For almost everyone else, the best way to absorb life insurance into your retirement-planning strategy is to get the right death benefit
for your family at the lowest cost so you have the most money left over
to take other key steps toward financial security. Let’s take a look at
how this approach works.
Showing posts with label Life Insurance. Show all posts
Showing posts with label Life Insurance. Show all posts
Life Insurance For Women: Is It Important?
Insurance, Life Insurance, Life Insurance For Women
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So many reasons abound as to why life insurance should form an integral part in every individual's financial planning, still, most ladies and women disregard this basic asset in the strategy of protection and are therefore more likely to be uninsured or underinsured as compared to men.
Term Life Insurance And Universal Life Insurance Compared
Insurance, Life Insurance, Term Life Insurance, Universal Life Insurance
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You've come across Term Life and Universal Life insurance policies and you are wondering whether there is any difference? Well, read on...
Term insurance provides life insurance coverage for a particular period of time for a specified premium. For example, a $100,000 20-year term policy for an annual premium of $1,000 is a contract that allows you to protect your beneficiaries for the next 20 years. At the end of 20 years, the coverage either ends, or you can continue the coverage at a much higher premium. Term Life Insurance is the most basic of insurance policies. It is nothing more than an insurance policy that provides protection for accidental death and possibly debilitating injuries for a specified period of time. If you or your beneficiaries do not make any claims during the term of such a policy, the policy will typically expire worthless. Generally, term life insurance is cheaper to buy during the earlier years of life, when the risk of death is relatively low. Prices rise in accordance with increasing risks and advancing age.Term insurance provides life insurance coverage for a particular period of time for a specified premium. For example, a $100,000 20-year term policy for an annual premium of $1,000 is a contract that allows you to protect your beneficiaries for the next 20 years. At the end of 20 years, the coverage either ends, or you can continue the coverage at a much higher premium.
TERM LIFE INSURANCE
Term Life Insurance is a temporary insurance which will usually terminate after a specified period of time. This type of insurance has a low premium compared with other types of life insurance.Term insurance provides life insurance coverage for a particular period of time for a specified premium. For example, a $100,000 20-year term policy for an annual premium of $1,000 is a contract that allows you to protect your beneficiaries for the next 20 years. At the end of 20 years, the coverage either ends, or you can continue the coverage at a much higher premium. Term Life Insurance is the most basic of insurance policies. It is nothing more than an insurance policy that provides protection for accidental death and possibly debilitating injuries for a specified period of time. If you or your beneficiaries do not make any claims during the term of such a policy, the policy will typically expire worthless. Generally, term life insurance is cheaper to buy during the earlier years of life, when the risk of death is relatively low. Prices rise in accordance with increasing risks and advancing age.Term insurance provides life insurance coverage for a particular period of time for a specified premium. For example, a $100,000 20-year term policy for an annual premium of $1,000 is a contract that allows you to protect your beneficiaries for the next 20 years. At the end of 20 years, the coverage either ends, or you can continue the coverage at a much higher premium.
UNIVERSAL LIFE INSURANCE
Universal life insurance is flexible coverage which will be temporary or permanent depending on how the policy is funded by the policy owner. Universal life insurance has a cash value which can be withdrawn by the policy owner, and can be invested in either a fixed interest or variable sub=account. In a variable sub-account the cash value is invested in assets such as stocks and bonds. How long the policy lasts will depend upon a number of factors including the premium payments made to the policy as well as the performance of the sub-account.Questions On Life Insurance You Should Ask
If you're in the market for life insurance,
you might have been tempted by those ads claiming that "for just a few
dollars a day, you can protect your family with $1 million in life
insurance!" It sounds like a good deal, right? These adverts typically refer to term life insurance.
As its name implies, term life insurance provides protection for a
limited amount of time - or a specific "term" of years, such as 10, 20
or even 30 years.
It's fairly simple; if you die while your policy is active, your family will receive a death benefit, but the many types of term insurance and options can be confusing. Is term life insurance likely to do the trick for you? Start by asking yourself the following questions.
