As we round out the month of September, Life Insurance Awareness Month, we’ve looked at the basic questions you need to ask yourself to determine if you need life insurance and how much. Of course, talking to a professional can help you get the correct information you need to make a decision.
But life insurance doesn’t just have to be about leaving financial support for your loved ones when you pass away. In fact, there are many strategies that can utilize life insurance to not only position your estate planning, but also save tax and, if you’re an incorporated business owner, even help your business.
Let’s touch briefly upon a few of these strategies and philosophies that I know and love.
Life insurance as a guaranteed investment
You don’t always know when you’re going to pass away, and it can be difficult to predict market conditions. Many who feel as though they have investment and other assets enough to satisfy any financial needs might want to look at life insurance as just another addition to their existing portfolio. Where else can you have a guaranteed payout on an unspecified date, with a steady monthly contribution?
While this isn’t a strategy, but merely a different way of viewing the role that life insurance can take in your overall financial plan, let’s look at this philosophy in action.
Say we have Adam, a male aged 35, who wants to contribute $50 monthly towards an investment, with the sole intention of those monies being there for his family when he passes away. He has other retirement savings and investments so doesn’t anticipate needing this particular investment for anything other than estate planning.
For $50 monthly he could get a Term to 100 insurance policy for $57,196 of coverage, which would offer him coverage until age 100 at the set premium. This benefit would pay out in full upon Adam’s death, whenever that may be, but let’s say he passes away at age 65 having contributed to this “investment” for 30 years.
Adam would have contributed a total of $18,000 in premiums over that time, and to achieve the payout of $57,196 would have had to achieve an average 5.75% rate of return every year for the 30 years (not factoring any taxation). That seems achievable given the current market conditions, right?
But what if Adam tragically passed away at age 45, after only contributing for 10 years? He would have only contributed $6000 and had to average a rate of return of 33.56% every year in those 10 years to achieve the same result of $57,196.
Since oftentimes the younger you are when you pass away, the greater the financial burden on your family may be, it just makes sense to put some of those investment dollars to work for you in life insurance.
Note that the example of a Term to 100 life insurance policy is only to achieve a cost-effective whole life insurance alternative. When looking for the right product fit for your life insurance needs, there may be a solution that more satisfies your needs.
Save probate fees and taxes with Life Insurance
There’s a fine line between an estate large enough to set up family trusts to transfer assets strategically through to the next generation, and an estate just big enough to have a chunk of tax to pay in order for the modest amount of assets to transfer. Tax and probate are based on the size of the estate. While you can’t always position hard assets like real estate to save or bypass probate in the estate planning process, we can utilize life insurance to transfer those assets tax strategically to our loved ones, or even to a charity.
After all, life insurance isn’t included in the probate of the estate, is passed on quickly to the designated beneficiaries, and is TAX-FREE in their hands and in the hands of the deceased’s estate. Win-win. So why would you want to leave life insurance instead of your investment assets? Not only is it comforting to know exactly what you’ll be leaving the next generation (see the first philosophy in action), but you’ll be free to use your investment assets to enjoy your own lifestyle, gift monies while you’re still alive, and pay for the life insurance premiums.
In the case of leaving life insurance proceeds to a charity, you can structure it so that you can be receiving a tax deduction through your lifetime, or upon your death.
Family dynamics, future planning and life insurance
A trend that we’re seeing more often with adult children of the baby boomer generation is owning life insurance on their parents, as an investment in their own future. While we never feel easy about “profiting” off the death of a loved one, owning life insurance on a parent can do more than just ensure their final expenses are wrapped up (especially if they own no insurance themselves). This allows that guaranteed investment towards a retirement plan to come to fruition in a tax-free way. Again — tax-free growth in the payment of life insurance premiums, and tax-free payout to the beneficiary, allowing you to invest for your future. While a life insurance policy on a parent should never be the only retirement savings strategy, it is one that can prove profitable if the parent is healthy and at a reasonable age when it first is placed.
Alternatively, if a larger life insurance policy currently owned by the parent is no longer needed for estate planning purposes, ownership and payment can be taken over.
Protect Your Business and Build Assets in your Corporation with Life Insurance
Many incorporated business owners look for ways to utilize their cash constructively so that the business can proceed seamlessly in the event of their death, and their family can be taken care of by the corporation. This can get complicated, or not, depending on the size and structure of the corporation. Here are just a few easy examples showing the value of corporate-owned life insurance:
- Business partners can utilize life insurance to fund a buy-sell agreement, which would have a corporate-owned life insurance policy paying the family of the deceased partner for their shares in the corporation. This allows for the corporation’s cash position to remain relatively unaffected, and shares flow back to the remaining partners in the business. Very rarely does a business owner suddenly want to be in business with their deceased partner’s family.
- In a family business situation, corporately-owned life insurance can help to equalize the estate upon a parent’s passing. If, for example, we had 3 siblings, and only 2 were actively involved in the business, expecting to retain control in the event of the founder (their dad) passing away. A life insurance policy paid for by the corporation would allow all three siblings to get equal shares in the estate, and fund a share buyout of the sibling who didn’t want to be involved in the business. Everyone’s happy, and an uninterested sibling has liquidity instead of ownership and shareholder rights. A lot of family fights can be saved with a structure like this in place.
- Corporate investment can provide liquidity and growth, however since there is no tax-sheltered investment available to corporations that growth is subject to capital gains tax each year. Including a permanent life insurance strategy that can build investment dollars within the policy – tax-exempt – can help to offset the capital gains tax. If life insurance is already needed for another purpose like a buy-sell, this solution just provides an added bonus.
Note that corporate life insurance, investments, and tax planning aren’t always cut and dry. While these are general strategies for use, you should consult your team of professionals to see what fits your corporation and goals best.
If you currently don’t own life insurance, or would like to look at enhancing your current financial plan with any of the above strategies, be sure to sit down with a professional. While many life insurance products are available online, the above require more consideration and expertise to implement successfully.