Traditionally, we think of life insurance as a way to ensure our loved ones are cared for after our death.
But life insurance can also be used to solve a host of other financial headaches – and some of the most interesting uses can come when the house is paid off and the children are out on their own.
Consider this situation: You have a beach house worth $500,000, and it constitutes half of your wealth. Your two sons don’t use it, but your daughter regularly spends her vacations there. You want your daughter to have the beach house, but you aren’t able to leave an equivalent amount to your sons.
The solution: You purchase a life insurance policy for the value of the beach house. When you and your spouse die, your daughter will inherit the beach house that she loves, one son will get your $500,000 in savings, and the other son will get all of your life-insurance payout.
Once you start thinking of life insurance as way to turn a non-liquid asset into a liquid asset, it’s easy to see other ways it can be used to address liquidity problems, often faced by individuals with family businesses or considerable (illiquid) assets.
For example, the owner of a family business could insure himself in order to distribute the worth of the business to his children, who don’t want to join the company.
Or two business partners could use life-insurance policies to allow one partners’ heirs to buy themselves out of their half the business.
This alternative use of life insurance may look tricky, but it’s actually simple.
It essentially relies on life insurance’s intended purpose – providing your heirs with liquidity when they need it most.
Instead of replacing a salary, however, the policy replaces the value of an asset.
Your advisor can help you decide if a life insurance purchase will solve a liquidity – or family – problem for you.