1. What am I trying to accomplish?
Before you purchase any kind of life insurance, think about why you're buying it. Are you protecting your family in case of an early death? Have you taken on additional debt that requires you to provide coverage? Are you looking to leave an inheritance to a charity?
Understand that in most cases, term insurance policies do not pay a claim - most people who buy term insurance "outlive" their policy's term. As a result, if you're shopping for insurance to protect financial obligations you may have for a very long time - possibly for the rest of your life - consider exploring another type of policy, called permanent insurance.
If you're in a cash crunch and have immediate obligations to your family, business partners, or lenders, term insurance can provide you with a quick, simple, short-term solution.
2. What's available?
Most people will have access to at least one of the two types of term insurance policies: group or individual.
Ludicrously, some people who buy term life insurance get upset when they find out that if they don't die, they don't get anything back.
If this is a concern for you, it's important to get an understanding of what will happen to your policy as you near the end of the term.
As mentioned previously, most term policies allow you to convert from a term policy to a permanent one. This is a great feature that provides future flexibility but because some policies have limitations, you should familiarize yourself with the conversion rules of any policy you're considering.
When can I convert?
The conversion privilege might have a time limitation on it, to age 70, for example. Some policies allow conversion during the entire term of the policy.
What can I convert to?
The most generous term policies allow you to convert to any type of permanent policy available, such as whole life, universal life, or variable universal life. Some term policies may force you to convert specifically to just one type, and some companies may not offer all types, which can also limit your options down the road.
5. Where do I buy a policy?
Chances are you'll probably hit the major internet search engines first when looking for information about buying a policy. A number of online distributors can provide you with a term insurance policy. These distributors typically focus on finding the lowest cost policy, given the personal information you provide.
For a more personalized experience, you might consider finding a professional. An insurance agent/broker will help you understand all the different variations of insurance - both term and permanent - and should be able to answer any questions you might have. You can find one by visiting any of the major company websites or combing through your local phone books, but probably the best way to find a representative is to ask around for a referral from a friend or business associate.
Finally, for group coverage, you can check with your employer. If you're self-employed, you may have access to a group plan through a professional association, or you may even be able to put a group plan in place for yourself and your employees.
After going through these questions, you will be able to decide for yourself if that million-dollar coverage ad is really what you need to provide for you and your family. If it's not, don't be afraid to pass it by - there are hundreds of policies waiting to provide you with the peace of mind you're looking for!
It's fairly simple; if you die while your policy is active, your family will receive a death benefit, but the many types of term insurance and options can be confusing. Is term life insurance likely to do the trick for you? Start by asking yourself the following questions.
1. What am I trying to accomplish?
Before you purchase any kind of life insurance, think about why you're buying it. Are you protecting your family in case of an early death? Have you taken on additional debt that requires you to provide coverage? Are you looking to leave an inheritance to a charity?
Understand that in most cases, term insurance policies do not pay a claim - most people who buy term insurance "outlive" their policy's term. As a result, if you're shopping for insurance to protect financial obligations you may have for a very long time - possibly for the rest of your life - consider exploring another type of policy, called permanent insurance.
If you're in a cash crunch and have immediate obligations to your family, business partners, or lenders, term insurance can provide you with a quick, simple, short-term solution.
2. What's available?
Most people will have access to at least one of the two types of term insurance policies: group or individual.
- Group - Most
companies offer their employees some form of term life insurance as an
employee benefit. This is called Group term insurance, because you're
getting protection as part of a larger group. Usually it's deducted
right from your paycheck and the only requirement for coverage is to
complete a brief questionnaire with details of your health history. Here
are some of the advantages of group term insurance:
- It's easy - You can usually sign up for a policy when you take a new job and enroll in your company's benefits program. You may also have an opportunity to sign up during the annual enrollment period at your company; when you may sign up for other benefits, such as medical, dental, or an employer-sponsored retirement plan.
- No medical - Most group plans don't require a physical exam. A statement of good health, along with a medical history, is usually all that's required to secure coverage.
- Automatic payments - Through payroll deduction, you'll hardly feel the financial hit of paying premiums every month.
