Life Insurance
Develop Your Plan
- Modern life insurance policies can now allow you to have access to large pools of money for long-term care without paying extra monthly premiums.
- Many policies actually have riders built in, at no additional cost, that will allow you to take some or most of the death benefit out to fund long-term care while you’re still alive.
- Many individuals have found that by placing a lump sum inside this kind of policy, they can turn $1 into $2, $3, $4 or even $5 of death benefit that can in turn be used for long term care when needed—we call this leverage, one of the key benefits of life insurance.
- Additionally, some policies can provide a little less leverage with the option of keeping all of your premium liquid in case you need it back.
Common Questions About Life Insurance
How Safe Are These Products?
Life insurance companies have stellar records, in many cases dating back to before the Great Depression. To date, there has never been a recorded instance of a company not paying out a claim on a death benefit due to the company’s inability to do so.
With regard to the investment portion of the product, there are different types of life insurance products that allow the carrier more flexibility in how they invest the “holding tank” funds. These products range from conservative to aggressive and anywhere in between. Although there are pros and cons to all investment vehicles, utilizing insurance products that don’t place your cash value directly into the market, such as whole life insurance or indexed universal life insurance, typically offer modest growth potential with zero potential for loss through market exposure.
How Are These Strategies Typically Used?
Life insurance is first and foremost just that: LIFE INSURANCE! And in many cases the death benefit paid out by life insurance policies is the most beneficial and useful aspect of the product. But the ability to aggressively build cash value and borrow from it tax-free can be an equally attractive and, in some cases, crucial part of one’s planning.
Consider using Tax-Free Loans for:
- College funding – Did you know that “Free Application for Federal Student Aid” (FAFSA) doesn’t look at the cash inside of a life insurance policy as an appropriate means for funding college education? That means that in many cases life insurance can be a used as a tool to help cover the cost of these expenses without disqualifying your children or grandchildren from student aid.
- Unexpected expenses – Depending on how it is structured, life insurance can offer growth potential without sacrificing much-needed liquidity in times of emergency. And, since loans are borrowed from the policy on non-qualified (already-taxed) dollars, there is no limitation on how old one needs to be to withdraw funds from the account.
- Business needs – Life insurance can be structured to provide cash benefits to owners while also providing valuable coverage to the business. You can read more about this in the What Will Happen To My Business topic.
- Retirement – Many people find themselves deep into retirement with a life insurance policy that they may not need anymore. By choosing a policy with lots of growth potential, you can allow yourself the flexibility of utilizing the cash within your policy to supplement your other sources of retirement income tax-free.
Long-term cash accumulation:
- One of the key features of both whole life insurance and indexed universal life insurance is that your principal is protected from market volatility—it is kept safe and sound in the insurer’s conservative portfolio earning a low, safe rate of return.
- In fact, no one has ever lost their money to market volatility in these kinds of policies.
- However, higher returns can be achieved by using just the low yield to safely link your growth to a market index, such as the S&P 500. In this way, your principal is kept safe while exchanging the low guaranteed return for the potential to earn many times that.
Do I Have Enough Long-Term Care?
Startling Statistics:
Did you know that about 70% of people over the age of 65 will require some type of long-term care services during their lifetime?
According to recent studies conducted by the National Clearinghouse for Long-Term Care Information (www.longtermcare.gov), more than 40% will need care in a nursing home. Do you have a plan to help cover these costs?
Why Not?
Why is it that some people don’t own long-term care insurance? Many say it is too expensive and they don’t want to pay for something they may never use. Fair enough—those are valid reasons! So how will you pay for long-term care?
- Rely on your children?
- Depend on Medicaid?
- Use your retirement savings?
- Continue working?
Discover the Real Need
It is important to explore your options and plan ahead. How much coverage will you need?
- Take this planning quiz to help you decide! www.longtermcare.gov
- Find out the cost of care in your state: www.longtermcare.gov
Is My Estate Protected?
