The Return of Whole Life Insurance

Over the last few decades, term life insurance has seemed to be the best way to provide for your family if you were to pass. 

It is affordable and pays out well, but after years of renewing policies that did not guarantee any benefits, people have started to turn back to whole life insurance coverage.

Whole life coverage had gotten a reputation for being a little expensive when compared to term life plans, but then again, your money remains yours with a whole life plan.

There are many reasons why these life insurance policies have recently become so popular.

First of all, interest rates are still ultra-low, but whole life policies pay out guaranteed rates that go far beyond what could be earned in a savings account or certificate of deposit with a similar duration. Better yet, taxes do not apply to the cash value growth of a whole life policy. 

Also, insurance companies offer a variety of different whole life plans that can help policyholders reinvest dividends and increase interest on the cash value, further protecting the investment.

Moreover, although taxes on capital gains and dividends have been recently reduced, the proceeds of whole life policies are generally not taxed, even when the benefactor dies.

In all, whole life policies can do things that term life coverage just cannot offer. For instance, once premium payments accrue enough cash value in the policy, premium costs may be reduced or even eliminated, without affecting the benefits or coverage terms.

Policyholders can even borrow money from their whole life policy’s cash value without needing to go through a lengthy loan approval process. And since it’s actually the policyholder’s money, there’s no rush to pay it back.

 

The takeaway

There are few guarantees in life, but people can count on the guaranteed benefits of whole life coverage. 

Every time a term life policy gets renewed, the process of investing begins anew, not to mention that term life coverage can be canceled if a payment is missed or late. But you can watch your money grow and rest assured that it will be there during times of need with whole life insurance.

 

Five Smart Things You Can Do with Life Insurance Cash Value

If you have accumulated significant cash value within a permanent life insurance policy, congratulations. Your planning and decision to save within such a policy is likely paying off.

Thanks to the tremendous tax advantages that Congress has given to provide for incentives for families to protect themselves with life insurance, and to the protection aspect itself, a life policy is a great place to keep money.

That said, let’s look at some of the most common options for dealing with your policy’s cash value:

Stay put -Let life insurance be life insurance. Your money is growing tax-deferred within the policy. And in the event of your death, an amount much greater than your current cash value will generally pass to your heirs, tax-free.

That’s a significant benefit right there, and a compelling reason not just to let your policy grow, but to add more premium to it if you can.

Borrow against the death benefit – You can withdraw accumulated dividends, and then borrow against the rest of it, generally with no tax consequence, as long as you don’t completely surrender the policy.

Interest will accrue, but you don’t have to repay the loan yourself unless you want to. If you don’t pay it back, the insurance carrier will simply subtract the balance due from any death benefit they pay to your beneficiaries.

Cash out the policy altogether – This option lets you get substantially all the cash in your policy. However, you may be subject to capital gains tax to the extent your cash value exceeds the amount you paid in.

Exchange for another life insurance policy – If you choose, you can execute a Section 1035 exchange of one life policy for another, tax-free.

You may opt to do this if you find ongoing premiums at a new carrier are lower for some reason, or if you want some specific protections or riders you can’t get from your old carrier.

For example, you may be able to exchange a straight-ahead universal or whole life insurance policy for a policy that also provides a benefit in the event you need long-term care insurance.

Exchange for an annuity – You can also exchange a life insurance policy for an annuity, tax-free, under Section 1035.

You might choose to do this if you decide you no longer want the life insurance protection, but you do want regular and reliable income.

For example, if your beneficiaries are grown up and no longer rely on your life insurance death benefit, you may execute a 1035 exchange to a lifetime income annuity – maximizing your income over your expected lifetime, rather than paying a large death benefit.

You can choose a joint and survivor annuity to guarantee income to your spouse as well.

 

The takeaway

Life insurance is among the most flexible and powerful resources you can have in your portfolio as you grow more established. But to have all of the above options later in life, you must plan ahead now.

Talk to us today. We can help you develop a plan that meets your needs and financial objectives.