- Individual - As the name
implies, an individual policy is one in which you apply for coverage on
your own. You - or typically a family member - will own the actual
policy. In order to obtain an individual policy, you'll probably have to
undergo a medical exam of some sort, provide a detailed medical
history, and give the insurance company permission to look into your
medical records and perform a background check on any driving offenses
and criminal activities. This might sound a little invasive, but there
are some great benefits to owning an individual life insurance policy.
- It's portable - If you take a new job at a different company, you don't have to worry about losing your life insurance protection.
- Level premiums - Generally, individual policies can be structured to have level premiums for the duration of the policy; typically this is a 10-20, or 30-year period.
- Flexibility - If you ever want to upgrade or convert your term policy to a permanent policy, you might have more options available with an individual policy than you would with a group plan.
Ludicrously, some people who buy term life insurance get upset when they find out that if they don't die, they don't get anything back.
If this is a concern for you, it's important to get an understanding of what will happen to your policy as you near the end of the term.
- Premiums go up - Many term policies offer level premiums for several years (10, 20 and even 30 years, for example). As you approach the end of that term, you may have the option of keeping your policy. If you do, you can expect a hefty jump in your premium.
- Might need a new policy - If you are still healthy at this time in your life and you want to keep the coverage, it may be best to apply for a new policy.
- Drop in coverage - Perhaps you only wanted your policy to cover you as long as you had a mortgage, or until your children's college education was paid for. If that's the case and you have no other obligations to protect, you might want to let the coverage expire.
- Upgrade the policy - Most term policies come with a "conversion privilege". This allows you to essentially trade in your old term policy for a new permanent policy.
As mentioned previously, most term policies allow you to convert from a term policy to a permanent one. This is a great feature that provides future flexibility but because some policies have limitations, you should familiarize yourself with the conversion rules of any policy you're considering.
When can I convert?
The conversion privilege might have a time limitation on it, to age 70, for example. Some policies allow conversion during the entire term of the policy.
What can I convert to?
The most generous term policies allow you to convert to any type of permanent policy available, such as whole life, universal life, or variable universal life. Some term policies may force you to convert specifically to just one type, and some companies may not offer all types, which can also limit your options down the road.
5. Where do I buy a policy?
Chances are you'll probably hit the major internet search engines first when looking for information about buying a policy. A number of online distributors can provide you with a term insurance policy. These distributors typically focus on finding the lowest cost policy, given the personal information you provide.
For a more personalized experience, you might consider finding a professional. An insurance agent/broker will help you understand all the different variations of insurance - both term and permanent - and should be able to answer any questions you might have. You can find one by visiting any of the major company websites or combing through your local phone books, but probably the best way to find a representative is to ask around for a referral from a friend or business associate.
Finally, for group coverage, you can check with your employer. If you're self-employed, you may have access to a group plan through a professional association, or you may even be able to put a group plan in place for yourself and your employees.
After going through these questions, you will be able to decide for yourself if that million-dollar coverage ad is really what you need to provide for you and your family. If it's not, don't be afraid to pass it by - there are hundreds of policies waiting to provide you with the peace of mind you're looking for!
Having An Understanding Of Life Insurance Premiums
Insurance, Life Insurance, Life Insurance Premiums
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Once you've made a decision to buy permanent insurance, you then
need to figure out what kind of policy to purchase and what amount of
premium to pay. Unlike term life insurance, which has a set premium
based on the amount and duration of coverage, the premium for a
permanent policy depends on how the coverage is designed and what
assumptions are used to prepare the hypothetical illustration. Premiums
also vary depending on the kind of permanent coverage; for example,
whole life has less flexibility than universal life. Additionally, the
premium can change over the time you own the coverage.
The Planned or Target premium is the amount modeled by the software and is based on the variables the insurance broker enters into the program, including an assumed rate of return. The assumed rate of return is important, since a higher non-guaranteed return results in a lower premium and vice versa.
