Life Insurance As Part Of Your Estate Plan
Life insurance as income replacement in retirement plan.

Life Insurance As Part Of Your Estate Plan

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 folks 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. Also, any benefits paid prior to the insured’s death because of chronic or terminal illness also are tax-free. This is called an accelerated death benefit (ADB) and is a pretty 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. But 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 includes sales charges, administrative expenses, and surrender charges. That’s 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 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”

 

As a New Parent, Have You Updated (or Created) Your Estate Plan?
New parents

As a New Parent, Have You Updated (or Created) Your Estate Plan?

You just had a baby. Now you’re sleep-deprived, overwhelmed, and frazzled. Having a child dramatically changes one’s legacy plan and makes having a plan all the more necessary, says ThinkAdvisor’s recent article, “5 Legacy Planning Basics for New Parents.”

Take time to talk through two high-priority items. Create a staggered checklist—starting with today—and set attainable dates to complete the rest of the tasks. Here are five things to put on that list:

  1. Will. This gives the probate court your instructions on who will care for your children, if something happens to both you and your spouse. A will also should name a guardian to be responsible for the children. Parents also should think about how they want to share their personal belongings and financial assets. Without a will, the state decides what goes to whom. Lastly, a will must name an executor.
  2. Beneficiaries. Review your beneficiary designations when you create your will, because you don’t want your will and designations (on life insurance policies and investments) telling two different stories. If there’s an issue, the beneficiary designation overrides the will. All accounts with a beneficiary listed automatically avoid probate court.
  3. Trust. Created by an experienced estate planning attorney, a trust has some excellent benefits, particularly if you have young children. Everything in a trust is shielded from probate court, including property. This avoids court fees and hassle. A trust also provides some flexibility and customization to your plan. You can instruct that your children get a sum of money at 18, 25 or 30, and you can say that the money is for school, among other conditions. The trustee will distribute funds, according to your instructions.
  4. Power of Attorney and Health Care Proxy. These are two separate documents, but they’re both used in the event of incapacitation. Their power of attorney and health care proxy designees can make important financial and medical decisions, when you’re incapable of doing so.
  5. Life Insurance. Most people don’t think about purchasing life insurance, until they have children. Therefore, if you haven’t thought about it, you’re not alone. If you are among the few who bought a policy pre-child, consider increasing the amount so your child is covered, if something should happen.

Reference: ThinkAdvisor (March 7, 2019) “5 Legacy Planning Basics for New Parents”

 

How Do I Plan for a Blended Family?
How do I plan for a blended family?

How Do I Plan for a Blended Family?

A blended family (or stepfamily) can be thought of as the result of two or more people forming a life together (married or not) that includes children from one or both of their previous relationships, says The Pittsburgh Post-Gazette in a recent article, “You’re in love again, but consider the legal and financial issues before it’s too late.”

Research from the Pew Research Center study reveals a high remarriage rate for those 55 and older—67% between the ages 55 and 64 remarry. Some of the high remarriage percentage may be due to increasing life expectancies or the death of a spouse. In addition, divorces are increasing for older people who may have decided that, with the children grown, they want to go their separate ways.

It’s important to note that although 50% of first marriages end in divorce, that number jumps to 67% of second marriages and 80% of third marriages end in divorce.

So if you’re remarrying, you should think about starting out with a prenuptial agreement. This type of agreement is made between two people prior to marriage. It sets out rights to property and support, in case there’s a divorce or death. Both parties must reveal their finances. This is really helpful, when each may have different income sources, assets and expenses.

You should discuss whose name will be on the deed to your home, which is often the asset with the most value, as well as the beneficiary designations of your life insurance policies, 401(k)s and individual retirement accounts.

It is also important to review the agents under your health care directives and financial powers of attorney. Ask yourself if you truly want your stepchildren in any of these agent roles, which may include “pulling the plug” or ending life support.

Talk to an experienced estate planning attorney about these important documents that you’ll need, when you say “I do” for the second (or third) time.

Reference: Pittsburgh Post-Gazette (February 24, 2019) “You’re in love again, but consider the legal and financial issues before it’s too late”