When was the last time you had your life insurance policies reviewed? Some changes that may require you to re-evaluate your coverage include marriage, divorce, a new baby, purchase of a new home, starting or expanding a business and retirement.
Life insurance and estate tax planning
Simply put, you can have a life insurance policy that covers the estate taxes on your assets. This prevents your loved ones from having to worry about selling investments while they are grieving — or when selling is disadvantageous — in order to pay the estate taxes.
Life insurance policy in a trust to replenish some of the estate taxes that will ultimately be paid to the IRS. This allows you to pass more of the assets that you’ve accumulate during your lifetime to your heirs, or creating liquidity where it could be difficult to raise money at this untimely event.
Why the ownership of your life insurance matters
While the main purpose of life insurance is to provide for the beneficiary, it can be a huge shortcoming in your financial planning if you never discuss the ownership of the life insurance policy.
The federal estate tax impacts those who die and leave a sizable taxable estate upward of $5.34 million (for 2014; visit IRS.gov for updated information). For those estates that do owe taxes, whether life insurance proceeds are included in the taxable estate depends on who owns the policy when the insured dies. If the deceased person owned the policy, the full amount of the proceeds are included in the taxable estate; if the ownership of the policy is in an irrevocable trust, the proceeds are not included in the estate.
To have your life insurance proceeds not subjected to estate tax, you may wish to consider an ownership change or possibly a new policy, which would avoid potential gift tax implications. Be aware that some group policies, which many people participate in through work, don’t allow you to transfer ownership at all.
Universal life insurance polices and interest rates
The low interest, low return environment that we have experienced over the past decade has resulted in the owners of universal life policies receiving considerably less interest on the cash portion of their policy as compared to the higher interest rates that were available at the time of purchase. The policy charges that were easily handled at the higher interest rates are now adversely impacting the originally projected policy cash values.
This will result in less than expected cash values down the road, potentially reduced death benefits and/or in the worst case, policies lapsing years earlier than originally projected.
A professional life insurance broker should be reviewing all of your life insurance policies, including Universal life, at least once a year.
Your health, your lifestyle and the impact on your premium
There are many things that affect your life insurance premium. The details of your lifestyle and current health are just a few of the factors that are considered when purchasing a life insurance policy. For instance, if you smoke and your insurance company labels you as a smoker, they place you in the smoker risk category, which means your premium will be significantly higher than it is for nonsmokers. While insurance companies assess each policy differently, smoking is defined as your use of cigarettes, cigars and chewing tobacco – and sometimes using a nicotine patch or gum can qualify you as a smoker.
Many times, if you’ve quit smoking for over a year, reducing your premium on your current coverage is possible. Keep in mind that you will still have to meet the insurance carrier’s other underwriting guidelines and not have other high risk conditions.
We recognize that every personal situation is unique — contact us today so you can make an informed decision about your life insurance protection options.