The No Lapse Guarantee premium is the amount that must be paid to ensure that the policy will stay in force for a set number of years, regardless of actual policy performance. During the no lapse period, the insurer guarantees the coverage will continue, even if the cash value drops to zero. However, once the guarantee period ends, the policy could lapse unless a significantly higher premium is paid. The no lapse period can range from as few as 5 years even up to age 121. In exchange for the guarantee, contracts with longer guarantee periods tend to build significantly less cash value than does the same contract using the target or other non-guaranteed premium.
The Guideline Premium and the Cash Value Accumulation tests were devised to provide an IRS-approved way to determine the tax treatment of a life insurance policy. The guideline premium test requires a policy to have at least a minimum amount of at-risk death benefit (insurance that exceeds the cash value). The corridor amount is greater when the policy holder is young and decreases as a percentage of the total death benefit as one ages, eventually dropping to zero by age 95. If the premium exceeds these guidelines, then the policy could be taxed as an investment rather than as insurance.
The Modified Endowment premium is the amount that makes an insurance policy a Modified Endowment Contract (MEC). Under the Technical and Miscellaneous Revenue Act of 1988, distributions from a policy determined to be a MEC, such as loans or cash surrenders, are potentially taxable and could be subject to an IRS 10% penalty tax. However, the death benefit remains income-tax free. A policy can become a MEC when the combined premiums paid during the first 7 years that the policy is in force exceeds the 7 pay test premium. The illustration software automatically calculates the 7 pay premium amount. The IRS has established these measures to help curb abuses where insurers sold policies with a nominal amount of insurance that were really designed to build a large amount of tax-free cash value. The 7 pay amount varies by age and kind of policy.
The Minimum premium is the amount that must be paid to put the policy in force. This amount is usually not sufficient to keep the coverage in force for life, unless the insured is very young. This premium may be used, for example, when a 1035 exchange from another policy is pending or the policy is owned in a trust and when issued gifts will be made to provide additional funding.
Whole life policies build a large cash value and tend to have higher set premium. Current assumption universal life policies have flexible premiums and assume fixed interest rates of return. Variable universal life policies, in contrast, offer the greatest risk reward potential, allowing the cash value to be invested in mutual fund sub-accounts.
To build the most cash value in a policy, you want to pay the maximum allowed premium and select a level death benefit that helps minimize the amount of insurance you are buying. If you want leverage (death benefit), universal and variable policies illustrated with a high rate of return, increasing death benefit and low premium provide the highest payout at death. A policy with a level death benefit, for example $500,000, includes your cash value as part of the death benefit. A policy with an increasing death benefits would pay $500,000, plus any cash value.
Whole life and no-lapse universal policies offer guaranteed death benefits. However, the policies will have a higher premium offering less leverage.
In other words, when designing permanent life insurance coverage, the right premium really comes down to why you are buying the coverage. Is it for protection, cash value accumulation or both?
How Is Premium Calculated?
The premium for a life insurance policy is calculated using illustration software provided by the insurance company. The premium amount is determined by a number of variables including your age, sex, health rating, assumed rate of return, payment mode, additional riders, and whether the death benefit is level or increasing. How long the policy is designed to last, as well as the assumed non-guaranteed rate of return, can have a significant effect on the premium. Some policies are calculated to last to expected mortality or age 90, while others may be modeled to last until age 121.Premiums
When you receive a hypothetical illustration all of the following premiums, along with some explanations, will be included. You will have to read through the illustration to locate them, since the ledgers in the illustration will be based on the planned premium.The Planned or Target premium is the amount modeled by the software and is based on the variables the insurance broker enters into the program, including an assumed rate of return. The assumed rate of return is important, since a higher non-guaranteed return results in a lower premium and vice versa.
The No Lapse Guarantee premium is the amount that must be paid to ensure that the policy will stay in force for a set number of years, regardless of actual policy performance. During the no lapse period, the insurer guarantees the coverage will continue, even if the cash value drops to zero. However, once the guarantee period ends, the policy could lapse unless a significantly higher premium is paid. The no lapse period can range from as few as 5 years even up to age 121. In exchange for the guarantee, contracts with longer guarantee periods tend to build significantly less cash value than does the same contract using the target or other non-guaranteed premium.
