Life insurance can be an important part of a balanced estate plan, no matter what your age, but it's an especially important consideration in your 40s and 50s before old age increases the premiums or failing health renders you uninsurable. If you had a divorce agreement requiring you to maintain coverage, or if your estate plan would simply be helped by life insurance coverage to pay taxes or protect your family after you die, now is the time to look at your current policies and decide whether you need to buy more.

Protect Your Family

Make sure to consider all the support relationships you have with friends and family when reviewing the amount of life insurance coverage you need. Chapter 4 details the different types of insurance available to you and will help you decide which type of policy to buy and how to check the strength of a policy you already own.

As part of your estate planning, it's important to be sure you have enough coverage to support your family or other dependents; that the beneficiary designations are worded correctly; and that the policy is owned by the right person, or even by a trust, if necessary.

If you have a pension, the spousal benefit works very similarly to a life insurance policy. Under this provision, you take a lower monthly benefit so that when you die, your spouse can continue to receive an income. The reduction in your benefit works much like an insurance premium on your life, reducing your monthly income so that a benefit can be paid if you die first. Many insurance agents suggest buying a policy separately and taking the maximum pension benefit, so that if the spouse dies first the pensioner isn't stuck at the lower pension income, especially paying to insure a benefit that's no longer needed. Fortunately, most pensions now take this possibility into account and will bring the pensioner's benefit back up to 100 percent if her spouse dies first, eliminating the need for additional life insurance coverage.

If you have a child or family member who relies on you but who also receives a government disability benefit, you'll need to consider this in creating your estate plan and deciding whether to use life insurance as part of his benefit. A disability and elder law attorney can guide you in setting up your estate plan and adjusting your beneficiary designations to fit with your plan.

Tax Savings Strategies

If you have a large estate (over $2 million in 2008 and over $3.5 million in 2009 and beyond) and would like to reduce the estate taxes you might pay on your assets, your estate lawyer may suggest buying life insurance and having the policy owned by someone besides yourself — to avoid having it subject to estate taxes as well — an irrevocable life insurance trust. An ILIT, as it's called, is an irrevocable trust that once created can't be changed. Using an ILIT, instead of putting assets in the trust that you would prefer to keep under your own control, you put a life insurance policy into the trust with enough benefit to pay the estate taxes, when due. You'll need to gift money to the trust each year so that it contains sufficient money to pay the annual life insurance premium, but that inconvenience and the cost of the premium could be small compared with the estate tax liability you would have had.

Divorce Requirements

Divorce settlements often require life insurance coverage to protect a support order such as alimony or child support. If you're required to carry coverage under an agreement, you might consider negotiating — in the case of a child support obligation — a beneficiary designation that leaves the benefit in trust for the child rather than outright to your ex-spouse. If you're the benefiting spouse looking to insure a benefit you are receiving, you should negotiate to own the policy yourself, with your ex-spouse paying the premiums, so that you can control the policy benefits and be sure the policy is kept in force. If this negotiation fails, insist that you receive a duplicate insurance statement directly from the life insurance company so that you would be made aware of any changes.