Life insurance has come a long way since the days when it was known as burial insurance and used mainly to pay for funeral expenses. Today, life insurance is a crucial part of many estate plans. It can:
- provide much-needed income that is immediately accessible to your survivors
- allow you to replace wealth lost due to estate shrinkage (i.e., the estate taxes and expenses associated with your death) and
- allow you to give money to your favorite charity.
What are the estate planning benefits of life insurance?
Life insurance can protect your survivors financially:
You can buy life insurance to help ensure that your survivors don't suffer financially when you die. You can protect their long-term financial needs by planning so that they will have enough money to pay their bills and live comfortably for years to come. You can also use life insurance to protect your survivors' short-term financial needs. Because life insurance proceeds normally don't pass through probate, your loved ones will have enough money to pay their bills right away--they won't have to wait until your estate is settled.
Life insurance can replace wealth that is lost due to estate shrinkage:
Life insurance may be the number one method of replacing wealth that is lost due to estate shrinkage. To ensure that the estate (money and assets) you leave to your survivors isn't less than you intended, you can buy enough life insurance to cover the expenses associated with your death, such as taxes, fees, and other debts that your survivors will have to pay.
Life insurance can be given to charity:
If you want to leave money to charity when you die, consider using life insurance. Not only does life insurance allow you to make a substantial gift to charity at relatively little cost to you, but there are certain tax benefits as well. For instance, depending on how you structure your gift, you may be able to take an income tax deduction equal to your basis in the policy or its fair market value. Or, you may be able to deduct the premiums that you pay for the policy. In addition, gifts to charity may reduce estate taxes owed when you die.
Plan carefully if you expect to leave behind a substantial estate:
Your survivors generally won't owe income tax on any life insurance proceeds that you leave to them. However, they may owe estate taxes if you leave behind a large enough estate but don't plan ahead. In general, if you're leaving behind a taxable estate worth less than a certain amount, your survivors won't owe estate taxes on a life insurance policy that you leave them. But, if you intend to leave an estate larger than that amount, you may want to consider the estate tax consequences of owning life insurance.
In general, to avoid life insurance-related estate taxes, make sure that you don't:
- Own the policy or have any incidents of ownership in the policy
- Make the proceeds payable to your estate
- Make the proceeds payable to your personal representative (executor)
- Make the proceeds payable to a beneficiary to satisfy a debt or to pay alimony or support
- Pay the premiums
What Is A Beneficiary?
In the world of life insurance, beneficiary is an important, common term. It refers to a person or entity who is named by the life insurance policy to receive the policy's benefits.
The benefits ( or proceeds) received after a policyholder dies are generally cash, but sometimes benefits are in the form of services or other types of awards. Entities are included because, besides people, business partnerships, corporations, trusts, churches, schools/colleges/universities, or charities may all be selected as beneficiaries.
Beneficiaries are not all alike. Life insurance policies are designed to protect persons/entities that are important to the life insurance policyholder. These policies may use different types of beneficiaries to fit a policyholder's preferences and/or to comply with legal or tax issues. The types of beneficiaries also have a LOT to do with the control of the proceeds and the beneficiary's rights. Here are the most common types of beneficiaries:
- Absolute Beneficiary - please refer to Irrevocable Beneficiary.
- Contingent Beneficiary - the party named to receive policy benefits, but only in the case of death of the primary beneficiary. Contingent Beneficiaries are often called secondary beneficiaries.
- Irrevocable Beneficiary - a beneficiary whose right to receive the insurance proceeds may not be changed UNLESS that beneficiary gives the policyholder his written consent to do so. Also known as an absolute beneficiary.
- Primary Beneficiary - typically, the party named to be first to receive the policy benefits and proceeds. If any others should be listed, they are considered contingent or secondary beneficiaries.
- Revocable Beneficiary - any beneficiary for which the policyholder retains the right to change. These beneficiaries exist at the whim of the policyholder.
- Secondary Beneficiary - please refer to Contingent Beneficiary.
Note that several ofthese beneficiaries can be combined, i.e. Revocable, Primary Beneficiary or Absolute, Secondary Beneficiary.
