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Using Life Insurance to Fund Estate and Tax Liabilities

Using Life Insurance to Fund Estate and Tax Liabilities

When a liability exists for a company, family or individual, it is prudent to build an asset to match, or offset, the potential requirement for future cash.  A variety of assets can be considered for asset-liability matching, including mutual funds, life insurance, annuities, or other outside investments.

Sources of Liabilities

  • Estate Tax
  • Future Benefit Payments
  • Business Succession / Buyout

Benefits of Life Insurance for Funding

  • The cash value accumulation inside a life insurance contract is free of income tax. The cash value is reflected on company financials as an asset and the asset growth can serve as an offset to emerging corporate liabilities.
  • Life insurance death benefits are delivered free of income tax.
    If cash values are needed during life, they can be withdrawn (to the basis in the contract) or borrowed free of income tax.
  • The various types of life insurance products can be tailored to suit the needs of the purchaser. The products run the gamut from term insurance and fixed premium whole life to indexed universal life and variable universal life. The variable universal life products allow the owner to select investment allocations within the contract which drive cash value accumulations. Survivorship, or ‘second-to-die’ contracts insure two lives and deliver the death benefit at the death of the second insured individual.
  • Life insurance benefits get paid at the time of a triggering event, such as death. This makes funding available to the policyholder, whether it’s the company, a surviving owner, or a surviving spouse or estate heir, so they can make a timely purchase of the business interest or payment of estate liabilities.
  • The death benefit is obtained for relatively low cost over time, and premium payments can often be coordinated with gifting and other estate planning strategies.
  • Availability of sufficient life insurance helps families and businesses avoid an adverse impact following death.
  • As a funding vehicle, life insurance is easy to administer. The premium payments must be made and policy performance monitored. The reporting requirements are minimal.
  • Provides immediate cash for estate tax payments by changing a “hard” asset to a liquid asset.

The variety of product types and tax treatment of life insurance make it a key element in funding estate and business liabilities.  The long-term nature of many of these liabilities match up well with the cash accumulation and death benefit delivery from life insurance.  Working with experienced advisors and insurance professionals can ensure the best selection of planning techniques and funding vehicle for payment of future liabilities.