Second-to-Die Life Insurance: Ideal for Estate Tax Planning and More

Federal estate tax generally applies when a person’s assets exceed a certain level, $11.4 million in 2019 and $11.58 million in 2020, at the time of death. The tax rate can be up to 40%. On top of that, some states also assess estate taxes.

That’s where survivorship life insurance – also called “second-to-die” life insurance – comes in. A second-to-die life insurance policy pays out an immediate cash benefit, tax-free, upon the death of the second spouse – not the first.

One common purpose for second-to-die life insurance is to provide a large amount of liquidity to pay estate taxes.

This can be important when a family’s wealth is tied up in illiquid assets that are difficult to sell. With a second-to-die life policy in place, the family or estate executors receive the tax-free cash death benefit right away, and can use that to pay estate taxes, rather than be forced to sell off assets like small businesses and real estate to raise the cash.

Otherwise, heirs may be forced to sell assets in the estate at heavily discounted prices, or at a very poor time in the market to sell, to meet the estate tax deadline.

Second-to-die policies also typically have lower premiums for a given death benefit than standard single-insured life insurance policies.

 

Use of trusts to move life insurance out of the taxable estate

Who owns the insurance policy itself? It may be prudent to set up an irrevocable trust, and have the trust own the life policy, rather than own it directly in your own name.

Otherwise, the life insurance policy would be considered part of the taxable estate, which would increase your tax bill. Setting up a properly constructed irrevocable trust will help you avoid this problem.

To set up the trust, speak with a qualified attorney and your tax advisor. Only a licensed attorney can write the documents required to set up the trust and ensure that it meets the requirements necessary for the assets in the trust to be considered separate from the taxable estate of the deceased.

Once the trust is established, the trust can then become the owner of the life insurance policy.

But, the applications of the second-to-die life insurance policy don’t stop there. Even if you don’t expect your estate to be big enough to be subject to federal estate tax, there are a number of other uses for this type of life insurance:

  • Funding for buy-sell agreements, where married couples operate their interests in a company together.
  • To provide for equal distribution of an illiquid estate to children. For example, one child may be able to run an inherited family business or farm, while other children may not have the interest or aptitude. Life insurance allows one child to receive the business and the others to receive cash, rather than forcing them all to liquidate a viable family-owned business.
  • Funding for special-needs children, who will still require support even after the death of the second parent. The parents can set up a special-needs trust to support the child – now an adult in many cases. This provides for their support without compromising their ability to qualify for Medicaid, food stamps or other need-based assistance.
  • To provide funding for the education of grandchildren.

 

There are other specialized applications where second-to-die life insurance works extremely well as a planning tool. To see if this type of policy would benefit your family, call us.

Getting All the Facts for Your Estate Planning

Estate planning laws change from one year to the next. Anyone who is doing estate planning for the first time in 2020 should especially be aware of the current laws, and it is also helpful for people who have planned before but are not sure about current rules to update their knowledge.

These are some of the most important tips to remember for 2020.

The threshold for lifetime gift and estate tax increased – In 2020, the amount has risen to $11.58 million for individuals; it is $22.8 million for couples. This is the maximum amount of gifting via money or asset transfer allowed during a person’s lifetime without tax consequences. The limit more than doubled in 2019 after tax legislation was signed into law by President Trump.

The annual gift exclusion amount is $15,000 – The annual federal gift tax exclusion allows you to give away up to $15,000 ($30,000 for couples) in 2019 to as many people as you wish, without those gifts counting against your $11.58 million lifetime exemption.

Some types of gifts are not subject to this limit. For example, gifts to a spouse, a medical fund or an education fund are not included. Also, education and medical gifts are not taxable. When making medical or education gifts, transfer the funds directly to the institution rather than sending them to an individual recipient.

Lifetime exclusion amount portability is still an option – Estate tax laws started allowing surviving spouses to use remaining lifetime exclusion amounts of their deceased spouses in 2011. In addition to simplifying estate planning, this gave couples a way to access exclusion amounts.

Couples can transfer up to $22.8 million of their taxable property to their heirs without estate tax penalties. However, transfers must be made by election in the estate.

