What is Insurance Planning?
Life Insurance is a versatile and powerful vehicle that most often is used for the creation of an estate or legacy where the individual has not yet had the time or been able to create it himself. Additionally life insurance is used for the preservation of an estate from the ravages of taxation and other estate costs. It can often times simultaneously result in higher returns and unique tax advantages. Some of the potential uses for insurance are listed below:
Life Insurance has been said to be the great equalizer. It has the wonderful quality of creating tax free cash at a time when it is needed most. It can create as estate when the person insured has not had sufficient time or resources to do so themselves. In cases where the estate owner does not have enough assets to take care of his or her loved ones, life insurance can create an estate immediately available to them at a time when it is needed most.
Pay Taxes at Death
Life insurance provides a fund source to pay for taxes at death, which are due, in most cases, within nine months after death. Proceeds from insurance are almost always tax free and therefore do not add to the tax burden.
Fairness at Inheritance Time
Life insurance enables you to leave relatives and friends an equal amount of benefit without upsetting any of the parties involved. In many cases second marriages with children form a previous marriage is the norm. This can result in rather unique planning challenges that can often times be solved with the creative use of insurance.
Provide for Retirement Funds
There are a variety of insurance products that can earn competitive returns and that may be available during retirement years. Universal Life and Segregated Fund contracts can be used to accumulate additional funding for retirement.
Funding Business Buy\Sell Agreements
Life insurance can provide the liquidity needed to ease the transfer of a business. Liquidity in the form of cash is always necessary when it comes to the successful transfer of a business from the estate of a deceased shareholder or partner to a surviving partner, shareholder or employee. Corporate owned insurance can be used to facilitate a buyout and retire corporate debt which will improve the chances of a business surviving the death of a shareholder or key person.
Gifts to Charities
Life insurance proceeds can be paid directly to charities in place of other assets, which will immediately benefit the charity and the taxpayer.
Payoff Mortgages, Guarantees Loans
A term policy for the value of a mortgage can be an easy way to satisfy a mortgage for the beneficiary. Other types of loans can also be satisfied with life insurance in a similar fashion.
Types of Insurance
Although there are many makes and models of insurance, they can be broken down into three main types:
Term insurance is designed to last a specified amount of time such as 1 year, 5 years, 10 years, or up to a certain age. At the end of this time, the policy expires. In order to continue coverage you must renew the policy for the next period. In most cases, due to the fact that the person has aged, the new premium is higher than it was during the period before.
New evidence of insurability (good health) is usually not required on subsequent renewal dates. Many policies also offer an option to convert the policy into a Whole Life or Universal Life policy without medical evidence if done so before a specific age in the future. (See below for information of Whole Life and Universal Life policies)
The amount of coverage in a term policy may remain level, increase or decrease over the term of the contract.
Most companies impose age restrictions for term policies. Due to the fact that they tend to have a short duration of coverage, most term policies do not have cash values, or the ability to borrow against it.
Whole Life Insurance
Whole Life insurance is the traditional policy with level premium payments and is designed to remain in force over the entire lifetime of the insured. The premiums paid tend to be higher than required to cover the probability of death. By doing this, the policy has a base reserve that builds up. This reserve, along with accumulated interest and the premiums that continue to be paid, cover the years later in life when the insured is more likely to die. Paying the higher premium enables the premium to remain level in later years.
Universal Life Insurance
This is a flexible premium, adjustable benefit policy where current interest rate are applied to most of its benefits. In one contract it blends term insurance and a savings account earning current interest rates or mutual fund like returns. Unlike a whole life policy, its premiums can be increased or decreased, paid when due or at unscheduled dates or stopped entirely and restarted at the owner's will, provided the policy value is adequate to maintain the cost of the insurance. There are also many unique and advantageous tax benefits that can only be had through the use of Universal Life policies.