Uses of Life Insurance

Uses of Life Insurance

  • Life insurance provides both death benefits and living benefits.

  • Whole life insurance creates an immediate estate and includes a cash value feature that can be borrowed against.

  • Important for addressing individual and business needs during the policyowner’s life and after death.

Determining the Proper Insurance Amounts

  • Human Life Value Approach:

    • Calculates the expected lifetime earnings of an individual.

    • Places a monetary value on a person's life for insurance purposes.

  • Needs Approach:

    • Identifies needs of the individual and dependents to determine necessary insurance coverage.

    • Considerations include:

      • Final Expense Fund

      • Housing Fund

      • Education Fund

      • Monthly Income

      • Emergency Fund

      • Income Needs if Disabled or Ill

      • Retirement Income

      • Estate Conservation (paying estate taxes)

Living Benefits of Life Insurance

  • Emergency Reserve Fund:

    • Covers unexpected expenses.

  • Education and Retirement:

    • Helps provide funding for education and retirement savings.

Business Uses of Life Insurance

  • Buy-Sell Agreements:

    • Essential for proper ownership transition in the event of an owner’s death or disability.

    • Often termed business continuation agreements.

Buy-Sell Funding for Sole Proprietors

  1. Buy-Sell Plan:

    • Legal document drafted by an attorney for transferring ownership.

  2. Insurance Policy:

    • Employee purchases a life insurance policy on the proprietor to fund the buyout upon death.

Buy-Sell Funding for Partnerships

  • Two Types of Agreements:

    • Cross-Purchase Plans:

      • Each partner buys life insurance on other partners and is the beneficiary.

      • Death benefit used to buy deceased partner’s share of the business.

    • Entity Plans:

      • The partnership buys life insurance, pays premiums, and benefits from policies on partners.

Buy-Sell Funding for Close Corporations

  • Legal Status of Close Corporations:

    • Separate legal identity from its owners.

  • Plan Types:

    • Cross-Purchase Plan:

      • Surviving stockholders purchase interest from deceased stockholder.

    • Stock Redemption Plan:

      • Corporation purchases stockholder's interest upon death.

Key Person Insurance

  • Protects against financial loss from the untimely death of a key employee (owner, officer, or manager).

  • Business pays premiums and is the beneficiary; death proceeds are not taxable.

Employee Benefit Plans

  • Deferred Compensation:

    • Future payments to high-paid executives for retirement, disability, or death.

  • Salary Continuation Plan:

    • Employer-funded agreement to continue income for employees post-death, disability, or retirement.

  • Split-Dollar Plan:

    • Cost-sharing arrangement between employer and employee for life insurance policies.