The Guideline Premium and the Cash Value Accumulation tests were devised to provide an IRS-approved way to determine the tax treatment of a life insurance policy. The guideline premium test requires a policy to have at least a minimum amount of at-risk death benefit (insurance that exceeds the cash value). The corridor amount is greater when the policy holder is young and decreases as a percentage of the total death benefit as one ages, eventually dropping to zero by age 95. If the premium exceeds these guidelines, then the policy could be taxed as an investment rather than as insurance.
The Modified Endowment premium is the amount that makes an insurance policy a Modified Endowment Contract (MEC). Under the Technical and Miscellaneous Revenue Act of 1988, distributions from a policy determined to be a MEC, such as loans or cash surrenders, are potentially taxable and could be subject to an IRS 10% penalty tax. However, the death benefit remains income-tax free. A policy can become a MEC when the combined premiums paid during the first 7 years that the policy is in force exceeds the 7 pay test premium. The illustration software automatically calculates the 7 pay premium amount. The IRS has established these measures to help curb abuses where insurers sold policies with a nominal amount of insurance that were really designed to build a large amount of tax-free cash value. The 7 pay amount varies by age and kind of policy.
The Minimum premium is the amount that must be paid to put the policy in force. This amount is usually not sufficient to keep the coverage in force for life, unless the insured is very young. This premium may be used, for example, when a 1035 exchange from another policy is pending or the policy is owned in a trust and when issued gifts will be made to provide additional funding.
Which Premium Amount Should You Pay?
The amount of premium you should pay really depends on how you design the coverage.Whole life policies build a large cash value and tend to have higher set premium. Current assumption universal life policies have flexible premiums and assume fixed interest rates of return. Variable universal life policies, in contrast, offer the greatest risk reward potential, allowing the cash value to be invested in mutual fund sub-accounts.
To build the most cash value in a policy, you want to pay the maximum allowed premium and select a level death benefit that helps minimize the amount of insurance you are buying. If you want leverage (death benefit), universal and variable policies illustrated with a high rate of return, increasing death benefit and low premium provide the highest payout at death. A policy with a level death benefit, for example $500,000, includes your cash value as part of the death benefit. A policy with an increasing death benefits would pay $500,000, plus any cash value.
Whole life and no-lapse universal policies offer guaranteed death benefits. However, the policies will have a higher premium offering less leverage.
In other words, when designing permanent life insurance coverage, the right premium really comes down to why you are buying the coverage. Is it for protection, cash value accumulation or both?
Reasons To Own Life Insurance In Irrevocable Trust
People buy life insurance for many reasons, and it offers some unique
features that are not found in many other financial products. For
example, leverage,
especially in the early years of a policy, where you pay a small
premium to lock in a large death benefit or the ability to time
liquidity to an event (the death benefit).
An Irrevocable Life Insurance Trust (ILIT) is created to own and control a term or permanent life insurance policy or policies while the insured is alive, as well as to manage and distribute the proceeds that are paid out upon the insured’s death. An ILIT can own both individual and second to die life insurance policies. Second to die policies insure two lives and pay a death benefit only upon the second death.
An ILIT has several parties -- the grantor, trustees and beneficiaries. The grantor typically creates and funds the ILIT. Gifts or transfers made to the ILIT are permanent, and the grantor is giving up control to the trustee. The trustee manages the ILIT, and the beneficiaries receive distributions.
It is important for the grantor to avoid any incident ownership in the life insurance policy, and any premium paid should come from a checking account owned by the ILIT. If the grantor transfers an existing life insurance policy to the ILIT, there is a 3-year look back period in which the death benefit could be included in the grantor's estate. There can also be gifting problems if the policy being transferred has a large accumulated cash value. If there is a question about the grantor being able to obtain coverage and you want to verify insurability before paying the expense of having a trust drafted, have the grantor apply for coverage and list the owner as a trust to be named. Once the insurance company has made an offer for a new application, properly listing the trust as owner can be submitted, replacing the initial application. The policy will then be issued to the trust.