Tax-free Death Benefit
When planning your legacy, consider that life insurance allows you to leverage your money in a way that is free of taxes, unlike typical investments that may leave your family with a large tax burden when you die. The proceeds of life insurance are always tax-free. Life insurance is one of the easiest ways to transfer money from this generation to the next. Take a look at your full financial picture and ask yourself 3 questions:
- Would my family’s lifestyle be drastically changed if I died tomorrow?
- Do I have enough saved to pay my debts, so that I don’t burden my loved ones?
- Will my retirement assets grow into a value that will be sufficient to see my spouse through their lifetime?
Avoid Regrets In the Future!
Are you looking for ways to reduce the size of your estate upon death? Are you concerned that the taxes incurred on your estate will significantly reduce the legacy you want to leave behind? Gifting is one way to solve this problem, but exactly how you gift money can make all the difference. Life insurance is an excellent strategy that maximizes your gifting dollars by providing a guaranteed higher value (the death benefit) that is tax-free to beneficiaries upon death.
Protecting Your Loved Ones
As we have already covered, life insurance is the best tool for income replacement during your primary income-earning years. It can also offer much needed cash to supplement the cost of estate taxes upon death. Did you also know that life insurance is very flexible and can be held inside a variety of trusts, thus protecting the benefits from creditors, probate, and other end-of-life hurdles?
What Will Happen To My Business?
No matter the size of your company, as a business owner, you have a responsibility to care for your employees, partners, and customers. The inherent flexibility of life insurance makes it an excellent tool for handling many problems that small business owners often face, such as employee retention, succession planning, and even deferred compensation.
Protect your business
Let’s say you have an employee who is of particular importance to a company. Maybe they are a designer for a clothing line and their good eye for style has made the company very successful. Or perhaps they’re a technical person who understands systems within your company and without that person’s expertise operations would come to a screeching halt. These types of people are extremely valuable to companies and their untimely sudden removal can cause catastrophic financial loss to companies without proper protection.
Key-Person Coverage is purchased on a “key” employee to recoup the financial loss the business would incur upon the employee’s death. Key-Person insurance is owned and paid for by the company. This coverage can provide crucial business stability.
Succession Planning
A typical business owner can often relate to phrases such as “asset rich” and “cash poor,” meaning they typically reinvest personal earnings into their business to build it up to sell later in life as a large part of a retirement plan. The problem arises when a business partner dies unexpectedly and their portion of the company is owed to their beneficiaries. Many times, the equity is tied up in other business assets and is completely inaccessible without selling large portions of the company, thus causing considerable financial loss to the surviving business partner(s).
How can life insurance help? By providing the much needed cash to a spouse or other beneficiaries to buy out the interest in a business without having to liquidate company assets. This is called a buy-sell agreement. In a nutshell, it is a legal contract restricting the right to dispose of a business interest to specified parties according to specified terms, and is most easily executed by life insurance.
Executive Bonuses and Deferred Compensation via Life Insurance
Sometimes called a section 162 plan, an executive bonus arrangement is a private, non-qualified means of rewarding select employees with permanent, cash-value life insurance for the beneficiaries of the executive as well as potential for cash value accumulation. In essence, the executive takes out a life insurance policy on themselves, and the company bonuses the premiums paid by the employee. This bonus is a tax write-off for the company, can be added to the cash value of the policy, and grown for the owner of the life policy, the employee.
The same goal can be reached through a deferred compensation program, whereby the company, not the employee, owns the life insurance policy and the premiums are paid outright by the company. This gives the company more control over the life insurance, but it still acts as a cash bonus to the executive.
Advantages to Cash Value Life Insurance as a Benefit to Employees.
- Provides valuable benefit to employee(s) at little or no expense.
- Flexibility: The business has discretion with regard to who will be covered and to what extent, unlike 401(k)s. As opposed to traditional 401(k) plans where all employees must be able to contribute, in a 162 plan the business owner has flexibility to decide who receives the plan and can use this as a reward for higher earning employees.
- Extremely high contribution potential: Often, based on earnings, age, and other factors, employees can contribute tens of thousands of dollars into plans.
- Portable to employee.
