When it comes to estate planning, it's helpful to think of life insurance simply as a source of funds that arrives when it's most needed. The best way to use that money depends on your specific circumstances, but there are several ways that life insurance is useful for a business owner. For example, a life insurance policy can:
- Pay for the expense of hiring and training new employees to replace the contributions you made to the business
- Protect the company from liability or instability caused by your death
- Provide a cushion for six months to one year of operating costs while your business adjusts to its new operating environment
- Provide financial assistance for buy-sell agreements
- Equalize a business inheritance when you're leaving your share of the company to only one child
- Protect your family from any business income loss related to your death
Using Premium Financing to Obtain the Necessary Coverage
Depending on the nature of your business, you may find that your succession plan requires a rather substantial life insurance policy. Life insurance policies purchased in the United States are generally cheaper and provide more generous coverage than those available in the Mexican financial system. However, permanent life insurance (the type that is recommended for business owners) is still five to six times more expensive than term life insurance.
When your coverage needs exceed $25 to $30 million, or your annual premiums are more than $250,000 to $500,000, premium financing may be the most effective way to obtain the necessary coverage. Premium financing involves taking out a third-party loan to pay for the premiums and agreeing to repay the loan in regular installments. If you pass away before the debt is satisfied, the balance is then repaid with the insurance proceeds.
Although this approach is not without risk, premium financing allows high net worth individuals to obtain the maximum coverage they need to protect their business and family without immediately liquidating assets to pay for upfront premiums. Lower than normal interest rates can make this option even more attractive.
Let Us Help You Plan for the Future
MEG International Counsel's international estate planning attorneys are well-equipped to address the unique needs of Mexican or Latin American business owners and can advise you on the best way to incorporate life insurance into your business succession plan as well as your general estate plan. To schedule a consultation, contact us today.
To help you learn more about the value of life insurance as an estate planning tool, we encourage you to request a copy of our whitepaper, How Should Mexican Residents Hold Life Insurance Policies in the United States?