Once established and funded, an ILIT can serve many purposes including the following:
In 2015 you can give $14,000 a year to as many people as you like. The $14,000 encompasses all gifts. A married couple can give an individual a combined $28,000 annually, gift-tax free. There is no limit to the total number of gifts a couple may make. You can also give someone more than $14,000 a year with the excess being applied toward your lifetime estate tax exemption of $5,430,000.
An ILIT helps leverage the grantor of the trust’s generation-skipping transfer (GST) tax exemption by using gifts to the trust to buy and fund a life insurance policy. Since the proceeds from the death benefit are excluded from the grantor’s estate, multiple generations of family -- children, grandchildren and great grandchildren -- may benefit from the trust assets free of estate and GST tax.
In conclusion, ILITs are a powerful tool that should be considered in many wealth management plans to help ensure that your policy is used in the best possible way to benefit your family and even with the federal estate and gift tax exemption at $5.43 million, it is still possible to owe state estate taxes. Many states begin taxing your estate at $1 million or less.
Irrevocable Life Insurance Trust (ILIT)
An irrevocable trust can't be modified or terminated without the permission of the beneficiary. The grantor, having transferred assets into the trust, effectively removes all of his rights of ownership to the assets and the trust. This is the opposite of a revocable trust, which allows the grantor to modify the trust.An Irrevocable Life Insurance Trust (ILIT) is created to own and control a term or permanent life insurance policy or policies while the insured is alive, as well as to manage and distribute the proceeds that are paid out upon the insured’s death. An ILIT can own both individual and second to die life insurance policies. Second to die policies insure two lives and pay a death benefit only upon the second death.
An ILIT has several parties -- the grantor, trustees and beneficiaries. The grantor typically creates and funds the ILIT. Gifts or transfers made to the ILIT are permanent, and the grantor is giving up control to the trustee. The trustee manages the ILIT, and the beneficiaries receive distributions.
It is important for the grantor to avoid any incident ownership in the life insurance policy, and any premium paid should come from a checking account owned by the ILIT. If the grantor transfers an existing life insurance policy to the ILIT, there is a 3-year look back period in which the death benefit could be included in the grantor's estate. There can also be gifting problems if the policy being transferred has a large accumulated cash value. If there is a question about the grantor being able to obtain coverage and you want to verify insurability before paying the expense of having a trust drafted, have the grantor apply for coverage and list the owner as a trust to be named. Once the insurance company has made an offer for a new application, properly listing the trust as owner can be submitted, replacing the initial application. The policy will then be issued to the trust.
Once established and funded, an ILIT can serve many purposes including the following:
1) Minimizing Federal and State Estate Taxes
If you are the owner and insured, then the death benefit of a life insurance policy will be included in your gross estate. However, when life insurance is owned by an ILIT, the proceeds from the death benefit are not part of the insured's gross estate and thus not subject to state and federal estate taxation. If properly drafted the ILIT can, however, provide liquidity to help pay estate taxes, as well as other debts and expenses, by purchasing assets from the grantor’s estate or through a loan. Also, lifetime gifts can help reduce your taxable estate by transferring assets into the ILIT.2) Avoid Gift Taxes
A properly drafted ILIT avoids gift tax consequences since contributions by the grantor are considered gifts to the beneficiaries. To avoid gift taxes it is crucial that the trustee, using a Crummey letter, notify the beneficiaries of the trust of their right to withdraw a share of the contributions for a 30-day period. After 30 days, the trustee can then use the contributions to pay the insurance policy premium. The Crummey letter qualifies the transfer for the annual gift tax exclusion by making the gift a present rather than future interest, thus avoiding the need in most cases to file a gift tax return.In 2015 you can give $14,000 a year to as many people as you like. The $14,000 encompasses all gifts. A married couple can give an individual a combined $28,000 annually, gift-tax free. There is no limit to the total number of gifts a couple may make. You can also give someone more than $14,000 a year with the excess being applied toward your lifetime estate tax exemption of $5,430,000.
