Life insurance is often seen as a way to protect your loved ones financially after you’re gone, giving you peace of mind that their needs will be met. But it can be much more than that. Life insurance can be a versatile tool in your financial plan, offering benefits that go beyond the basic death benefit.

For individuals, a permanent life insurance plan can play a key role in estate planning by helping to reduce estate taxes. For small business owners, it can protect key employees, provide executive benefits, and help preserve business ownerships. Let’s look in more detail at the different ways to use life insurance.

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Estate Planning and Taxes

If you have a high net worth, estate taxes might be a concern for your heirs. The federal estate tax kicks in above a certain threshold, which, as of 2024, is $13.61 million for individuals and $27.22 million for couples. This exclusion amount is set to drop to $5 million (adjusted for inflation) in 2026 once it sunsets in 2025, making planning even more crucial.

Life insurance can provide the liquidity your beneficiaries need to pay estate taxes without having to sell assets. Since estate taxes are due within nine months of your death, the timely payout from a life insurance policy can be a lifesaver. Moreover, you can direct the death benefit to a charity, supporting a cause you care about while reducing the taxable value of your estate.

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Protecting Key Employees

For business owners, the sudden loss of a key employee can be a significant financial blow. Key person insurance can help mitigate this risk. This type of life insurance policy is taken out by the business on a crucial employee, and the business is the beneficiary. The death benefit can help cover the costs of recruiting and training a replacement, as well as any potential loss in revenue.

If the insured employee doesn’t pass away during their tenure, the policy’s cash value can be redirected toward other business needs or used as deferred compensation for the employee. This makes it a flexible tool for business continuity planning.

Businesses that use this life insurance strategy must get the employee’s approval in writing. They must disclose the terms of the policy, including the insurance amount, and ensure that the employee understands that the business will be the beneficiary.

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Executive Benefits

Life insurance can also be used as part of an executive benefit package. By funding a life insurance policy for an executive, businesses can offer a long-term incentive that also provides a death benefit. The policy can generate cash value over time, which the executive can access, offering them additional financial security and a reason to stay with the company longer.

When structured properly, these plans can provide a steady income stream for executives in retirement, adding another layer of financial stability for your top talent. Keep in mind that, with an executive bonus plan, you would need to have a legal agreement in place explaining how the life insurance funds are to be used.

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Buy-Sell Agreements

In a buy-sell strategy, business owners can protect their interest in the business using a buy-sell contract funded by life insurance to prevent outsiders such as heirs from running or selling the business when one owner dies. If one business owner dies, the other business owner(s) could use the life insurance funds to buy that partner’s stake in the company, rather than sharing ownership with the deceased partner’s family members.

To use life insurance with a buy-sell agreement, you first need to work with an attorney to draft a legal buy-sell agreement that specifies the terms of the sale of the business interest. Then, life insurance would serve as a funding source to buy that business stake so that it remains under the control of the current owners. Essentially, the buy-sell agreement funded with a life insurance benefit can minimize conflicts and help ensure a smooth business transition.

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The Bottom Line

Life insurance is more than just a safety net for your family. It’s a versatile financial tool that can help manage estate taxes, protect your business, and reward key employees.

If we can help you explore how life insurance can fit into your broader financial strategy and meet your specific goals, please schedule a call with our team.

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