Below is a case study that shows how an index oriented option can help offer income guarantees and increase income success rates.
Do your seek greater certainty in your retirement income strategies? Below is a case study that shows how an index oriented option can help offer income guarantees and increase income success rates.
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In our previous blogpost, we discussed life insurance underwriting for applicants with Hep C. Below is an article from Prudential about the facts and tips for people with Hep C. Fidelity Investments, which has $11.1 trillion in assets under administration, announced on November 18, 2021 that it was launching Guaranteed Income Direct in 2022, giving 401(k) and 403(b) plan participants the ability to annuitize their retirement savings.
The company says it has 8 million workers age 50 to 64 on its savings platform, noting that the growing interest in these “guaranteed income” products was a key reason for offering this new option. Workers in the Fidelity network will be able to buy an immediate income annuity, with institutional pricing and offered by an insurer of their choice, via Fidelity’s platform. Participants can select the product and the amount they want to convert on an individual basis. Any money not converted can remain in the workplace savings plan, the company said. Risks can take a toll on retirement resources. Learn how to spot them and understand how to address them. What Do Medicare and Medicaid Cover?
Both programs generally help people with improving or correcting specific medical or health problems, but not with day-to-day custodial care, or what are known as Activities of Daily Living (ADLs). Medicare will only cover rehabilitative care following a hospital stay which limits the availability of benefits. On the other hand, Medicaid is a program for individuals with limited resources and income which means most people won’t qualify for these benefits. So, if you eventually need help with ADLs like eating, bathing, getting dressed, getting around or personal hygiene, those services wouldn’t be covered by Medicare or Medicaid. You would need private long-term care insurance to help pay for that. Advantages of a private LTCi policy over Medicare and Medicaid
The financial strength of an insurance company is based on prior claims experience, investment earnings, level of reserves, and management, to name a few. Guides to insurance companies' financial integrity are published by the following various independent rating services:
The most common employer provided group life insurance benefit is coverage up to $50,000 per employee of group term life insurance with additional coverage for the employee's spouse and dependents of up to $2,000 each.
The reason this is the most common employer provided group life benefit is because this is the amount and type of life insurance coverage that an employer can offer to their employees without the premiums paid being considered as income to the employee. Section 79 of the Internal Revenue Code sets these limits. With this type of arrangement the employer pays the policy premiums, deducts them as a business expense, does not add the premium to the employee's W2, and the death benefit is still income tax free to the beneficiary. Universal life offers two death benefit options to the policyowner. Option A is the level death benefit option, and Option B is the increasing death benefit option. Under Option A, the death benefit remains level while the cash value gradually increases, therefore lowering the pure insurance with the insurer in later years. The reason the above Option A illustration shows an increase in the death benefit at a later point in time is so that the policy will comply with the "statutory definition of life insurance" that was established by the IRS. According to the definition, there must be a specified "corridor" or gap maintained between the cash value and the death benefit in a life insurance policy. The percentage that applies to the corrido is established in a table by the IRS and varies as to the age of the insured and the amount of coverage. If the corridor is not maintained, the policy is no longer defined as life insurance for tax purposes and consequently loses most of the tax advantages that have been associated with life insurance.
Under Option B, the death benefit includes the annual increases in cash value so that the death benefit gradually increases each year by the amount that the cash value increases. At any point in time, the total death benefit will always be equal to the face amount of the policy plus the current amount of cash value. Since the pure insurance with the insurer remains level for life, the expense of this option is much higher than that for Option A, therefore causing the cash value to be lower in the older years (all else being equal). This article from Zerohedge calls this strategy Private Placement Life Insurance, or PPLI.
