life insurance

Serving Southwest Florida

Helping clients plan for their family's future, by creating an efficient, thoughtful and comprehensive estate plan that preserves their legacy and gives them peace of mind.

Communicating Your Estate Plan

This post stresses the importance of communicating your estate plan with your children.  Some $68 trillion will move between generations in the next two decades, reports U.S. News & World Report in the article “Discuss Your Estate Plan With Your Children.” Having this conversation with your adult children, especially if they are members of Generation X, could have a profound impact on the quality of your relationship and your legacy.

Staying on top of and communicating your estate plan with your children will also have an impact on how much of your estate is consumed by estate taxes. The historically high federal exemptions are not going to last forever—even without any federal legislation, they sunset in 2025, which isn’t far away.

One of the purposes of your estate plan is to transfer money as you wish. What most people do is talk with an estate planning attorney to create an estate plan. They create trusts, naming their child as the trustee, or simple wills naming their child as the executor. Then, the parents drop the ball.

Talk with your children about the role of trustee and/or executor. Help them understand the responsibilities that these roles require and ask if they will be comfortable handling the decision making, as well as the money. Include the Power of Attorney role in communicating your estate plan.

What most parents refuse to discuss with their children is money, plain and simple. Children will be better equipped, if they know what financial institutions hold your accounts and are introduced to your estate planning attorney, CPA and financial advisor.

You might at some point forget about some investments, or the location of some accounts as you age. If your children have a working understanding of your finances, estate plan and your wishes, they will be able to get going and you will have spared them an estate scavenger hunt.

If possible, hold a family meeting with your advisors, so everyone is comfortable and up to speed.  Advisors can help with communicating your estate plan.

Most adult children do not have the same experience with taxes as parents who have acquired wealth over their lifetimes. They may not understand the concepts of qualified and non-qualified accounts, step-up in cost basis, life insurance proceeds, or a probate asset versus a non-probate asset. It is critical that they understand how taxes impact estates and investments. By explaining things like tax-free distributions from a Roth IRA, for instance, you will increase the likelihood that your life savings aren’t battered by taxes.

Even if your adult children work in finance, do not assume they understand your investments, your tax-planning, or your estate. Even the smartest people make expensive mistakes, when handling family estates.

Communicating your estate plan is another way to show your children that you care enough to set your own ego aside and are thinking about their future. It’s a way to connect not just about your money or your taxes, but about their futures. Knowing that you purchased a life insurance policy specifically to provide them with money for a home purchase, or to fund a grandchild’s college education, sends a clear message. Don’t miss the opportunity to share that with them, while you are living.  Let us help you create and communicate your estate plan.

Reference: U.S. News & World Report (Feb. 17, 2021) “Discuss Your Estate Plan With Your Children”

Selling Your Life Insurance Policy

An interesting way of providing retirement income is selling your life insurance policy.  It is quite common to buy life insurance. It may have been to protect your family financially or as a vehicle to provide liquidity for estate taxes. As we grow older and laws change, it is critical to determine if your policy has outlived its intended purpose. The traditional strategy of “buy and hold” no longer applies to the ever-changing world. Today, it may be a good idea to consider selling your life insurance policy.

Forbes’ recent article entitled “What You Should Know Before Selling Your Old Life Insurance Policy” explains that a lesser-known alternative to abandoning or surrendering a policy is known as a life settlement. This gives the policy owners the chance to get a much bigger cash lump sum, than what is provided by the life insurance carrier’s cash surrender value.

Life settlements are not new. Third-party institutional buyers have now started to acquire ownership of policies, in exchange for paying the owner a lump sum of cash. As a consequence, the policy owner no longer needs to make future premium payments.

T After selling your life insurance policy, the buyer then owns the policy and takes on the responsibility of future premium payments. They also get the full death benefit payable from the life insurance carrier when the insured dies.

Research shows that, on average, the most successful life settlement deals are with policies where the insured is age 65 or older. Those who are younger than 65 usually require a health impairment to receive a life settlement offer.

Knowing what your policy is worth is important when selling your life insurance policy, and its value is based on two primary factors: (i) the future projected premiums of the policy; and (ii) the insured’s current health condition.

Many policy owners don’t have the required experience with technical life expectancies, actuarial tables and medical knowledge to properly evaluate their life settlement value policies. This knowledge gap makes for an imbalance, since inexperienced policy owners may try to negotiate against experienced and sophisticated policy buyers trying to acquire the policy at the lowest possible cost.

