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February 2015

Life Insurance: Where to Start

Whether you are married or single, a parent or without children, life insurance can play a key role in your financial plans. However, millions of Americans have no life insurance coverage whatsoever, and of those who do, many don’t have enough.

Appreciating the importance of having adequate life insurance is one step, while assessing your own unique needs is quite another.

Where to Start

Many people obtain life insurance when they first have children and then forget about it, except for when the premium bill comes due. But an effective financial plan includes reexamining your life insurance needs continually throughout your life to ensure the assets you’ve accumulated are protected and to provide additional opportunities to create wealth.
As a starting point, determine your net earnings after taxes as well as your routine living expenses. Other factors to include in your calculations include:

  • Any outstanding debt that you owe, such as a mortgage or education loans
  • Future tuition bills for your children
  • Funeral and/or potential uninsured medical costs
  • How much your surviving spouse might need to adequately fund a retirement nest egg

Generally, you’ll want a benefit that will cover all of these expenses. Some planning specialists believe a good rule of thumb is to buy a policy that would provide the equivalent of five to seven times your annual salary. That standardized approach may work for some people, but in reality your decision may not be that simple.

While ensuring the financial security of loved ones is a critical use of life insurance, there are other ways it can be used to meet planning goals throughout your life. For instance, people in their peak earning years can use life insurance to protect their wealth while accumulating additional tax-deferred assets. Older people can use life insurance as an integral part of an estate planning strategy designed to pass more wealth to future generations.

What Type of Policy Is Right for You
Once you have an idea of the coverage you need, evaluate whether term life or permanent life insurance is more appropriate for you. Term life is the more basic and less expensive form of life insurance — particularly for people under age 50. A term policy provides coverage for a predetermined period of time, typically one to 10 years, but policies are also available for longer terms. Premiums increase at the end of each term and can become prohibitively expensive for older individuals. Unlike many other policies, term insurance has no cash value and benefits are paid only if you die during the policy’s term.

Permanent life insurance combines death benefit protection with a tax-deferred savings component. With permanent life insurance, as long as you continue to pay the premiums, you are able to lock in coverage at a level premium rate for the life of the contract. Part of that premium accrues as a tax-deferred cash value. As the policy’s value increases, you may be able to borrow up to 90% tax-free at attractive interest rates. If you do not repay the borrowed money, it will be taxable as income at then-current rates. And if you’re younger than age 59 1/2, you may also be subject to an additional 10% IRS early withdrawal penalty.

Determining the right type and amount of life insurance coverage you need is easier said than done. Your financial professional can help you make an accurate assessment of your needs.

The cost and availability of life insurance depends on such factors as age, current health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insured by having the policy approved. There are also expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges.

© 2012 S&P Capital IQ Financial Communications. All rights reserved.

Is a Million Dollars Enough?

If your clients left $1 million to their family in the form of a life insurance policy’s death benefit, would it be enough? You may be surprised at the answer.

A Quick Case Study

Tom and Susan are a married couple with:

  • A $200,000 mortgage
  • Annual incomes of $60,000 each
  • Two children, ages 2 and 4

In the event Tom or Susan should pass away, they want:

  • To provide for their children’s education
  • Their family to be able to pay off all expenses and debt
  • Their family’s standard of living to remain the same
  • The surviving spouse to retire comfortably

Upon the passing of one spouse, the other spouse receives the $1 million benefit. Subtract from that the mortgage, college costs of $95,0001 and funeral and other final expenses of $5,000, leaving a lump sum of $700,000. A hypothetical return rate of 6% would create an annual income stream of $42,000. That amount replaces only 70% of the spouse’s missing income ($60,000) with no adjustment for inflation.

If Tom and Susan would like to maintain the annual pre-tax income of $60,000 (and assuming a 3% inflation rate and an annual pre-tax investment rate of 6%), the lump sum will last only 14 years.

1 Based upon both children attending school with current tuition of $20,000 a year, taking into account 4% inflation and 8% return on a lump sum of money for 16 and 14 years, respectively.

In the case of Tom and Susan, a surviving spouse would only be able to maintain the family’s current standard of living for 14 years. What are your clients’ needs, and do they have the appropriate coverage in place?

This case study can serve as a valuable illustration and encourage a dialogue between you and your clients regarding the importance of proper life insurance coverage.

