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Oct 21, 2014

In the traditional use of a life insurance policy, money is paid to benefactors upon the death of the policy holder. This is often something that spouses do so that their children or partner can be taken care of in the event that they die unexpectedly. This is a necessary but often rather unpleasant part of financial planning for many people, and they don't give the policy another thought once it's been bought and the payments are being made.

The figure arrived at through the initial policy is often enough to pay off or make a dent in a large mortgage payment as well as set up college funds for the children (should there be any) and provide some liquid money to cover funeral expenses and help with household bills for the first few months or year after the death. This means the figure for Phoenix life insurance would be different than New York City life insurance, and so on. However, sometimes — even most of the time — the circumstances of the family change. The children grow up and go to college while both parents are still alive. The couple works hard and pays down their mortgage on their own before either one of them expires. And still they're paying on two large life insurance policies that now can take on other important functions in their financial lives.

Replace Wealth upon Death

This sounds very much like the intended purpose at first glance, but actually it's not. What it actually means is that the policy itself is going to pay for the estate taxes that fall on families, CNBC says. Often a lack of liquid assets means that grieving families have to sell off assets that otherwise would have continued to produce income just to pay the taxes on their estate. This could also force them into selling in a bad market or lose money on an investment. Using a life insurance policy to give your heirs an influx of cash to settle taxes and outstanding debts is a great gift.

Funding a Bequest

Another way that a life insurance policy can help your heirs is by providing equal value to something given to one of them. Only one of your children can get your house, unless you want to deal with each child receiving a share and deciding to buy each other out or selling it entirely. A life insurance policy can be held in trust so that you can dictate who gets how much and how it is spent.

In some ways, life insurance policies are a lot like your will: They can be an uncomfortable topic. But, like a will, deciding your options with your life insurance policy can help you and your family for years to come.

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