- Potential future supplemental income: Because of the nature of the life insurance investments that are inside of section 162 plans, they are often provide more flexible and sustainable income streams as opposed to traditional 401(k) plans.
Explaining Guaranteed & Non-Guaranteed Income
Non-Guaranteed Income
Your life’s work allows you to receive paychecks until you retire. How do you plan to receive paychecks for the rest of your life so you can stay retired?
There are many sources you may receive retirement income from, but most include the risk of running out of money before you run out of life.
Bonds are often used to create income, but if you are trying to live off the income of safe bonds, you are not going to get paid much as yields are 1-3%. High yield bonds, also know as “junk” bonds, may lose your principal and are generally considered too risky for retirement.
Certificates of Deposit can also create income; however today’s national average yield on a 5-year CD is 0.95%. The income this CD provides would not be very much.
Target Dated Mutual Funds offer no guarantees, place principal at risk, and often do not deliver the results you need. This is because they are not able to control what the markets do and are dependent on consistent market growth over time to create income.
Dividend Paying Stocks can be great until the dividends are reduced or stopped altogether. You have no control over the board of directors, which makes the decision. A stock’s ability to pay dividends is directly related to its profitability, which in turn is impacted by the economy. The repercussions of the 2008/2009 recession are still being dealt with today. Dividend paying stocks can be helpful but offer no guarantees.
Working during Retirement Years will provide income, but there are several issues to be addressed. Do you want to fully retire at some point? Would you like to stop working for a living at age 60, 65, 70? Will you be healthy enough to continue working? Will the economy offer you employment as you age and potentially become less employable? And finally the obvious, if you never quit working, then you will never retire.
Guaranteed Income
Pensions are designed to deliver income during retirement but there are three challenges. First, are you entitled to one? Since the advent of the 401(k), most are not eligible. Second, many are underfunded and will not be capable of delivering sufficient income in retirement. Third, most are dependent on stock market gains over time. Many pension fund managers are counting on an 8% return from the market and some need even higher returns than that. Bill Gross, CEO of PIMCO Bond Funds and manager of the world’s largest bond fund, believes that the stock market will yield a 4-5% return for many years to come.1
Social Security was created to provide you with income for life. This income will last a lifetime because of our government’s ability to print money and raise taxes to keep the income coming. Most are well aware of Social Security. But, did you know that there is potential for you to maximize your payout on Social Security? You can learn more about this in our Social Security section of this website. Although Social Security was never intended to be our sole source of retirement funds, for many it represents 1/3 to 1/2 of their retirement income.
Fixed Indexed Annuities are a type of annuity that provide several attractive features. First, there is no market risk to your principal. Second, you can grow your principal, benefiting by a rising market, but never be hurt when it falls. Third, you can “turn on” income at any time, even as early as thirty days after you have purchased a Fixed Indexed Annuity. Options exist that allow you to fund the annuity with either IRA/401k pre-tax funds or with already taxed funds. Using an IRA or 401k to buy an annuity does not create a taxable event. Your funds will continue to grow tax-free until you start taking income.
Although there are many potential sources of income there are only two that are guaranteed for life: Social Security and annuities. And of the several types of annuities we recommend, Fixed Indexed Annuities have unparalleled versatility in providing protection, growth, and lifetime income for retirement.
1 William H. Gross; “Cult Figures”; http://pimco.com/EN/insights/pages/cult-figures.aspx; accessed 01/01/2013
Life Insurance Glossary
A
Advanced Premium: Pre-paid premium payment made before it’s due. The money is typically held in an account by the insurance company and then paid to the policy when the premium is due.
Amount of Insurance: Amount of coverage purchased. Also known as a face amount.
Annual Renewable Term: A form of term life insurance that automatically renews on a yearly basis with increasing premiums.
Application: Statement of information you provide to insurer used by the company to assess your risk. Along with other underwriting factors, determines your underwriting classification, premium, and eligibility.
B
Beneficiary: Person(s) or entity named in the life insurance policy that receives the death benefit upon the death of the insured.
