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Why Do I Need Life Insurance in My Estate Plan?

“Life insurance can offer income and saving options for the long term.”

You’re not alone if you don’t fully understand the value and benefits that life insurance can give you as part of a retirement plan. Kiplinger’s recent article, “Don't Overlook Advantages of Making Insurance Part of Your Retirement Plan,” says many people see life insurance as a way to protect a family from the loss of income, in the event a breadwinner passes away during his or her working years.

If that’s your primary purpose in buying a life insurance policy, it’s a solid one. However, that income-replacement function doesn’t have to stop in retirement.

When a spouse passes away during retirement, the surviving spouse frequently struggles financially. Some living expenses might be less when there’s just one person in a household, but the reduction in costs rarely makes up for the drop in income. One of the two Social Security checks the couple was getting goes away, and a pension payment may also be lost or reduced 50% or 75%. Life insurance can be leveraged to make certain there’s sufficient cash to compensate for that missing income. This lets the surviving spouse maintain his or her standard of living in retirement.

There are several sections of the tax laws that give life insurance income tax and transfer tax benefits. For example, death benefits typically are paid income-tax-free to beneficiaries and may also be free from estate taxes, provided the estate stays under the taxable limit. Any benefits paid prior to the insured’s death because of chronic or terminal illness are also tax-free. This is called an accelerated death benefit (ADB) and is a relatively new option. If your insurance doesn’t have this coverage, it can probably be added as a rider.

Finally, cash values can grow within a permanent life insurance policy without being subject to income tax. Any cash values more than the policy owner’s tax basis can be borrowed income-tax-free, as long as the policy stays in effect. However, if you were to pass away prior to paying back your policy loan, the loan balance plus interest accrued is deducted from the death benefit given to the beneficiaries. This may be an issue, if your beneficiaries require the entire amount of the intended benefit. When the loan remains unpaid, the interest that accrues is added to the principal balance of the loan. If the loan balance increases above the amount of the cash value, your policy could lapse. That means you could you risk termination by the insurance carrier. If a policy lapses or is surrendered, the loan balance plus interest is considered taxable, and the taxes owed could be pretty hefty, based on the initial loan and interest accrued.

There are fees that can include sales charges, administrative expenses and surrender charges. That is in addition to the cost of the insurance, which grows as you age.

Just because you’re retired, doesn’t mean you don’t still need the protections and benefits that life insurance can offer you and your family.

Reference: Kiplinger (July 10, 2019) “Don't Overlook Advantages of Making Insurance Part of Your Retirement Plan”

Should I Roll A 401(k) into My Annuity?

“Many annuities cannot be passed on to a beneficiary; any money left in them when you die goes to the insurance company.”

We’d all like to have guaranteed income after retirement, but there are a few risks to think about before you roll a 401(k) into an annuity. There may also be major fees incurred by annuitants, because you risk losing part of your investment if you die prematurely. You may not be able to pass the rest of the annuity on to your beneficiaries.

Investopedia’s recent article asks “What Are the Risks of Rolling My 401(k) Into an Annuity?” The article says many insurance companies advertise the tax benefits of annuities, but a traditional 401(k) is already tax sheltered. A delayed rollover could mean more taxes.

Extra Fees. The big benefit of annuities is that they give you guaranteed income. However, there are some important differences between the income generated by fixed compared to variable annuities. Most annuity investments are made by people looking to ensure that they are provided for in later life. However, you’re likely to see some major expenses if you own an annuity, in addition to your capital investment. The types of fees from your insurance company will vary, depending on the type of investment you select.

Variable annuities usually have higher fees than fixed annuities, because they require a more active, engaged management style. Annuities that protect your principal or guarantee your balance can’t decrease, but have even higher fees. There also may be one-time up-front costs, like a sales commission or a contract fee.

If you decide to withdraw your initial investment early, you’ll be hit with a big surrender charge, starting at 7% and gradually decreasing over the first seven to ten years of account ownership.

Risk of Loss. If you pass away before you use up your 401(k) savings, your named beneficiary will inherit the account. However, if you die before you get the full benefits from your annuity, the insurance company may keep the rest of your savings. Many annuities have the option of having the contract pay over the course of your life and then transfer to your spouse if you die first. Of course, there may be a fee for this. Ask questions and read the fine print.

