GENERAL PURPOSES OF LIFE INSURANCE
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 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 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 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 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 Charitable Remainder Trusts 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: The Health Insurance
Portability and Accountability Act of 1996 changed federal tax law to allow 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.
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 are also commonly 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 fund college expenses.
Supplement retirement funds: Current
insurance products provide competitive returns and are prudent way of accumulation 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