The gift and estate tax effective rate is 40% – If your estate is under $11.8 million, congratulations: The federal estate tax will not apply to your estate. Any amounts over that threshold will be taxed at marginal tax rates that cap out at 40% for an estate worth more than $1 million over the cap.

Remember state gift tax laws – While the rules covered in the previous sections apply to federal laws, they do not apply to state laws. Many states have laws that require estate and gift taxes. If the taxes include lifetime exclusion limits, they will be lower than the federal limits.

To learn about individual state laws, discuss concerns with an agent. It is not possible to avoid these taxes in the states where they are required.

The takeaway

While estate planning is not something most people think about often, it should be considered every year – and when any major life changes happen.

A new addition to a family, a marriage, a death in the family, getting a major promotion and big health changes are just a few examples of times when estate plans should be reviewed and changed as necessary.

Neglecting these changes can cost a person’s heirs a considerable amount of time and money. Stay on top of these issues to keep plans running smoothly. Call us to learn more about optimizing estate planning.

At What Age Should You Buy Long-term Care Insurance?

The specter of having a severe illness or injury that requires long-term care is a scary proposition for most anybody, not to mention the financial obligations you would face.

But trying to time when is the best age to purchase a policy is not an easy decision. Obviously, you don’t want to buy the policy too early and unnecessarily spend thousands of dollars on premium over your life for coverage you may not need until you are much older.

The younger you are when you buy a policy, the lower your premiums. That said, people typically do not purchase long-term care policies in their 30s or 40s since they are looking at a long time-horizon for when they would need to file a claim. After all, the policy may not be needed for 30 years or more.

At the same time, if you wait until you are in your late 60s or early 70s, the premiums may be cost-prohibitive for you – not to mention you may have trouble finding an insurer willing to write your policy.

For example, based on the “Genworth 2019 Cost of Care Survey,” if purchased today, a long-term care policy with a maximum daily benefit of $150 a day for three years would cost an estimated:

  • $2,004 a year for a man who is 55
  • $2,846 a year for a man who is 65
  • $9,603 a year for a man who is 75.

 

As you can see, the ideal time cost-wise is probably in your 50s and 60s.

But before pulling the trigger, you should think about how the premiums fit into your life and other obligations. If you have children who have not yet graduated from college, they will be your major concern. You should carry enough life insurance to see them through.

But after your children, if any, are on their own, you might take the funds you were using to pay for life insurance premiums and use them to finance long-term care insurance premiums instead.

 

What policies cover

Long-term care insurance covers:

  • Nursing home care
  • Assisted living facilities
  • Adult day care services
  • In-home care
  • Home modification
  • Care coordination

 

When shopping for a policy, you will have many choices to make:

The trigger – Policies will have a trigger for when payments can commence. Often, policies base qualification on cognitive impairment or the need for assistance in at least two activities of daily living (dressing, toileting, eating, transferring, bathing and continence).

Inflation riders – As you know, health care inflation is never-ending. While $150 may be sufficient to cover your cost of care today, that may not be the case in a decade or 20 years from now.

With long-term care insurance, you often have the option to buy an inflation rider with the policy, which will increase the allowance for daily benefits by a certain percentage a year, like 5% on a flat or compound basis.

But, you need to know that this type of rider comes with a price in increasing premiums. Some experts recommend that buyers aged under 70 purchase an inflation rider, while anybody older than 70 does not need to do so.

Elimination period – The elimination period is the time the insured must wait before the policy starts paying out. During that period of waiting, you will be on the hook for long-term care expenses. Typically, the waiting period is anywhere from one to 90 days, but it could be even longer.

The longer the elimination period, the lower the premium. That said, the premium savings you achieve by choosing a longer elimination period may not be worth it for you.

 

Don’t fall into the disclosure trap

One thing you have to be very careful about when applying for long-term care insurance is full disclosure about your pre-existing conditions or prior illnesses.

If you fail to tell the insurer about an illness, the company may refuse you coverage at the time you file for benefits. It’s in your best interest to be up front about your health, as you would rather be denied during the application process than have your claim denied after paying your premiums for years.

Why LTC Planning Is Essential for Boomers

As millions of baby boomers in the United States reach old age every year, experts predict the number of long-term care patients will double over the next 30 years.

