Estate Planning: Life Insurance - T. Rowe Price

Life insurance provides the payment of a predetermined amount of money to a designated beneficiary upon the death of the insured. Life insurance generally is purchased to replace your income for a person, family, or business dependent on your financial support. The insured may or may not be the policyholder who owns the life insurance policy and pays the premiums. It is important to realize that if you own the life insurance policy on your life, the policy amount is included in your taxable estate and may be subject to estate taxes.

You may not need life insurance if there is no one depending on your income to maintain his or her standard of living or if your current estate is large enough to cover these costs. If you have a growing immediate family or dependent relative, you may want to consider purchasing life insurance as part of your estate plan.

Life insurance is often thought of as a tool to provide for beneficiaries in the years following your death, but the proceeds may be needed quickly if you own a business or expect your estate to go through a long probate process. If you own the policy and your estate is not the beneficiary, the policy's beneficiary should receive a prompt payment of cash upon your death. Note that the amount of the proceeds typically would be included in your total assets for purposes of determining whether estate taxes are due. The policy proceeds would not be included in your taxable estate if another person owned the policy on your life or if the policy is held in an irrevocable life insurance trust.

If you decide that life insurance is necessary for your particular situation, consider which type of insurance is right for you and how much you need. When making the purchase, consider your income, the length of time your dependents would need financial support, how long it may take for your assets to reach them, and how much support your current estate would provide. Choosing the right policy and how it would be owned can be complicated, so consult a financial advisor when making these decisions.