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Three Creative Ways to Use Life Insurance

Learn about three ways to use life insurance for business succession, estate planning and charitable giving. Review fresh insights.

When most people think about life insurance, they think of a policy that will generate income to help their families meet ongoing living expenses after they die. However, life insurance can be used to accomplish many financial goals other than just providing a death benefit for your loved ones.

These include business succession, estate planning and charitable giving. Following is an explanation of several ways that high-net-worth individuals and families can use life insurance in creative ways.




Business Succession

According to Cadence Bank Executive Vice President Jamie Burns, life insurance can play a key role in the transfer of a closely held or family business to successor owners. Burns says that life insurance is commonly used as the funding vehicle for a buy-sell agreement, which is a tool often used to transfer business ownership between partners or within families.

“The life insurance provides the liquidity needed for successors or partners to buy the business upon the owner’s death or permanent disability,” he explains. 

Alternatively, owners can use life insurance to fund a family limited partnership (FLP). “The owner can give shares of the FLP to his or her heirs but retain business decision-making authority while he or she is still alive,” says Burns. “And children who don’t work in the family business can receive cash, which helps equalize all the family members.”




Estate Planning 

Sheri E. Robinson, CPA, CFP®, AEP®, a Wealth Advisor with Linscomb & Williams, a Cadence Bancorporation subsidiary, explains how life insurance can be used to meet estate planning goals: “Life insurance is a good way to leverage liquidity in order to pay estate taxes. You can give a policy outright or in trust to your heirs so these assets aren’t part of your taxable estate, thus helping your heirs save estate taxes. Gift tax rules do apply.”

The current estate tax rate is 40 percent on estates worth more than $5.43 million, or estates worth $10.86 million for married couples. In 2016, individuals can give away up to $14,000 — or married couples can give away up to $28,000 — to their heirs estate-tax free. 

Using an Irrevocable Life Insurance Trust, or an ILIT, is a common technique. The ILIT would be set up outside of your estate and you would make annual gifts to it that would be used to purchase a life insurance policy payable to your heirs after you die. Your heirs could then use proceeds from the policy to pay any estate taxes that might be due, as well as settle any other estate expenses.




Charitable Giving

Life insurance can make it easier for you to realize tax and estate planning benefits when giving away money to charitable causes that you are passionate about. This can be done by distributing your gifts via a Charitable Remainder Trust (CRT). 

With this strategy, you will place assets in a CRT instead of giving them directly to a charity. You’ll receive a current deduction for the charitable contribution and income generated by the assets held in the CRT. After you die, the assets remaining in the trust will go to the charity.

Meanwhile, you can purchase a life insurance policy with the income from the CRT. Your family will then receive the policy’s death benefit after you die. Depending on how the policy is structured – for example, whether it is owned by the children or by a trust – it could be income-tax and estate-tax free. Either way, CRTs combined with life insurance enable you to give to your favorite charities and provide financially for your family at the same time.


Related articles:

Creating a Plan for Effective Wealth Transfer
Protect Your Assets with a Trust
Why Business Succession Planning is Important… and Getting an Early Start is Critical

Cadence Bank can help you strategize creative uses of life insurance to meet a wide range of different goals. To learn more, contact your Cadence banker today.

Linscomb & Williams is a subsidiary of Cadence Bancorporation.

This article is provided as a free service to you and is for general informational purposes only.
Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article.
The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.

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