Tax Trade-Offs. A financial advisor may recommend annuities, because your investment grows tax deferred. That means you pay no income tax on your gains, until they’re withdrawn. However, if your investment capital is already in a traditional 401(k) or IRA account, a rollover to an annuity gives you no additional tax benefits. Earnings on 401(k) funds are already tax deferred, just like your original contributions. As with an annuity, you don’t pay income tax on your contributions or interest until you withdraw those funds after you retire.

Short Time Limits. Another issue to review when rolling over your 401(k) into an annuity, are the tax implications of the rollover itself. While the IRS permits tax-free rollovers from qualified retirement plans, you must complete the transaction within 60 days. Otherwise, you may lose 20% of your balance. Any amount you don’t roll over is taxable as ordinary income, which can substantially increase your tax liability for the year. If you have a direct rollover from trustee to trustee, you can avoid this.

Reference: Investopedia (July 15, 2019) “What Are the Risks of Rolling My 401(k) Into an Annuity?”

Is There a Market for My Long-Term Care Insurance Policy?

“Some people have life insurance policies that have long-term care riders that allow them to access up to the death benefit for long-term care needs. These might be able to be sold through a life settlement.”

There is a market to sell life insurance through what is known as a life settlement. However, there’s no such market for long-term care policies.

A life settlement is the sale of a life insurance policy to a third party. Usually the owner of the policy receives an amount that’s valued at more than the policy's cash surrender value, but less than its face value or death benefit.

nj.com’s recent article asks, “Can I sell my long-term care insurance policy?” The article explains that HMOs typically don’t include the costs of long-term care or skilled nursing care.

However, some people purchase life insurance policies that contain long-term care riders. This type of policy lets the owner tap into the death benefit for long-term care needs. The policy owner may be able to sell this insurance through a life settlement.

When contemplating the sale of your life insurance policy, you should be certain that you don’t need the life insurance for legacy, estate planning needs or income needs.

Remember that HMOs don’t cover any potential needs for skilled nursing care. A person who moves along the continuum of care to an assisted living facility will need the long-term care insurance.

Be sure to look over the policy details. Long-term care insurance policies, once they’re employed, usually no longer require you to pay the premium.

According to the Genworth Cost of Care annual report, the costs for assisted living facilities in New Jersey, for example, can average over $6,000 a month, while nursing homes average $10,600 per month. This is a significant ongoing expense.

Only a long-term care insurance policy is going to cover the skilled assistance a person will need when she’s not able to do daily living activities, like bathing, toileting, transferring, eating, continence and getting dressed.

Medicare will only pay for up to 100 days in a skilled facility after a hospital stay.

Reference: nj.com (May 21, 2019) “Can I sell my long-term care insurance policy?”

Will a Reverse Mortgage Help Me in Retirement?

“While it’s common advice that retirees should avoid borrowing if possible, situations could arise when it will be necessary. Where to turn?”

It’s not uncommon for a homeowner to take out a home equity line of credit or borrow against an existing one. This can provide the funds to pay some bills and stay afloat.

Another option if you’re at least 62 with a home that’s not heavily mortgaged, is to take out a reverse mortgage. A reverse mortgage gives you tax-free cash. No repayments are due, until you die or move out of the house.

However, these loans are expensive. In addition, reverse mortgages aren’t for those people who want to give their home to heirs, because most or all of the home’s equity may be eaten up by the loan principal and interest.

Fed Week’s recent article entitled “Considerations for Borrowing in Retirement” explains that reverse mortgages work best for seniors who need cash, who want to stay in their homes and who have few other options.

These HECM reverse mortgage loans are insured by the Federal Housing Administration (FHA). They let homeowners convert their home equity into cash with no monthly mortgage payments.

After getting a reverse mortgage, borrowers are still required to continue to pay property taxes and insurance. They also must maintain the home, according to FHA guidelines.

People use reverse mortgage loans to pay for home renovations, as well as medical and daily living expenses. Some homeowners who have an existing mortgage will use their reverse mortgage loan to pay off their existing mortgage and get rid of their monthly mortgage payments.

When the homeowner moves, sells the house, or passes away, the loan becomes due. If the house is held until death, heirs have the option to take out a conventional mortgage, pay off the reverse mortgage and continue to live there.

Other options include loans against your life insurance or your securities portfolio.

Ask a qualified estate planning attorney or elder law lawyer how a reverse mortgage might fit into your situation.

Reference: Fed Week (May 16, 2019) “Considerations for Borrowing in Retirement”

Have You Maximized Your Life Insurance Benefits?

“Life insurance is intended to protect your loved ones. However, there is a lot to think about. Here are some tips and questions to ask, as you assess your insurance situation.”

