5 Roles of Life Insurance You May Not Have Considered
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life insuranceLife insurance can serve different purposes for different people. Sure, number one--providing for your loved ones--is pretty straightforward. But there are other roles life insurance plays and reasons why avoiding it can cause confusion and even lawsuits. Here are five benefits of life insurance:

1. To provide your loved ones with immediate liquidity to pay estate taxes and funeral expenses until your estate is administered through probate or a trust. This is especially helpful where an estate consists primarily of illiquid assets like real property, artwork, or even wine collections. 

2. To equalize beneficiaries who have received other assets (say, the family business), or to leave disproportionate assets to beneficiaries if that is your intention. For instance, if your estate plan provides for one of your children to take over a family-run business, you can use life insurance to achieve an equitable result by naming those children who are not involved in the business as beneficiaries. Conversely, you may want to provide for your children equally in your Will, but provide additional funds to a particular child through the use of life insurance.

3. To “buy out” a business partner, so that you need not remain in business with your partner’s spouse when your partner dies, if you cannot afford to buy your partner’s shares in the business from his or her estate.

4. To pay any outstanding mortgages or maintain properties until other assets can be liquidated, to avoid having to sell the asset in a down-market or in a “fire sale.”

5. To ensure that your beneficiaries have funds available to pay other potential future tax liabilities, such as estate, annual estate income, or capital gains taxes.

Before purchasing a life insurance policy, you should give careful consideration as to who will be listed as the owner of the policy. There is a common misconception that life insurance proceeds are not taxable in your estate. However, if the insured person owns an insurance policy, or has “control” over the policy, (i.e., the right to change the beneficiaries on the policy), then the death benefit of the policy will be added to the value of the insured person’s estate, and may therefore be subject to estate taxes. In contrast, if the policy is owned by someone other than the insured, then the insurance proceeds will not be included in the insured person’s taxable estate. There are other planning techniques that may allow you to transfer an existing life insurance policy to another person or to an irrevocable trust and potentially avoid future estate taxes for those insurance proceeds provided you live an additional period of three years after the transfer of the policy.

As you can see, there are many potential benefits of life insurance. In order to figure out the benefits to your particular estate plan, you should consult with your estate planning attorney, financial advisor, and insurance agent.

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