Life insurance – based wealth management strategies can be divided into two categories — those for wealth preservation and those for wealth creation and accumulation.
The following represent these strategy types:
- Term Life Insurance: Term insurance is like leasing a car. You purchase death benefits for a specified period — usually 5, 10 or 20 years. When the period is over, it’s like turning in the leased car. The deal is done and you walk away. Term insurance pays a specific lump sum to your designated beneficiary if you should die during the term of the policy. The policy protects your family by providing money they can invest to replace your salary, and to cover immediate expenses incurred by your death. Term life insurance is best for young, growing families, whose financial needs are especially high but who often have limited resources to cover those needs.
- Permanent Life Insurance: Permanent, or “Cash Value,” Life Insurance is like buying the car you plan to drive forever. As long as you pay the premiums, permanent insurance stays in force as long as you live. It provides protection for your dependents by paying a death benefit to your designated beneficiary upon your death. In addition, a portion of your premiums are deposited into a tax-deferred cash value account that you can use while you are alive.
- Create a source of savings: Some types of life insurance create a cash value that, if not paid out as a death benefit, can be borrowed or withdrawn on the owner’s request. Since most people make paying their life insurance policy premiums a high priority, buying a cash-value type policy can create a kind of “forced” savings plan. Furthermore, the interest credited is tax deferred (and tax exempt if the money is paid as a death claim).
- Creditor and asset protection: An affluent client is often less concerned with death and taxes than protecting his or her legacy from litigation and creditor claims. Life insurance placed inside an irrevocable trust with special provisions can provide a client with the confidence that the legacy will be protected for the benefit of spouses, children and grandchildren.
- Estate taxes and settlement costs: These expenses can be minimized with proper planning. Survivorship insurance for a married couple or traditional life insurance for a single person can be positioned to provide cash, which the estate can utilize to pay the expenses that remain after planning.
- Income in respect of the decedent (IRD): This often overlooked tax can apply to estates regardless of whether they owe estate taxes. IRD taxes are owed on monies that are in qualified plans, IRAs, and non-qualified tax-deferred annuities that are in the estate upon the death of the account owner. Life insurance is often positioned to pay the income and estate tax on the account.
- Fund a business transfer: Business owners often agree to buy out an associate’s share from his or her estate. These buy-sell agreements are typically funded with insurance, which provides the necessary cash flow for this transaction.
- Protect against key employee loss: Executive fringe benefit plans are used to recruit, retain, reward and retire key employees whose untimely deaths may cause severe financial strains on businesses. Key employee insurance, executive bonus plans and deferred compensation plans are strategies that can protect businesses and executives’ families from these risks.
- Charitable legacy planning: Gifts to charity are federal estate tax–exempt. A client with charitable intent can pass estate assets to charity to avoid federal estate taxes. Wealth replacement trusts funded with life insurance can be used to replace those assets.
- Equalize inheritances: Passing a valuable business to an actively involved child can create the need to compensate other children. Life insurance can give equal amounts to other children who do not have interests in the business.
- Pay final expenses: Life insurance can pay your funeral and burial costs, probate and other estate administration costs, debts and medical expenses not covered by health insurance.