What does that mean for you? It means that if you don’t have a long-term care plan in place, you and your family may have to face some tough choices down the road.

Read on to learn why a long-term care plan is critical for every baby boomer.

Americans are living increasingly longer lives. Recent estimates give a healthy 65-year-old man a 24% chance of living to at least 90, and a healthy woman a 35% chance of living that long. While this is great news, the longer we live, the more likely we are to suffer from a long-term care event.

This all means that now is the time to put a plan in place.

 

The hefty price tag

If you or a loved one suffers from an illness that requires long-term care, get ready for some sticker shock. A year-long stay in a nursing home typically can cost between $40,000 and $80,000, often more. While prices vary by state and the type of care required, one thing is consistent across the board when it comes to long-term care: it’s phenomenally expensive.

Just take a look at the average costs of various types of long-term care in the U.S.:

  • $5,566 a month for a semi-private nursing home room
  • $6,266 a month for a private nursing home room
  • $2,968 a month for care in an assisted living unit
  • $19 per hour for a home health aide.

 

These costs can quickly add up and eat away at your nest egg. For example, let’s say you hire a home aide to assist your husband just three times a week for four hours. At $19 an hour on average, that would come out at $228 a week. That adds up to nearly $12,000 a year. Unfortunately, Medicare does not cover these exorbitant long-term care expenses.

To top it off, informal home care is simply not a realistic option for most families these days. After all, most children of baby boomers are struggling to balance their own work and family life. They simply don’t have the time or resources to care for sick parents.

This is why it’s critical for each and every family to plan ahead for a potentially expensive long-term care event. Without the proper protection, such an event could devastate a family’s finances.

 

The simple solution: LTC insurance

How can boomers handle the skyrocketing costs of a potential long-term care event? The answer is simple: long-term care insurance. Without LTC coverage, a nursing home stay or another long-term care event could destroy your family’s finances.

Because LTC insurance covers many of these expenses, this valuable coverage will not only protect your finances ― it will also help you to maintain your current standard of living if you or your spouse requires long-term care.

 

The takeaway

Without LTC insurance, the cost of a nursing home stay or a home health care aide could wreak havoc on your finances and whittle away at that nest egg you’ve worked so hard to build. Don’t burden your loved ones with this kind of emotional and financial strain. Create a long-term care plan today to save your family a lot of heartache and stress tomorrow.

If you want to discuss your long-term care insurance options, call us. A professional can evaluate your unique situation and help you customize an effective plan.

A Reality Check Concerning Long-Term Care

Despite expected longevity increasing, more and more people will also need long-term care at some point in their life.

Most people prefer to create their own reality about long-term care rather than face the truth.

But, in the event of a long-term care need, it’s important that the family stays focused on the emotional and physical needs of the person needing care. Having properly planned for this eventuality with insurance coverage allows them to do so.

Many families assume that they will be able to handle the demands of long-term care on their own. What they don’t realize is that having the responsibility of being a caregiver has a major impact on your life.

The demands often cause people to give up jobs so they can devote the necessary amount of time needed to provide care. It can also drive a wedge between family members if a spouse becomes an absentee parent because they are spending most of their time providing care for their own parent.

That’s why it is so important to have long-term care insurance to provide suitable care without placing undue stress on the family of the person requiring the care.

While this makes sense in theory, many people are reluctant to purchase insurance because they don’t grasp the reality of long-term care costs and if they can pay for them.

Many people believe that they can pay for long-term care costs from their own assets. They think  that a reverse mortgage or stock portfolio can take the place of a policy. However, the cost of caring for an extended illness can easily wipe out one’s assets and bring a family to bankruptcy.

Some also falsely believe that long-term care is only administered in nursing homes. In fact, the majority of people receive long-term care today in their own homes or community based facilities, not nursing homes.

Depending on the policy, long-term care insurance can cover nursing home stays, home health care and community-based services.

And finally, many people believe they can rely on Medicaid for long-term care. However, the policy changes to the Medicare program mandated by the Deficit Reduction Act of 2005 have made fewer people eligible to receive benefits.

