Ideas, tips and news about life insurance and the uses of life insurance

If you are an owner in a closely held business with other partners or stockholders, here’s a question for you: “Are you prepared to work with your partner’s spouse as your partner?” Why is that question asked? If your partner dies, their share likely goes to their spouse or their children. That means you’re in business with them and they probably will expect their share of profits and cash flow, after all they have living expenses.

What planning could have been done? While all partners are living, you develop a buy-sell agreement for the fair value of each one’s shares. The agreement says that if any of the partners should die their share is bought out. How is this buy-sell agreement funded? You could set aside money or try to pay for it out of cash flow after someone dies.

There are problems with each of these solutions. Setting aside money now is a good idea but there always seems to be something else that needs to be invested in and what if someone dies too soon i.e. before there’s enough money to pay off the heirs? The ideal solution is a method to make the full amount of money available when it is needed.

That answer is life insurance to fund the buy sell agreement. The heirs get full value. The surviving partner(s) keeps the business and doesn’t have to support another family. It’s also better for the heirs since they won’t be financially dependent on a business about which they may know very little – a clean and simple solution.

Also, it’s overlooked sometimes but disability insurance should be bought to cover the buy sell agreement in case of permanent disability.

Here’s the simple, maybe too simple, explanation of the types of life insurance: There’s term life insurance and permanent life insurance. Term means for a period of time. Permanent means for your whole life.

Since term life insurance insures you for a period of time (1 year, 5 years, 10 years, 20 years, 30 years etc.) the insurance company’s risk is limited to that period of time. Since their risk is limited so is your cost (premium). Simply stated, you can outlive term life insurance and if you’re healthy, you’re likely to do so.

Some term policies are renewable which means you can continue the policy after the term is up but at the price for your then older age. Permanent life insurance goes by a variety of names but the most common types are whole life insurance and universal life insurance. Whole life is built to last the rest of your life and guarantees a premium. Your outlay will never increase.

Universal life is also permanent life insurance but has flexibility in premium where you can pay less than whole life but take a risk that you may have to pay more later. (I’ll go into more detail on universal life in a later post on the blog.)

Interestingly, some universal life policies now guarantee the premium. The experts at lifeinsure.com can explain all this thoroughly or get you quotes for all the types of life insurance.

You can also directly quote term life insurance or return of premium life insurance on that site instantly and anonymously to do some comparison shoppping before you talk to anyone.

What is a life insurance trust? In most cases it’s an irrevocable life insurance trust meaning you can’t reverse it or “revoke” it once it’s started. A trust owns the policy through a trustee – a person or institution such as a bank. The trust would have beneficiaries – usually the children.

The purpose of an irrevocable life insurance trust (ILIT) is to have someone or some entity (in this case a trust) own the life insurance, so that this special kind of property called life insurance will not be owned by the insured person or persons. You do this so that when the insured person or persons die, the life insurance benefit is not in the insured’s estate (it’s not their property – it’s owned by the trust) and thus the insurance proceeds will not be taxed for estate tax purposes.

Here’s what happens if someone bought $3,000,000 of life insurance but not in an ILIT, with children as the beneficiaries . Let’s assume their net worth put them in in the 50% estate tax bracket: Life insurance benefit = $3,000,0000 . Estate taxes = $1,500,000. Benefits to children = $1,500,000. What if life insurance were purchased with an irrevocable life insurance trust?

The result would be Life insurance benefit = $3,000,000. Estate taxes = 0. Benefits to children = $3,000,000. When buying life insurance you should look into the use of life insurance trusts. Call the experts at lifeinsure.com who can help you set up your life insurance in the right way. You would go to your attorney to draft any trusts.

Why does someone buy life insurance online instead of from a local agent or your “friend in the business”?

Here are just a few reasons: