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Life Insurance: A Unique Tool for Wealth Creation and Problem Solving

Introduction to Life Insurance

Life insurance is a complex amalgamation of legal, tax, and economic elements. Basically, it is a unique wealth creation tool that assures the accumulation of a desired amount of liquid capital at death. Depending on the plan of insurance, it may also create more or less capital for lifetime needs.
Through its unique capital creation feature and tax advantages, life insurance can help people solve a host of personal and business problems. However, insurers offer a wide variety of life insurance policies that are suited to a broad host of financial planning problems. Once an insurance adviser identifies a client’s problems, the adviser must match the appropriate life insurance products to the problems. To do so, the planner must first fully understand the legal, tax, and economic elements of life insurance and the particular features of each type of policy.
This chapter will provide an overview of, as well as an introduction to, the multi-faceted aspects of life insurance. Use this chapter to gain and maintain perspective and balance. Because life insurance is not really one product but a multiplicity of products, above all, learn to Life insurance is the only certain way to create “instant” capital. That capital, in turn, can be used by clients to solve a multiplicity of personal and business problems. To understand how life insurance can—and should—be used you must first focus on the problems. The planners’ imagination, creativity, and ethical perspectives are the only major boundaries limiting the scope of life insurance’s uses. The planning team must: Solve the Client’s Most Important Problems First
When matching a product to multiple problems, consider which problems are most important to the client and solve those first. Here are the major problems the client’s family will face:
1. Lack of liquidity: Not enough cash to pay death taxes, administrative costs, May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law.
EBSCO Publishing : eBook Comprehensive Academic Collection (EBSCOhost) - printed on 2/9/2021 4:43 PM via UNIVERSITY OF MARYLAND 
2. Improper disposition of assets: The wrong thing goes to the wrong person at the wrong time in the wrong manner. Many times the awesome responsibility of safeguarding, investing, and distributing the income from complex property or the task of running a business interest is thrust upon persons who are unable or unwilling to handle it. Life insurance is often used as a substitute for such property. It can be paid to (or owned by a trust for the benefit of) a beneficiary who cannot or should not manage a complex portfolio or run a business while the more competent, capable, and willing beneficiaries can be left securities or a business interest.
3. Inadequate amounts of income or capital for particular needs at the client’s death, or before: College costs continue to climb. This in turn exhausts funds that might otherwise have been used for retirement and leaves many facing retirement with debt rather than assets. Clients are living longer, and having greater medical expenses during retirement and surprisingly higher (rather than as expected lower) standards of living and consequent maintenance costs. In many cases they have more leisure time to travel, try new hobbies, and spend money than they did before they retired and less of their expenses are paid for after retirement by their
companies. Cash value life and disability insurance are obvious answers to part of these problems if the protection is coordinated with other investment planning.

Understanding the Legal, Tax, and Economic Elements of Life Insurance

4. The value of the client’s assets has not been stabilized or maximized: When all or the bulk of an estate consists of real estate or business interests, the cash required to pay taxes often far outstrips the cash available to pay those taxes. The result is often a forced sale of the assets at the worst possible time. Likewise, a business which loses a key employee through death (or disability) often loses value needlessly. Without a “buy-sell” agreement, the client’s family will seldom obtain a full and fair price for a business interest. The result of the absence of a buy-sell agreement between business owners is a total lack of a market for the business interest or at best a forced sale at pennies on the dollar (a “fire sale”). Life and disability income insurance have been the traditional means of “shock absorbers” to stabilize a business at a key employee’s death or to buy-out and bail out the heirs of a shareholder-employee.
5. Excessive transfer costs: The cost of transferring wealth from one generation to
another continues to increase because of increasing federal and state taxes,
probate costs, attorneys’ fees, and other “slippage.” When property is owned in
more than one state, “ancillary administration” (multiple probates) results in
unexpected aggravation, delay, and expense. In many cases the ownership of
property is set up in a manner that aggravates rather than minimizes the tax
burden and other costs. Life insurance can be set up in a manner that avoids all of these problems.
6. Special needs: Successful clients often express a strong desire to “give back” to their schools, churches, synagogues, communities, or other charitable organizations. Many clients have spouses or children with certain gifts or handicaps which require larger than usual amounts of both capital and income – or who have asset management needs that would not be served by an outright
disposition of property to them. Life insurance is often the most effective means – and sometimes the only way – of raising large amounts of cash to create financialsecurity for an organization or an individual.
Only when the planner has started with and identified the need(s) and the client has expressed preference as to the order of needs should the planner attempt to formulate a strategy. Few clients can solve all their financially-oriented problems simultaneously.
Resources must therefore be allocated to the tools or techniques which are most cost effective in solving these problems.

The advantages offered by life insurance vary with the type of policy and the problem to which the policy is applied. However, all types of life insurance policies provide certain favorable features, which are listed below.
1. Life insurance provides a guarantee of large amounts of cash payable immediately at the death of the insured. The amount of the death benefit payable is usually significantly greater than the premiums paid for the policy.
2. Life insurance proceeds are not part of the probate estate. The only way life insurance benefits become part of probate is when they are paid to or for the benefit of the estate of the insured. Therefore, the insurance company can pay death proceeds to the beneficiary without the delay caused by administration of the estate.

3. There will be no public record of the death benefit amount or to whom it is payable.
4. Life insurance policies generally have some protection against creditors of both the policyowner and of the beneficiary. The amount of protection varies from state to state.
5. Life insurance cash values provide instant availability to cash through policy loans. The interest rate (or interest-rate formula) for policy loans is known in advance and is usually lower than the rate applicable to loans from other sources.
6. The death benefit proceeds from a life insurance policy generally are not subject to federal income taxes.
7. The increases in the cash value of a life insurance policy enjoy federal income tax deferral. Interest earned on policy cash values generally is not taxable unless or until the policyowner surrenders the policy for cash.
8. Life insurance proceeds often are exempt from state inheritance taxes.
9. Despite some highly publicized life insurance company insolvencies, the life insurance industry remains unparalleled in safety among the financial intermediaries such as the savings and loan, banking, and mutual fund industries. It is commonly noted that not a single dollar of death claim has been lost or denied because of a life insurance company insolvency or failure

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