Life Insurance: A Strategic Wealth Transfer & Business Tool

While life insurance is essential for taking care of family members when you die, it can also be a critical strategic tool when it comes to wealth management. The right strategy can effectively take assets that you won’t need in your lifetime and position these assets for an efficient transfer to your heirs.

A life policy can also be used to protect your business against financial loss that may result from the death of a partner. For example, if you have a key person who generates most of the sales, their death could have a devastating impact on your business. The proceeds from a key person life policy can help supplement your cash flow until you find a replacement.

A life policy can also be used to help buy out a business partner’s stake in the business from their beneficiaries so you don’t suddenly find yourself running the business with the spouse of your deceased business partner.

Consider the following:

Will your beneficiaries have enough liquidity to pay estate taxes?
Will there be a financial hardship if a business owner dies?
Do you have enough liquidity to buy out a business partner’s spouse/beneficiary?

Click here to learn more about leveraging a life insurance policy to transfer wealth and protect your business.

Key Person Insurance

Will your children have enough cash to pay estate taxes when you die?
People with substantial wealth can expect their heirs to pay as much as 40% in estate tax on the non-exempt value of their fortunes when they die. This federal exemption currently stands at $5.45 million for a single person or $10.9 million for a couple. Anything over those amounts is fully taxable. One good way to plan for estate taxes is with a life insurance policy that pays off Uncle Sam as a death benefit. This is especially important for business owners, who may have a substantial portion of their wealth tied up in their companies. You probably don’t want your heirs to have to dismantle the company you’ve worked so hard to build in order to pay estate taxes. All business owners should consider a life insurance policy as an element of their business succession plan.

Would the loss of your business owner create a financial hardship for the business?
It’s likely that your company’s owner is more than just a figurehead. He or she may serve as president and CEO, as chief rainmaker, or even as primary designer or strategist. Have you considered what would happen if the company lost its most important asset? How long it will take to replace your number one “employee,” and what would the company do in the meantime? Depending on the size of your business, you may actually have several key employees. Securing key person insurance for each “irreplaceable” executive can help keep the company running until a suitable replacement can be found.

If your business partner dies, do you have enough liquid cash to buy out your partner’s spouse or heir(s)?
In a partnership (or any business with multiple owners), each owner’s interest in a company goes to the person’s spouse or heirs upon his or her death. Problems can occur when the business doesn’t have enough cash on hand to buy out the heirs—or if the heirs don’t want to sell. This is easy to prevent with a “buy-sell agreement” funded by life insurance policies on each owner. The insurance pays the value of the deceased partner’s ownership interest, and the buy-sell agreement ensures continuity of the business by passing ownership back to the other partner(s).