Here Are 4 Purposes of Life Insurance

The number one reason to have life insurance is of course to protect your beneficiaries in the event of your untimely death.

It is clear. All other reasons are secondary, although for some people they may be considered more important in certain circumstances.

The Purpose 1: See protection for beneficiaries

Protecting your survivors means replacing the income you generate in the event of your untimely death. 

If you have children, you may spend your income on expenses.

If you die, the life insurance death benefit replaces your income so you don't have to suffer financially.

If you have a mortgage on your home, a life insurance death benefit can help your family stay in your home after your death.

Life insurance can help you overcome having to make a complete life change when you lose half or more of your income.

Finally, if you are a joint heir to the business, you can purchase a business insurance policy so that if you die, the beneficiary will inherit the business's death benefit from your heirs.
 

The Purpose 2: Use life insurance as an investment

Another purpose of having life insurance is to use it as part of your investment portfolio.

Most financial advisors encourage you to balance your money so that if one type of investment falls (such as the stock market), another type of investment may rise (perhaps bonds or real estate).

By balancing your balance sheet and diversifying your investments, you can weather a storm in one area while some assets rise or stay flat in other areas.

Some life insurance policies are actually long-term policies where you can contribute and withdraw funds before you die. These so-called financial accounts are actually savings accounts that create value and protect you over time.

While these plans don't require the highest interest you earn, they're tax-free, so you get a higher return than simply putting money into a savings account where you don't have to pay taxes.

The Purpose 3: Use life insurance as a tax haven

 Life insurance can play two roles in the taxpayer's investment;

• Money withdrawn from cash will not be taxed until you withdraw it.
• Income from death benefits is not taxed on your survivors.
  

Your cash flow system generates deferred revenue, which increases your income.

Now consider that death benefits are not taxable to your survivors, and use the same formula to compare taxable income to non-taxable income:

Let's say you currently earn $60,000 a year and purchase a $180,000 life insurance policy to cover you for the remaining three years of no income. If you die, your estate will receive the full $180,000 and there will be no tax.

While these examples may seem a little complicated, the point is simple. Because it comes from the cash value of death settlements and life insurance, the tax is deferred, like a tax-deferred shelter.
 

The Purpose 4: Use life insurance as part of your estate plan

In addition to being a tax haven for you and your survivors, life insurance can be an important part of estate planning—the distribution of wealth after death.

Currently, the federal tax code exempts the first $650,000 of estates from federal tax (this amount will increase over the next few years).

Most states have the same or equal estate tax. In fact, most people don't care much about the taxes they spend on their property. Also, most spouses jointly own property and assets, so the surviving spouse or owner is not subject to estate tax, even if the property is larger than the law allows.

But if your property is worth more than the law allows, how do you let your wealth go to your survivors, not the government? This is where life insurance and life insurance funds come in.
For this type of estate planning, consult an expert who can advise you and set up an appropriate vehicle. In short, it works like this:

• It constitutes an irrevocable life insurance trust to which annual contributions are made. A trust is actually a life insurance policy that is tax-free for your children or survivors. You cannot withdraw this money for any reason (hence the term irrevocable).
• You and your spouse left your children as permitted by law at the time, so this money is also tax-free.
• You will donate the remaining amount to an eligible charity of your choice, which by definition is exempt from estate tax. If you don't donate the remaining amount to charity, it will be considered part of your estate and your heirs will have to pay taxes for it.
  

In this case, it would take the IRS out of the picture. Using a portion of your estate, you purchase a tax-free life insurance policy so that your heirs will receive the same amount equal to your estate as before any estate taxes.

Also, he donates most of his fortune to charities rather than the government. The only loser is the IRS (the other side wins: life insurance company, which bills you a lot for this policy over several years). But your heirs have nothing to lose! Isn't that the point of estate planning?

Don't try to do this complicated process yourself. A qualified professional can help you sort out the details and prevent you from making costly mistakes.