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.

 

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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.

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.

Four Life Insurance Myths Shattered

Life insurance is a straightforward concept: Buy a policy and pay a relatively small premium, and the beneficiary will get a large cash benefit if the insured dies while the policy is in force.

But there are many variations on this basic theme – and just as many misconceptions about how life insurance works. Here are some of the most common myths.

 

I already have enough life insurance through my job.

Many people believe they have coverage from work. But in many cases, the amount of coverage from a workplace group policy is not nearly enough to provide meaningful protection for the employee’s family.

The reason: Section 7702 of the tax code, which governs employer-paid group life insurance benefits, only allows employers to deduct premiums for a death benefit of $50,000 or less. That’s only a fraction of the true need for most working families.

Many financial experts recommend owning between 10 and 12 times one’s salary or more – especially if you are relatively young. The reason: If the unthinkable happens, the family will need that life insurance to replace many years of a breadwinner’s salary.

Furthermore, if you get sick and lose your job, you may lose your life insurance just when you need it most. And you may not be able to qualify for life insurance then.

Owning your own policy ensures that you can select the amount of protection that suits your needs, and that your policy follows you even if you change jobs or leave the workforce. If you have coverage at work, you may want to explore owning additional coverage for yourself and your family.

 

I’m young and healthy and don’t need it.

The best time to buy life insurance is when you are young and in good health. Accidents and injury, not illness, are the leading cause of death for Americans under age 44, and the fourth leading cause of death for Americans of all ages, according to the Centers for Disease Control.

These deaths include:

• Car accidents
• Accidental drug overdoses, including prescription drug overdoses
• Medical error
• Falls
• Drowning
• Accidental shooting
• Electric shock
• Fires
• Traumatic brain injury
• Crime

 

Any of these events can strike the young and healthy at any time. More than 235,000 Americans died of injuries and accidents in 2016, according to the CDC –  105,296 of them, or 43%, were age 45 or younger.

I don’t qualify for life insurance.

Medicine has improved a great deal in recent years – and life insurance underwriting has changed with it. You may still be able to qualify even if you have controllable diabetes, cancer (in remission, usually for five years or more), or if you smoke or are overweight, have high blood pressure or cholesterol.

Yes, you’ll likely have to pay a higher premium, or settle for a lower amount of life insurance.

 

I can’t afford it.

It’s more affordable than you think. Some 80% of Americans vastly overestimate the cost of life insurance, according to LIMRA. Millennials overestimate the cost by 213%, and Gen Xers by 119% .

The fact is today’s life insurance carriers are able to offer meaningful protection for just a few dollars per week – and often less than the cost of a single dinner out per month. This is especially true if you buy it while you are still relatively young and healthy.

Besides, if you think you can’t afford it now, imagine how devastated your family would be if they suddenly lost you!

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

The Little-Known Secret About Annuity Safety

There are two layers of protection included in an annuity policy’s cash value. The first layer is based on the life insurance company’s financial strength, and the second layer is provided by a guaranty association located in the state where the policy was issued. The main national organization for guaranties says that policyholders may rest assured that the guaranty associations found in various states exist to help protect and maintain coverage of policyholders. Guaranty associations provide safety nets to make sure the promises of the insurance industry are kept even if companies fail financially. In 1983, NOLHGA was started for the purpose of providing financial backing for policies in the event that insurers suffered a financial collapse.

Although guaranty associations exist today, many people have never heard of them and will not learn about them without searching for information. This is because state insurance commissioners do not want people to be aware of them. There is actually an act in existence that prohibits agents and insurance companies from blatantly advertising guaranty associations. Section 19 of this rule says that no person who is an insurance agent or is affiliated with an insurance company can publish, circulate or disseminate information to the public. This applies to magazines, newspapers and other forms of publication. Notices, circulars and other common forms of advertisements are also prohibited. They may not broadcast the information on the radio or on the television. Statements made about the guaranty associations cannot be verbal or written, so telling people about them is also prohibited for agents.

While there have been obvious attempts to suppress this information, state guaranty associations have continued offering policyholders financial protection for any annuities ranging between $100,000 and $500,000 for the past 25 years. The amount of coverage depends on the type of annuity chosen and the policyholder’s state of residence. The NOLHGA has a site that makes plenty of information available. People who are concerned about this issue can visit the site for more information. Some people have annuities, but they may not fully understand how these financial products work. It is important to learn this, and a good way to start is to discuss the details with an agent. An agent can explain how these function and what policyholders can expect. While they are not supposed to share information about guaranty associations, ACBI can provide helpful tips and offer answers to other various questions.

