Traditionally, we think of life insurance to help those that depend on our income in case of our death. Consider a family living on one income, for example. The father purchases a 20-year term life insurance policy for $1 million. If he were to die before the policy expired, the family would receive $1 million to help replace the income that would be lost.
Sometimes, life insurance isn’t bought to replace income but to help with a financial burden in the case of death. For example, a stay-at-home mother of a family might also have a life insurance policy. This could help pay for childcare, laundry services, and house cleaning so the father could continue to work and take care of the children.
In both examples mentioned above, insurance also lets family members grieve without having to worry about financial stress.
These examples are often what we think of when discussing life insurance. Here are some ways people have used life insurance that you might not have heard of:
This one is also fairly common — especially when it comes to estate planning for medical professionals — but it might not be the first thing you think about when it comes to insurance. Many people have life insurance policies to help their loved ones pay estate taxes when they pass. Tax considerations are essential when it comes to inheritance.
Imagine your child is in their peak earning years and thus in their highest tax bracket. At the time of your death, they end up having to sell the family cabin just to pay taxes on your estate. Even though your dream was to keep the cabin in the family for years to come, illiquidity and a high tax bill have forced your child into a tax nightmare. An insurance policy can alleviate that burden and keep that cabin making memories for generations.
If you did end up choosing a strategy similar to this, let your children know the purpose of the policy or consider including instructions in a will to enable the correct stewardship of your assets.
Business Succession Planning and Disaster Prevention
As one could imagine, losing the owner, partner, or another critical person of a small business could be detrimental. Imagine a small tax consulting firm without its principal. Or imagine a doctor’s office continuing without a doctor — you’d have to commit to selling the medical practice! Without proper planning, someone’s business could fall apart quickly because of an unexpected loss.
An interesting strategy is using life insurance to protect business owners from unexpected deaths of critical persons. Consider a law firm with two practicing partners. Each partner has a life insurance policy and an agreement so that if one died, the other partner (named as beneficiary) would be compensated for their part of the business. The amount of insurance is usually equal to the value of the portion of the business the partner owned. This helps the business not lose out on revenue while they can assess the business and come up with a plan to move forward.
Aside from life insurance, oftentimes, business partners will purchase disability insurance for the same purpose (which can be crucial when it comes to insurance planning). In the case a partner became disabled, the partner would be protected from an otherwise business-shattering tragedy.
Estate Planning Problems
It’s rare to have an inheritance split perfectly between children. If you think about it, most estates have so many different assets, all varying in levels of liquidity. Some are assets that aren’t meant to be liquidated.
For example, a man leaves behind his business, rental properties, sizable investment earnings in both qualified and non-qualified accounts, the family vacation home, and some rare baseball cards.
Some children might be completely capable of taking over the business or managing the rental properties. Other children might not be in a place to do so. How can this man split the inheritance equally between his children in such a case? It’s not uncommon for estate attorneys to recommend some sort of life insurance to help even out inheritance problems such as this. One child may be happy taking over the business, while another may receive insurance proceeds in equal value.
Gifts to Charity
Philanthropists spend their lives giving to others. It’s only fitting that they would want their legacy to continue even after their death. It’s for this reason that some people leave bequests at the time of their death to a favorite charity. Charitable people can do this by purchasing life insurance and leaving their charity of choice as the beneficiary.
Work With the Right Professionals at IMAFS
Using insurance is a critical tool that, when used right, can protect everything from your loved ones to your assets and to your business. Because of its importance in the context of your financial future, getting expert advice is crucial when developing a financial plan completely tailored to your unique situation.
Trusted financial planners and estate attorneys can help you determine if insurance has a place in your plan. If you are concerned about your exposure to certain risks, consider taking action now to put a plan in place to manage those risks. Remember that the future is uncertain. It’s been said that “farmers who wait for perfect weather never plant. If they watch every cloud, they never harvest.”
Learn more by scheduling a consultation with IMAFS’ leading team of fiduciary advisors.