Life insurance is a key to many people’s financial plans. However, there are nuances that sometimes get overlooked. WTOP’s recent article, “4 questions to ask to maximize your life insurance benefits” focuses on key questions that need to be asked about life insurance.

Changed Circumstances. The amount of life insurance you need, is unique to each person’s financial and family circumstances. Remember that life insurance death benefits are used for more than just replacing immediate income from the family breadwinners. They can also pay off the mortgage and other debts, cover college tuition, create a retirement nest egg for a surviving spouse, fund a business transfer, or be an important estate planning tool. With life insurance, you can protect your family against a premature death with a solid safety net. In the event of divorce with future child and spousal support obligations due to you, you’d want your divorce settlement agreement to say that your ex-spouse, as payor, maintains a sufficient life insurance policy naming you, as the recipient-beneficiary, to cover all future commitments. You also need to be notified by the insurance company of any policy changes or lapses, because you may be depending on this money in the future, should something happen to your ex-spouse. Stay-at-home spouses and caregivers also need life insurance, because replacing their duties could incur many unexpected costs for the survivor.

Up-To-Date Beneficiaries. Here are some do’s and don’ts, when naming a beneficiary:

• DO designate named individual(s) or a trust to avoid probate and allow death benefits to pass directly to beneficiaries, income tax-free;
• DO know the difference between per stirpes (i.e., family lineage) and per capita (i.e., by head);
• DON’T designate your estate, because this will lead to proceeds becoming involved in probate and allow creditors to place claims against the estate;
• DON’T designate minors as beneficiaries, because assets will be paid outright to them as soon as they reach the age of majority in their state; and
• DON’T designate a special-needs adult or child directly, because this may disqualify them from government benefits.

Trusts. Designating a trust as beneficiary for minor children, special-needs individuals, or a person with no financial sensibility lets you provide more control. Work with an estate attorney to establish the appropriate trust for your intended purpose. Remember, if you’re the trust owner and the insured, the death benefit will be included in your gross estate for tax purposes. Having life insurance owned by an irrevocable life insurance trust (ILIT) removes the death benefit proceeds from the insured’s estate (unless the three-year-look-back rule applies).

Policy Exclusions. Read the fine print to see if some of these universal exclusions are included, that may prevent your beneficiaries from receiving their intended death benefit:

• The contestability period is a predetermined time period, usually two years from the date of issuance, where an insurance company can contest any information you submitted, and cancel coverage or deny a claim, if there were misstatements or omissions made on the life insurance application. If you die during the contestability period and it’s shown that you made misrepresentations on your application, your claim can be denied—even if the cause of death had nothing to do with the actual misrepresentation.
• Material misrepresentation is intentionally withholding material information or providing false information to the insurance company, that would’ve resulted in them not insuring you. It extends during the entire policy term, since life insurance claims can be denied after the contestability period ends, if fraud was committed to obtain the policy.
• A suicide clause is included in nearly all life insurance contracts. The company won’t pay the death benefit and return premiums, if the insured commits suicide within the first two years of the policy.

Some exclusions that aren’t universal but may be in the fine print of your life insurance policy include: illegal activity/committing a crime; dangerous activities, like sky diving or car racing; alcohol and drug use; and an aviation exclusion for private plane travel.

Life insurance can protect your loved ones. Don’t forget to review your life insurance needs and update beneficiaries, based on your current situation.

Reference: WTOP (March 6, 2019) “4 questions to ask to maximize your life insurance benefits”

What Will Happen If I’m In An Accident?

“Most people are aware that an accident can happen, although they rarely think it will happen to them.”

Expensive and rising healthcare costs can’t be a surprise to those nearing or in retirement. However, something that’s not often discussed, is how unexpected medical and related expenses from accidents can have a devastating impact on investment accounts, particularly for younger adults.

It’s estimated that 3.14 million Americans were involved in an auto accident in 2016, according to the National Highway Safety Administration. This shows how common they are.

Think Advisor’s recent article, “How Car Accidents Can Wreck Retirement Accounts,” looks at the case of a 35-year-old single professional with more than $600,000 in her investment account.

This woman, Sue, was driving home from work, when an uninsured motorist ran a traffic light and ran into her new convertible. The car was totaled, and she was severely injured. Sue was rushed to the hospital, required surgery for several broken bones and then went to a rehab facility for physical therapy upon her release.

