Life Insurance Tips

Life Insurance Knowledge Center:

Click any of the following general topics to reveal all the helpful details.


Choosing An Amount

It turns out that for life insurance, the solution to the puzzle of "how much" can be found with some basic calculations. The reason for purchasing life insurance, of course, is to provide your family with long-term financial security. To come up with a dollar figure that will provide that security, you should begin with a careful review of your financial situation.

Essentially, there are two categories that you should consider-what your family's immediate needs will be if something happens to you, and what their ongoing needs will be.

  • Immediate needs can include the final expenses associated with a terminal illness, burial costs, estate taxes, the balance of an unpaid mortgage and even relocation expenses.
  • Ongoing needs might include monthly bills and expenses, mortgage payments, daycare costs, education, income replacement and retirement.

Most people aren't so anxious to figure out how their family will replace the income lost if they die, or even to tackle such details as how much their own funeral will cost, or if the family will have to sell their home should such an event occur, and what the marketplace will be like if selling the home is neccesary. One way to start the process is to consider this basic rule of thumb for life insurance:

  • In general, most people should have life insurance that is equal to five to seven times their annual gross income.

Life insurance comes in two basic forms. There is:

  • Term life insurance and
  • Permanent life insurance (also known as Cash-Value). Knowing which one is appropriate for you means understanding what your needs are and what you are protecting.

You should elect an amount necessary to meet the needs you are trying to satisfy.

Choosing The Type

There are two basic types of life insurance, term insurance and cash value insurance. There are many variations on these two basic types. Term Policies provide life insurance for a specified period of time. These policies provide benefits in the event of death, but they generate no "cash value". If you have a limited amount to spend, and only need the additional coverage insurance for a finite period of time (for instance.. until the children graduate from college), you may be able to get more coverage by acquiring term insurance than by with cash value insurance. Today's term policies usually have two sets of premiums - guaranteed maximum premiums, and "current premiums", which are usually much lower. The company cannot increase current premium above the guaranteed maximum premiums shown in the policy.

When you buy term insurance you need to make a choice as to how long you want the protection. You may renew the policy without a physical examination for the period of years specified in the policy. Some term insurance can be converted to cash value insurance up to a specified age with no physical examination. Premiums for the converted insurance will initially be higher than the premiums you would be paying for the term insurance. Cash-Value Insurance combines death benefits with a cash accumulation feature. The buyer of a cash value policy pays more in the early years than for term insurance, but the money not needed to pay for the cost of the death benefit accumulates as interest. If the policy is surrendered before the insured dies, there may be a cash value paid to the owner. In addition you can make loans from your policies cash value. This interest rate for most policies decreases after a specified number of years, and if the loan is never paid back then the amount is deducted from the policy's benefit. As a general rule, it is not a good idea to buy cash value life if you plan to surrender early.

If all premiums are paid, cash value insurance usually lasts for the whole life of a person, and pays death benefits to the beneficiaries named in the policy upon the death of the insured. The cash value can be used as loan collateral for borrowing funds at the interest rate specified in the policy. Any outstanding loans are deducted from policy proceeds at death or surrender. Some of these products may enjoy tax advantages.

Choosing Beneficiaries

Designating a Beneficiary

A beneficiary is the person or entity you name (designate) to receive the death benefits of a life insurance policy.

Revocable and irrevocable beneficiaries
The beneficiary can be either irrevocable or revocable. Once named, you cannot change an irrevocable beneficiary without his or her consent. A revocable beneficiary can be changed at any time.

Primary, secondary, and final beneficiaries

You can name as many beneficiaries as you want, subject to procedures set in the policy. The beneficiary to whom the proceeds go first is called the primary beneficiary. Secondary beneficiaries are entitled to the proceeds only if they survive both you and the primary beneficiary. A third level of beneficiary ("final" beneficiaries) can be named as well. Final beneficiaries receive proceeds only if they outlive all other beneficiaries. Usually aunts, uncles, nieces, nephews, and charities are named at this level.

You should name both secondary beneficiaries and final beneficiaries. You may outlive the primary beneficiary, you may die simultaneously, or the primary beneficiary may be unable to collect the proceeds. In these cases, if you have not named secondary beneficiaries, the proceeds pass to your estate. Proceeds paid to your estate are subject to all the expenses and delays associated with settling an estate, whereas named beneficiaries can receive proceeds almost immediately after your death.

