Life insurance is the quintessential income replacement vehicle, and it is a very important component to most estate plans. Making sure that you have adequate life insurance coverage is a way to protect family members that are relying on your income to maintain their standard of living. This is something for people of all ages to take seriously because you never know what the future holds, and it is certainly much better to be safe than sorry.
But in addition to its value as a vehicle of income replacement, life insurance can be used in other ways when you are planning your estate. We would like to point out two of them here, and the first one involves small business succession planning.
If you are a partner in a small business you would logically want to leave your share to your family members. But if you do this, what will they do with it? If they sell it to anyone who happens to come along, your surviving partner or partners would be stuck with this individual or entity whether they liked it or not. Of course you would also be forced to accept this arrangement if you outlived a partner or partners.
This situation is commonly addressed by something called buy-sell agreements. One of these is the cross purchase plan, and this plan is implemented by each partner taking out an insurance policy on every other. When one of them dies, the insurance company proceeds are used to purchase the share that was owned by the deceased from his or her family.
Another way that life insurance can be used in estate planning that we would like to highlight is the balancing of inheritances. Suppose you are in fact a small business owner but you don’t have any partners. Let’s say you have two children, a daughter and a son, and your daughter has worked full-time in the business for many years. Your business represents the lion’s share of your assets. If you you leave the business to your daughter, your son would be largely left out in the cold. You can address this situation by taking out a life insurance policy on yourself that was valued at the approximate worth of the business, naming your son as the beneficiary.
Mr. Nirenstein is licensed to practice before the courts of the State of Connecticut and the United States District Court. He is a member of the Connecticut and Hartford County Bar Associations, and the Estate and Probate, Elder Law, Business Law and Real Estate Sections of the Connecticut Bar Association.
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