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Life Insurance as a business asset

Life Insurance can be a viable business asset when used properly.

Life insurance pays the beneficiary of the policy upon the death of the insured person.
Common Uses of Life Insurance in Business are:
  • Collateral for business loans
  • Funding for buy/sell agreements
  • Funding lost profits while seeking a replacement for a key executive
  • Providing benefits to key employees and general employees

Following are the types of Life Insurance

  • Term Insurance
    • Variable term
    • Level premium term
  • Permanent Insurance
    • Whole life
    • Universal life
    • Variable life
    • Variable universal
There are advantages and disadvantages of each type of policy and picking the right one is very important.
Below is a basic description of each:
Term Insurance
Term insurance provides a coverage for a specified period of time. At the end of a set time period, which may be a set number of years or may be at a certain age, the policy will expire. Variable term policies will change during the life of the policy, either decreasing the amount of coverage as the insured gets older, increasing the cost as the insured gets older, or both. Level policies lock in the premium price of the coverage for a specified number of years (typically ten to twenty) before the cost of the premiums can be increased or coverage reduced. The primary advantage of term insurance is price.

Permanent Insurance

Permanent insurance continues to provide coverage for as long as you pay the premiums. The price is based on the age of the insured at the time the policy is purchased, and typically do not increase with age. Because the premiums do not increase with as the insured gets older, the cost of coverage is initially more expensive than term insurance. These policies also have gain a cash value which can be received when if they are surrendered; these policies can also be used as collateral for an inexpensive loan or it can be used to pay premiums
Whole Life insurance has a fixed interest rate and results in guaranteed cash values.
Universal Life insurance is a policy that is “interest driven.” There is a low guaranteed rate of interest, but the policy is purchased with an expectation of higher returns. If returns are low, the policy may require additional payments above the premiums. Universal life policies have limited flexibility in changes to the death benefit and the amount and frequency of premium payments.
Variable Life insurance is backed by a investments selected by the purchaser and therefore has no guarantee on either interest rate or cash value, as well as a minimum guaranteed death benefit. The death benefit and the cash value are based on the performance and value of the investment portfolio.
Variable Universal insurance combines the properties of Universal Life and Variable Life.

Key Items to Consider

Riders are available (at additional cost) to cover:
  • Disability waiver of premium
  • Guaranteed purchase options
  • Coverage of spouse or children
  • Double indemnity for accidental death
Some policies provide for and riders are available for proceeds to be accelerated and paid prior to death in the event of a terminal illness or catastrophic event involving long-term care.
Proceeds from Life insurance are subject to estate tax. Consider having your beneficiary purchase the policies and gift them the funds to make the premium payments.
Always have a secondary beneficiary in case the primary beneficiary passes away at the same time or before you do. If this happens the proceeds go into the estate and can be depleted and delayed in probate.
The cash value of a policy can be used to obtain a loan at an interest rate stated in the policy.
The proceeds of a life insurance policy are generally exempt from income tax.
The cash value of a policy can be used to pay the premiums once the policy has accumulated sufficient cash value.

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