All estate- and business-planning strategies take time to put in place and to work. This creates what is known as the "mortality gap." That is, where does the cash come from to solve the problems that arise before the planned solution is fully in place and funded?
There are a whole host of financial problems involving estate and business planning that are effectively solved with the right life-insurance planning. And critically important, that solution is in the form of cash.
The need for life insurance runs the gamut from having cash available to pay the "Death Tax" and other estate-settlement costs, to enabling the living to continue to afford a quality lifestyle, to funding the survival needs of a business. While there are a whole host of really sophisticated estate-planning techniques, for many the most efficient and least costly way to shift invested wealth multi-generationally and assure a business survival is through insurance structures.
The reality is that your assets, like most everyone else's, are substantially composed of illiquid assets. Primarily closely held stock or real estate. But taxes, debts, and just the costs of paying monthly bills require cash. For those who want to benefit a charity, a small amount of premium properly planned can make a big financial impact in the ultimate generosity of your philanthropy.
In one recent case, good insurance planning was the key in assuring family harmony. When the father, the creator of the family business, died the kids working in the business were able to inherit the business while the kids not in the business got their share of the father's estate from a separate life-insurance trust.
The most difficult parts of successful estate or business planning aren’t just tax issues, but avoiding the difficulties resulting from the normal disfunctionality of human beings.
Valuation of assets for tax and other planning purposes is a major problem that is either dealt with or will have costly, if not, disastrous results if not. Illiquid assets don't bring full value at a forced sale.
What happens when one of your partners dies — or is disabled — and your "buy-sell" agreement isn’t funded? I see this happening all the time. In the last year or two, we have all seen some fire sales of what were some well-structured portfolios or businesses, and the picture isn’t a pretty one. Many of these losses could have been avoided by having the right insurance planning in place.
At its most basic, life insurance is a difficult financial product to beat. It allows the investment income to build up effectively tax free and it enjoys all the benefits of the law of large numbers in computing cost. Clearly, professional advice is needed because life insurance has a mix of economic, legal, and tax components. It takes some experience to know what is the right policy for a particular situation.
Because Congress and the Obama administration just didn't kill off the "Death Tax" once and for all, it is the impetus or the focal point for a great deal of personal and business planning.
People have a lot of financial needs. There is no question in my mind, that life insurance will continue to be highlighted as important in meeting the problems of life that can be solved by having cash available when needed.
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