Importance of Key Employee Insurance

Key employees are those whose skills and knowledge are significant contributions to overall business income. If a key employee dies or is unable to work anymore, the impact is significant enough that the business will suffer. The financial consequences are undesirable and detrimental. Research shows that many businesses depend on at least one or two key employees for their overall success. However, less than 25 percent of employers have life insurance for their key persons.

Disability income and life insurance for key persons who die or become disabled can provide compensation for a business. The monetary benefits are enough to cushion the adverse financial impact of losing the key person. There is no specific dollar amount that employers should purchase for this type of coverage. However, each employer should consider how much their key persons contribute to the company in order to decide how much coverage to buy. To ensure the proper amount is purchased, it’s best to contact an agent to discuss insurance options. Some insurance companies provide special formulas for calculating this amount. However, it’s important to keep in mind that a calculator is standardized, so it may be better to purchase more than the amount derived from the formula. Only an employer can determine an individual employee’s worth to their company.

In many cases, reviewing the employee’s list of responsibilities can help in the evaluation process. It’s important to consider the cost of replacing a key person. Hiring new employees can be expensive. In addition to this, agency fees, salary and possible moving expenses should be considered for the replacement. While the insured organization pays the premium, is the beneficiary and owns the policy, it’s possible to set up an insurance plan that allows sharing of these responsibilities between the key employee and employer. However, the employee must agree to the company’s purchase of this type of insurance.

Most businesses choose term insurance if their main purpose is getting compensation for losses resulting from the death or disability of a key employee. In some cases, policies that accumulate cash value are appropriate. It’s best to discuss these options with an individual agent. Key person life insurance is more popular than key person disability coverage. However, it’s important to consider the possibility of an employee becoming partially or fully disabled and the effects the disability would have on the financial future of the business. If the key person is a sole proprietor or partner, it may be best to consider a business overhead expense policy for disability coverage. To determine which options are best for an individual company, contact ACBI. 

 

Creating a Solid Business Succession Plan

Business owners who are nearing retirement must think about forming a succession plan. Choosing a successor is not an easy process. There are many different factors to think about, and some owners may find that it is best to simply sell the entire business. However, choosing a good successor can be even more profitable, so it is worth considering.

Choosing A Successor Maintaining a good cash flow and keeping a stable balance sheet are two main goals all business owners have. Both can be an ongoing battle. Choosing a successor who is capable of keeping an optimal cash flow can be challenging. In some cases, business owners may simply be able to appoint a family member. However, those who do not have family members, or those who do not have family members interested in keeping a business, have the biggest challenges. It is best to devise a list of candidates. Identify each individual’s strengths and weaknesses. Another factor to consider is how important the business may be to the successor. Many family members feel that a business upholds the family name, so they may be less likely to sell it. However, a successor outside of the family may not feel the same way.

Determining The Business’ Worth Certified public accountants can perform an appraisal on a business or a share of a business. This puts a realistic dollar value on its worth. If a company’s value depends on public stock, the value of the owner’s interest is calculated using the current stock market values. As soon as a value is established, life insurance should be purchased by the business owner or all partners. If one partner dies, that individual’s life insurance benefit can be used to buy out his or her share of the business. It can also be equally divided among the surviving partners. These arrangements may be known as entity-purchase agreements or cross-purchase agreements. The term used is determined by the specific situation’s details.

Ways To Transfer A Business Cross-purchase agreements allow each partner to own a policy for every other business partner. Each partner is both a beneficiary and an owner for the same policy. By paying the benefit to all partners in equal sums, there are no quarrels over unfair percentages. However, there are limits for this type of agreement’s practicality. If there are more than 10 partners in a business, it does not make sense for each partner to have a policy for all of the others. In addition to this, there may be significant differences in underwriting requirements and terms for each partner’s policy. For example, if one partner is 30 years old and one is 60 years of age, their policies and costs would be different. In situations such as this, entity-purchase agreements are often used. Entity-purchase agreements are not as complicated. The business itself is the beneficiary, and there are separate policies for each partner. With this type of agreement, the partners’ equity is underwritten, and the business consumes all of the costs. If a partner dies, the benefit is paid solely to the business itself.

Having a business succession plan is a good idea. Creating one may seem like a hassle, but it is time well spent. Devising a succession plan ensures that an agreeable price is set for each partner’s share of the business. It also reduces the need for valuation after death because of pre-agreed prices. A succession plan can also help with prompt settlement of a deceased partner’s estate. Benefits are available immediately after death, and there are no time restraints or liquidity issues to deal with. This eliminates the possibility of having to sell the business or facing external takeover due to financial issues. These plans require solid preparation. It is important to seek the advice of a competent adviser. For more information about creating succession plans, contact ACBI.

