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B. special uses of life insurance

B. A few special uses of life insurance.

1. Life insurance proceeds are a guaranteed, quick source of funds for the payment of post-death obligations. Despite maximal planning, substantial federal estate tax might be due. (Remember, after the first $1 million (in 2003, $1.5 million in 2004) in estate value, rates start around 40%!) This can present a serious problem when the estate consists of non-liquid assets, like real estate. Life insurance can provide tax money, so that a “fire sale” of assets, to raise cash under time pressure, is avoided. Family business owners often underestimate what their companies are worth for federal estate tax purposes. Insurance can prevent a forced sale or liquidation of the business.

2. Life insurance can and should play an integral part in many buy/sell and other business continuation arrangements. A family’s biggest asset and primary source of income might be its share of a business owned by several unrelated partners. When one of these partners dies, what happens to his/her share? Will there have to be a sale to outsiders, or liquidation of the company just to pay that partner’s post-death obligations?

An agreement should be made whereby the surviving owners of a business (or the business itself) are given the right to purchase the deceased partner’s share. There are many variations on this theme, but funds must be available to honor the agreement. There are life insurance products specifically designed for this purpose.

3. “Second to die” (survivorship life) policies pay only upon the death of which ever spouse (or other insured person) dies last. Survivorship life policies are relatively new, and there are many variations. They can be either term or whole life.

Frequently, a need is anticipated strictly for tax cash. With the unlimited marital deduction having been used after the death of the first spouse, it is often only at the second death that federal estate tax is actually payable. Likewise, business partners might recognize that ready cash needs to be available to fund their business continuation plan. In these cases, survivorship life insurance can be a cheaper way to go than purchasing two individual policies. A “second to die” policy can also be used as an income replacement fund, for a family able to financially withstand the loss of one breadwinner, but not both.

However, if it is not necessary to keep premiums to the bare minimum, buying even one traditional life policy might be a better overall deal than a “second to die” policy. The rationale goes like this: If you insure one spouse, and he/she dies second, you are in much the same situation as if you had bought a second to die policy, anyway. If he/she dies first, however, the policy proceeds go to the survivor. True enough, this payment comes before the anticipated need. But, so what? The survivor can just invest the money till it is needed.

Survivorship life is definitely something to consider for those in certain situations. One has to lay out options and use real numbers, though, to know if it is the best choice.

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