Life insurance plays a big role in estate planning. In a general sense it may seem obvious that you can certainly purchase life insurance to leave behind some financial resources to loved ones after you pass away. However, life insurance can serve very specific purposes when certain circumstances exist.
For example, life insurance is the operative solution at the root of buy-sell agreements. These agreements are often used by small business partners.
To allow the remaining partners to retain control of the business after the death of one partner, they all enter into such an agreement. One type of buy-sell agreement is the cross purchase plan.
With this agreement, the partners determine the value of each business share. Once this has been accomplished, each of them purchases life insurance on the other. The combination of the proceeds is calculated to equal a share in the business.
Upon the death of a partner, this money is used to buy that share from the family of the deceased partner.
Life insurance can also be used to balance inheritances. Let’s say that under a similar scenario you and another person were partners in a business.Your son works in the business, and your partner would have no problem with your son assuming your role in the business after you pass away.
You also have a daughter however, and the value of your share in the business is your most significant asset.
It would be possible to balance inheritances by taking out a life insurance policy equal to the business share and making your daughter the beneficiary.
Inheritance balancing through the purchase of life insurance could be useful any time that you wanted to give a particular piece of valuable property to a certain loved one whether it was a business share or something else.