Other Methods For Designating Beneficiaries
Class Desienation - refers to when a group is chosen to share equally in a policy's proceeds. The class designation has an advantage of providing equal benefits to a group that may change between the time the designation is made and when the proceeds are paid. Commonly a policyholder's children, grandchildren, or siblings are selected as a class.
Specific Desienation - typically means that a beneficiary selected by his or her name and relationship to the policyholder, such as Gwenna Mygirl, daughter of the insured.
Per Capita Desienation - this method of designation permits greater flexibility than a straight class designation. For instance, a policyowner can name his children to share the proceeds equally and, in the case of a child's death; the deceased beneficiary's children may receive in EQUAL (per capita) shares with the surviving policyowner's children.
Example: Joe designates his children, Bill, Trudy and Stan, to equally share $3 million in policy proceeds on a per capita basis with any children who survive them. Joe dies in a car accident and Bill dies in the same tragedy. Therefore, Bill's children, Gary, Paulie and Pam become equal participants in the proceeds ($600,000 apiece). If only Joe had died in the accident, Joe's children would have received $1 million apiece.
Per Stirpes Desienation - this method is the ultimate contingency plan. It allows the policyowner to pass the proceeds equally to his direct heirs and, in the event of any person's death, that particular share is passed on to any descendants. Example: Joe designates his children, Bill, Trudy and Stan, to equally share $3 million in policy proceeds ($1 million a piece). Joe dies in a car accident and Bill dies in the same tragedy.
Therefore, Bill's children, Gary, Paulie and Pam become equal participants in Bill's share of the proceeds. In this instance, Joe's surviving children each get $1 million while Bill's children share the amount that Bill would have received (roughly $333,000 apiece).
If you need to discuss your plans on providing for your loved ones, an insurance professional is a great place to start.
Choosing an Amount
It turns out that for life insurance, the solution to the puzzle of "how much" can be found with some basic calculations. The reason for purchasing life insurance, of course, is to provide your family with long-term financial security. To come up with a dollar figure that will provide that security, you should begin with a careful review of your financial situation.
Essentially, there are two categories that you should consider—what your family's immediate needs will be if something happens to you, and what their ongoing needs will be.
Immediate needs can include the final expenses associated with a terminal illness, burial costs, estate taxes, the balance of an unpaid mortgage and even relocation expenses.
- Ongoing needs might include monthly bills and expenses, mortgage payments, daycare costs, education, income replacement and retirement.
Most people aren't so anxious to figure out how their family will replace the income lost if they die, or even to tackle such details as how much their own funeral will cost, or if the family will have to sell their home should such an event occur, and what the marketplace will be like if selling the home is neccesary. One way to start the process is to consider this basic rule of thumb for life insurance:
- In general, most people should have life insurance that is equal to five to seven times their annual gross income.
Life insurance comes in two basic forms. There is:
- Term life insurance and
- Permanent life insurance (also known as Cash-Value). Knowing which one is appropriate for you means understanding what your needs are and what you are protecting.
Long-term health care includes much more than just nursing home care for the elderly. Today's long-term care may also refer to a variety of protection, such as:
However, there is a common theme among the different types of coverage: they all feature care for people who, due to illness or disability, need special assistance with daily activities. A common reason for use of a convalescent nursing facility is when a patient has been discharged from a hospital but still needs continued medical care and rehabilitation therapy while recuperating from an illness or injury. However, it important to know that LTC can be provided in either a special care facility or in the home.
What's The Cost And Type of Long Term Care?
The cost for a convalescent center stay can rise as high as $40,000 annually.
Some experts predict that the cost may exceed $80,000 by the year 2010. Of course the cost is greatly affected by the level of care involved, such as:
Custodial care - where the (licensed or non-licensed) caregiver assists a person in performing routine activities typical of daily life such cleaning, bathing, eating, dressing, etc. These services are often referred to as Activities of Daily Living (ADLs).
- Intermediate care - generally involves care provided several times weekly by nurses or aides to help restore a person's health or physical capabilities. The care is typically supervised by a physician.
- Skilled care - involving care that is 24 hours a day and 7 days a week. The treatment is always supervised by a physician and is administered by licensed health care professionals.
What About Medicare and Medicaid?
Medicare policies contain only a limited amount of coverage for skilled nursing care and nothing for care that is considered intermediate or custodial.
