The Benefits of Protection and Preparation
Life Insurance, in all it’s varied forms, is quite simply a method for handling the risk of financial Peace of mind for the whole family. instability in the event of premature death. In order to prepare your financial obligations, and how a financial loss may affect your family or business. In addition to security for your family and business, life insurance can also help provide liquidity for the payment of estate taxes, and may offer tax deductions through charitable gifts.
Thinking of a future without ourselves in it can be emotionally difficult, although preparing for such an event may be necessary to secure protection for financial obligations. Certain life events often trigger the need to purchase life insurance. If you already own a policy, it should be reviewed over the years on a regular basis to ensure the coverage continues to meet your needs and stays current. The following life events and concerns often trigger the need for either purchasing a policy or reevaluating existing coverage amounts.
- Newlyweds will soon have shared financial obligations, which could be greatly impacted by the loss of a spouse. Life insurance can help offset this potential shortfall.
- If you already have a policy, you will need to determine whether the coverage amount is still appropriate. You may also want to consider additional insurance for your spouse. Updating your beneficiary list to include your new spouse, as well as correcting your policy to reflect a name change, if applicable, are important aspects of your plan.
- The cost of raising children today can be expensive, particularly if childcare is needed. Life insurance can help provide the necessary funds.
Current policies may require an increase in coverage, as well as an updated beneficiary list.
- Homeowners may consider purchasing a policy or increasing a policy’s value to help ensure that an outstanding mortgage will be paid.
- Many people purchase life insurance to help cover their children’s future college expenses and possibly graduate school.
- Your spouse’s earnings alone may be insufficient to cover the monthly expenses of your family’s current lifestyle. Providing supplemental income through life insurance can help maintain their standard of living.
- The amount you need may change with time according to your: other assets, retirement plan benefits, Social Security benefits, age, health, and your spouse’s earnings power.
Starting Your Own Business/New Job:
- If you change jobs or start your own business, make sure that any loss of employer-sponsored benefits does not affect your personal life by ensuring you have adequate life insurance
Funding for Estate Tax Liability:
- Life insurance is often purchased as a tool for creating liquidity at death, so that estate taxes can be paid and asset transfers to future generations may be maximized
- Review the coverage amount over the years to make sure it still fits your financial situation and tax laws
Taking a closer look at the different types of expenses you face on a daily basis can leave you wondering: How much coverage should I purchase? A “needs analyses” can help you answer this question. It measures your assets and liabilities in order to calculate the amount of life insurance you may need.
Conduct Your Own Needs Analysis
First, total the value of all the things that you and/or your spouse own. These are your assets. (Enter amounts in one column for yourself, and in another column for your spouse.) Next, list and evaluate all the debts for which you or your family may be held liable, in case one spouse dies. These are your potential liabilities. When totaling your assets and insurance, you should include what you currently have in savings, retirement accounts, and real estate. Take a look at these potential cash needs and assign a dollar amount to each:
- Immediate Money Fund. The total cost of possible medical and hospital expenses, bills presented after death, burial costs, and attorney/executor fees. (It may be sufficient to set aside 50% of the higher wage earner’s annual income for this purpose.)
- Debt Liquidation. Total your debt from credit card bills, school and auto loans, unpaid notes, outstanding bills, etc.
- Emergency Fund. Unexpected bills not readily payable from current income, such as major repairs, or medical emergencies. (Again, 50% of the higher wage earner’s annual income may be sufficient.)
- Mortgage/Rent Payment Fund. How much would you need to pay off your mortgage should one partner die?
- Child/Home Care Fund. Estimate the cost of hired help needed to substitute your spouse’s duties as caretaker of the home and children.
- Education Fund. The cost of funding your children’s education.
The total of all of the above costs minus your liquid assets would give you your new cash needs. Obviously, the numbers will be different for you and for your spouse, because assets, as well as child/home care amounts, are likely to be different. Now that you have performed a needs analysis you may be interested in discovering other uses for life insurance.
