We’ve advised readers in the past against dropping existing life insurance policies simply because of the temporary increase in the estate tax exemption. Instead, now is the time to review existing policies, possibly simplify techniques or repurpose its use. Not sure how? Here’s a list of seven strategies for repurposing existing life insurance.
- Survivor Income
Life insurance has long been used to protect families from the effect of an untimely death. It
is the only way to guarantee that the potential shortfall in a family’s capital needs will be
covered in the event of a premature death. Often, we think of this as applying to a young
family where there is a shortage of assets; however, it also applies to situations where the
survivors are asset rich but income poor. For example, the family of a business owner
typically only receives income because the owner is busy working in the business.
- Estate Equalization
Most parents want to treat their children equally when dividing up their estate. However,
this may prove impossible with a family business in which only the children active in the
business receive the business. If the business’ value exceeds the active children’s
proportionate share of the estate, it is impossible to treat the children equally. A simple
solution is to use life insurance as an estate equalizer.
- Second Marriages
When there are children from a previous marriage involved, estate planning becomes more
complicated. Consider the following example assuming the husband has children from a
previous marriage. Assume the husband establishes an estate plan that, upon his death,
provides income and principle to maintain his wife in her accustomed standard of living, with the remainder passing to the children at the death of his wife’s subsequent death. This approach has two problems. First, the children must wait until their step-mother’s death to inherit their father’s death. Second, as the remainder beneficiaries, the children have legal rights to challenge the distributions to their step-mother if those distributions exceed (in the children’s opinion) the amount described by the estate plan. A solution to these problems is life insurance on the husband’s life. The policy beneficiaries can either be the wife or the children. If the wife is the beneficiary, the husband can leave his estate to his children. Alternatively, if the children are the beneficiaries, the husband can leave his estate to his wife. In either case, the second wife and children of the first marriage will have no financial involvement with one another after the husband’s death.
- Children with Special Needs
A child with special needs may be eligible for Supplemental Security Income (SSI). Many parents want to supplement this program’s benefits. As a result, they establish, at the death of the surviving parent, a “special-needs” trust for the benefit of the child with special needs. A special needs trust is designed to supplement SSI and Medicaid without disqualifying the child from any government assistance. The special needs trust strategy provides little consolation to parents who do not have funds to provide to the child with special needs. A solution to this problem is for the parents to purchase a life insurance policy. The policy is often owned by the parents and payable to a special needs trust for the benefit of the child. Upon the death of the child with special needs before the complete distribution of the trust, assets remaining in the trust may pass to the other children.
- Life as Alternative Asset in Portfolio
Many portfolios are comprised of stocks, bonds, and mutual funds that may be volatile and fluctuate frequently. Unfortunately, having a valuable investment portfolio does not necessarily mean that today’s value will eventually be passed on to love ones. A market downturn could result in a significant reduction in its value and could jeopardize the financial security of surviving family members. Depending on the type of life insurance policy purchased, life insurance is not tied to market performance. Having an asset that is not correlated to market is tantamount to being diversified.
- Wealth Replacement
Charitable remainder trusts are often used by people who wish to sell highly appreciated assets without generating current capital gains tax liability. The main drawback of using a charitable remainder trust is that upon the death of the donor and the donor’s spouse, the assets remaining in the trust must pass to a qualified charity. A life insurance policy can be purchased for the heirs to replace the wealth passing to charity. Alternatively, life insurance can be purchased to provide a legacy to a favorite charity.
- Business Planning
Life insurance can play an important role for your clients that own businesses. Life insurance can be used to help pay off business debt, to provide key person coverage, and to help fund a buy-sell agreement.
How Can DBS Help?
Even if your client’s estate is not subject to tax, life insurance is uniquely suited to handle many nontax
issues commonly confronted in an estate. DBS’s advanced sales resource, Terri Getman, JD, CLU, ChFC,
RICP, AEP (Distinguished), is here to help you navigate opportunities presented by the legislation.