Most people think that they know what life insurance is all about. But, honestly, there is a lot more to life insurance, and it’s uses, than meets the eye.
Sure, you know the basic premise: You pay a premium and, if something unfortunate happens to you, payment is made to your family. Do you know what that payment is for or the different ways it might be used to help a family?
As Richard Cayne of Meyer International said, “Life insurance is pretty straightforward if you don’t have much money or many assets. But, the more you have, the more interesting it gets.”
He went on to note that the interesting part is what the benefit money is used for and what it is needed for. Here is the most common, and one less common, use for life insurance benefit money:
Common Use of Life Insurance Benefits: Income Replacement
Income replacement is the most basic use of life insurance benefit money. As its name states, this is money paid out to your family to replace the income you would have made. It’s intended to keep your family at the same standard of living that they enjoyed while you were living and working.
This is what most people think of when they think about life insurance and this is, at its very root, the reason that life insurance exists.
Less Common Use of Life Insurance Benefits: To Pay Inheritance Taxes
When you have a family that has many assets in, say, real estate or investments, those assets will get divided up and inherited when the family breadwinner dies.
In many places, any asset worth more than a small amount will be taxed when passed from person to person and the beneficiary is often responsible for that tax. Often, it’s a sizable amount.
So, wealthy life insurance holders may take a higher life insurance policy to cover the taxes that will be levied on the assets they leave to their heirs. If the policyholder in question does not do this, for some reason, it’s quite reasonable that the beneficiary will have to sell the asset in order to pay the tax levied on it.
Here is an example given by Richard Cayne:
Let’s say a father passes away and leaves his son an apartment building worth $20 million that has been in their family for generations. He also gives his son the instruction to never sell the building because it is important to their family legacy.
The capital gain or inheritance tax for his son might be $3 million when he takes possession of the $20 million asset. It’s reasonable to think that the son might not have $3 million sitting in his bank account. So, what does he do if his father has not allowed for the money for the tax to also be included in the benefits? The son is forced to sell the building to pay the tax and not fulfil his father’s wish.
A more financially-savvy life insurance buyer (or one with a savvy life insurance consultant like Richard Cayne and the team at Meyer International) will plan for these events and the money will be there to pay the tax and keep the building in the family, where it belongs.
These are just two of the ways that life insurance benefits are used by families. Keep checking this blog for more information about life insurance, investments and financial planning for the experts at Meyer International.
For further information about life insurance of other investment topics, Richard Cayne and Meyer International can be reached at (+66) 02 611 2561