The safest course of action is not to wait and learn that your family member cannot qualify, but rather prepare for the future with a long-term care policy.

 

Comparing policies

When you are comparing policies, there are several factors to consider before making your decision:

  • The financial strength of the insurance company underwriting the policy.
  • The cost of care in your area, so that you can choose a daily benefit that will cover the needs of the person receiving the care.
  • The length of the benefit period. Since it is difficult to determine how long they may require care, many people choose policies with lifetime benefits.
  • The number of days the policyholder will be responsible for paying out of pocket before coverage begins. This is known as the elimination or waiting period.
  • The inflation protection provided by the policy. This feature ensures that benefits provided by the policy will be adequate to cover future needs.

FSAs, HSAs Can Now Be Used for Non-Prescription Medications

The recently enacted $2 trillion stimulus law aimed at providing financial assistance during the coronavirus outbreak also includes a key change on how health savings accounts and flexible spending accounts can be used.

The Coronavirus Aid, Recover and Economic Stabilization Act, or CARES Act for short, reverses an Affordable Care Act rule that barred policyholders from using funds in HSAs and FSAs to pay for over-the-counter medications.

HSAs and FSAs allow people to set aside pre-tax funds for medical costs, medical out-of-pocket and copays, as well as for the cost of pharmaceuticals. The moneys in these funds are usually deposited from the employee’s paycheck before taxes, thereby reducing their tax burden.

 

HSAs

HSAs are usually attached to high-deductible health plans, while FSAs can be used in conjunction with any employer-sponsored health plan.

For 2020, contribution limits to HSAs are $3,550 for individual coverage and $7,100 for family coverage.

Unlike FSAs, HSA owners can allow their funds to carry over from one year to the next, so their contributions and the interest accrues tax-free.

You can withdraw money from an HSA tax-free if it’s used for qualified medical expenses. You can find a list of these expenses on the IRS’s website (your HSA provider should also be able to provide you with a list).

 

FSAs

For the 2020 calendar year, an individual can contribute up to $2,750 to a health care FSA.

If employers provide health care FSA contributions, this amount is in addition to the amount that employees can elect. Employees can elect up to the IRS limit and still receive the employer contribution on top of what they contribute themselves.

If employers have adopted a $500 rollover for the health care FSA, any amount that rolls over into the new plan year does not affect the maximum limit that employees can contribute.

 

The takeaway

The ACA rule was relaxed by the CARES Act due to the coronavirus outbreak, so that people can use their FSA funds to pay for OTC medications like pain relievers, anti-inflammatories and other medicines that don’t require a prescription.

While the coronavirus led Congress to permanently overturn the Obamacare restriction on OTC medications, other parts of the CARES Act reforms could vanish once the pandemic ends. For example, it only temporarily allows insurers and employers to cover telemedicine if employees haven’t met their deductibles.

Estate Planning During Coronavirus Outbreak

During these trying and frightening times, we are all aware of our own mortality as we see the infection and death rates of the coronavirus pandemic.

This is especially true if you are concerned about your heirs and dependents at this time. The last thing you want is for your estate to be tied up in probate with no clear path for distributing your assets.

There are many advantages of having a comprehensive estate plan, such as avoiding probate, tax savings, planning for incapacity and providing for minor children ― but perhaps most importantly, is peace of mind.

You can call us to go through what you will need to put your estate plan together, and we can provide you with model plans that you can use as the structure for yours.

Fortunately, most estate planning work can be done at home. You may not be able to physically meet with your attorney, but you can still create, update or finalize your estate plan. Most attorneys are working remotely and are available via e-mail, telephone and video conferencing to advise you.

Documents can be drafted and e-mailed to you for review, or delivered to you by mail or a tracked delivery service.

In general, there are four essential estate planning documents everyone should have in order.

 

The will

A will can ensure a person’s wishes are followed after their death in many regards. A simple document specifying where everything will be directed after death is essential when there are multiple heirs.

The will should also name the executor, who would be in charge of making decisions about the estate and paying bills. You should let the person you name as executor know you appointed them. At the same time, it’s not necessary to tell all heirs they are included, excluded or what they can expect.

