For some of you reading this blog, you have had a loved one pass away.
You know that those days are truly some of the darkest. Today we are going to outline a tool you can utilize to protect the people you care about most.
Life Insurance
Life insurance often has two spectrums of consumers. They either love it or they hate it. Today we are going to focus on education.
Why should we buy life insurance?
When should we buy life insurance?
Specific examples of the benefits of life insurance?
These are only a few of the many questions you will get answered when reading this blog.
Let's dive in.
Why do we buy life insurance?
There are many applications for buying life insurance. Today we are going to break down 3 of the most common.
Each of these has a unique solution we are trying to solve for. The common thread that runs through each of these is that you almost never expect each of these to happen in an instant. On your worst day, we need your family to be protected.
1. Supplementing Income For Your Family
Life insurance serves as a crucial income replacement tool, guaranteeing that your family's financial needs are met in your absence.
Case Study: John's Income Replacement
John, the primary earner in his family, understands the significance of financial protection for his loved ones. He has created a great life for his family. Over the course of many years, he has built his business to the point in which his wife can stay home with his kids. He has upgraded his lifestyle with a new house and cars. John is proud of the life he has built for his family. John begins to wonder what happens if he is no longer around to provide for his family. This is when he starts considering insurance.
The Need: A lump sum of money to allow his family to continue living their life. John also has voiced he wants to be able to pay off his mortgage and all liabilities. His goal is to allow his family to live the same life they are living today without any additional income from his wife. After speaking with his advisor they determine this is $3,000,000 of life insurance.
The solution: After a deep conversation about John's need for life insurance his advisor recommends a Term Life Insurance Policy. Let's look at the pros and cons of this type of policy.
Term Life Insurance Summary: A term life insurance policy allows you to pay a specific dollar amount for a specific number of years to get the right to a specific death benefit.
Example:
$3,000,000 Death Benefit
20 Year Term
$1,200 annually
This means that as long as you pay your $1,200 dollar premium every year your family will receive $3,000,000 of death benefit if you die anytime within the next 20 years.
2. Buy-Sell Insurance for Entrepreneurs
For entrepreneurs, life insurance facilitates a seamless transfer of ownership in the event of a partner's demise.
Case Study: Sam and Michael's Business Agreement
Sam and Michael, co-founders of a thriving tech startup, recognize the importance of safeguarding their business interests. What started as a project in college has turned into a multi-million dollar operation. Their most recent unsolicited LOI recently arrived from a national private equity firm. When they saw the number they immediately saw the problem. We have a big issue if one of us passes away. We do not have the financial means to buy the other partner's shares.
The Need: When you own a business with a partner it is key to ensure the business continues on if one of you suddenly passes away. The best way to protect from this happening is planning.
The solution: After reviewing each of their personal balance sheets we determined neither had enough liquidity to afford the shares of the business. After discussing the different types of insurance we have determined that we do not need cash value but rather a death benefit that can purchase the shares.
Term Life Insurance Summary: A term life insurance policy allows you to pay a specific dollar amount for a specific number of years to get the right to a specific death benefit.
Example:
$5,000,000 Death Benefit
10 Year Term
$1,000 annually
This means that as long as the company pays the $1,000 dollar premium every year your partner will receive $5,000,000 if you pass away. He can use these funds to purchase the shares of the company.
When you execute a buy/sell agreement it is key to ensure the beneficiaries are set up properly and it is legally documented in a buy/sell agreement what will happen if you pass away. Without proper legal documentation, this could be a nightmare.
3. Estate Tax Planning
Life insurance serves a critical role in estate planning by furnishing liquidity to cover estate taxes and preserve family wealth. For more information on estate taxes check on this blog.
Case Study: Sophia's Estate Planning Strategy
Sophia, a prosperous entrepreneur, meticulously structures her estate plan to plan for estate taxes. Today her net worth is $30,000,000 well over the $13,610,000 lifetime exemption. She realizes her estate tax bill is going to be millions of dollars and wants to do something about it.
The Need: When you have a net worth over the estate tax limit you need to plan for estate taxes. In this scenario, she is going to owe approximately $6,500,000 in taxes at her death.
The solution: There are two components to this solution. The first is the insurance policy. We would look into a permanent policy for this need. TWe are not solving for a known time frame but rather a a need for a lifetime. The second is how we own the policy. Let's look at both.
Permanent Life Insurance Summary: Permanent insurance has multiple choices that we could look at, but today let's focus on whole life insurance. For this type of solution, we pay a premium for our entire life to get a death benefit that is guaranteed for life. Other benefits to this type of policy include cash accumulation and the ability to borrow against the cash value of the policy.
Example:
$6,500,000 Death Benefit
$50,000 Annual Premium
Protects you for Life
Note that your premium will be much higher in these types of policies and will vary dramatically based on how you design the policy. Just like selling your business, the terms are sometimes more important than the price. With a permanent policy, the design is more important than the annual premium.
When you are executing a permanent life insurance policy for estate taxes it is key to ensure this is outside of your estate. Typically these are held in an ILIT (Irrevocable Life Insurance Trust). This is important because if you do not have the policy outside of your estate it will be subject to further estate taxes.
------------------------------------------------------------------------------------------------------------------------------
At Moment, many of our clients want to protect themselves on their worst days. We have found that life insurance can be confusing. This is why we educate first.
If you are confused about your life insurance policies and want answers schedule a call, and talk with a Moment founder.
Get in Touch With An Advisor
*Moment Private Wealth offers information on tax and estate planning that is general in nature. Tax and Legal advice are not provided by Moment Private Wealth. Consult an attorney or tax professional regarding your specific legal or tax situation.
Commentaires