|
From a financial viewpoint, there are four basic reasons for the purchase of life insurance:
Family Income Protection
So as not to leave the family destitute or inadequately provided for, life insurance protection is generally purchased to provide the family with ample income to replace the income lost in the event of death of a wage earner. The increase of two-income families has emphasized the need for coverage on both spouses.
Economic Concerns
Developing forced savings for the future, with the build-up of tax-deferred, sometimes tax-free, interest can be very beneficial. While life insurance may not be the best investment because of the costs of the death benefits provided, it has historically been the best method for many people to save money. It constitutes a semi-compulsory, regular plan of savings that is self-completed upon death and continued during a disability.
Estate Settlement Costs
People with sizable estates often have a high percentage of their total wealth tied up in fixed assets. In order to pay the federal estate taxes within nine months of one’s death, the executor of the estate may be forced to sell, at depressed values, a portion of the fixed assets within the estate.
In such cases, the income tax-free proceeds from life insurance can serve to protect the heirs from unnecessary shrinkage due to the distressed sale of assets in order to pay estate settlement costs.
Life insurance can also be arranged in an irrevocable trust in such a fashion that the entire death benefit escapes estate taxes. For this reason, life insurance can be the essential element in an estate that enables the preservation of the other important assets. The largest purchasers of life insurance are the wealthy estate owners.
Business Reasons
Many partnerships and closely held corporations have agreements that provide for the purchase of the deceased’s ownership in the firm from the heirs of the deceased partner/shareholder. It is often advantageous to fund such “buy-sell” agreements with life insurance in order to guarantee the availability of funds to fulfill the terms of the agreement. By so doing, the corporation or surviving partner(s) avoid the financial strain that may be created by fulfilling the buy-out agreements.
Many business owners also sign personally on business loans. This causes the loans to be called at their death and presents a liquidity crisis in the estate. Life insurance is the most appropriate vehicle to prevent this occurrence.
Policy Selection
The purchase of any particular life insurance policy should go through the same careful analysis that goes into making any investment decision. The revolution that has taken place in the insurance industry in recent years has caused a tremendous improvement in policy design and flexibility.
However, a specific recommendation on the type and amounts of insurance to own is almost entirely dependent on: the purpose for the insurance, the length of time the protection is needed, the future life insurance needs, and finally, the current cash flow considerations.
Ownership of the insurance will depend on the current and projected estate tax brackets and the total estate distribution plan that will be in place. If there are family members who are not capable of managing large funds, trust arrangements have been effective at retaining, investing and dispersing life insurance proceeds.
|
