The death benefit protection offered by a life insurance policy can be a key component of a sound financial plan. It can offer income protection to guard our loved ones' standard of living or estate liquidity to protect assets from the eroding effects of taxes.
A variety of expenses can burden loved ones in the event of lost life, including mortgage and other loans, child care and education. Without proper life insurance coverage, a major change in lifestyle and/or standard of living may be required to meet expenses. If you recognize the need for life insurance but have been delaying the purchase, consider the costs associated with waiting.
Both loans and withdrawals from a permanent life insurance policy may be subject to penalties and fees and, along with any accrued loan interest, will reduce the policy's account value and death benefit. Assuming a policy is not a Modified Endowment Contract (MEC), withdrawals are taxed only to the extent that they exceed the policyowner's cost basis in the policy and usually loans are free from current federal taxation. A policy loan could result in tax consequences if the policy lapses or is surrendered while a loan is outstanding. Distributions from MECs are subject to federal income tax to the extent of the gain in the policy and taxable distributions are subject to a 10% additional tax prior to age 59½, with certain exceptions.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "Act") reinstated the federal estate tax and generation skipping taxes and reunified the estate and gift tax basic exclusion amount. Under the Act, estate, gift, and generation-skipping transfers are taxed at a maximum rate of 35%. The individual basic exclusion amount for estate, gift and generation-skipping transfers is $5,000,000, subject to an inflation adjustment in 2012. An individual’s basic exclusion amount for estate tax purposes may be increased by the unused basic exclusion amount of a deceased spouse. The Act expires at the end of 2012, at which time the estate, gift and generation skipping transfer tax exemptions will be reduced to $1,000,000 (the generation skipping tax exemption is indexed) and the maximum rates will be increased to 55%.
The uncertainty regarding how the Act might be modified, underscores the importance of seeking guidance from a qualified advisor to help ensure that your estate plan adequately addresses your needs and those of your beneficiaries under all possible scenarios.
If you already have life insurance coverage, are you sure you are properly covered? Our lives are constantly changing, and each change can affect our financial situation and needs. Annual policy reviews should be part of any life insurance strategy.
Many factors may influence the effectiveness of your life insurance coverage without you realizing it, such as:
Universal Life insurance is permanent life insurance with a flexible premium structure and the ability to build cash value.
Universal Life policies provide a minimum guaranteed interest rate. However, this is not a guaranteed “rate of return” due to the effect of policy charges.
Term life insurance is basic life insurance coverage that provides protection for a specific period of time ("term"). It may be a suitable life insurance product if you need short-term death benefit protection and have temporary financial obligations, such as mortgage payments, car payments, or short-term debts. Coverage provides lower premiums for people who cannot afford permanent life insurance premiums. Should you decide you want permanent life insurance, you can convert your policy later on (within certain parameters).
¹ The death benefit may be included in your estate for federal estate tax purposes.