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Using Life Insurance to Solve Three Needs

By Linda Moore:

New Baby.Week 1 Term life insurance may be used to accomplish certain business and personal objectives.  That is what some business owners have done.

As an example, let’s say “John” is expanding his practice.  He has constructed a larger office and is bringing a new partner, “William,” on board who is also putting some equity into the business.  The expansion of the business activities, along with the ongoing desire to financially protect his family, resulted in the need for additional life insurance.

John had three needs.  First, the bank required John to obtain life insurance as collateral to qualify for the construction loan.  Second, John and William agreed to use life insurance to fund a buy-sell agreement in case either of them died.  And third, John wanted to add life insurance as a benefit for his family to ensure his wife, Penny, and the children would be financially secure. In order to address these needs, John purchases three separate term life insurance policies, totaling $2 million in coverage.

Three Policies for 3 objectives

1.     John is the owner and insured of a life insurance policy for $250,000.  This life insurance is assigned to John’s bank as collateral for the construction loan, and his wife Penny is the beneficiary.  If John dies before the construction loan is paid off, the bank would have first right to the proceeds to pay off the balance of the loan.  Any amount remaining after paying off the loan would go to Penny.

2.    As part of a buy-sell agreement, John is the owner and beneficiary of a second policy for $1,000,000, insuring the life of John’s new partner, William.  William is also the owner and beneficiary of a policy on John for an equal amount.   The buy-sell agreement stipulates that if either partner dies, the remaining partner will use the life insurance proceeds to buy the property and business from his partner’s estate.  The living partner would then have complete ownership of the business.  This would be considered a funded buy-sell because it gives the living partner the cash needed to buy out the other partner.  Without the funding, the living partner may have to take an additional loan on the business to pay off the estate of his partner.  This could create additional stress and pressure for the on-going business partner.

3.    For the third policy, John is the owner and insured with his wife Penny as the beneficiary.  The purpose of the $750,000 is so that Penny could comfortably continue on with her and the children’s lives.  Also, this money would be used to replace some of John’s lost income.  The money would bridge the gap until financial affairs are in order and the business is sold to its successor, William.

Business owners who wish to explore options for purchasing life insurance need to start by identifying what possible needs they may have.  Sharing those ideas with a competent professional is a good place to start so he/she can explain different arrangements that would be helpful to your business and your family.  A tax advisor should also be consulted, as certain ownership arrangements have estate and/or gift tax consequences.  This type of planning is what can help you face the future with anticipation and not apprehension.

Life insurance policies contain exclusions, limitations, reductions in benefits and terms for keeping them in force.  A financial professional can provide you with costs and complete details.

Life insurance is issued by The Prudential Insurance Company of America and its affiliates, Newark, New Jersey.  Each is solely responsible for its own financial condition and contractual obligations.  Prudential Financial, its affiliates, and their licensed financial professionals do not render tax or legal advice.  Be sure to consult with your tax and legal advisors regarding your personal circumstances.

Provided courtesy of The Prudential Insurance Company of America, Newark, NJ). For more information, contact Linda Moore, a Financial Professional with The Prudential Insurance Company of America’s agency located in Downers Grove, IL. She can be reached at and/or (630)442-6845.

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