Whole Life vs. Term Life Insurance
Though there are some hybrid forms, the most widely used types of life insurance are whole life and term life insurance. When you have whole life insurance, a portion of your premiums is set aside as an interest-earning savings component. This is called its “cash value.”
You can take out loans against the cash value, and you can withdraw it if you choose to do so. Whole life insurance is relatively expensive because you are definitely going to get something in return for your premium payments.
To provide an example, a healthy, non-smoking man that is in the 45 to 55 age group can expect to pay between $432 and $674 a month for $250,000 of coverage. The premiums for a woman are about $100 a month less.
Term life insurance is a more suitable income replacement vehicle for relatively young adults that want to protect their families for a particular period of time. There is no cash value, but as a result, the premiums are much lower for the same death benefit.
A 35-year-old Cincinnati woman that is purchasing a policy with a $250,000 death benefit would pay between $12 and $18 a month depending on their health.
Since the coverage is so affordable, there is no reason to take any chances with the well-being of your loved ones.
In addition to its utilization as an income replacement vehicle, life insurance can also be used to bolster your legacy. Some people will buy it to cover the final expenses, and high net worth individuals will sometimes use it to pay their estate taxes.
Planning for Small Business Partners
Estate planning for small business partners can involve the use of life insurance. With the buy-sell agreement that is called the cross purchase plan, each partner will take out life insurance policies on the others.
The payout will equal the value of a share of the business. When one partner dies, the proceeds are collected, and they are used to purchase the deceased partner share.
It is also possible for the business as an entity to purchase policies on all the co-owners.
These agreements can be used for general succession purposes so people can choose to retire or step away for some other reason. The buyout price can be set in contractual terms, and life insurance does not necessarily have to be the source of the funding for a purchase.
Let’s say that you own a brewpub and it became very popular, so you opened up a couple of new locations. After graduation from college, your son helps you manage the businesses, and he contributes a great deal over the years.
Your daughter decided to go in a different career direction. You want to leave equal inheritances to your two children, but you are going to leave the brewpubs your son.
Under these circumstances, you could use life insurance to balance the inheritances. You simply take out a policy that is equal to the value of your son’s inheritance and you can make your daughter the beneficiary.
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