Life insurance is a unique asset. Because of its potential high yield and its tax-favored benefits, it can be used to solve some of life's perolexing financial problems.
Create an estate: Where time or other circumstances have kept the estate owner from accumulating sufficient assets to care for his or her loved ones, life insurance can create an instant estate. Pay death taxes and other estate settlement costs: These costs can vary from a low of three to four percent to over 50 percent of the estate. Federal Estate Taxes are due ninemonths after death.
Fund a business transfer: Business owners ofthen agree to buy a deceased owner's share from his or her estate afterr death. Life insurance provides the ready cash to finance the transaction. Pay off a home mortgage: Many people would like to pass the family residence to their spouse or children free of any mortgage. Often a decreasing term policy is used, which decreases the face amount as the mortgage balance is paid down. Protect a business from the loss of a key employee: Key employees are difficult to attract and retain. Their untimely death may cause a severe financial strain on the business.
Replace a charitable gift: Gifts of appreciated assets to a charitable remainder trust can provide income and estate tax benefits. Life insurance can be used to replace the value of the donated assets. Proceeds from life insurance policies can also be paid directly to a charity.
Pay off loans: Personal or business loans can be paid off with insurance proceeds. Equalize inheritances:When the family business passes to children who are active in it, life insurance can give an equal amount to the other children. Accelerated death benefits: Federal tax law allows a "terminally ill" individual to receive the death benefits of a life insurance policy on his or her life income tax free. Such "living benefits", received prior to death, can allow a person to pay medical bills or other expenses and maintain his or her dignity by not dying destitute. If certain conditions are met, a "chronically ill" person may also receive accelerated death benefits free of federal income tax.1 Existing life insurance policies should be reviewed to verify that policy provisions allow for payment of such "accelerated death" benefits.
1The discussion here concerns federal income tax law; state or local tax law may vary.
Types of Life Insurance Policies In choosing the type of life insurance policy you purchase, consideration must be given to the need which is being filled; e.g., creation of an estate, payment of estate settlement costs (federal and state death taxes,1 last illness and burial costs, probate fees, etc.), business buy-out, key-man coverage, etc.
Decreasing Term:Level premium, decreasing coverage, no cash value. Suitable for financial obligations which reduce with time; e.g., mortgages or other amortized loans.
Annual Renewable Term:Increasing premium, level coverage, no cash value. Suitable for financial obligations which remain constant for a short or intermediate period; e.g., income during a minor's dependency.
Long-Term Level Premium Term:Level premium, level coverage, no cash value. The annual premiums are fixed for a period of time, typically 5, 10, 15 or 20 years. Suitable for financial obligations which remain constant for a short or intermediate period; e.g., income during a minor's dependency.
Whole Life:Level premium, level coverage, cash values. Cash value typically increases based on insurance company's general asset account portfolio performance. Suitable for long-termobligations; e.g., surviving spouse lifetime income needs, estate liquidity, death taxes, funding retirement needs, etc.
Universal Life:Level or adjustable premium and coverage, cash values. Cash values may increase, based on the performance of certain assets held in the company's general account. Suitable for long-term obligations or sinking-fund needs: estate growth, estate liquidity, death taxes, funding retirement needs, etc. Universal Life with Guaranteed Level Premiums: Scheduled level premiums (policy can be scheduled to have one premium, multiple number of years or for life) with a guaranteed death benefit until the death of the insured.
1 Under the Tax Act of 2001, the federal estate tax is gradually phased out until its final repeal in the year 2010. If congress does not act at that time to repeal it for the years following, it will automatically revert back to the rates in effect during the year 2001, with an exemption for the first $1,000,000 of assets.