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Life Insurance

How much life insurance do you need? It's probably one of the most important and unsettling questions that I pose to my clients. It's also a question that many of us tend to ignore until it's too late. Perhaps the best way to come to terms with this difficult subject is to educate yourself and understand how best to determine your coverage needs.

I wanted to provide you with a selection of resources that can help you understand what Life Insurance is all about. I'd also like to assist you in determining your coverage needs and how you can best meet your objectives.

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Life Insurance – How much life insurance would you need to produce a sufficient income stream for your family?

Research Articles

How Can I Determine the Financial Strength of My Insurance Company?

How do you compare life insurance companies? What features do you examine? What criteria do you use? How do you know what to look for? Making sure that your insurance company is financially sound is an important part of helping to ensure family security.

Fortunately, there are a number of independent companies that make these evaluations. These rating companies carefully examine each insurance company in the areas of profitability, debt, liquidity, and other factors. From the results of these examinations, they then issue overall ratings.

Looking up a company's rating will provide you with a snapshot of that company's financial health. Tracking the company's rating on a regular basis may give you some advance warning of trouble.

The four most prominent rating companies are A.M. Best, Standard & Poor's, Moody's Investors Service, and Fitch Ratings. Each of these services uses slightly different criteria when rating companies. As a result, each may have a slightly different view of a given company. A.M. Best ratings are based on financial conditions and performance; Moody's, Fitch Ratings, and Standard & Poor's ratings are based on claims-paying ability.

You should be able to find copies of at least one of these ratings in the reference section of your local library. If you are unable to find them, or if the ratings in your library are outdated, you can contact the services directly. All four services will provide ratings over the phone.

A.M. Best Company – 908-439-2200
Standard & Poor's – 877-772-5436
Moody's Investors Service – 212-553-0377
Fitch Ratings – 800-893-4824

 

The information in this article is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2018 Broadridge Investor Communication Solutions, Inc.

Maximizing Your Insurance Benefits

Understanding the threat of estate taxes on your life insurance proceeds is the first step in protecting these funds from unnecessary tEquitabletion. The next steps are determining the appropriate ownership of your policy and selecting your beneficiary. Although there are other alternatives, a life insurance trust can help avoid potential threats to the policy's proceeds.

What threats exist besides estate taxes?

Several factors may come into play that could undermine the financial security provided by the proceeds of your life insurance policy. Beyond estate taxes, there is the potential for probate, gift taxes, financial mismanagement, and misuse. Proper planning is necessary to help avoid these threats.

Ownership options

Other than owning the insurance yourself, there are three practical options for the ownership of your life insurance. However, be aware that a taxation gift from the owner to the beneficiary may result when the owner, the beneficiary, and the insured are all different parties. To reduce the threat of gift taxes, the owner of the policy should be the beneficiary of the policy.

Your spouse. If you choose your spouse to be the owner and beneficiary of your life insurance policy, the proceeds of the policy will be subject to estate taxes and perhaps probate administration when he or she eventually dies. In addition, your spouse will be responsible for investing the proceeds of your policy. Make sure your spouse is prepared and has the willingness to handle these additional responsibilities.

A child. Naming a child as owner and beneficiary can lead to problems if the child lacks the experience for such a designation. You must be able to rely on him or her to maintain the policy and avoid letting the policy lapse. In addition, because your child will be the legal owner of the policy proceeds, you must be sure that he or she will be willing to supply necessary funds to the estate to settle taxes, fees, and other expenses.

An irrevocable life insurance trust. An irrevocable life insurance trust (ILIT) can help avoid threats to your policy's proceeds. Because the designated trustee must manage the trust for your benefit, ILIT strategy helps ensure the availability of liquid funds when they are most needed. And because the trust is irrevocable and is the owner and beneficiary of your policy, the proceeds escape estate taxes in most cases. The trust arrangement allows the proceeds to avoid probate administration and can sanction the professional management of the proceeds to help ensure the livelihood of your survivors. The use of a life insurance trust can provide an opportunity for families to utilize the benefits of their life insurance.

An irrevocable life insurance trust cannot be changed once it has been created. An insured individual contemplating the use of an ILIT must be willing to relinquish control of the assets transferred to the trust and must recognize the limitations that arise as a result thereof. The insured may not retain the right to revoke, alter, amend, or terminate the trust, which means the insured does not have the power to change the trust beneficiaries and their interests. Likewise, the insured cannot require that assets contributed to the trust be used to pay premiums or otherwise maintain life insurance owned by the trust. Finally, the insured may not retain any economic benefit in the life insurance policy; for example, the insured will not be able to cash in or borrow against the cash surrender value of any life insurance policy after it is transferred to the trust.

Keep in mind that the cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing this strategy, it would be prudent to make sure that you are insurable. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have contract limitations, fees, and charges, which can include mortality and expense charges.

Trusts incur up-front costs and ongoing administrative fees. The use of trusts involves a complex web of tax rules and regulations. You should seek the counsel of an experienced estate planning professional before implementing such a strategy.