To address this imbalance, the policy owner should seek help from an experienced estate planning attorney to help them with the process to sell the policy for the highest possible price.

If you have an old life insurance policy that’s collecting dust, ask an experienced estate planning attorney to review the policy’s importance and purpose in your portfolio. This may be the right time to turn that unneeded life insurance policy into cash.

Reference: Forbes (Jan. 26, 2021) “What You Should Know Before Selling Your Old Life Insurance Policy”

 

Life Settlement Planning

This post addresses Life Settlement Planning.  Even in this volatile environment, many seniors may have an option for more retirement income available in the sale of their life insurance policy. A “life settlement” could provide them with an average of four or more times the cash surrender value of their policy.

The Street’s recent article entitled “Is Your Life Insurance Policy Worth More Than Its Cash Surrender Value?” explains that anytime a senior isn’t going to keep a life insurance policy, they should look into a life settlement to bring them the most money when they terminate the policy.

When a policy is lapsed, the policy owner gets nothing. When a policy is surrendered back to the insurance company, the policyowner receives little, if any, cash surrender value. So, in instances where a policy is being lapsed or surrendered, a life settlement makes financial sense.

According to 2019 life insurance industry data, over 90% of life insurance policies (by face amount) that terminated in 2018 were lapsed or surrendered. In 80% of those cases, the policyowners received nothing in return for years of premium payments to the insurance company, because they lapsed their policies.

Over the next decade, more than $2 trillion in life insurance policy death benefits that could qualify for a life settlement is anticipated to be lapsed or surrendered—about $850 billon is projected to be policies between $100,000 and $1 million.

To qualify for a life settlement, an individual must usually be at least 70 years old and own a whole life, universal life, or convertible term insurance life insurance policy, with a death benefit of $100,000 or more.

Traditionally, life settlements have been available only where the insured has developed a significant health impairment since the policy was started, but now even those insureds without a change in health can qualify for a life settlement, depending on their age and the type and size of the policy.

Some life settlement companies take several months to make an offer to purchase a policy, asking for full medical records and independent underwriting. However, recently, these companies have shortened the time in evaluating a policy and making an offer.

Reference: The Street (Dec. 22, 2020) “Is Your Life Insurance Policy Worth More Than Its Cash Surrender Value?”

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The Death of a Spouse

It probably is the last thing on your mind, but there are tasks that must be accomplished after the death of a spouse. You might want to ask for help and advice from a trusted family member, friend, or adviser to sort things out and provide you with emotional guidance.

Kiplinger’s recent article entitled “Checklist: Steps to Take after Your Spouse Dies” provides a checklist to help guide you through the most important tasks you need to complete:

Don’t make any big decisions. It’s not a good time to make any consequential financial decisions. You may wish to sell a home or other property that reminds you of your spouse, but you should wait. You should also refrain from making any additional investments or large purchases—especially if you weren’t actively involved in your family’s finances before the death.

Get certified copies of the death certificate. You’ll need certified copies of your spouse’s death certificate for any benefit claims or to switch over accounts into your name. Ask the funeral home for no fewer than 12 copies. You also may need certified marriage certificates to prove you were married to your late spouse.

Talk to your spouse’s employer. If your spouse was working when he or she passed, contact the employer to see if there are any benefits to which you are entitled, such as a 401(k) or employer-based insurance policy. If you and your dependents’ medical insurance was through your spouse’s job, find out how long the coverage will be in effect and begin making other arrangements.

Contact your spouse’s insurance company and file a claim.  After the death of a spouse, get the documentation in order prior to contacting the insurance company and make certain that you understand the benefit options to claim a life insurance benefit.

Probate the estate. Get a hold of the will. Contact the attorney for help in settling the estate. If your spouse didn’t have a will, it will be more complicated.  However, the death of a spouse may reveal that many if not all assets are held as tenants by the entireties which has rights of survivorship and doesn’t require probate. Reach out to an experienced estate planning attorney or elder law attorney for advice in this situation.

Collect all financial records. Begin collecting financial records, including bank records, bills, credit card statements, tax returns, insurance policies, mortgages, loans and retirement accounts. If your spouse wasn’t organized, this might take some time. You may be required to contact companies directly and provide proof of the death of a spouse, before being able to gain access to the accounts.