How Buy-Sell Agreements Can Save a Business Partnership if One Partner Dies

Business partners share many burdens and the task of making difficult decisions. They are assets to a company, so it is important to protect the business in the event a business partner dies. Both partners should plan ahead for this possibility. A death will affect multiple aspects of the business, and its effects span wider than most people assume. Many people prepare for the ensuing conflicts between themselves and the deceased partner’s family or survivors. However, it is also important to prepare for issues such as suppliers recalling contracts, customer numbers dwindling, creditors demanding payments and the possibility of some employees wanting to leave the company.

Exploring the available choices in the event a business partner dies is beneficial. One of the first steps a person may take is to liquidate the business. After this, the assets will be distributed. However, this will eliminate the main source of income for the surviving partner in most situations. Surviving partners should also be aware that assets usually sell for only a small percentage of what they are worth. Another option is to offer partnership to the deceased’s heirs. There could be problems with this choice, because the heirs may not share the same workable relationship with the surviving partner that the deceased partner did. They may also not be familiar with that type of business and require more training. Replacing a deceased partner’s skill set, chemistry, knowledge and perspective is difficult and sometimes nearly impossible.

Some surviving partners can sell their own shares to the deceased partner’s heirs. This option dos not usually work, because the heirs typically disagree with the purchase price. Difficulties often continue throughout the rest of the processes. A final option is to buy out the heirs and make the business a sole proprietorship. Again, this option comes with disagreements over terms and the purchase price. In addition to this, the surviving partner must produce the money to buy the remaining half of the business.

These exhausted and undesirable options may seem to leave no choices. However, the best option is to construct a buy-sell agreement. This is a legally binding contract that outlines what will occur if a business partner becomes disabled or dies. All decisions can be made in advance, so both partners will be able to make future decisions for the business if one dies. Contracts can be very complex or very simple, but they should specify purchase prices or include a formula to calculate the value of the company if a buyout must be made.

A business partner’s death will be hard for not only his or her surviving family members but also a surviving business partner. Negotiating the future of the business during a difficult time can be bypassed by having a solid buy-sell agreement in place. Adequate and fair provisions can be made with a buy-sell agreement for the heirs of the deceased partner. It is also much easier to place an accurate value on the deceased partner’s business shares, and the agreement will take some of the strain off of the business. It also keeps bad feelings between the parties from forming. To learn more about these options and to protect the future of a business, contact ACBI.

Why Married Retired Couples Should Pay Attention to the Social Security Two-Life Benefit

Financial experts said the top Social Security strategy is to maximize the two-life benefit. This strategy applies to retired married couples, and it involves delaying collection of the larger of the two peoples’ benefits longer. This is done until the target beneficiary reaches the age of 70. The lesser of the two benefits is later commenced when that person reaches retirement age, and this helps maximize Social Security payouts.

File And Suspend With this method, the spouse entitled to the greater benefit claims it. However, that person avoids drawing against the benefit. Couples who are financially able to wait to draw the benefit after the top wage earner reaches the age of 66 must allow the benefit to grow at an annual rate of eight percent. That money must remain untouched until the person turns 70. At that point, it is maximized. The spouse who earns less is able to collect 50 percent of the higher earner’s maximized benefit. In some cases, this is more than what the lower earner’s benefit would have originally been.

Restricted Application In some cases, the lower earning spouse may not benefit from the first option. If that individual would receive a more generous benefit than 50 percent of the higher earner’s benefit, he or she would file a restricted application. This type of application lets the lower earner claim a spousal benefit, but it also lets that individual’s benefit grow until the higher earner turns 70. At that point, both individuals can collect their maximum benefits.

Important Considerations Experts also pointed out several other important considerations connected to these strategies. Many advisers think about crossover points with Social Security payouts. However, those crossover points are not relevant for married couples, because the adviser’s goal is not to target the crossover point but the two-life benefit instead. Since a surviving spouse receives a larger benefit and the odds are likely that one will outlive the other, targeting this benefit is key. For people who are single, crossover points are more important to consider. A single person could start collecting early and receive a smaller benefit, or he could wait until later and still receive the same amount. Regardless of the age the person lives to be, he or she will still receive the same benefit.

Eliminating Investing Payout Strategy When individuals expect to pass away at an earlier age, it is more sensible to start collecting benefits early. In addition to this, people who expect to outlive the average mortality point should delay claiming benefits until they reach the age of 70. In the past, it was possible to collect Social Security benefits, use the payout to invest and then pay the Social Security Administration back later. After doing this, a person could start over at a higher rate. However, there are now time frames for paying back benefits received during the span of one year, so that put an end to that type of strategy.

To learn more about options and what choice is best for individual circumstances, call ACBI at 203-259-7580 or visit our website.