3) Government Benefits
Having the proceeds from a life insurance policy owned by an ILIT can help protect the benefits of a trust beneficiary who is receiving government aid, such as Social Security disability income or Medicaid. The Trustee can carefully control how distributions from the trust are used so as not to interfere with the beneficiary's eligibility to receive government benefits.4) Asset Protection
Each state has different rules and limits regarding how much cash value or death benefit is protected from creditors. Any coverage above these limits held in an ILIT is generally protected from the creditors of the grantor and/or beneficiary. The creditors may however attach any distributions made from the ILIT.5) Distributions
The trustee of an ILIT can have discretionary powers to make distributions and control when beneficiaries receive the proceeds of your policy. The insurance proceeds can be paid out immediately to one or all of your beneficiaries or you can specify how and when beneficiaries receive distributions. The trustee can also have discretion to provide distributions when beneficiaries attain certain milestones, such as graduating from college, buying a first home or having a child. This can be useful in second marriages to ensure how assets are distributed or if the grantor of the trust has children who are minors or need financial protection.6) Legacy Planning
The generation-skipping transfer tax (GST) imposes a tax of 40% on both outright gifts and transfers in trust to or for the benefit of unrelated persons who are more than 37.5 years younger than the donor, or to related persons more than one generation younger than the donor. A common example is gifting to grandchildren instead of children.An ILIT helps leverage the grantor of the trust’s generation-skipping transfer (GST) tax exemption by using gifts to the trust to buy and fund a life insurance policy. Since the proceeds from the death benefit are excluded from the grantor’s estate, multiple generations of family -- children, grandchildren and great grandchildren -- may benefit from the trust assets free of estate and GST tax.
7) Taxes
Irrevocable trusts have a separate tax identification number and a very aggressive income tax schedule. However, the cash value accumulating in a life insurance policy is free from taxation as is the death benefit so there are no taxes issues with having a policy owned in an ILIT. If properly designed, an ILIT can allow the trustee access to the accumulated cash value, by taking loans and/or distributions at cost basis, even while the insured is alive. However, once a death benefit has been paid, if the proceeds remain in the trust, any investment income earned and not distributed to the beneficiaries could be taxed.In conclusion, ILITs are a powerful tool that should be considered in many wealth management plans to help ensure that your policy is used in the best possible way to benefit your family and even with the federal estate and gift tax exemption at $5.43 million, it is still possible to owe state estate taxes. Many states begin taxing your estate at $1 million or less.
Why You Should Buy Disability Rider On Life Insurance
When buying a life insurance policy does it make sense to also pay for a rider
that waives the premium payment if you become disabled? According to
the American Council of Life Insurers the majority of individual life
insurance policies in force include a rider that waives the premium upon
total disability. However, most people really don’t understand how the
riders work or if it is a cost effective benefit.
A ''rider'' is an add-on provision to a basic insurance policy that provides additional benefits to the policyholder at an additional cost. Standard policies usually leave little room for modification or customization beyond choosing deductibles and coverage amounts. Riders help policyholders create insurance products that can meet their specific needs.
The cost of the rider depends on several factors including the amount of insurance and kind of policy as well as the insured’s age, occupation and health rating. With term policies the cost of the rider could be an additional 10-15% of the planned premium. The cost in a permanent policy varies depending on the design and kind of coverage (whole life, universal life, etc.). The rider commonly adds an additional 3-6% to the premium.
Once eligible, the rider pays a benefit to age 65 or for the planned premium period. The planned premium period is how the policy was issued based on the hypothetical illustration. For example, the benefit could stop on a whole life policy that was scheduled to be paid up at age 55 or after 20 years on a level term policy. The limited waiver period can be a problem with a permanent policy that was illustrated with premium payments that extend beyond age 65 because the policy may be underfunded and eventually lapse.
To qualify for benefits, most riders have an elimination period of four to six months during which the insured must be totally disabled. The premium may also have to be paid during the elimination period, depending on the company later reimbursed. If the insured has a recurring disability, due to the same problem, once the initial elimination period has been met, subsequent claims will not require a new elimination period. However, if the claim is for a new ailment a new elimination period will be imposed.