Medicaid is a federal and state program that covers medical bills for the needy. If you qualify, it will pay for your long-term care expenses. In order to qualify for Medicaid, you will have to have essentially no assets.
Benefits Of LTC Insurance
Because of the length and cost of long term care, LTC insurance policies may provide you with a number of critically important benefits, such as:
enabling you to keep your assets
protecting your spouse's quality of life and independence
protecting your family home and estate
- protecting your business and other personal property
- allowing you to maintain your independence
- providing cash so that you may choose the long-term care options that you feel are most suitable for you
Are There Different LTC Policies?
Technically, no. It would be more accurate to say that all LTC policies have the intent of providing coverage for extended care, with each policy providing some level of reimbursement for the following:
nursing home stays
home health care
nursing home stays and home health care
Coverage may be provided by an individual policy or a group policy. Further, the policy may qualify for tax benefits. It is important to work with an experienced insurance professional when purchasing this type of insurance.
There are several different types of cash value life insurance policies from which to choose. They are all designed to provide living benefits as well as the death benefit.
The principal objective of cash value life insurance is the same as with term insurance: to create an immediate estate should the insured die. The cash value in the policy can also be accessed through loans or withdrawals for emergencies or other needs. It is important to remember that loans or withdrawals of a policy's cash value will reduce the policy's death benefit.
- Whole Life Insurance
- Universal Life Insurance
- Variable Life Insurance
Whole Life Insurance
Whole life insurance offers a number of guarantees made by the issuing insurance company. The following are typically guaranteed with whole life insurance:
- death benefits
- cash values
- level premiums
Sometimes dividends are also guaranteed.
Whole life insurance can be a good tool for long term life insurance needs.
Characteristics of Whole Life Insurance
- Tax-deferred growth of cash value
- Cash values are guaranteed
- Premiums are guaranteed
- Can withdraw or borrow cash value
- Dividends are tax free
Universal Life Insurance
With a Universal Life policy, both premium payments and death benefits can be flexible, within limits.
When premiums are paid, part of the premium goes to pay for the term insurance and part of the premium is put into a side fund upon which interest is paid.
If the premium paid is not enough to cover the cost of the insurance, the additional amount needed is taken from the side fund.
The policyowner has a number of options with regard to premium payments.
Within limits, premiums can be adjusted up or down. Premium payments can also be skipped entirely if there is enough cash value in the policy to make the payments. Also, the death benefit of the policy may be adjusted up or down.
However, a request to increase the death benefit may require proof of insurability (such as updating some health questions or even submitting to a physical examination)
Characteristics of Universal Life
- Tax-deferred growth of cash value
- Interest rates are competitive
- Access to cash value through loan or withdrawal
- Premiums are flexible
- The policy's death benefit may be adjusted (higher or lower)
Variable Life Insurance
Variable life insurance is a flexible life insurance product that is offered by a prospectus.
Variable life insurance has a term insurance foundation and an investment fund.
The policyowner gets to choose which type of investment vehicle in which the cash value will be placed. The following are types of investment vehicles from which the policyowner can choose:
- Money Market Account
- Corporate Bond Portfolio
- Common Stock Portfolio
- Government Securities
- Fixed Account
Insurance agents must be properly licensed to sell securities in order to sell variable products which are sold by prospectus. Be certain that you CAREFULLY read the prospectus before purchasing any variable product.
A disability policy is designed to replace lost income when a policyholder is unable to work due to a covered accident or illness.
Disability policies generally have:
- A waiting period - A waiting period in disability insurance is like a deductible on your car insurance. The difference is that while a deductible for auto insurance is expressed in dollars ($250, $500, ect.), a waiting period for disability insurance is expressed in time, such as 60 days, 90 days, or longer. It is the amount of time that you must wait before benefits will be paid. The longer the time period, the lower the premium.
- A benefit period - A benefit period can be two years, five years, ect. The most comprehensive policy is one that pays benefits to Age 65.
- An occupational classification - Depending on the occupational classification, the premium and the benefit period will be determined.
- A monthly benefit amount - A monthly benefit amount can be up to 60% of the present income. Benefits are tax free on an individual policy. The older you are, the more disability insurance will cost, but once a premium has been established, it is likely to stay the same throughout the life of the policy.