 

The information in this article is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2018 Broadridge Investor Communication Solutions, Inc.

How Can I Build and Preserve My Estate?

Building an estate can take years of diligent saving and investing. Once you have built up an estate, you'll want to make sure that you preserve its value for your heirs. You can also add to or create a valuable estate by using life insurance.

Why Create an Estate?

Premature death can result in financial difficulties for your survivors. By using life insurance to protect against this outcome, you can rest assured that your heirs will be cared for financially in your absence.

If you wish, you can also ensure that other financial goals are achieved. Because the premature death of a breadwinner could make college savings or mortgage repayment impossible, steps should be taken to prepare for these possibilities. Life insurance provides a cost-effective way to guard against the threat of interrupted financial goals.

A Case Study

The following example illustrates the concept of estate creation.

Paul Pringle, a 40-year-old computer programmer, would like to begin a savings program. He and his wife, Pam, have two children, ages 10 and 8. He feels he can afford to save about $3,000 per year.

Among his options, he could choose to invest in a traditional IRA. His contributions would be fully deductible and would grow on a tax-deferred basis. This could help provide a respectable retirement nest egg. However, it would not be accessible for most other purposes without penalty before he turns 59½.

For the same annual amount, he could choose to purchase a whole life policy. He could choose a fixed premium, and his cash value would be allowed to grow tax-free, under current tax law, just like in the IRA. Unlike IRA contributions, however, whole life policy contributions are generally not tax deductible.

Paul would have penalty-free access to the cash value through policy loans or withdrawals.* And in the event of Paul's premature death, his family would receive the policy proceeds free of income tax. The proceeds would help to maintain his family's standard of living, and it could ensure a college education for both of their children.

Financial Leverage

In the unfortunate event that Paul dies prematurely, his policy could generate a significant amount of wealth. For a potentially low premium investment, Paul can create an estate that might take 20 to 30 years to accumulate in an IRA.

Life Insurance: A Clear Advantage

The security provided by life insurance, combined with the opportunity to create an estate, makes this choice a logical one for many families. Consult an advisor to see how you can help provide financial security for your family.

* Access to cash values through borrowing or partial surrenders can reduce the policy's cash value and death benefit, increase the chance that the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured. Additional out-of-pocket payments may be needed if the actual cash dividends or investment returns decrease, if you withdraw policy values, if you take out a loan, or if current charges increase. The cost and availability of life insurance depend on factors such as age, health, and type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable. Any guarantees are contingent on the claims-paying ability of the issuing company. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies typically have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.

 

The information in this article is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2018 Broadridge Investor Communication Solutions, Inc.

What is term life insurance?

Term life insurance is “pure” insurance. It offers protection only for a specific period of time. If you die within the time period defined in the policy, the insurance company will pay your beneficiaries the face value of your policy.

Term insurance differs from the permanent forms of life insurance, such as whole life, universal life, and variable universal life, which generally offer lifetime protection as long as premiums are kept current. And unlike other types of life insurance, term insurance does not accumulate cash value. All the premiums paid are used to cover the cost of insurance protection, and you don't receive a refund at the end of the policy period. The policy simply expires.

Term life insurance is often less expensive than permanent insurance, especially when you are younger. It may be appropriate if you want insurance only for a certain length of time, such as until your youngest child finishes college or you are able to afford a more permanent type of life insurance.

The main drawback associated with all types of term insurance is that premiums increase every time coverage is renewed. The reason is simple: As you grow older, your chances of dying increase. And as the likelihood of your death increases, the risk that the insurance company will have to pay a death benefit goes up. Unfortunately, term insurance can become too expensive right when you need it most — in your later years.

Several variations of term insurance do allow for level premiums throughout the duration of the contract. You may be able to obtain 5-, 10-, 20-, or even 30-year level term, or level term payable to age 65. An advantage of renewable term life insurance is that it is usually available without proof of insurability.

Life insurance can be used to achieve a variety of objectives. The cost and availability of the type of life insurance that is appropriate for you depend on factors such as age, 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 insurable. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have contract limitations, fees, and charges, which can include mortality and expense charges.

 

The information in this article is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2018 Broadridge Investor Communication Solutions, Inc.

What Is Universal Life Insurance?

Universal life insurance was developed in the late 1970s to overcome some of the disadvantages associated with term and whole life insurance. As with other types of life insurance, you pay regular premiums to your insurance company, in exchange for which the insurance company will pay a specific benefit to your beneficiaries upon your death.

As with whole life insurance, a portion of each payment goes to the insurance company to pay for the pure cost of insurance. The remainder is invested in the company's general investment portfolio, with the potential to build cash value.

Most universal life policies pay a minimum guaranteed rate of return. Any returns above the guaranteed minimum vary with the performance of the insurance company's portfolio. The policyholder has no control over how these funds are invested; funds are managed by the insurance company's professional portfolio managers.

