One of the interesting things about estate planning is that there are so many different strategies that are appropriate in various specific situations. This is one of the reasons why it is almost laughable to see websites claiming that everyone can simply plan their own estate by filling out a generic template form concocted by an Internet marketer. The reason why we say that it is “almost” laughable is because putting the well-being of your family members at risk by going forward without professional guidance is really no laughing matter.
We are all aware of the use of life insurance as a vehicle of income replacement, and this is very important, especially when you have family members who are relying on your income to be able to maintain their standard of living. But life insurance has value beyond that of an income replacement vehicle. With this in mind, let’s take a look at a couple of the strategic ways that life insurance is used in the field of estate planning.
Partners in small businesses often use buy-sell agreements when they are planning their estates, and life insurance is essential to these agreements. One frequently used type of buy-sell agreement is the cross purchase plan.
The way that this works is that the partners in the business take out life insurance policies on one another, the total value of which is equal to an agreed-upon share in the business. Should one of the partners pass away, the survivors pool their respective insurance benefit proceeds and use these funds to buy the share of the deceased partner from his or her family members.
Life insurance is also used to balance inheritances. Let’s say that you had two sons named James and Bill, and you are the sole owner of a successful small business. James works in the business and you would like to leave it to him. The business is by far your most valuable asset. You could take out a life insurance policy on yourself that will pay a benefit that is equal to the value of the business and make Bill the beneficiary.