Here is a quote from the article. “The math is simple: as long as assets are held in a PPLI policy, they escape taxes much to the horror of wealth redistributionists like Elizabeth Warren. When the holder of a PPLI policy dies, heirs inherit the PPLI’s contents tax-free, a perk which strikes at the heart of Biden’s plans to get the very wealthy to pay more taxes on their investments, especially on capital gains that currently aren’t levied if assets are held until death.” Do you want to advantage of a massive loophole in the tax law? Cash value life insurance is the number one benefit in the entire tax code. This benefit is entirely legal, easy to exploit and politically very hard to close. It is the greatest time ever to buy cash value life insurance. Here are 6 tax advantages associated with annuities that you need to be aware of:
Term life offers a simple, affordable and flexible way to protect yourself and loved ones from financial hardship.
1. Term life is straightforward. It is easy to understand how the policy works and its reciprocal benefits. If a consumer needs life insurance for a specific period of time, term life insurance enables them to match the length of the term policy to the length of the need. Most commonly, people buy this policy to protect their families from financial hardship due to loss of income. 2. Term life is cost effective. It is affordable and allows people to buy just the right amount of coverage they need for when they need it most. For example, single parents are often concerned about their children being able to afford college tuition in the event of their premature death, but term life can account for that. Typically, premiums remain the same throughout the length of a term life policy. And, younger policyholders gain a greater amount of value for less cost. This means that for any younger consumers thinking about life insurance, term life makes sense to consider sooner rather than later. 3. Term life can be customized. In an age of personalization and innovation, term life insurance can be structured to fit a consumer’s unique financial situation and requirements. This is particularly appealing to millennials, a generation accustomed to being able to tailor and customize everything from their social media feeds to their investment or savings products. Term Life can be customized in several ways: value of the death benefit; term length; level or decreasing death benefit the life of the policy; whether the policy is renewable; and riders. With these important options available, it comforts consumers to know that term insurance can be more than a death benefit. When the capabilities of life insurance are clearly described to consumers, many people may be surprised when they see what their dollars can do for them. In last blogpost, we discussed Same-sex couples.
Multigenerational families In a multigenerational family, two middle-aged adults might find that their dependents include not just children, but also an aging or disabled parent. Financial hurdles for multigenerational families include loss of income and retirement assets due to providing assistance to a parent. When you have an aging parent living with you, just the normal day-to-day living costs can start to add up, which can affect the couple’s cash flow and savings. While any income the parent receives can help offset the additional living costs, often that income is used to pay for medical and health care expenses for that parent. Further, that parent may need around-the-clock assistance at some point, which will put further stress on the family. Considering paying for full-time care is extremely expensive. Some families have elected to have one spouse stay at home and be the caregiver. The decision to quit your job to stay at home with Mom or Dad has an impact on your current financial situation and a lasting impact on your future retirement. Leaving work means losing not just current income but also future Social Security or pension income, as well as employer benefits such as health insurance and 401(k) contributions. If you do not take care of your own physical, mental, and financial health, then ultimately no one will benefit from this arrangement. In last blogpost, we discussed Single person, living alone, with no children.
Same-sex couples Thanks to the Supreme Court decision legalizing same-sex marriage nationwide on June 26, 2015, same-sex couples now face simpler financial planning that makes it easier to jointly own assets, inherit assets, and file taxes. Their notion of a dependent is no longer unique. Nonetheless, establishing trusts and making an estate plan provide extra protection through clear legal documentation, especially in states that are still fighting against the law. And same-sex couples that consist of two high-earning professionals may need extra help investing their money wisely. What else is still different about financial planning for same-sex couples? Because they are not guided by the traditional relationship mores, they have to make big decisions about how intertwined they want to be with one another from a financial perspective. Even life partners can have a hard time comingling their finances because some people are very protective about their money. One partner might want to plan as if their money is one, and the other might want to approach assets as being individually owned. One of the most common pieces of advice is that aren’t married is to consider marriage for the sake of love, and nothing else. When finances become a part of the marriage decision-making factor, it almost never works. In fact, if love wasn’t a part of marriage, the advice would generally be to stay unmarried for the sake of finances. Managing individual investment portfolios simplifies tax implications, investment decisions, income distributions, et cetera. In next blogpost, we will discuss Multigenerational families. In last blogpost, we discussed Single-parent households.
