Uses of Life Insurance

How Much Coverage: HLV vs Needs (and the Shortcuts)

The human life value approach prices a life as the discounted present value of future net earnings devoted to the family — income only, no goals. The needs approach starts from the survivors' side: total capital needs (final expenses, debts, mortgage, education, spouse's income — including bridging the Social Security blackout period) minus liquid assets. Inside the needs family sit capital needs analysis (lump-sum + income needs; liquidation spends principal, retention preserves it) and the single needs method (fund one priority). The shortcuts: multiple-of-earnings (5–7× salary), the interest-only method (live on earnings, insurer keeps principal), and the arbitrary seat-of-the-pants pick.

Life Insurance as Property & Personal Uses

Life insurance is unique: it's protection AND an asset that can be bought and sold — insurable interest matters only at inception, so the divorced wife's policy on her ex stays in force. Its headline advantage: it creates an immediate estate. Personal uses split into lump-sum needs (final expenses, debt, emergency fund, mortgage redemption, estate conservation, charity) and income needs (survivor income, education, retirement supplement, liquidity), with cash value adding living benefits: loan collateral, low-interest policy loans, and tax-free access up to cost basis. Charitable gifting has two tax flavors: transfer an existing policy → deduct its cash value; buy a new one with the charity as owner and beneficiary → deduct the premiums.

Buy-Sell Agreements: Entity vs Cross-Purchase

A buy-sell agreement guarantees an orderly transfer of the business and cash for the survivors at a prearranged price — life insurance makes sure the money exists on the exact day it's needed. Sole proprietor: the succeeding employee owns, pays for, and is beneficiary of a policy on the proprietor. Partnerships (which legally dissolve at a partner's death) choose between an entity plan — the business owns one policy per partner (3 partners = 3 policies) — and a cross-purchase plan — each partner insures every other partner (3 partners = 6 policies; n × (n−1)). Corporations use the same two shapes; the entity version is a stock redemption plan, with the §303 redemption available when stock is ≥ 35% of the adjusted gross estate.

Key Person Insurance & COLI

Key person insurance indemnifies a business for losing a vital employee: the business is applicant, owner, premium payor, AND beneficiary; the employee is only the insured (textbook third-party ownership — the business's economic interest supplies insurable interest). Four purposes: indemnification, a reserve fund (cash value on the balance sheet), business credit, and favorable taxes — premiums not deductible, proceeds not taxable, and nothing lands in the employee's estate. COLI is the same ownership shape, often with a change-of-insured provision: swap in the replacement employee instead of buying a whole new policy.

Executive Benefit Plans

Four selective, mostly non-qualified ways to reward key people. Deferred compensation: the employee's own pay is postponed to disability/retirement/death, often informally funded with cash value life insurance. Salary continuation: same goal, but funded by the EMPLOYER. The §162 executive bonus: employer pays a deductible bonus, the employee (who owns the policy) pays tax on it and pays the premiums. Split-dollar: employer and employee split premium, cash value, and death benefit — the employee gets coverage they couldn't afford alone.