Definitions are very important and do differ by insurer. For instance, a liberal definition may allow the insured who was not working, but instead a full time student, when the disability occurred to collect benefits. Also, many riders allow the insurer to review the insured’s status periodically as well as change the definition of disability after a stated period of time, three to five years, for example. The change is usually to a wider definition of disability, such as the inability to perform the substantial and material duties of any occupation for which the insured is reasonably suited based on education, training or experience. Thus, upon review, the insurer could argue that benefits should end well before age 65, depending on the insured’s ailment.
A ''rider'' is an add-on provision to a basic insurance policy that provides additional benefits to the policyholder at an additional cost. Standard policies usually leave little room for modification or customization beyond choosing deductibles and coverage amounts. Riders help policyholders create insurance products that can meet their specific needs.
What is a Waiver of Premium?
When you buy a life insurance policy, for an additional fee, a rider can be added to the contract that waives the premium payment if the insured becomes totally disabled. In other words, the insurer pays the planned premium. For a term policy, this would simply be the cost of insurance but in a permanent policy the insurer would also be making additions that help build the cash value.The cost of the rider depends on several factors including the amount of insurance and kind of policy as well as the insured’s age, occupation and health rating. With term policies the cost of the rider could be an additional 10-15% of the planned premium. The cost in a permanent policy varies depending on the design and kind of coverage (whole life, universal life, etc.). The rider commonly adds an additional 3-6% to the premium.
How Does the Rider Work?
The waiver of premium rider is underwritten separately when applying for life insurance and is usually issued to individuals between the ages of 18 and 60. However, the rider is not automatically issued and for individuals in higher risk occupations, such as a fireman or police, an insurer may offer the life insurance coverage with a favorable rating, but exclude the rider. Or the cost of the rider could be more expensive based on the insured’s occupation or risky hobby, such as rock climbing.Once eligible, the rider pays a benefit to age 65 or for the planned premium period. The planned premium period is how the policy was issued based on the hypothetical illustration. For example, the benefit could stop on a whole life policy that was scheduled to be paid up at age 55 or after 20 years on a level term policy. The limited waiver period can be a problem with a permanent policy that was illustrated with premium payments that extend beyond age 65 because the policy may be underfunded and eventually lapse.
To qualify for benefits, most riders have an elimination period of four to six months during which the insured must be totally disabled. The premium may also have to be paid during the elimination period, depending on the company later reimbursed. If the insured has a recurring disability, due to the same problem, once the initial elimination period has been met, subsequent claims will not require a new elimination period. However, if the claim is for a new ailment a new elimination period will be imposed.
What Qualifies as Disabled?
The definition of disability is included in the policy. For example, many insurers define total disability as the inability to perform the substantial and material duties of one’s regular occupation. In addition, the disability must be due to an accidental injury or a sickness and pre-existing conditions may be excluded. The loss of sight as well as the loss of use of a hand or foot may also qualify the insured for benefits.Definitions are very important and do differ by insurer. For instance, a liberal definition may allow the insured who was not working, but instead a full time student, when the disability occurred to collect benefits. Also, many riders allow the insurer to review the insured’s status periodically as well as change the definition of disability after a stated period of time, three to five years, for example. The change is usually to a wider definition of disability, such as the inability to perform the substantial and material duties of any occupation for which the insured is reasonably suited based on education, training or experience. Thus, upon review, the insurer could argue that benefits should end well before age 65, depending on the insured’s ailment.
Should You Buy a Rider?
Purchasing a rider to waive the premium can be an expensive way to get a limited amount of disability income coverage. If you have group long-term disability coverage and/or are eligible to purchase an individual policy you should weigh the cost and benefit of the rider. If you have limited disability coverage or coverage is unavailable due to a health issue or could be very costly based on your occupation, then purchasing a rider that waives the premium could make sense.Conclusion
Before automatically buying a rider you need to read the fine print and understand the how the rider works and what kind of benefit you could receive. Paying the added cost for the rider can make sense if you need the life insurance to stay in force and would have difficulties making the premium payments if you were out of work.Best Life Insurance For You
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