. Take help from a professional estate planner and ensure the policy aligns with your financial goals

5. Keep detailed documents, records and relevant information about the beneficiary and the policy 

6. Check out the tax implications and the areas where you can claim tax benefits 

1. Which life insurance policy is best for estate planning?

There are two types of policies: term life and whole life. While term policies provide benefits for a fixed tenure, whole life policies provide lifetime coverage with cash value. You can choose the whole life policy; however, choosing the right policy depends on individual preferences. 

2. How does term life insurance differ from whole life insurance?

Term life insurance policies offer coverage for a specific tenure, such as 10 or 20 years and are cheaper. A whole life insurance policy offers lifetime coverage but comes with higher premiums. 

3. Can life insurance proceeds be taxed?

Yes. The amount received from the life insurance policy is tax-free under Section 10(10D). Also, you can claim tax deductions for insurance policy premium payments. 

4. Should I name my estate as the beneficiary?

Yes. You can name your estate as a beneficiary for major assets, depending on your choices and preferences. 

5. How often should I review my policy for estate needs?

There is no specific rule about how often you should review my policy for estate needs. However, you can review your policy for estate needs every three to five years.

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