However, universal life policies are very flexible. As the policy owner, you can vary the frequency and amount of premium payments and also increase or decrease the amount of the insurance to suit changes in your situation.

For example, if your financial situation improves significantly, you can increase your premiums and build up the cash value more rapidly. On the other hand, if you find yourself under a financial strain, you can reduce your premiums, or you may even be able to deduct premium payments from the cash value of the policy. Of course, changing the premium or withdrawing part of the cash value in your policy will affect the rate at which your cash value accumulates. It may also reduce the size of the death benefit.

Any cash you withdraw from your universal life policy is considered “basis first.” You won't incur a tax liability until your withdrawals exceed the premiums you've paid into the policy. Any amount that exceeds the premiums will be taxed as ordinary income.

It is possible to structure many universal life policies so that the invested cash value will eventually cover the premiums. You would then have full life insurance coverage without having to pay any additional premiums, as long as the cash-value account balance remains sufficient to pay for the pure cost of insurance and any other expenses and charges.

Access to cash values through borrowing or partial surrenders can reduce the policy's cash value and death benefit, increase the chance that the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured. Additional out-of-pocket payments may be needed if actual dividends or investment returns decrease, if you withdraw policy values, if you take out a loan, or if current charges increase. Guarantees are contingent on the financial strength and claims-paying ability of the issuing company.

Under current federal tax rules, loans taken will generally be free of current income tax as long as the policy remains in effect until the insured's death, does not lapse or matures, and is not a modified endowment contract. This assumes the loan will eventually be satisfied from income tax free death proceeds. Loans and withdrawals reduce the policy's cash value and death benefit and increase the chance that the policy may lapse. If the policy lapses, matures, is surrendered, or becomes a modified endowment, the loan balance at such time would generally be viewed as distributed and taxation under the general rules for distributions of policy cash values.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. As with most financial decisions, there are 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 and income tax implications.

For investors who want the flexibility to change their premiums or death benefits, a universal life insurance policy may be ideal. If you are considering purchasing life insurance, consult a professional to explore your options.

 

The information in this article is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2018 Broadridge Investor Communication Solutions, Inc.

What Is Whole Life Insurance?

Most people are familiar with whole life insurance. For many years, whole life policies were the predominant type of life insurance sold in America.

When you purchase a whole life policy, you traditionally pay a fixed premium for as long as you live or for as long as you keep the policy in force. In exchange for this fixed premium, the insurance company promises to pay a set benefit upon your death.

In addition to providing a death benefit, a whole life policy can build cash value, which accumulates tax deferred. Part of the premium pays for the protection element of your policy, while the remainder is invested in the company's general portfolio. The insurance company pays a guaranteed rate of return on the portion of your premium that is in its investment portfolio, building up the value of your policy.

Note: Guarantees are contingent on the financial strength and claims-paying ability of the issuing company.

This buildup in cash value is part of the reason the premiums on a whole life policy generally remain fixed instead of escalating to match the increased risk of death as you age. As the cash value grows, the risk for the insurance company declines.

Although the cash value in your policy is “your” money, you can't simply withdraw it as needed, as you would cash from a savings account; but you do have limited access to your funds. You can either surrender the policy for its cash value or take the needed funds as a loan against the policy.

Under current federal tax rules, loans taken will generally be free of current income tax as long as the policy remains in effect until the insured's death, does not lapse or mature, and is not a modified endowment contract. This assumes the loan will eventually be satisfied from the income-tax-free death. Loans and withdrawals reduce the policy's cash value and death benefit and increase the chance that the policy may lapse. If the policy lapses, matures, is surrendered, or becomes a modified endowment, the loan balance at such time would generally be viewed as distributed and taxation under the general rules for distributions of policy cash values. Additional out-of-pocket payments may be needed if actual dividends or investment returns decrease, if you withdraw policy values, if you take out a loan, or if current charges increase.

You should be aware that, in addition to charging a modest interest rate for loans against a policy, the insurance company may pay a lower rate of return for the portion of your cash value that you borrow. However, loans against the value of an insurance policy are generally not taxation and can provide the cash to help with unexpected expenses.

The cash value of a life insurance policy accumulates tax deferred, but if you surrender the policy, you'll incur an income tax liability for funds that exceed the premiums you have paid.

The fact that whole life policies have fixed premiums and fixed death benefits can be either positive or negative, depending on the situation. To some people, it means one less thing to worry about. They know in advance what they'll have to pay in premiums and exactly what their death benefits will be.

To others, whole life policies don't provide enough flexibility. If their situations change, it is unlikely that they will be able to increase or decrease either the premiums or the death benefits on their whole life policies without surrendering them and purchasing new policies.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. As with most financial decisions, there are 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 and income tax implications. If you are considering purchasing life insurance, consult a professional to explore your options.

 

The information in this article is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2018 Broadridge Investor Communication Solutions, Inc.


 

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Protecting Your Dependents with Life Insurance – Term or whole life? Just be sure you have adequate coverage.

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