An Estate Planning Tool
Estate taxes can take a heavy toll on the size of the estate you hope to leave to your loved ones. While assets may pass to a spouse free of tax, transfers to other beneficiaries, including children, in excess of the applicable exclusion amount ($1,500,000 in 2004 and 2005) may be subject to federal estate tax. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) stipulates that the applicable exclusion amount will rise to $2 million for years 2006 through 2008 and $3.5 million in 2009. The federal estate is scheduled for repeal in 2010, but will be reinstated in 2011 at rates in effect prior to EGTRRA unless Congress takes further action.
How will your heirs raise the cash to help pay estate taxes if and when they come due? Life insurance can help fund the payment of estate taxes, using an irrevocable life insurance trust (ILIT). When properly drafted and executed, the proceeds of an ILIT will be payable to ILIT beneficiaries (generally, children and grandchildren). An ILIT can purchase a life insurance policy on your (the donor’s) life, with policy premiums funded by annual gifts you make to the ILIT. The proceeds will be excluded from your estate and will not incur any estate tax liability.
Your annual gift tax exclusion ($11,000 annually per donee and $22,000 for gifts made by husband and wife in 2004, but indexed annually for inflation) can be used to minimize your gift tax exposure. Used in accordance with rules pertaining to Crummey withdrawal powers (Crummey v. Comm. 397 F.2d 82 (9thCir. 1968)), This planning technique is a straightforward mechanism for funding future estate liabilities and creating the potential for leveraged gifts to family or charity. Consult your tax and legal professionals for specific guidance.
Sweet Charity – Life Insurance Gifts
If you are charitably inclined and are seeking tax advantages, the gifting of life insurance can offer unique planning opportunities. Did you know that you can make a gift of a new or existing life insurance policy to your favorite charity?
A charitable bequest plan is ideal if you would like a charity to benefit from the proceeds of an existing life insurance policy but feel uncomfortable about surrendering control during your lifetime. By changing the beneficiary arrangement to a desired charity you retain the benefits of owning a policy. At death, a charitable deduction for the full value of the policy proceeds is allowed.
If you wish to receive an immediate income tax deduction for a gift of an existing policy, you may wish to consider a charitable gift plan. By simply changing the beneficiary and ownership designations on an existing policy to a favorite charity, you can enjoy an immediate gift tax charitable deduction for the policy.
Under a charity ownership plan, a life insurance policy – where permitted by law – is purchased by, and made payable to, a charity of your choice. Policy premiums are technically paid by the charity, but you can make annual cash gifts to offset this cost. A gift tax charitable deduction for the full value of the annual cash gift is allowed.
Using Life Insurance for Business Ends
Life insurance is also an important feature of many business arrangements. Here are some of the more common ways you can use life insurance to help benefit and solidify your business.
Funding Buy-Sell Agreements. Under a typical buy-sell agreement, business partners agree to purchase each other’s interest upon a triggering event. Life insurance can be a cost effective method of funding a buy-sell agreement provided you and your partners are insurable.
Insuring Key Employees. The death of a key employee can create a number of financial pressures for a business: revenues may be affected; customers must be assured business operations will continue; and a replacement must be recruited and trained. Key person life insurance can provide funds to help meet all these needs without jeopardizing your business operations or cash flow.
Guaranteeing Business Loans. Owners of new or growing businesses may face difficulty in obtaining business loans. Lenders want to be assured that loans will be repaid, even if you die unexpectedly. Life insurance may make it easier to obtain financing.
Regardless of your stage in life, life insurance offers a variety of ways to address your financial concerns. It can help: provide financial security for family; provide a source of cash to help pay estate taxes; benefit charity; and be useful in the business world. A qualified insurance professional can be of assistance in reviewing and recommending the many ways life insurance can provide the protection you need and the peace of mind you deserve. Click here to find out about How 10 of the Major Life Insurers Got Their Start!