Single person, living alone, with no children For singles living alone with no children, your primary dependent is yourself. And single-person households make up more than a fourth of all U.S. households nowadays. Not having a partner can make it harder to save — you don’t have two incomes and you don’t have the economies of scale that you get from sharing housing, utility, and food costs. In expensive parts of the country, home ownership can be out of reach for singles. On the plus side, not having children means incredible savings. There may be less of a need to purchase life insurance since, depending on circumstances, no one directly depends on your income. On the other hand, some single situations may contradict that thinking. While everyone should plan to be financially self-sufficient, considering long-term care insurance options is extra important for this group, who can’t count on children to help care for them in old age. Planning for unemployment and disability is also essential for singles, since there’s no second income to fall back on. Saving a substantial emergency fund to cover several months’ worth of expenses, purchasing disability income insurance, and starting a side job or piece work to diversify your income stream can make things less precarious. It’s also important to have a will and a trust to spell out what should happen to your assets when you die and keep the process out of probate court. In next blogpost, we will discuss Same-sex couples. In last blogpost, we discussed blended families.
Single-parent households In 2020, there were about 15.31 million children living with a single mother in the United States, and about 3.27 million children living with a single father, according to one analysis. In these families, caring for a dependent can be especially tough, because divorce often slashes a family’s income and assets, as does never partnering up in the first place. Single parents are less likely to be saving enough for their own retirement and may be extra stressed by trying to save for themselves while wanting to help children pay for college. Alimony and child support may be insufficient to pay for major expenses like childcare during work hours, extracurricular activities, braces, and college because the original arrangements were made without the child’s long-term needs in mind. What will happen to the child if the single parent becomes ill or passes away is the primary concern for single-parent households. So, a sole breadwinner should focus on disability planning and insurance. To that end, the parent should establish an emergency fund and secure disability income insurance. The emergency fund is key because disability income insurance policies typically have a waiting period before making payments on a claim. The emergency fund can provide for living expenses before the disability income insurance policy’s waiting period is up and even while it’s paying benefits, since the insurance typically will only replace 50 percent to 70 percent of monthly income. Life insurance is also a priority to help ensure children’s financial needs will be met if the parent passes away before they become financially self-sufficient. Single parents must resist the urge to put saving for their children above saving for their own retirement because they have no spouse to help with retirement savings or retirement expenses and since the division of assets in a divorce may have taken a bite out of their retirement savings. Further, federal financial aid doesn’t count a parent’s retirement assets against a child’s college financial aid package. One simple thing single parents can do to improve their finances is to file as head of household on their annual tax returns. This status will result in a lower tax rate and higher standard deduction than filing single. If you feel as though things are particularly precarious as a single parent, keep this in mind: no family style is guaranteed to be stable. All families must create their own stability and recognize what they can and cannot count on. Next, we will discuss Single person, living alone, with no children. How has the changing notion of a dependent affected family finances and financial planning?
Families are smaller these days, and two-parent households are less common. Same-sex couples can legally wed in all 50 states. And a “dependent” is no longer always a biological child younger than 21; it may be an older parent, a same-sex partner, a spouse, or stepchild from remarriage, a former spouse, or even in a sense oneself. We will take a look at five of the more common types of modern family arrangements:
Blended families It’s common these days for adults who decide to marry or live together to bring children from a previous relationship into the picture. That can mean more dependents to take care of. A family might include children from each spouse’s previous marriage, plus new children from the new union. More kids mean more expenses, the biggest of which is college. Who should pay? The biological parent the child lives with most? The biological parent with the most resources? The stepparent? And who do colleges expect to shoulder the costs? Figuring out how to maximize financial aid for college can be tricky in blended families since there are both FAFSA guidelines and, for many private schools, CSS/PROFILE guidelines to learn the ins and outs of. The good news is that blended families can pool their assets. They might be able to afford things that single and divorced parents can’t. Blended families can find it difficult to save, though, because of financial liabilities created by a previous marriage, such as child support and alimony, not to mention the loss of shared assets that were divided in the divorce settlement. Also complicating finances are tax matters related to selling previously shared assets and claiming dependents. Blended family estate planning is more difficult, too. Carrying life insurance to provide for your new dependents and updating beneficiaries on old policies are key. You don’t want proceeds accidentally going to your former spouse. Further, there may be a need for increased life insurance in blended families where the parents are not married because of the loss of survivor’s benefits or the ability to draw on the higher earner’s Social Security benefits. In next blogpost, we will discuss single-parent households. We discussed 3 forgotten tax benefits of life insurance here, now the next 3 tax benefits.