Transfer accounts and cancel credit cards. If your spouse was the only name on an account, like a utility, change the name if you want to keep the service or close the account. Get a copy of your spouse’s credit reports, so you’ll know of any debts in your spouse’s name. Request to have a notification in the credit report that says “Deceased — do not issue credit.” That way new credit won’t be taken out in the spouse’s name.

Contact government offices. Have your spouse’s Social Security number available and call the Social Security Administration office to determine what’s required to get survivor benefits. Do this as soon as possible to avoid long delays before you get your next Social Security payment. You may also qualify for a one-time death benefit of $255. If your spouse served in the armed forces, you may be eligible for additional benefits from the Department of Veterans Affairs. Therefore, contact your local office.

Change your emergency contact information. Change any of your or your family members’ emergency contact info that had your spouse’s name or number listed as someone else’s primary point of contact.

This checklist is a good way to help with the pressing tasks. You can also contact an estate planning attorney or elder law attorney for help.

Reference: Kiplinger (Aug. 27, 2020) “Checklist: Steps to Take after Your Spouse Dies”

 

Estate Planning After Retirement

How you handle money and legal matters during retirement is more important than during your working years. It’s harder to bounce back from financial setbacks when you aren’t getting a regular paycheck. Managing finances and legal affairs to keep your savings intact and keeping your estate planning after retirement current is part of your new responsibility as a retiree, says a recent article “7 Money Moves You Should Make After Retiring” from MoneyTalksNews.

  1. Review estate planning documents. One of the most important documents is your will, but you also need to review any power of attorney and trust documents. A will is used to specify what you want done with your property after you die. What happens if you die without a will? The state will step in and make those decisions for you.

If you marry, divorce, inherit or buy property, you should update your will to reflect your changed circumstances. The arrival of a new grandchild may make you want to change your beneficiaries.

Reviewing your estate planning after retirement and then periodically afterwards can put your mind at ease. If you don’t have a will or trust, now is the time to have one created with an experienced estate planning attorney. You may also need a living will, power of attorney and letter of intent.

  1. Review named beneficiaries. Beneficiary designations require updating anytime there is a change in your life.  They play a large role in your estate planning after retirement. When you purchase life insurance, enroll in a pension plan or open an individual retirement account, you are often asked to name a beneficiary–the person who will inherit the proceeds when you die. These instructions take precedence over instructions in a will.
  2. Prepare for your funeral. No one wants to consider their own mortality, but helping your loved ones be financially prepared for your funeral is a gift. By planning your own funeral, including making arrangements for funds to be available to pay for it, you save your family of the burden of having to plan and pay for a funeral while they are grieving your loss. Planning in advance also gives you an opportunity to decide what type of funeral you want.
  3. Consider trimming transportation costs. If your household has two cars, but you could manage with one, consider paring down this expense. Seniors tend to pay higher rates than young people, so this is one way to trim your monthly expenses.
  4. Review emergency fund status. Having money set aside for unexpected expenses is more important now than when you were working. An emergency fund can help you avoid taking money out of retirement accounts, which costs you not only the funds themselves, but the potential growth of the funds and any taxes that might be due on withdrawals.
  5. Plan for Required Minimum Distributions (RMDs) and taxes. Once you celebrate your 72nd birthday, you’ll need to start taking RMDs from tax-deferred retirement accounts. If you miss an RMD deadline or don’t take out enough, you may have to pay a 50% tax penalty on the amount of money you did not withdraw. RMDs are treated as taxable income, so they may impact your federal income tax rate, as well as the “combined income” formula used to determine the extent to which your Social Security benefits are taxable.
  6. Do you still need life insurance? If your family is not dependent upon your income, now might be the time to drop life insurance policies. The main purpose of life insurance is to provide an income stream for loved ones, if you should die unexpectedly when you are working and raising a family. However, if you are retired, your children are grown and your spouse is not relying on your income, it may be time to let the policies lapse. On the other hand, if you can afford the premiums and wish to leave the proceeds to a spouse or your children, by all means keep the policy. However, check the beneficiary designation.

Let us help you with your estate planning after retirement.

Reference: MoneyTalksNews (Oct. 9, 2020) “7 Money Moves You Should Make After Retiring”

 

Trusts And Life Insurance

A trust is a legal vehicle in which assets are legally titled and held for the benefit of another party, the beneficiary, explains Forbes’ recent article entitled “How To Fund A Trust With Life Insurance.” The article says that trusts are often funded with a life insurance policy. This will provide assets to be used after the death of the insured for the benefit of their family. If you are a parent of minor children, the combination of trusts and life insurance may be the best way to make certain that your children have their financial needs satisfied and also make sure the assets are used in ways you want.