Fortunately, Sue’s medical coverage from work covered her hospitalization, rehab stay and at-home visits during her recovery. Sue’s own auto insurance policy paid for a new car. However, Sue was unable to work for a year. Her employer-paid short-term disability insurance that covered about 65% of her lost income for three months, but she had no long-term coverage and had to pay some health-related expenses out of pocket. In total, Sue lost $120,000 in income, had to pay $10,000 in medical expenses not covered by her plan, and spent $65,000 for at-home assistance during her recuperation.

Luckily, she had savings outside her investment accounts that covered those expenses. However, there are many other accident victims who aren’t as fortunate as Sue. They must use investments that may have been intended for their children’s education and their retirement. The result is paying penalties for tapping into qualified accounts.

Sue didn’t tap into her investments. However, she did have to stop making contributions to her qualified accounts and adding to her other investments. Because the accident occurred during her prime earning years, the compounded effect on her nest egg will be significant.

In addition, Sue could’ve avoided the loss of income and the out-of-pocket expenses, if she’d been covered by a more comprehensive auto insurance policy and purchased additional disability insurance.

Review your coverages and your entire estate plan with a knowledgeable attorney to be certain you have the best protection.

Reference: Think Advisor (March 26, 2019) “How Car Accidents Can Wreck Retirement Accounts”

What Are the New Rules for Veterans’ Benefits?

“Under the new rules, veterans will be given three options for their benefits appeals. All three are designed to streamline the complicated existing process for cases, which can languish for years as new evidence and arguments are introduced throughout the timeline.”

Veterans rejected for disability benefits will have new options for appeals. This is because federal officials are implementing an overhaul of the review process, with the objective of significantly reducing wait times for complicated cases.

The Department of Veterans Affairs announced last month that it will implement new appeals modernization rules starting in mid-February. The changes have been in the works for more than 18 months, since lawmakers passed sweeping reform legislation on the topic in the summer of 2017.

Veterans will now be provided with three streamlined options for their benefits appeals, reports the Military Times in the article “VA’s benefits appeals process will see a dramatic changeover next month.”

The VA is now hoping that the most difficult reviews can still be finished in less than a year in most cases. The target for cases that don’t go before the Board of Veterans Appeals is an average of about four months for a final decision.

A successful appeal can result in thousands of dollars in monthly benefits payouts for veterans who’ve previously been turned down, for what they believe are service-connected injuries and illnesses.

“(This) is the most significant reform in veterans’ appeals processing in a generation and promises to improve the timeliness and accuracy of decisions for our nation's veterans,” said House Veterans’ Affairs Committee Chairman Mark Takano, D-Calif.

Veterans groups primarily support the appeals changes, but some have expressed concerns about the new system limiting veterans’ options for future reviews, in favor of getting faster resolutions.

Parts of the new process were implemented as pilot programs at select sites in recent months. In the past, the cases involved a combination of all three options, with cases reset and repeating steps with every new submission of case evidence.

With the first of the three new appeals processes, veterans can file a supplemental claim where they introduce new evidence in support of their case. The appeal is handled by specialists at a regional office, who make a final decision.

The second option allows veterans to request their cases be reviewed by a senior claim adjudicator, instead of the regional office. Those reviews are for clear errors or mistaken interpretations of a statute. If they find mistakes, they can require corrections for the cases.

The third option allows veterans to appeal directly to the Board of Veterans’ Appeals. Those cases are anticipated to take the longest to process, due to the legal prep work. Veterans can obtain a direct decision or request a hearing before the board.

Veterans with cases currently pending in the system, can opt to go with the new processes or stay with the current system, if they think it will be better for them.

Should Older Millennials Buy Life Insurance?

“Let's break it down on why millennials need life insurance and how companies are starting to understand this trend.”

We're all going to die someday. That’s one of the only certainties in life, along with taxes. However, a recent study by Budget Insurance found that 82% of millennials don't know the purpose of life insurance—despite the fact they’re aging, starting families and dealing with more complex financial situations.

Forbes’ article, “Why Older Millennials Need To Start Taking Life Insurance Seriously,” notes that, although most millennials may not have given life insurance much thought before, it's now time to begin taking life insurance and other estate planning more seriously. To help with this, more companies are starting to take millennials seriously, when it comes to financial matters. The result? It's getting easier than ever before to get life insurance.

Life insurance is used to protect your family financially, in case of your death. That is important for millennials who are starting families that depend on them financially.

