Life insurance policies
Life insurance enjoys an excellent reputation throughout the world as being a unique financial planning vehicle. In its simplest form, it identifies the policy owner for the financial loss incurred as a result of the death of someone in whom he or she has a definable insurable interest. In its more advanced form, it is an excellent vehicle for tax planning.
There is probably no other financial instrument for any country of the world that provides so many benefits. First and foremost, life insurance is a very tax efficient wealth accumulation vehicle, since the values inside on insurance contract typically grow income tax free. In some countries, life insurance premiums may even be tax deductible, although the deduction is usually limited to small amounts for basic family income protection purposes. In a few countries, funds can be accumulated in a policy income free and then withdrawn tax free after a required period of time.
Second, life insurance is an excellent, tax efficient wealth preservation vehicle, since in many countries it enjoys asset or creditor protection. This applies to the policy owner or insured and even to beneficiaries.
Thirdly, life insurance is also a very tax efficient wealth transfer vehicle, not only for practical reasons, but also for tax reasons. Life insurance death proceeds pass outside of the probate process and are contractual in nature, so it is beyond the scope of forced heir ship laws. Life insurance in some countries enjoys special death tax treatment over other assets.
TYPES OF liFE INSURANCE
Term Insurance: Term insurance is popular in instances where the need for life insurance protection is temporary or where other, more costly forms of insurance are unaffordable. For example, term insurance may be an ideal choice for a young family with children, where insurance protection is vital but the family income may still be modest. As the family grows older and the parents careers take wing, the family income will probably increase, and other types of policies may become more attractive.
Cash Value Insurance: Life insurance that combines a death benefit with a potential tax deferred buildup of money in the policy. The three main kinds of cash value insurance are whole life insurance, variable live insurance, and universal life insurance. In whole life, cash value is accumulated based on the return on the companys investments in stocks, bonds, real estate, and other ventures. In variable life policies, the cash reserves are invested in securities, stocks, and bonds, combining the insurance reserve feature with a mutual fund. Your investment return, therefore, is tied to the performance of the financial markets. In universal life, a policyholders cash value is invested in investments such as money market securities and medium term treasury bonds to build cash value.
Joint-Life Insurance: Under this form of insurance, two or more lives are insured in the same policy and the policy proceeds are payable to the beneficiary at the death of the first insured to die. The lives insured may be a husband and wife or others, such as the owners of a closely held business pursuant to a buy- sell agreement. For example, both spouses may be working outside the home and both their incomes may be needed to support their family, so insurance is needed when either of them dies. Or suppose there are three stockholders of a closely held corporation who have agreed to buy each other out in the event one of them dies. The agreement could be funded with a joint life policy insuring all three of them.
Joint life policies often allow the policy to be split into two or more single life plans. Since a joint life policy usually terminates after the first death, the policies may contain an option for a surviving insured to continue insurance under a separate single life policy or, if there is more than one survivor, under a new joint life policy.
Split-Dollar Insurance: Split-dollar insurance is one of the few employee benefits that an employer can offer to particular key employees without running afoul of too many tax law restrictions. There are variations among split-dollar plans, but basically, life insurance is provided to a particular employee, with the employer paying the part of the insurance premium representing the increase in the current years cash value and the employee paying the balance. The amount paid by the employer is typically a significant part of the premium. The employer then receives the cash value of the policy at the employees death, and the employees beneficiary. Obviously, while the plan remains in effect, the death benefit received by the employer increases and that of the employees beneficiary decreases.
Disability Insurance: Another corporate perk is the ability to provide tax-deductible disability insurance for employees. Premiums paid by a corporation for employee disability insurance coverage are deductible by the corporation and not taxed to the employee. Benefits paid under a disability insurance policy are generally taxable to the employee unless the employee paid the premiums or suffers a permanent injury.
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