Could You Use Life Insurance More Creatively?
When they think of life insurance, most people only envision a financial product that will provide income for their loved ones when they die. But this coverage can actually help dealers accomplish a wide range of financial objectives.
Here are some creative uses of life insurance that go beyond income replacement for your family after you die:
As a key component of your business succession plan. Many dealers use a buy-sell agreement to help ensure the smooth transfer of the business to a successor should they die unexpectedly or become disabled. And life insurance is often used to fund the agreement.
Here’s how it works: You appoint a successor – often a family member or key employee – who buys a cash value life insurance policy that pays out upon your death or permanent disability. Your successor then uses the proceeds to buy the dealership at a predetermined value. Your heirs, meanwhile, would receive the remainder of the proceeds to meet their ongoing living expenses.
As part of your charitable giving and estate planning efforts. Using life insurance may enable you to accomplish both charitable giving and estate planning goals using a charitable remainder trust (CRT).
Instead of giving assets directly to a charity, you would place them in the CRT. You would receive a deduction for the charitable contribution as well as income generated by the assets in the CRT while you’re alive. When you die, whatever assets are left in the CRT would go to the charity.
But what about your family? This is where the life insurance comes in: If you buy a life insurance policy with the income from the CRT, your family will receive the policy’s death benefit when you die. This way, you’re providing for your family and giving to charity at the same time.
As a way for your heirs to pay estate taxes. This can be accomplished using an irrevocable life insurance trust (ILIT). You would set up an ILIT outside of your estate and make annual gifts to it. The trust would then buy a life insurance policy with your heirs as the beneficiaries. Your heirs, in turn, could use these proceeds to pay any estate taxes and other expenses due upon your death.
A variety of options
Although less popular as a savings tool in recent years, life insurance still presents dealers with a variety of intriguing options. Consult your financial advisor about whether these strategies would be applicable to your situation.
Dealer Insights - March/April 2016