Trusts are either revocable or irrevocable. A revocable living trust is the most frequently used type of trust. It has some major benefits, like the ability to avoid probate, which can be an expensive and lengthy process. Assets in a revocable trust are accessible much more quickly than those left through a will.  Because they’re revocable, the person who creates the trust (the grantor) can also make adjustments to the trust, as their situation changes.

A grantor will fund the trust with assets for the trust beneficiaries. For parents of minor children, life insurance is an inexpensive tactic to make certain that your children are cared for after your death. Typically, each parent buys a life insurance policy, and in a two-parent household, usually each spouse names the other as the primary beneficiary with a revocable living trust as the contingent beneficiary.

If the second parents were to die, the life insurance policies would pay to the trust. The trustee would manage the trust assets for the minor children. Funding a trust with life insurance also benefits heirs, because it provides liquidity right after your death. Other assets like investment accounts and real estate can be very illiquid or have tax consequences. As a result, it can take a while to get to that equity.

On the other hand, term life insurance is a fast and tax-free funding way to build a trust. Purchase a term life policy that will last until your children are adults and out of college. In using life insurance with your children as beneficiaries of the trust, you also have some control over the assets. If you name minor children as beneficiaries on a life insurance policy, they won’t be able to use the money until they are an adult. Some children may also not be financially responsible enough to manage money as young adults in their 20s.

If you already own a life insurance policy and want to create a trust, you can transfer ownership of the policy to the trust. Work with an experienced estate planning attorney.

Reference: Forbes (Sep. 17, 2020) “How To Fund A Trust With Life Insurance”

 

Funding a Trust with Life Insurance

How would funding a trust with life insurance work, and could it be a good option for you? A recent article in Forbes “How to Fund a Trust With Life Insurance” explains how this works. Let’s start with the basics: a trust is a legal entity where one party, the trustee, holds legal title to the assets owned by the trust, which is managed for the good of the beneficiary. There can be more than one person who benefits from the trust (beneficiaries) and there can be a co-trustee, but we’ll keep this simple.

Trusts are often funded with a life insurance policy. The proceeds of the policy provide the beneficiary with assets that are used after the death of the insured. This is especially important when the beneficiaries are minor children and the life insurance has been purchased by their parents. Funding a trust with the insurance policy offers more control over how funds are used.

What kind of a trust should you consider? All trusts are either revocable or irrevocable. There are pros and cons to both. Irrevocable trusts are better for tax purposes, as they are not included as part of your estate. However, with an $11.58 million federal exemption in 2020, most people don’t have to worry about federal estate taxes. With a revocable trust, you can make changes to the trust throughout your life, while with an irrevocable trust, only a trustee can make changes.

Note that, in addition to federal taxes, most states have estate taxes of their own, and a few have inheritance taxes. When working with an estate planning attorney, they’ll help you navigate the tax aspect as well as the distribution of assets.

Revocable trusts are the most commonly used trust in estate planning. Here’s why:

  • Revocable trusts avoid probate, which can be a costly and lengthy process. Assets left in the revocable trust pass directly to the heirs, far quicker than those left through the will.
  • Because they are revocable, the creator of the will can make changes to the trust as circumstances change. This flexibility and control make the revocable trust more attractive in estate planning.

If you are funding a trust with life insurance, be sure the policy permits you to name beneficiaries, and be certain to name beneficiaries. Missing this step is a common and critical mistake. The beneficiary designations must be crystal clear. If there are two cousins who have the same name, there will need to be a clear distinction made as to who is the beneficiary. If someone changes their name, that change must be reflected by the beneficiary designation.

There are many other types of trusts, including testamentary trusts and special needs trusts. Your estate planning attorney will know which trust is best for your situation. Make sure to fund the trust and update beneficiary designations, so the trust will achieve your goals.

Let us help you with funding a trust.

Reference: Forbes (Sep. 17, 2020) “How to Fund a Trust With Life Insurance”

Suggested Key Terms: Estate Planning Attorney, Power of Attorney, Will, Trust, Life Insurance, Trustee, Beneficiary, Testamentary, Special Needs, Revocable, Irrevocable

Cashing In Your Life Insurance Policy

Investopedia’s recent article entitled “Cashing in Your Life Insurance Policy” explains that there are some drawbacks to cashing in your life insurance to meet your immediate cash needs—one of which is potentially compromising your long-term goals or your family’s financial future. However, if other options aren’t available, life insurance—especially cash-value life insurance—can be a good source of needed income.