 

Medical power of attorney

This document is sometimes called a health care proxy. It allows any designated adult to make medical decisions for a person if he or she is unable to do so. It is important to choose a person with trusted judgment who has the ability to stay calm during a crisis while still exercising good judgment.

 

Durable power of attorney

This document appoints another person as an agent to act with authority and make decisions for the creator of the power of attorney if they become disabled or are not capable of making their own decisions for whatever reason.

No person should take this decision lightly or make hasty choices. The role of power of attorney gives a person long-lasting power. The person chosen should be trustworthy and financially responsible. It is always important to name a backup person, as well.

 

Living will

Living wills, also known as advanced health care directives, specify the wishes of the creator for their end-of-life care. This includes topics such as life support, resuscitation and feeding.

It is important to sit down and talk to loved ones about individual wishes when it comes to living wills and medical power of attorney forms.

 

Next step

To ensure that people can finalize their estate plans at this trying time, lawyers are offering to:

  • Conduct the initial meeting by teleconference or videoconference,
  • E-mail and deliver documents for you to review at home, and
  • Make adjustments and finalize the plan by teleconference or videoconference.

 

State laws govern execution of wills. Some states require two witnesses and a notary, others only one witness. Some states allow for online execution of these documents, while other states don’t.

Witnesses who sign the will should not be party to the estate plan (such as heirs).

Some law firms are still open to provide this service, and some are doing house calls for executing the paperwork (with precautions such as disinfecting ahead of time, social distancing and wearing masks).

But you could also do it in your own home with witnesses present without a lawyer. However, there are rules around who can act as a witness.

Depending on your state, notarization of your documents may or may not be required. Call us to find out if this is necessary for you.

Life Insurance Benefits That Kick in Prior to Death

Most prudent individuals with a family have life insurance in place, but what happens if you have a life-debilitating illness or injury that leaves you incapable of working and which renders you struggling to hang on to life?

The financial consequences of a terminal illness can be catastrophic. Developing cancer, suffering a heart attack or being seriously injured in an accident can leave you and your loved ones scrambling to make ends meet.

For people in that position, it makes sense for life insurance benefits to kick in so that they can be used while the covered individual is still alive.

The term for this type of insurance is “living benefits,” which typically comes in the form of a rider to a life insurance policy. A living benefits rider helps people to receive care and pay for chronic or terminal illness that precedes death.

The rider entitles the policyholder to an early and accelerated payout of policy death benefits, if the insured is diagnosed to have a life expectancy of 12 months or less.

The rider can help make the insured’s remaining time as comfortable and as dignified as possible, and also keep the family from financial ruin.

Often the majority of our health care expenses come during our end-of-life stage. And that leaves many terminally ill patients facing financial hardship during the worst possible time.

Unfortunately, a simple life insurance policy will not step in to pay benefits until the insured has passed. The living benefits rider breaks down that barrier.

The policyholder can access up to $250,000 or more of eligible policy proceeds, depending on the type of contract.

This payment, made to the policyholder rather than the beneficiary, reduces the cash value and death benefit, so it dilutes what the policyholder’s beneficiaries will receive upon his or her death.

Policyholders without this rider and in this situation have two options for accessing funds:

•          A policy loan

•          A policy surrender

 

In most cases, however, the rider may provide more funds than either of these options.

This is because policy loans or surrenders are usually based on cash value, while the amount available from the living benefits rider is generally based on the policy’s face value, paid-up additions, and (if applicable) an amount payable under a rider that provides a level amount of insurance.

The rider may be exercised only once and it will be terminated once the policyholder makes a claim for accelerated benefits.

At the policyholder’s request, this rider can be added to new or existing policies for a one-time charge, which is applied when the rider is exercised.

The policy owner merely has to elect living benefits coverage, and can choose to do so anytime.

Benefits are tapped when the policyholder presents the insurance company with proof that they have a terminal illness or have been given a certain time to live based on their circumstances.

If you have any questions about this voluntary benefit and why you should consider offering it to your employees, contact us today.

If you have any questions or would like to speak to a professional advisor, please contact ACBI Insurance at 203-259-7580.