What are Some Other Uses for Life Insurance?

Life insurance is a very versatile product that can be used many different ways in financial planning.  The uses extend way beyond simply protecting your family should something happen to you unexpectedly.  Life insurance can be a valuable tool in estate planning, gift and charitable giving, retirement planning and business planning.  It can provide the protection and flexibility that other financial tools simply can’t provide.

Personal Uses

Income Replacement – The most popular use for life insurance is income replacement.  In this case, coverage is purchased on the lives of those that provide financial support.  If they were to pass away, the death benefit from the life insurance policy would provide the lost income to beneficiaries.  This is mostly used by parents who provide financial support to children but can be used in many other instances as well such as children who financially support elderly parents.

Estate Tax Planning – If you have a large estate and expect estate taxes will be due at your death, life insurance can help your beneficiaries pay the expected tax bill without having to liquidate assets.  This is important for those who have hard assets such as a business, art or real estate.  The last thing that you would want is for your beneficiaries to have to liquidate a large portion of these assets to pay a tax bill.   Since estate taxes are due 9 months after death, your beneficiaries might be in a position where they have to liquidate an asset for less than full value to meet the deadline or sell an asset when market conditions are poor.  With some life insurance planning,  your beneficiaries could hold on to the assets you worked so hard to build.

Charitable Giving – Some like to incorporate charitable giving into their plan.  They might choose to leave the “normal” assets of their estate  such as their home, personal belongings and  investment accounts to family beneficiaries, but would like to leave something outside of these assets to a charity.  This strategy can be approached in a couple of ways. One, a life insurance policy can be purchased with a charity as the beneficiary.  Two, the charity owns the policy on the donor’s life and the donor pays the premiums.  In some cases, the premium paid may be tax-deductible.

Gifting – Life insurance can be a valuable tool for gifting.  By utilizing yearly tax-free gifting limits ($14,000 per person in 2014), a person or couple could use these tax exempt gifts to pay premiums on a life insurance policy.  Careful planning needs to be done in order to avoid tax consequences.

Equalizing Inheritances – Life insurance can help equal out the amount that will be inherited among children.  In some cases a child will work in the family business and eventually take it over when the owner parent passes away.  In fairness to other siblings who choose not to work in the family business, life insurance could be used so that they will receive a death benefit equal to the value of the business thus equalizing the inheritance amount among children.

Retirement Planning – Life insurance can be a valuable tool for retirement planning if used properly.  Cash value in a life insurance policy grows tax deferred and can be accessed tax-free with the proper planning during your retirement years. A policy can be set up so that premiums are paid in until age 65 and a yearly income stream can be accessed during retirement.  It is important that this strategy be set up properly to maximize cash value accumulation. Read our post about life insurance for retirement planning.

Long Term Care Planning – More companies are adding long term care riders to policies these days.  This allows you to access the death benefit for long term care costs.  Traditional long term care policies require yearly premiums to be paid that are lost in most cases if you never need long term care.  By adding a long term care rider to a life insurance policy, you will still have cash value and a death benefit at your disposal if you never need long term care.

Special Needs Planning – Life insurance is an excellent planning tool to protect children with special needs when parents are no longer living.  It can allow a special needs child to have the quality of life parents want them to have after their passing.  Careful planning with these policies is necessary so that the child does not lose any government benefits when the policy pays the death benefit.

Business Uses

Buy/Sell Agreements – The premise of a buy/sell agreement is somewhat simple but careful planning is required when setting up such an agreement.  The two most common buy/sell agreements are a cross purchase plan or a stock redemption plan. In a cross purchase plan each business owner purchases a life insurance policy on each of the other owners. When an owner dies, the surviving owners use the death benefit to purchase the deceased owner’s share of the business.  In a stock redemption plan, each owner enters into an agreement with the business for the sale of their respective interests to the business. The company owns the policy and pays the premiums.  When an owner dies, shares are passed to the heirs of their estate.  The company uses the death benefit to buy the interest from the estate and usually retires the shares.

Key Person – Key person life insurance is very important in protecting a company should it lose any of its most valuable employees.  If there is an employee who has a particular expertise that is vital to the company or one that is responsible for a majority of sales, their death could be devastating to a company’s ability to survive.  Owning a life insurance policy on that individual could give a company the liquidity to survive while it replaces one of those employees if they died unexpectedly.

Executive Bonus Arrangement – In this arrangement,an employer pays a cash bonus to an executive  which is used to pay the premium on a life insurance policy.  The employee owns the policy, has access to the cash value and can choose the beneficiary of the policy.  The bonus can be structured so that the after tax bonus amount equals the policy premium.

Group Term Insurance – Some companies offer a group term policy to their employees as a benefit.  Depending on what type of type of entity, premiums are usually deductible by the employer up to the first $50,000 of coverage and the coverage is tax-free to the employee at this level as well.  Any additional amounts will usually have tax implications. Although it doesn’t allow for a lot of coverage, it could help an employee pay final expenses and any additional bills should they pass away unexpectedly at no cost to them.

Proper Planning is Key

These are just some examples of various ways life insurance can be used in personal financial planning and business planning. They are simply meant to give you an overview of the many uses of life insurance.  Before considering any strategy mentioned above, adequate due diligence should be done to make sure life insurance is  the right fit for your situation. We will be happy to give you a free no obligation consultation to show you how life insurance can provide solutions for your personal and business needs.