There are nearly 2,000 life insurance companies actively marketing life insurance coverage in the United States. Most of these companies offer level premium whole life policies as well as other permanent forms of life insurance. In addition to commercial insurance companies, some fraternal organizations, savings banks, professional associations, membership organizations, and stock brokerage houses offer level premium whole life policies. Prospective insureds can purchase policies through many agents representing licensed insurance companies.
In general, some type of life insurance is indicated when a person needs or wants to provide an immediate estate upon his or her death. This need or desire typically stems from one or more of the following reasons.
- To provide income for dependent family members until they become self-supporting after the head of household dies.
- To liquidate consumer or business debts or mortgages, or to create a fund that would enable the surviving family members to do so when the head of household dies.
- To provide large amounts of cash at death for children’s college expenses or other capital needs.
- To provide cash for federal estate and state inheritance taxes, funeral expenses, and administration costs.
- To provide funds for the continuation of a business through a “buy-sell” agreement.
- To indemnify a business for the loss of a key employee.
- To help recruit, retain, retire, or reward one or more key employees through a salary continuation plan and to finance the company’s obligations under that plan to the dependents of a deceased key employee.
- To fund bequests of capital to children, grandchildren, or others without the erosion often caused by probate costs, inheritance taxes, income taxes, federal estate taxes, transfer fees, or the generation-skipping transfer tax.
- To fund charitable bequests.
- To preserve the confidentiality of financial affairs. Life insurance proceeds payable to someone other than the deceased’s estate are not part of the probate estate and are not a matter of public record. It is not unusual for a beneficiary to be a lover, illegitimate child, or to have some other relationship to the insured that the insured may not want to publicly acknowledge. Likewise, the insured may not want the amount payable to the beneficiary to become a matter of public record.
- To assure nearly instant access to cash for surviving dependents. Insurers generally pay life insurance proceeds to beneficiaries within days of the claim. There is no delay, as might be the case with other types of assets, because of the intervention of state or other governmental bodies due to settlement of tax issues, or because of claims by the decedent’s creditors.
- To direct family assets to family members in a way that minimizes state, local, and federal taxes.
- Level premium whole life, in particular, is the preferred type of policy when the need is long-term and there is a desire to maintain a relatively fixed annual premium cost. For many families, it is the most “affordable” form of long-term coverage on the principal breadwinners.
- Level premium whole life may satisfy various business-related life insurance needs (e.g., financing vehicles for buy-sell agreements, key person insurance and nonqualified deferred compensation arrangements). It is especially suitable if the objective is also to receive tax-sheltered returns and the company has accumulated earnings problems. The cash buildup in life insurance policies held for legitimate business purposes is not counted towards the accumulated earnings limitation.
- Level premium whole life insurance is often the preferred type of insurance for split-dollar arrangements. (See Chapter 41 for a further discussion.)
- Level premium whole life is a tax-sheltered way to finance post-retirement health insurance for a selected group of executives or key employees by using life insurance policies on their lives. Cash values are available to the corporation to help meet future cash needs for health insurance premium payments for retirees. When the employee dies, the corporation receives the death proceeds free from federal income tax (except for some potential alternative minimum tax liability). The corporation is reimbursed for part or all of its costs for the post-retirement health insurance. Corporate Owned Life Insurance (COLI) offers certain advantages over other methods for recovering post-retirement health insurance liabilities.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM