For many people, the decision to purchase life insurance is somewhat of a given. You’re going to pass away one day, right? So why not leave a pot of cash for those you leave behind?
While purchasing life insurance may seem like a “no-brainer” to many people, the reality is that there are many considerations that should go into purchasing the right policy for you and your estate plan. So what are some of the ways in which life insurance should work in that plan?
Providing Liquidity. While some assets are considered by many to be liquid, it is important to remember that liquidity is more of a sliding scale than an all-or-nothing concept. A home may be considered a liquid assets, but depending on the housing market existing at the time the owners try to sell it, it may be more or less liquid. Right now, for instance, residential real estate is far less liquid than it has been at any other time in the last 15 years. For most people, the vast majority of their wealth lies in what would be considered less-liquid assets such a real estate, retirements accounts and pensions. While this is all well and good while you are alive, the $500,000 home you live in now does not necessarily translate to $500,000 of value that your estate can use to pay off debt or transfer to your heirs when you’re gone. Having a sufficient life insurance policy can provide cash, liquidity to your estate. That liquidity in turn provides flexibly. It allows you to devise those less-liquid assets as part of your estate instead of having to sell them off, often times at highly discounted values.
Maintaining Lifestyle. While many have grown accustomed to a certain standard of living, the reality is that standard would probably have to change if something tragic unexpectedly happened to them. They say that wealth is not a function of income, its a function of spending, and that proves to be no more true than when you pass away leaving a family behind. While your income stream allowed your family to service its debt sufficiently while you were alive, what happens when that income stream has run dry. You may not have lived extravagantly, but what resources will be available to service the debt that remains. Besides providing liquidity, life insurance death benefits allow your estate to pay off deb that would otherwise exist without income to satisfy it.
Creating Equity. Besides being comprised of mostly less-liquid assets, most estates are comprised of a wide variety of types of assets all with an equally varied value. This can become problematic when it comes time to administer your estate upon your death in a way that is fair and equitable to all of your heirs and beneficiaries. Once way to provide that equity is with a sufficient life insurance policy. Let us suppose that, for instance, you want to leave your home to your daughter, who is divorced and has three kids still to raise. But on the other hand, you are concerned about leaving something to your son, who although is not married and does not have the financial challenges as your daughter, is a hard worker and worthy of your legacy. Life insurance is a great way to, as we say in estate planning parlance, “balance the equities.” With the death benefit from a thoughtfully purchased policy, you can leave the less-liquid home to your daughter, and still have sufficient cash to leave to your son. In short, you don’t have to liquidate the house in order to meet all of your primary estate planning goals.
Business Succession Funding. An oft-times overlooked aspect of estate planning, business succession planning in the process of ensuring that your business carries on even when you are not there to be the one at the helm. Although the great majority of shareholders and limited liability operating agreements contain some sort of “buy-back” provision in the event the founders/owners pass away, often times there are insufficient funds, or at least insufficiently liquid funds to purchase the deceased’s owners shares/units. With a life insurance policy that covers the business owner, that owner can ensure that which he has worked a lifetime to build can continue on in profitability for the benefit of his/her family and employees.
The above are just a few examples of how life insurance can help address your very specific estate planning needs. As you can see, it’s not necessarily about having as big a pot of cash as you can afford to pay for during your life. No, life insurance fulfills very specific purposes in the estate planning arena.
Be sure to speak with your attorney, financial planner and/or insurance agent about what life insurance product is right for you.