For a family situation, the most common need is to replace the income of a family's income provider in the event of an early death. The most cost-effective way to accomplish this is through the use of term life insurance. Term life insurance is not always promoted by the life insurance agent because the compensation is generally lower for term life insurance than for other kinds of insurance. We advise families to carefully review their needs in order to best evaluate options for life insurance coverage.
Another use of life insurance is for estate planning. If you are going to have a taxable estate, life insurance in the proper trust structure can save you about half the value of the death benefit by avoiding estate taxes on that amount. This can help you get more money without tax into the hands of your heirs. This type of planning requires a lifetime commitment to paying premiums and administering the trust.
For business owners, life insurance can be a good funding vehicle for buy-sell agreements. Basically, life insurance is set up to pay for the buy-out of one owner upon his or her death. This enables the business to continue while the deceased owner's family is paid for his or her share of the business. Another kind of insurance for businesses is key person life insurance, which offsets the cost to a business of losing a key employee due to death.
For those who need additional tax deferral options and have maxed out their IRA and/or retirement plan, life insurance or annuities might be useful. These investment vehicles can be combined with retirement plans for businesses. In the right situation, life insurance or annuities can help you build your wealth over time. However, given the expenses and restrictions, we advise you to look at all of your options before considering life insurance or annuities as investment vehicles.