According to Pew Research, 60% of families depend on dual incomes and just 31% of families rely on a single income.  A total of 91% of families in the U.S. require the income of at least one spouse to survive. However, what happens if one (or both) die? That's where life insurance comes into play.

Because millennials are still relatively young, getting life insurance is very cost effective. In addition, for the vast majority of millennials, a simple term life insurance policy will do the job.

Term life policies are very inexpensive and can be a financial relief, if they’re ever actually needed.

It's possible to get a $1,000,000 term life insurance policy for about $40 per month, depending on your age and health. That is quite a bit of insurance for little expense.

With the increase in millennials who require life insurance, many insurance companies are making buying life insurance very easy.

These companies have online or app-based solutions that focus on speed and ease of use. These companies leverage technology and keep human interaction to a level that most millennials like.

Reference: Forbes (January 26, 2019) “Why Older Millennials Need To Start Taking Life Insurance Seriously”

Understanding Long-Term Care Planning

“Unless you're very rich or very poor, you should be looking into all of the long-term care possibilities out there. Because of the costs and complexity involved, the choice isn't easy. But it is necessary.”

There is no easy way to plan for long-term-care expenses. According to the U.S. Department of Health and Human Services, 70% of those age 65 and over will need some sort of long-term care. Paying out of pocket won’t be possible for most, because the median annual cost of a private nursing room is $97,455.

Kiplinger notes, in its article, “The Impossible Reality of Long-Term Care Planning,” that the long-term care insurance industry is in flux, with many companies closing this part of their business because claims are much higher than expected.

While there’s no perfect, easy solution, you can consider long-term care insurance. The other option is to be very wealthy and pay out of pocket or try to qualify for Medicaid.

Most of us have a financial situation that could be ruined by the average long-term care event. The best bet is to transfer some of the risk to an insurance company. The issue then becomes determining the right amount. Many insurance agents recommend a monthly benefit that is aligned with the average facility cost. But given the high cost of long-term care insurance, it should be used to fill a gap, not cover the entire expense. Don’t reach to buy a policy you can barely afford today, because premiums can skyrocket.

As far as the type of policy, traditional long-term care insurance is the easiest to understand and the type everyone bought until a few years ago. While you’re covering a big risk from both a likelihood of need and a dollar perspective, it’s expensive.

The life insurance industry recently introduced a hybrid universal life insurance with long-term care riders. This is permanent universal insurance with flexible premiums. “Riders” are like guarantees. In effect, these are policies with set periods for the premium. You can pay for them all up-front or over time. Premiums are guaranteed not to rise, and if you don’t use the insurance, it will pass to the next generation as a death benefit.  However, the death benefits are lower than they would be without the long-term care part, and the monthly benefit amounts are typically lower than they would be for the same amount in a traditional policy. Some will take this tradeoff for the certainty of knowing the amount of their premiums.

This insurance isn’t easy to get: there’s a standard life insurance exam plus a memory test. If you have health or cognitive issues, an annuity with a long-term-care rider may be the only option.

Reference: Kiplinger (January 2, 2018) “The Impossible Reality of Long-Term Care Planning”

How Much Insurance is Enough Insurance?

“Leaving an inheritance to your children is an admirable goal, and it can be part of a comprehensive estate plan.”

A $1.5 million term life insurance policy will cover the bills if one spouse dies. But it may not provide an inheritance for your kids, NJ 101.5 says in a recent article, “Do you need more insurance?”

If leaving an inheritance is important to you, start this process by taking an inventory of all your assets. Look at how they may factor into your support during retirement and see what might be left as an inheritance. This exercise may result in discovering that you already have money that will make a nice inheritance for your children someday in investment or retirement accounts. In addition, your primary residence could be a source of inheritance.

Before you buy more insurance, talk with an estate planning attorney about your options. Your attorney will help you review your situation and make projections for where your assets may be in the future.

If you conclude that more insurance is needed, you’ll have to decide the type. Term insurance can be a cost-effective way to provide income replacement during your working years, but look at your policies to be certain you know how the premiums may change in the future.

You can also consider policies like whole or universal life. These may be a better choice for leaving an inheritance. The annual premiums for permanent insurance will be greater for a similar amount of coverage, but these policies can accrue cash value that can be used while you are still alive.

When you weigh your new insurance options, it’s critical to calculate the cost of the premiums into your current and future budget.

For more information on Estate Planning and Insurance Policies please visit our website here

Reference: NJ 101.5 (June 27, 2016) “Do you need more insurance?”