4. Tax-Advantaged Access to Cash When Needed Most potential buyers don’t understand that permanent life insurance policies have contractual features that allow the owner of the policy to withdrawal cash from the policy using tax-advantaged loans and withdrawals. Money borrowed or taken from the cash value of a life insurance policy is generally not subject to income taxes up to the “cost basis” — the amount paid into the policy through premiums. Also, there are no regulatory restrictions on how the cash taken from a life insurance policy must be used by the owner. This creates significant flexibility to use the cash to fund a variety of needs, be they health or personal needs, such as putting on a new roof. 5. Supplemental Source of Tax-Free Retirement Income Policyowners can withdraw or borrow against the value of their permanent life insurance contracts for any need, like supplementing their retirement income. If this benefit is used, the policyholder needs to clearly understand that tapping a life insurance policy’s cash value decreases the remaining cash value as well as the death benefit. 6. Tax-Free Way to Leave a Legacy Life insurance can be used to create an income tax-free legacy to beneficiaries using the income tax-free death benefit. For very large death benefits there is the possibility of triggering estate taxes, which must be planned. Legacies can be created for family members, charities, religious organizations and educational institutions. This can allow individuals to benefit numerous entities using the leverage that the life insurance death benefit creates. The key takeaway is this: When you read about tax advantages provided to the middle class, the benefits of life insurance are infrequently mentioned. Life insurance offers significant tax benefits that provide families with protection, the ability to accumulate cash and leave a legacy to those they care about. We need to beat the drum louder to promote these intrinsic benefits. Here are the top six tax advantages of cash value life insurance.
1. No Limit on the Amount Purchased In comparison to qualified plans, there is no limit on the amount of life insurance that can be purchased subject only to the underwriting limitations of issuing life insurance carriers. Using cash value life insurance as a tool to save for the future and to generate supplemental retirement income are valuable benefits in a world where households need to save more as corporate pension plans disappear. 2. Tax Deferral on Earnings Permanent life insurance policies can generate cash value over time as premiums are paid and excess cash beyond the policies’ cost is generated. All cash income earned is not taxed currently and is able to earn interest on the taxes not currently paid. As we face the prospect of increasing future income tax rates, this benefit could become even more valuable. 3. Income-Tax Free Death Benefit One of the most forgotten tax benefits of a life insurance policy is that the death benefit is income-tax free. Beneficiaries receive the policy’s death benefit, usually in a lump sum, and don’t have to report the payout as taxable income. They can use it as they please. The fact that the payment is received without any federal or state income taxes multiplies its value to the beneficiary. Keep reading for the next 3 forgotten tax benefits of life insurance. Do you seek greater certainty in your retirement income strategies? The case study below shows how an index oriented option can help offer income guarantees and increase income success rates. Q. How should I deal with life insurance and my estate? Will any of that change in 2026 or sooner, if the estate laws are modified?
A. The death benefit of life insurance is includable in the decedent's gross estate. None of the current tax change proposals contemplate changing the taxability of the death benefit of life insurance. However, there are some potential changes to the gift tax laws that could have an impact on certain estate planning strategies that leverage life insurance. Currently, there is no limit to the number of annual exclusion gifts, whether to a trust or otherwise. As a result, people with multiple children and/or grandchildren (or other beneficiaries) can utilize their annual exclusion gifts to make $15,000 gifts to each beneficiary of a trust to fund life insurance policy premium payments. Because an irrevocable trust is a separate and distinct entity for estate tax purposes, the value of a life insurance policy owned by the trust is not included in the estate of the insured. Financial-planning.com has an article that details why the proposed tax plan upends estate planning using trusts with life insurance.