Cash-value life insurance, like whole life and universal life, builds reserves in its excess premiums plus earnings. The deposits are held in a cash-accumulation account within the policy. These cash-value life insurance policies offer the chance to access cash savings within the policy through withdrawals, policy loans, or partial or full surrender of the policy. Another option is to sell your policy for cash, which is called a life settlement.

While cashing in your life insurance policy might be useful during stressful financial times, you could face unwanted consequences, depending on the way you use to access the funds. You can generally withdraw limited amounts of cash from a life insurance policy. The amount you can take differs, based on the type of policy you have and the carrier. The big advantage of cash-value withdrawals is they’re not taxable up to your policy basis, provided your policy isn’t classified as a modified endowment contract (MEC). That’s a term given to a life insurance policy, where the funding exceeds federal tax law limits.

You should also note that cash-value withdrawals can have some unexpected or unrealized consequences. For one, the withdrawals that decrease your cash value could reduce your death benefit, which is a potential source of funds you or your family might need for income replacement, business purposes, or wealth preservation.

Cash-value withdrawals aren’t always tax-free, like when you take a withdrawal during the first 15 years of the policy, and the withdrawal causes a reduction in the policy’s death benefit. If so, some or all of the withdrawn cash could be subject to taxation. The withdrawals that reduce your cash surrender value could also make your premiums go up to maintain the same death benefit. Otherwise, your policy could lapse.

If your policy has been classified as a modified endowment contract, the withdrawals generally are taxed pursuant to the rules applicable to annuities. The cash disbursements are considered to be made from interest first and are subject to income tax and possibly a 10% early-withdrawal penalty, if you’re under the age of age 59½, when you take out the funds.

Most cash-value policies let you borrow money from the issuer, using your cash-accumulation account as collateral. The amount you can borrow depends on the value of the policy’s cash-accumulation account and the contract’s terms. The borrowed amounts from non- modified endowment contract policies are not taxable, and you don’t have to make payments on the loan, even though the outstanding loan balance might be accruing interest. However, loan balances typically decrease your policy’s death benefit. Therefore, your beneficiaries might receive less than you intended. An unpaid loan accruing interest also reduces your cash value. This can cause the policy to lapse, if insufficient premiums are paid to maintain the death benefit. If the loan is still outstanding when the policy lapses or if you later surrender the insurance, the borrowed amount becomes taxable to the extent the cash value (without reduction for the outstanding loan balance) exceeds your basis in the contract.

Policy loans from a policy that’s seen as a MEC are treated as distributions. As a result, the amount of the loan up to the earnings in the policy will be taxable and could also be subject to the pre-59½ early-withdrawal penalty. Note that withdrawing money or borrowing money from your policy can reduce your policy’s death benefit. Surrendering the policy also means that you’re giving up the right to the death benefit altogether.

When you surrender or cancel your policy, you can use the cash any way you want. However, if you surrender the policy during the early years of ownership, there will probably be surrender fees that will drop the cash value. The gain on the surrendered policy is also taxed. If you have an outstanding loan balance against the policy, additional taxes could be incurred.

Look at other options before cashing in your life insurance policy, like borrowing against your 401(k) plan or taking out a home equity loan. Each has its drawbacks, but based on your current financial circumstances, some choices are better than others.

As the policy owner, if you sell your life insurance policy to an individual or a life settlement company in exchange for cash, the new owner will keep the policy in force (and pay the premiums). They’ll also get a return on the investment, by receiving the death benefit when you die. The big advantage to a life settlement is that you may receive more for the policy than by cashing it in (surrendering the policy). While life settlements can be a valuable source of liquidity, remember these issues:

  • You relinquish control of the death benefit
  • The new policy owner(s) has access to your past medical records and usually the right to request updates on your health; and
  • The life settlement industry is very marginally regulated, so it’s hard to determine your policy’s value, which makes it tough to know if you’re getting a fair price for your policy.

Up to 30% of your proceeds may also go to commissions and fees, which reduces the net amount you receive.

Reference: Investopedia (Aug. 11, 2019) “Cashing in Your Life Insurance Policy”

Suggested Key Terms: Elder Law Attorney, Life Insurance Settlement