C
Cash Value: The amount of money that accumulates in a permanent life insurance policy from which a loan or partial surrender can be made (unpaid loans and any accrued interest may affect the death benefit).
Cash Surrender Value: Amount of money the insurance company pays you when you voluntarily terminate the policy before your death or before the policy matures.
Conversion: When all or some of your term life insurance is exchanged into a permanent life insurance policy.
D
Death Benefit: Amount of money paid to the beneficiary upon the death of the insured.
Direct Response: When insurance is sold directly to you by an insurance company via phone, mail, or the Internet.
Dividend: Portion of a company’s profits that may be paid to policyholders in conjunction with a life insurance policy (typically whole life policies). Dividends are a partial return of premium and are not guaranteed.
E
Endorsement: Add-on coverage to your life insurance policy that provides additional benefits or exclusion; may require additional premium (also known as a rider).
Extended Term Insurance: If you fail to pay your premiums, an insurance company can take the cash value in your policy and use it to purchase term insurance. You would then be covered for a specific amount of time depending on how much your cash value was at the time of forfeiture (only available on whole life policies).
F
Face Amount: The amount of coverage purchased (also known as amount of insurance).
Final Expenses: Expenses incurred at the time of a person’s death, including funeral costs, current bills or debt. Life insurance can help cover final expense costs.
G
Grace Period: Amount of time after the premium due date when a premium payment can be made without the insurance policy lapsing.
I
Illustration: Hypothetical representation of how a company computes policy results.
Insured: Person(s) covered under the life insurance policy.
L
LIFE INSURANCE GLOSSARY
Lapse: When a life insurance policy becomes inactive due to non-payment of premiums.
Life Expectancy: The age a person is expected to live. Life expectancy is considered when determining the premium.
Life Insurance: A contract with an insurance company that, in exchange for premium payments, provides a sum of money, known as a death benefit, to beneficiaries upon the insured’s death.
Limited Pay: A type of whole life insurance, where premiums are paid only for a limited number of years; coverage still lasts a lifetime (if no loans are unpaid).
N
Non-Forfeiture Options: A policy provision specifying how the policy cash value can be applied if the policy owner stops making payments.
P
Paid-up Insurance: Amount of permanent life insurance available with no premium payments due after the cash value accrues enough to cover the premium payments.
Participating vs. Non-Participating Policy: A participating policy is a policy that can receive dividends from a life insurance company. A non-participating policy does not receive dividends.
Policy: The contract between the insurance policy owner and the insurance company.
Policy Loan: A loan issued by the life insurance company using the cash value of a life insurance policy as collateral. Loans are charged an interest rate and outstanding loans or unpaid interest may affect the death benefit. Failure to pay the loan balance could result in policy termination.
Policy Owner: The person who owns the insurance policy (also known as the policyholder).
Premium: The periodic payment you make to your insurance company to keep the policy active.
R
Reinstatement: The ability to re-activate your life insurance policy after it has lapsed (subject to review and approval).
Rider: Add-on coverage to your life insurance policy that provides additional benefits or exclusions. A rider may require additional premium (also known as an endorsement).
S
Settlement Options: How the death benefit is paid to the beneficiaries; usually in a lump sum but can also be paid in installments.
Standard Risk: A risk the life insurance company considers common or normal which would qualify you for a standard rate.
Surrender: A full cancellation of your insurance policy.
T
Term Life Insurance: Provides coverage for a certain time period (or term) such as 10, 20 or 30 years. The death benefit is be paid to the beneficiary(ies) if you die during the term.
U
Underwriter: Person who evaluates you for potential risks in order to determine the risk classification and whether or not to insure you.
Underwriting: Process used to assess your eligibility to purchase insurance and your risk classification.
Underwriting Class: The category you’re placed into based on your risk. The underwriting rating class/category impacts your premium (also known as rating or risk classification).
Universal Life Insurance: Long-term life insurance that offers flexible payments, an adjustable death benefit, and the cash value element of whole life insurance.
W
Whole Life Insurance: Permanent coverage that has fixed premiums, a fixed death benefit, and guaranteed cash value. Policy may receive dividends.