‘Crisis stage’ The blow to life insurance in trusts, a bread-and-butter wealth preservation strategy of the rich for decades, is one of many proposals in the emerging tax bill that take aim at the wealthy to finance President Joe Biden’s $3.5 trillion social spending plan. The draft bill would raise the top individual rate to 39.8% from 37% and bump up the top capital gains rate to 28.8% from 23.8%. It would tax capital gains at the top ordinary rate once income hits $1 million, crack down on large retirement accounts and end backdoor Roth conversions, a favorite strategy of high-income earners to create tax-free profits. And it would kill the use of grantor trusts, the workhorse of estate planning, whether or not they contain life insurance. It's easy to see what the tax perk has been. Say a person dies owning a $3 million home, $7 million in retirement accounts and $4 million of life insurance not held in a trust. With the current estate tax exemption at $11.7 million, $2.3 million of that $14 million estate would incur the 40% estate tax — a bill of $920,000. Now assume instead that the insurance policy is in a grantor trust. It wouldn’t go into the person’s estate, leaving nearly $1 million more for heirs. Such savings would no longer be possible under the proposal. In any case, the historically high level at which estate taxes kick in would fall by nearly half to under $6 million in the House plan. Under the House bill, “the life insurance issue has moved things to crisis stage,” said Steve Parrish, who co-directs the Center for Retirement Income at The American College of Financial Services. “Right now, webinars, emails and panicked calls are circulating among estate planning professionals.” One particularly hairy element, he said: Advisors are “trying to draft answers to their clients that avoid professional liability if they’re wrong.” ‘A major impediment’ The legislative proposal has upset financial advisors and estate lawyers because it’s common for life insurance to be held in a widely used type of trust called a grantor trust. “This problem with insurance is really buried in the legislation,” said Warren Racusin, the head of the trusts and estates group at law firm Lowenstein Sandler in New York. A grantor trust is a type of trust over which the owner, meaning the grantor, retains control and pays income tax on its gains. It comes in many flavors, including intentionally defective grantor trusts, or IDGTs, and grantor retained annuity trusts, or GRATs — all alphabet soup names well known to estate planners for the rich. Advisors say that most irrevocable life insurance trusts, or ILITs, are set up as grantor trusts, so they’d be hit by the curb, too. The proposal says, in obscure language, that any assets contributed to grantor trusts come 2022 would become part of the grantor’s estate for estate tax purposes. The issue is that under the plan, a policyholder who pays her annual premiums for a policy that’s held in a trust would be “contributing assets,” thus making the trust subject to the 40% estate levy. While the proposal would “grandfather” existing grantor trusts, that’s small comfort for those with life insurance. According to Mari Galvin, the chair of the trusts and estates group at law firm Cassin & Cassin in New York, it’s not clear from the proposal whether all of a trust could be shunted into the owner’s taxable estate if premiums are paid after this year, or just the portion related to the premium payments starting next year. “Time will tell,” Galvin said. In any case, the grandpa safety net could be mighty small. Trusts that already exist and whose policies are fully paid would “most likely” remain grandfathered, according to Andrew Bass, the chief wealth officer of Telemus Capital, an independent advisor with brokerage services in Southfield, Michigan, that manages nearly $2.2 billion for high net worth investors. But only, Bass added, if the terms of the trust prohibit it from using its own income to pay premiums. The problem, he said, is that “most trusts were written with language that allowed trust income to be used for payment of premiums, thus forcing a loss of grandfathered status.” In any case, wealthy individuals who want to create a future trust for their life insurance couldn’t make their spouse a beneficiary without subjecting the trust to estate tax. That’s because such a trust is automatically a grantor trust and thus would have to pay estate tax under the proposal. “That is a major impediment, as insurance is typically needed by a surviving spouse,” Bass said. The solution becomes the problem The proposal has the potential to upend retirement planning. “Life insurance is used by the