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Strategies Using Life Insurance

Strategies Using Life Insurance

May 22, 2023

What is it?

Life insurance is not only about protecting your survivors in the event of your death. Depending upon the type of policy you purchase, it can also enable you to meet specific life goals: generational wealth transfer, providing for your survivors, and estate settlement costs. If you own a business, life insurance can even fund the purchase of your business interest when you die or decide to sell your business. In addition, life insurance can provide you with certain tax benefits. The following life insurance-related strategies may help you to achieve your various investment objectives.

Buy term and invest the difference

Individuals who buy cash-value life insurance typically do so because it offers them a chance to accrue savings and protect loved ones simultaneously. On the downside, however, cash value life insurance involves higher premiums than term life insurance and may afford you little (or no) opportunity to manage and control your investment.

Depending upon your financial situation and goals, it may be best to buy term life insurance and invest the difference between the term insurance premium and the cash value premium in an investment of your own choosing. Although a certain amount of risk will be involved, it may be possible for you to obtain higher returns on your own, as insurance companies tend to invest quite conservatively. In terms of risk, be aware that many investors who intend to invest the difference end up spending the difference. Also, term insurance does not last indefinitely. When your term is up, your premium to renew may skyrocket, or perhaps you may not even qualify to renew or replace the policy.

Consider life insurance when planning your estate

A comprehensive estate plan will probably make use of life insurance. The proceeds from a life insurance policy will ensure that your survivors have the necessary cash immediately following your death to pay for day-to-day living expenses and estate costs (such as bills and taxes). In addition, because life insurance can be used as a vehicle for making charitable donations, you can accomplish your philanthropic wishes and reduce your estate and gift tax liability at the same time. Life insurance and estate planning can involve complex issues, so it's wise to get expert advice if you're considering this possibility.

Fund your buy-sell agreement with life insurance

If you own a business, you can use life insurance to fund a buy-sell agreement, which is a formal agreement that spells out how a business interest will be transferred if an owner dies or decides to sell his or her interest. There also are other business applications for life insurance; some examples include insuring a key employee, providing insurance as an employee benefit, and funding split-dollar arrangements or qualified retirement plans.

This article was prepared by Broadridge.

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