Corporate Life Insurance

The Role Of Life Insurance In Estate Planning

Estate shrinkage is closely related to estate liquidity or the lack of liquidity. A certain amount of liquidity is needed to meet estate settlement costs that cause the shrinkage. Those considerations cannot be discussed in a vacuum; they must be applied to the estate owner’s own situation. By performing an estate liquidity analysis, we can help the estate owner ascertain the liquidity necessary to meet future estate settlement costs, considering the value of his present and projected future liquid assets, and the cash deficit, if any.

If a cash deficit is found, additional funds should be made available to fund the deficit. Absent sufficient liquidity, the estate owner may well have to liquidate other properties, most likely at a loss, thus frustrating their broad estate planning objectives. To obviate this, the value of life insurance is well known.

The various types of life insurance coverage and the advantages of life insurance in providing sufficient liquidity to meet estate settlement costs are considered below.

 

Advantages of the Life Insurance Plan for Meeting Estate Settlement Costs

1. Insurance avoids losses from forced sale of estate assets

Losses through the sacrificial sale of estate assets to meet tax and other charges will never defeat the estate plans of the person who has provided sufficient life insurance to promptly meet the liabilities his estate will face.

2. Insurance meets the estate transfer liabilities without borrowing

Instead of leaving the executor to pay interest on the estate costs, and ultimately pay the principal sum too, the estate owner pays the “interest” in the form of life insurance premiums while he lives and the principal never comes due.

3. Insurance avoids the need for cash or liquid securities

The sale of securities at death may generate an income tax liability that depletes the proceeds available for estate liquidity. Life insurance avoids this problem.

4. Insurance pays the estate liabilities for the estate instead of from the estate

The debt created automatically by virtue of and at the time of death is offset by a credit created by the same event. The life insurance premiums—not the estate assets—will pay the charges.

5. Insurance guarantees the full amount of cash whenever death occurs

The insurance plan removes the uncertainties, which must inevitably surround any other plan of meeting these charges—the uncertainties of the future and of death.

6. Insurance helps the executor carry out the estate plan

With the estate free of “encumbrances,” with an opportunity to await favorable conditions for the sale of assets, the executor can carry out the estate plan as the owner would have it carried out.

7. Insurance enables the estate to take advantage of tax discounts

Instead of burdening the estate with penalties for delayed payment, the insurance plan makes it possible to take advantage of the discounts allowed by some states.

8. Insurance is an economical plan for meeting estate costs

“Estate” dollars are needed to meet these estate liabilities, and nowhere else can “estate” dollars be purchased as cheaply as under the insurance plan.

9. Insurance finances the estate liabilities on the installment plan

Income and property taxes are paid in installments year by year. The life insurance plan makes it possible to pay estate liabilities the same way. And if death occurs after only one premium has been paid, the remainder of the charges will be paid by life insurance.

10. Insurance is the only certain solution to the problem of estate costs

Other plans to meet these costs are difficult and uncertain; but the insurance plan, properly arranged, solves the problem —it is a “self-completing program.”

 

Types of Life Insurance Coverage

Term Insurance

Term insurance provides protection only for a specified period of time, whether that’s for five, 10, 15 or 20 years. The premium may be fixed and guaranteed for the entire term or fixed for a limited number of years with expected increases at specified dates.

Whole Life

Life insurance provides coverage for an individual’s whole life, rather than a specified term. A savings component (called cash value or loan value) builds over time and can be used for wealth accumulation. 

Combination Plans

Combination plans are life insurance policies that combine features of term life and whole life.

Universal Life (UL)

Universal life insurance combines the low-cost protection of term insurance with a savings component that is invested in a tax-deferred account, the cash value of which may be available for a loan to the policyholder.

Index Universal Life (IUL)

This is the type of life insurance for which the amount of the payments and the cash value accumulation is determined by the performance of the underlying index funds chosen by the policyholder.  IUL policies offer a limited number of index funds to provide market exposure to various world markets.  Frequently, IUL policies are designed to provide protection from principal loss in volatile markets.

Variable Universal Life (VUL)

This is life insurance for which the amount of the payments and the cash value accumulation is determined by the performance of the underlying investments chosen by the policyholder.  VUL policies offer dozens of investment options to match the investment objectives of the policyholder.  Agents selling such policies must be registered representatives of a broker/dealer licensed by the NASD and registered with the SEC.

Second-to-Die Universal Life Insurance (SUL)

Second-to-die universal life insurance is a form of insurance which pays a death benefit only upon the death of the last surviving insured person, and is often used by a married couple in estate planning. This type of insurance may be either universal or variable life.

1035 exchange

A 1035 exchange is a tax-sheltered exchange of cash value from one life insurance policy to another. This allows an individual to avoid capital gains or losses in the first policy as long as the second policy is of greater or equal cost.

Single-Premium Life Insurance

Single-premium life insurance is a cash-value life insurance requiring one initial lump sum payment.