well-heeled to both conserve and create an estate,” Parrish said. But if a policy’s death benefit gets hit with a 40% tax at death, “the insurance becomes the problem rather than the solution.” The idea of pre-paying premiums revolves around using outside funds, not money inside the trust, as the latter would get caught by the proposed curb. “We are advising clients to pre-fund their premiums now” by contributing cash or other assets before the new law passes so that no additional outlays are required to pay future premiums, said David Handler, a partner in the trusts and estates group at law firm Kirkland & Ellis in Chicago. That’s easier said than done. Ponying up early premiums for a large “permanent” policy that lasts for life can cost millions of dollars. Where to find those dollars between now and New Year’s Eve? Individuals might have cash on hand, or they might contribute securities to the trust which can be sold over time to pay the premiums, Racusin said. Handler said that others "might borrow from banks.” But Parrish said many investors would be left out in the cold, because “in many cases, these policies are financed through loans, so it’s impractical to pre-pay the premiums.” Flying blind The proposed curb would hit not just the very rich. People of more middling wealth, for whom a life insurance policy is often their trust’s single largest asset, would also feel pain. For example, a person might have a net worth under the estate tax threshold but also a large life insurance policy to care for their family if they die prematurely and their income grinds to a halt, Handler said. Which means that when the insurance death benefit is paid, the decedent’s total assets can exceed the estate tax exemption. Wealth advisors and estate planners say they're flying by the seat of their tax pants. Advisors, Parrish said, “are feeling damned if they do” (pre-paying or taking other moves) and “damned if they don’t" (adopting a wait-and-see approach to whether the proposal becomes law). Bass said one solution might involve “decanting” a grantor trust, like a fine wine. That strategy involves “pouring” a trust’s assets into a new trust. Or a trust could pay the insurance premiums through so-called split dollar arrangements, which are common with wealthy executives. Or it could be set up so that beneficiaries other than a spouse would have to approve any distributions out of the trust to the spouse, “but that could cause family rifts and may have gift tax implications for the kids,” Handler said. Racusin likened the tax contortions to navigating wealth planning with blinders on. “It’s kind of like an architect telling a builder, ‘hey, I need you to build this house right now, but I don’t have the plan, but you need to start building it right away.’” In last blogpost, we discussed what is prostate cancer. Now we will discuss life insurance underwriting for Prostate Cancer below.
The primary questions to be asked of a proposed insured that presents with this history are:
Underwriting decisions for prostate cancer are based on three things: (1) the tumor grading, (2) what the Gleason score and PSA were prior to surgery, and (3) age and time since treatment ended. Diagnosis prior to age 50 or with a Gleason of 9 or greater will typically have a 5-year postponement period. A lower stage/grade cancer and a Gleason of 2-6 often are available for offer as soon as treatment as been completed, typically in the Table 2-4 range (depending on the age). Standard offers are possible with low staging, usually at 5 years post prostatectomy, and 10 years if treated with radiation. About Prostate Cancer
The prostate is part of the male reproductive system. It's a gland about the size of a walnut that surrounds the urethra at the base of the bladder. Even though prostate cancer is the most common form of cancer for men overall, it's only the third most common cause of death from cancer in men of all ages. However, it's the most common cause of death from cancer in men over age 75. Prostate cancer is rarely found in men under age 40. Types & Detection Most prostate cancers are adenocarcinomas, but another form is sarcoma, which have a worse prognosis. It's usually detected through blood tests and PSA screening, typically before any symptoms occur. Once a PSA reading of 4.0 or higher is seen, typically the doctor will request a biopsy to determine if there are signs of cancer. Treatment for prostate cancer may be done in several ways, including prostatectomy (removal of the prostate), chemo and radiation, and hormone therapy. In next blogpost, we will discuss life insurance underwriting for prostate cancer. |
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