Life Insurance: More than Just Family Protection
December 4, 2015 – Life insurance’s primary purpose is widely known. It can help ensure your family is okay financially if you die, but life insurance also has less publicized uses. It can help with estate planning, keep a business running, create more options for charitable giving and even help with long-term care expenses.
Life insurance is among the most basic estate-planning tools. The death benefit can replace the income of a family breadwinner who dies. It could also help pay estate taxes. That might save your children or grandchildren from having to sell securities and other assets that you bequeathed to them. In addition, the policy’s proceeds might fund college costs for your heirs and meet the special financial needs of relatives 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. Your heirs could pay that tax bill with the proceeds from your second-to-die policy.
You might investigate holding 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. To sidestep this ownership issue, you might have the irrevocable trust purchase and own a new life-insurance policy. If you transfer an existing policy into an irrevocable trust, the assets will be considered part of your estate if you die within three years of the transfer.
Life insurance can be the key to keeping a business running if an 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 also finance an automatic buyout should one partner die.
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.
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. The strategy, however, has one drawback: If you continue to own the policy, your premiums are not tax-deductible.
If you’re aiming to cut your tax bill, you might consider a policy donation. Unlike naming the charity as your beneficiary, donating a policy not only gives you an immediate tax deduction based on the fair market value of the policy, but also it shrinks the size of your taxable estate.
Hybrid life-insurance policies, also known as combination policies, combine an insurance policy with a long-term care benefit. For instance, with some policies, you can buy a single-premium life policy and, if you need care, you can receive up to 100% of the death benefit income tax-free to pay for your long-term care costs. If you don’t need the benefit before you die, the policy’s proceeds go to your beneficiaries, also income tax-free.
IBTX Wealth Managers can assist you with these and other options for life insurance. For additional wealth management information, contact us at 800.880.6689.