When Life Insurance Is a Planning Tool — and When It Is Just a Policy

Insurance advisory at Financial Planning Simplified sits inside the broader plan. That sentence is easy to write and easy to violate. The way to keep it honest is to name the job before anyone talks about a product.

Jobs insurance can do well

• Create cash so a tax bill on death does not force a sale of shares or property

• Fund a shareholder’s obligation to buy a deceased partner’s interest

• Replace the economic contribution of a person the business cannot quickly replace

• Provide cash so one child can keep the company while others receive equivalent value

• Support a spouse’s security while growth shares sit in a trust or with an operating child

Questions that should be answered first

Who should own the policy — the individual, the operating company, or a holdco? Who should be the beneficiary? What happens if the shareholder agreement and the beneficiary designation disagree? How does the premium get paid in a tax-aware way? Those questions are structure questions. An illustration cannot answer them.

When we would rather wait

If the company is in the middle of cleanup, if the freeze has not been designed, or if the family has not decided who will own the future growth, a large permanent policy can freeze the wrong assumption into a 20-year contract. Sometimes term coverage is a bridge. Sometimes the right next step is no new policy at all.

What prospects should expect

A needs-based discussion, coordinated with the rest of the plan, explained without theatre. If insurance is not needed, that is a complete answer.

Key takeaways

• Common planning jobs for insurance include funding tax on death, supporting a buy-sell, protecting against the loss of a key person, and equalizing an estate.

• The amount, owner, and beneficiary should follow the corporate and family structure, not precede it.

• A policy without a job is an expense. A policy that matches a documented need is a tool.

• Recommendations should be explainable in plain language.

A next step, if this sounds familiar

If you already own policies, a useful review asks what job each policy is doing today. If you own none, the useful first question is still the plan, not the illustration.

The first conversation is a discovery meeting, not a product pitch. You should leave with a clearer picture of your current path and whether more coordinated planning would be useful.

This article is general information for educational purposes. It is not legal, tax, accounting, or insurance advice and should not be relied on as a recommendation for any particular structure, product, or transaction. Rules affecting trusts, corporations, the lifetime capital gains exemption, probate, and insurance change and depend on individual facts. Speak with qualified advisors about your own situation before making decisions.

Related services

If this article is relevant to your situation, these Financial Planning Simplified services go into more detail:

• Insurance Advisory

• Estate Planning & Family Trusts