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Life insurance is a practical and popular planning tool. The reasons for this relate to the basic mechanics of an insurance policy. Premiums are priced relative to policy proceeds. For a married couple, it is common to use second-to-die coverage for estate liquidity needs. But, if the insured owns the coverage or has incidents of ownership, the proceeds are subject to estate tax. Therefore, it may be wise to consider positioning life insurance owned outside of the estate in order to avoid inclusion of the proceeds for tax purposes. Placing life insurance in an irrevocable trust or ownership by adult children are ways to accomplish this.
In addition, life insurance is typically used to fund buy-sell agreements. In a stock redemption, the corporation owns a policy on the life of each shareholder. In a cross purchase, each shareholder owns a policy on the life of each of the other shareholders.
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