Types Of Life Insurance Policies
Personal Uses of Life Insurance
- Education Funding
- Insurance proceeds may be used to pay for children’s education expenses so they can remain in school, or sometimes a surviving spouse that has worked in the home caring for children will need to receive education or training in order to reenter the job market.
- Survivor Protection
- The death of the primary wage earner can stop the flow of income to a family. Equally devastating can be the death of a nonworking spouse, who cares for minor children. Life insurance can provide the necessary funds for the survivors of the insured to be able to maintain their current lifestyle in the event of his/her death. Planning for survivor protection requires careful examination of current assets, liabilities and income as well as what survivors’ needs may be.
- Estate Creation
- An individual can create an estate through earnings, savings, and investments, but all of these methods require disciplined action. If time is not available, they will all fail. Life insurance, in the event of death, creates an immediate estate. Estate creation is especially important for young families that are getting started and have not yet had enough time to accumulate assets. When an insured purchases a life insurance policy, he/she will have an estate of at least that amount when the first premium is paid. There is no other method of legal means whereby an immediate estate can be created as such a low cost.
- Social Security retirement benefits very rarely are sufficient to allow retired individuals to maintain the same standard of living as when they were working. Life insurance may be useful for those who do not have a retirement plan at their place of employment and need to provide for their own income supplement in retirement. It can provide income protection during working years, and upon retirement, the cash values can be used to supplement income.
- Liquidity in life insurance refers simply to the availability of cash to the insured. Some life policies offer cash values that can be borrowed and used for immediate needs.
- Estate Conservation
- Life insurance proceeds can be used to pay any potential income taxes and/or federal estate taxes so that it is not necessary to sell off assets from the estate to pay these costs.
Business Uses of Life Insurance
- Buy-Sell Funding
- A buy-sell agreement is a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled. A buy-sell agreement between business partners, or between an owner and a key-employee obligates business owners or partners (or the heirs) to withdraw from the business and sell their interest to a surviving partner(s) or key person at a predetermined price. The surviving partner or key person contractually agrees to buy at that price.
- Key Person
- A business can suffer a financial loss because of a premature death of a key employee that has specialized knowledge, skills or business contacts. A business can lessen this risk through the use of key person insurance. In this type of a policy, the business is the applicant, owner, premium payer and beneficiary. In the event of the death of the key person, the business would then use the proceeds for the additional costs of maintaining the business and/or replacing the employee.
- Split Dollar Plans
- Split dollar plans can utilize life insurance to provide employee benefits. Split dollar plans are not a specific type of life insurance, but a way of purchasing permanent life insurance as a fringe benefit for key employees. These types of plans are considered non-qualified and as such, do not require government approval. Typically, the employer’s contributions equal the annual increase in the policy’s cash value, while the employee’s portion represents the sheer death protection and decline annually. If death occurs, the employer receives the part of the death benefit equal to the cash value of the policy or the amount of the premiums paid, whichever is greater. The balance of the death benefit is paid to the employee’s beneficiary.