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The Role of Insurance in Your Financial/Estate Plan

When used effectively as part of an overall financial or estate plan, life insurance and other types of insurance products can serve many purposes for both individuals and businesses.

 

How Insurance Benefits Individuals

Below are some of the most important reasons why you should consider insurance in your financial/estate plan:

  • Estate Preservation
    You can offset the costs that are incurred at death and preserve your estate by having the insurance proceeds pay them for you. Taxes, liabilities, estate-related and other future costs can all be offset by your permanent coverage.

  • Tax Minimization
    Tax-exempt insurance (such as universal or whole life insurance) can eliminate the annual taxes you pay on your investment growth, as well as those payable when you die. Individuals tired of being punished for strong earnings may appreciate such an opportunity.

  • Estate Maximization
    By taking advantage of the tax-preferred status of universal or whole life insurance, you can maximize the value of assets you plan to pass on to the next generation. The long-term value of these products can often far eclipse what would otherwise be earned through regular investing.

  • Wealth Creation
    If you are in the early stages of wealth accumulation, insurance can be a low-cost way to create a financial safety net in the event there is a loss of an income earner.

  • Income Enhancement
    Certain insurance products can provide a supplemental stream of income during retirement. The net income derived from this strategy may be significantly higher than what is achievable with traditional fixed-income vehicles, especially during times of low interest rates.

  • Liquidity
    When the unexpected occurs, insurance proceeds can provide much needed funds to cover financial obligations like taxes, outstanding bills and last-minute expenses. These proceeds are allowed to bypass the estate and, therefore, the entire probate process. That means these funds will not be held up in court or subject to fees that normally apply to the rest of your estate, such as executor, lawyer and accounting fees.

  • Disability Protection
    Most people understand the benefit of life insurance as financial protection against death, but few realize that the odds are far greater that a person will become disabled. This can mean a major loss of income for your family. You might also consider how long your investment portfolio would last if you were forced to liquidate in order to replace that income. Disability insurance can provide funds to offset living expenses during times of sickness or accident.

  • Charitable Giving
    There are several insurance products and strategies that allow you to provide funds to a charity or charities of your choice in the most cost- and tax-effective way possible.

  • Diversification
    We all have the same pools of capital within which to invest. But life insurance is another pool of capital—a tax-exempt one that can add another layer of diversification to your overall asset allocation strategy. It is an excellent way to complement the rest of your overall portfolio; by moving a small percentage of your non-registered pool into a policy each year, you can further diversify your interests and spread your assets over one more pool of capital, namely your tax-exempt life insurance pool.

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How Insurance Benefits Businesses

Below are some of the top insurance strategies you may wish to consider as a business owner:

  • Funding Buyout Agreements
    In the case of partnerships, the death or disability of one partner can have a devastating effect on the survival of a business. Insurance can provide an excellent method of funding buyout agreements so that the remaining partner takes full control of the business and the surviving family is properly compensated.

  • Shared Ownership
    For companies who wish to retain top employees, the shared ownership of a permanent insurance policy can be an attractive opportunity. It protects the company against the death of the employee, and motivates that person to remain with the firm through the enticement of an attractive, low-cost retirement asset.

  • Minimize Corporate Taxes
    If corporate assets are invested in fixed income, then an insurance strategy can not only reduce its taxable income but it will lower the value of the business by the amount of the investment, thereby reducing the inevitable capital gains tax liability.

  • Maximize Corporate Assets
    By taking advantage of tax-deferred growth inside universal or whole life insurance, corporate assets can avoid accrual taxation and grow to a much greater value than if they were invested in a regular account. Not only that, but upon death, most, if not all, of the proceeds can be paid out of the corporation tax-free. Ordinarily they would be paid out as taxable dividends, requiring approximately 1/3 of the value to be paid in taxes.

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