Home › Financial Guidance › Insurance & Long-Term Care
Life insurance’s primary purpose is widely known: To help ensure your family’s financial security if you die, but life insurance also has many less publicized uses.
Life insurance can help keep a business running, help with estate planning, create more options for charitable giving and even help with long-term care expenses. Intrigued? Here are some uses of life insurance you might want to discuss with your Financial Advisor.
Business Planning
Life insurance can be important to keeping a business running 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 contract 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, preserving the business’s value. At the same time, the deceased partner's heirs or estate gets the liquid value of the funds.
If business owners want to expand, they often 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 relatively inexpensive 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.
Estate Planning
Life insurance is a commonly used tool in estate planning. Death benefit proceeds can become available almost instantly following the insured’s death 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.
Most people support their favorite charities by donating cash and property. But you can also use life insurance to help support a cause.
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. Your heirs could pay that tax bill with the proceeds from your second-to-die policy. Under federal law you can shelter up to $12.06 million in assets (based on the 2022 federal applicable exclusion amount), several states have inheritance taxes that kick in at much lower amounts.
You might investigate owning your life insurance in an irrevocable trust. If you have insurance on your life when you die, the proceeds usually aren't subject to income taxes. The payout, however, could be hit with federal estate taxes if you are listed as the policy's owner. As an alternative, you could have the irrevocable trust purchase and own a new life insurance policy. 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
Most people support their favorite charities by donating cash and property. But you can also use life insurance to help support a cause.
You could name a charity as the beneficiary of your life insurance. This can be an inexpensive way to make a 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 take a tax deduction and the policy is removed from your estate for estate tax purposes.