Four Health Insurance Options for the Self-Employed

Self-employment is an important career choice for many people. But with this choice comes the need to provide your own health insurance, which can be a formidable expense. The new health care legislation signed into law by President Obama should make it easier for individuals to purchase health insurance. Until all its provisions take effect, if you are self employed and are seeking health care coverage, here are four options.

1. Join your spouse’s plan. If you have a spouse or partner who is or can be enrolled in an employer-sponsored plan, joining his or her plan is usually the simplest and least expensive way to maintain coverage. Nearly all employer-based plans offer coverage to spouses and children, and many provide coverage to domestic partners as well.

2. Look into COBRA coverage. If you formerly worked for an organization that employed 20 or more people and made a group health plan available to employees, you may be able to obtain medical coverage through the federal Consolidated Omnibus Budget Reconciliation Act, known as COBRA. COBRA requires employers to make available to departing employees the option of continuing membership in an employer-sponsored group medical plan at the employee’s expense. You can continue your health insurance under COBRA for yourself and your dependents for 18 months, during which time you can search for the best option as a self-employed person.

3. Check out high-deductible plans. Another option is to enroll in a high-deductible health plan (HDHP) and fund a health savings account (HSA). As the name suggests, high-deductible health plans involve a high deductible or threshold, a minimum of $1,200 for an individual and $2,400 for a family in 2011, below which you must pay all costs. In essence, a high-deductible policy provides coverage for catastrophic situations but not for regular doctor visits and routine care. Such plans can involve complex cost-sharing arrangements in which certain procedures or visits are covered only in part. When considering this option, factor in not only monthly premiums but also the costs of partial out-of-pocket payment for different procedures. Combining an HDHP with a tax-free health savings account can also save you in taxes. You deposit pre-tax dollars into your HSA, and use that money to pay medical expenses that aren’t reimbursed by your health insurance.

4. Investigate coverage through a professional association. A more cost-efficient option may be to enroll in a group plan through a professional association or union. Check with any affiliations you may have (or inquire about any you can join) and ask about group rates for members.

When shopping for the right plan, make sure to compare premiums, coverage, deductibles, and copays. Also keep in mind that after you turn 65, you may be eligible for Medicare, even if you remain self-employed.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

The Benefits of Bypass Trusts

Trying to predict the federal estate tax is about as easy as trying to predict the stock market. After a decade of almost yearly changes, the government has currently legislated a temporary fix that expires 2012. Given the uncertain nature of the tax, couples need to remain vigilant about estate planning. Bypass trusts can help a couple maximize use of the federal estate tax exemption and ultimately bequeath more of their wealth to successive generations.
For bypass trusts to achieve their goal, a couple needs to value their assets, title them appropriately, and review their estate plan every few years to determine whether the trust’s funding mechanisms remain appropriate. Trusts are complicated legal entities, and it is important to seek advice from an estate planning attorney with experience in this area.

Why Consider Bypass Trusts?

A married taxpayer may bequeath an unlimited amount of assets to a spouse without triggering federal estate taxes, a practice known as the unlimited marital deduction. A missed opportunity can arise when a surviving spouse inherits these assets and subsequently dies with an estate that is worth more than the amount of the federal estate tax exemption in effect at the time. In this scenario, the estate tax exemption of the spouse that died first was not used and, in effect, was wasted. Bypass trusts address this situation by maximizing the exemptions of both spouses.

How Bypass Trusts Work

Couples often establish bypass trusts within the framework of a living trust that determines legal ownership of the couple’s assets. Estate planning experts typically recommend that each spouse maintains a bypass trust with assets that are worth close to the value of the current estate tax exemption. Assets within the bypass trusts typically are those that the couple does not intend to use during their lifetimes but instead plans to bequeath to heirs.
Upon the death of the spouse that dies first, the surviving spouse inherits the decedent’s assets that are not part of the decedent’s bypass trust. Because of the unlimited marital deduction, there is no immediate tax liability for these assets. The surviving spouse is the beneficiary of the decedent’s bypass trust, which will not be included in the surviving spouse’s estate. The assets used to fund the decedent’s bypass trust thus bypass the estate tax that otherwise would have been assessed upon the death of the surviving spouse. When the surviving spouse dies, the couple’s heirs become beneficiaries of both bypass trusts.
If you believe that a bypass trust may be suitable for your situation, an estate planning attorney can help you learn more about the details.
© 2011 McGraw-Hill Financial Communications. All rights reserved.

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