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Life Insurance

General Purposes of Life Insurance

Life insurance is a unique asset that can be used to help solve some of life’s perplexing financial problems.

Death Benefit Uses for Life Insurance

  • 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 help 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 40 percent of the estate. Federal Estate Taxes are due nine months after death.

  • Fund a business transfer: Business owners often agree to buy a deceased owner’s share from his or her estate after death. Life insurance provides the ready cash to help 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 in 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 help 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 help 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 help 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.

Existing life insurance policies should be reviewed to verify that policy provisions allow for payment of such “accelerated death” benefits.

Other Uses for Life Insurance

While life insurance products are primarily used for death benefit protection, they may also be used for long-term accumulation goals.

  • College fund for children or grandchildren: Cash value increases in a policy on a minor’s life (or the parent’s life) can be used to help fund college expenses.
  • Supplement retirement funds: Many current insurance products provide guaranteed rates of return and may be a prudent way of accumulating additional funds for retirement.

Available cash values may also serve as an “emergency reserve,” if needed, or a source of loans, since life policies frequently include features permitting borrowing against these cash values.

Not everyone can qualify for life insurance. The cost of life insurance can vary between individuals and are determined by several factors, including, but not limited to, age, general health, and family history. Extra riders increase the cost of premium.  Your financial professional can provide you with costs and complete details. Any guarantees are based on the claims paying ability of the underlying insurance company. Loans and withdrawals reduce the policy’s cash value and death benefit and increase the chance that the policy may lapse.  Using acceleration of death benefits will reduce the benefit available at time of death.  If the policy lapses, terminates, is surrendered or becomes a modified endowment, the loan balance at such time would generally be viewed as distributed and taxable under the general rules for distributions of policy cash values.

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