Life Insurance

General Applications of Life Insurance

Life insurance is a unique asset that can be employed to tackle some of life’s most challenging financial dilemmas.

Death Benefits for Life Insurance

Establish an estate

When time or other conditions have prevented an estate owner from amassing sufficient assets to provide for his or her loved ones, life insurance can aid in creating an immediate estate.

Cover death taxes and other costs of estate settlement

These expenses can range from a minimum of three to four percent to over 40 percent of the estate. Federal Estate Taxes are payable nine months following death.

Finance a business transfer

Business proprietors often agree to purchase a deceased owner’s stake from his or her estate after death. Life insurance provides the readily available cash to aid in funding the transaction.

Pay off a home mortgage

Many individuals wish to pass on the family home to their spouse or children free from any mortgage. Often a decreasing term policy is utilized, which lessens in face value as the mortgage balance decreases.

Safeguard a business from the loss of a key employee

Securing and retaining key employees is challenging. Their premature death may lead to a significant financial burden on the business.

Replace a charitable donation

Donations of appreciated assets to a charitable remainder trust can deliver income and estate tax benefits. Life assurance can assist in replacing the value of the donated assets. Proceeds from life assurance policies can also be directly paid to a charity.

Settle loans

Personal or business loans can be settled with insurance proceeds.

Balance out inheritances

When the family business is passed on to children who are involved in it, life insurance can aid in providing an equal share to the other children.

Accelerated death benefits

Federal tax legislation permits a “terminally ill” individual to receive the death benefits of a life assurance policy on his or her life free of income tax. Such “living benefits,” received before death, can allow a person to settle medical bills or other costs and assist in maintaining their dignity by avoiding financial ruin. If specific conditions are met, a “chronically ill” person may also receive advanced death benefits exempt from federal income tax.1

Existing life assurance policies should be reviewed to confirm that policy provisions permit the payment of such “advanced death” benefits.

Additional Applications of Life Insurance

While life insurance products are primarily employed for death benefit protection, they are also utilized for long-term accumulation objectives.

College fund for children or grandchildren

Cash value increments in a policy on a minor's life (or the parent's life) can be used to assist in funding higher education expenses.

Boost retirement funds

Accessible cash values can also serve as an “emergency fund,” if needed, or a source of loans, since life assurance policies often include features permitting borrowing against these cash values.2
1 The discussion here concerns federal income tax law; state or local tax law may vary.

2 A policy loan or withdrawal will generally reduce cash values and death benefits. If a policy lapses or is surrendered with a loan outstanding, the loan will be treated as taxable income in the current year, to the extent of gain in the policy. Policies considered to be modified endowment contracts (MECs) are subject to special rules.

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Financial Planning