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Life insurance and the real estate industry.

Most people think of life insurance only in terms of family security, yet a majority of the policies issued today protect businesses, not individuals - in the case of an untimely death. And in the real estate industry, life insurance plays a critical role in providing nontaxable assets for companies and investors when a key person passes away, helping organizations avoid unintended ownership, and assisting in the settlement of estate taxes.

Due to the number of loans that pass between investors and property owners, "key person" life insurance policies are perhaps the most important in real estate. What happens if the primary individual involved in a project dies when development is in midstream? Clearly, some of the investment capital has already been spent. Does the lender have to get involved with the project? Does the financing entity have to become a general creditor? Not necessarily. "Key person" life insurance provides an option for investors to collect their money and walk away.

Equally important to acquiring a "key person" life insurance policy is making sure that it has been structured to allow for clear access to the proceeds. Investor-owned policies are almost always the best bet. If the developer holds the policy while it is in force, it may become subject to claims of the company's creditors.

Beyond "key person" insurance, "buy-sell" insurance represents another important type of policy for real estate owners and developers. This protects both the insured partner as well as the insuring partner(s). For the insured partner, a "buy-sell" policy guarantees that, upon death, family members will receive the full value of that partner's interest in the company. At the same time, the insuring partner is protecting the business against the possibility of unintended ownership by using the "buy-sell" policy to purchase the insured parts of the business back from the family.

Finally, life insurance can play an important role in settling estate taxes without disrupting real estate assets. When a person dies, taxes on the estate are due within nine months. Because the average real estate owner is rich in assets, but relatively poor in cash, families of the deceased often find themselves without the necessary liquidity to pay estate taxes. Many times, assets are sold at "fire sale" prices in order to raise the funds. To avoid this unfortunate situation, life insurance policies are available that provide the cash to pay estate taxes. Surviving family members can enjoy their inheritance free of obligations to the IRS, and real estate assets remain intact.

In real estate, timing is everything, and the right type of life insurance policy essentially serves as a letter of credit, providing money just when it is most needed. Thus, well-prepared investors and property owners recognize that life insurance plays a key role in making sure that real estate projects, organizations and heirs receive the funds necessary to continue on, even in the face of a tragic loss. As such, life insurance is an important and effective finance tool that builds trade and real estate leaders.
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Author:Taffet, Gary
Publication:Real Estate Weekly
Article Type:Brief Article
Geographic Code:1USA
Date:Apr 12, 2000
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