Life Insurance: More Than Just Protection for Your Family

Life insurance is known for helping to ensure your family’s financial security if you pass away, but there are many lesser known uses for having a life insurance policy.

Life insurance can help plan for orderly business transition, support estate planning, create more options for charitable giving and even cover long-term care expenses. Intrigued? Here are some uses of life insurance you might want to discuss with your Wealth Advisor.

Life Insurance for Business Succession Planning

Life insurance can be important to transition business ownership and operations if a key owner dies. The policy's proceeds can help meet the firm's expenses and pay salaries during the transition to new owners, cover any estate-tax bill, and even buy out a family member who owns a share of the company but has no interest in being part of the business.

If you have business partners, a business-oriented life insurance policy can help finance a buyout should one partner die. Indeed, life insurance can play a crucial role in a buy-sell agreement, also known as a buyout agreement. This agreement determines what happens if a co-owner chooses to leave the business, dies, or is forced to depart.

This agreement between business co-owners is often backed by life insurance policies on the participating owners' lives. This arrangement, known as an "insured" buy-sell agreement, can provide the money needed by the remaining partners to pay for a deceased owner's share of the business.

This can keep the business with the owners who know how to run it best, helping to preserve the business’s value. At the same time, the deceased partner's heirs or estate gets their agreed upon share of the business.

If business owners want to expand, they may need loans, either from a bank or a private lender. Lenders may require life insurance on the business owners as collateral for the loan. In most cases, you can buy a competitively-priced term policy, perhaps with guaranteed level premiums, to cover you for the duration of the loan.

Estate Equalization. A business owner may also use life insurance for estate equalization. For instance, if one child is involved in the family business, the parent might want to leave the entire business to that child. Given that most of a business owner’s net worth is often tied to the value of the business, this might unintentionally disinherit the other children, especially if estate taxes and final costs are paid by utilizing business assets. Life insurance can be a straightforward solution to this issue. A life insurance policy on the parent’s life can be the uncomplicated answer. Proceeds from the policy can help to provide the child/children who isn't/aren’t involved in the business with an amount equal to the value of the business.

Life Insurance for Estate Planning Liquidity

Life insurance is a commonly used tool in estate planning. Death benefit proceeds are paid outside of probate and without the potential delays and lost values that often result when trying to liquidate other assets such as real estate or a business. Policy proceeds may also be available to create an educational fund for your heirs, or meet the special financial needs of children, grandchildren, or other family members with mental or physical disabilities.

If you and your spouse are worried about estate taxes, or you want to make sure there's money left for your heirs, you might consider second-to-die insurance, also known as survivorship life. These policies don't pay out until the second of two people dies. For instance, suppose you die and leave a sizable sum to your spouse. Thanks to the unlimited marital deduction, there shouldn't be any estate taxes owed. But when your spouse dies and leaves everything to the kids, the estate-tax bill could be substantial if the surviving spouse is subject to the federal estate tax in part because the assets would be considered as part of the surviving spouse’s estate. This could diminish the assets otherwise intended for heirs.

As an alternative, you could set up an irrevocable life insurance trust to own the policy for the receipt of the proceeds on the second-to-die. With proper planning, this could shield the death benefit proceeds from estate tax and provide liquidity to pay any estate tax due on other assets. (Under federal law you can shelter up to $13.61 million in assets (based on the 2024 federal applicable exclusion amount); several states have inheritance taxes that kick in at much lower amounts.)

Please speak with your tax advisor and estate planning attorney regarding the pros and cons of transferring ownership of your existing life insurance policy to an irrevocable trust, compared with the trust owning a new policy.

Charitable Giving: Your Favorite Charity Can be the Beneficiary of Your Life Insurance Policy

Some people support their favorite charities by donating cash and property. Life insurance can also be used to help support a cause.

You could name a charity as the beneficiary of your life insurance. This can be a way to make a leveraged charitable gift since your premiums should be less than the death benefit.

One of the drawbacks: If you continue to own the policy, your premiums are not tax-deductible, and the proceeds could be includable in your estate for estate tax purposes.

If you're aiming to cut your tax bill, you might consider applying for a policy to donate.

If premiums are still owed on the policy, should you continue to pay the premiums, you may be able take a tax deduction and the policy is removed from your estate for estate tax purposes. As with the above, you should consult with your tax advisor to consider your individual circumstances before entering into transactions that could have potentially taxable consequences.