Multiple beneficiaries
You may name multiple beneficiaries if you choose. There are no legal restrictions--and few company restrictions--on the number of beneficiaries you can designate. The only requirement is that they must all have an insurable interest in you (e.g., spouse, child, business partner, etc.) at the time you apply for the insurance.

If you name multiple beneficiaries, you must also specify how much each beneficiary will receive. You may not want to give each beneficiary an equal share, so you must state how the proceeds should be divided. Because of the numerous interest and dividend adjustments the insurance company must make, the death benefit check often does not exactly equal the policy's face value. Thus, it's wise to distribute percentage shares to your beneficiaries, or to designate one beneficiary to receive any leftover balance.

How do you name or change a beneficiary?

When you buy life insurance, the insurer will provide you with a beneficiary designation form. Generally, you only need to list the names of the beneficiaries, sign the form, and date it. When changing a beneficiary, a similar form is used. It is advisable to specifically revoke any previous designations by writing this in on the change of beneficiary form. You may want to review your beneficiary designation every two or three years. Additionally, be sure to check and update your designation upon certain life events (e.g., divorce, remarriage, the birth of children, etc.).

Don't make the mistake of thinking that you can change your beneficiary in your will. A change of beneficiary made in your will does NOT override the beneficiary designation form. If you want to change the beneficiary, execute a change of beneficiary form. Do not rely on your will to do so.

Why designating the proper beneficiary is important

Life insurance is purchased for two primary reasons: to create an instant estate to provide for your family members, and to solve cash flow problems caused by your death. To attain these goals, you want to ensure that all the life insurance proceeds are received by the beneficiary. To do this, you need to avoid estate taxes that will deplete these funds. One way to avoid taxes is to properly designate the beneficiary.

Should you name your spouse as beneficiary?

Most married people name their spouse as primary beneficiary. If your spouse is the beneficiary, then the proceeds pass free of estate taxes under the unlimited marital deduction, regardless of who owns the policy. However, if the spouse also has a sizeable estate, the proceeds will be included when he or she dies (unless, of course, they have been spent). In the later case, you may end up only postponing estate taxes, not completely avoiding them.

Additionally, if you and your spouse die simultaneously, the Uniform Simultaneous Death Act (USDA) provides that the beneficiary will be presumed to have died first. This means that the unlimited marital deduction will be lost, and the proceeds will be included in your gross estate.

Be aware, however, that if you live or move to a community property state, your spouse must give written consent before you can designate anyone else as your beneficiary.

Other things to think about

Be careful if you name your estate or your executor

If your estate or your executor is named as beneficiary on your life insurance, the proceeds will be included in your gross estate for federal estate tax purposes. If your gross estate is large enough, estate taxes must be paid. These taxes reduce the life insurance proceeds available for your family, and the process of settling the estate will delay the availability of the life insurance proceeds.

Of course, your child or spouse may also serve as your executor. In this case, he or she may be a perfectly appropriate beneficiary. Just make sure you indicate that the beneficiary is your child or spouse, and not just the executor of your estate.

Be careful if you name a creditor, or someone who will use the proceeds to do you a favor

Occasionally, a beneficiary is considered by the IRS to be for the benefit of your estate. When this happens, the proceeds from the life insurance policy are included in your gross estate for estate tax purposes. Examples of this include:

  • naming a creditor as beneficiary (in payment of a debt)
  • naming a beneficiary to receive proceeds under an agreement that requires him or her to pay your estate's debts or expenses
  • naming a beneficiary to receive proceeds to pay alimony or support

Don't name a minor unless a guardian has been appointed or a trust is used

Insurers generally will not make settlements directly to minors. Do not name a minor as a beneficiary unless you also appoint a guardian or use a trust.

Name a beneficiary in accordance with a divorce decree, settlement agreement, or state law

Your right to change a beneficiary may be limited by a divorce decree or settlement agreement. In some states, divorce automatically terminates a spouse's interest. In other states, divorce allows a policyowner to change the beneficiary, even if the beneficiary is irrevocable.

Claiming Benefits

How do you claim life insurance benefits?

Life insurance benefits are not paid automatically. If you are the beneficiary of a life insurance policy, you must file a claim in order to receive any money. Often, this is as simple as contacting your insurance agent, and filling out some paperwork.

However, if this is the only step you take, you may be missing out on other life insurance benefits to which you are entitled. For example, your spouse or family member may have owned one or more group policies that pay benefits depending on how the insured person died, or in restricted amounts. If you spend time uncovering these unseen policies, you may uncover additional support funds from life insurance than you had expected.

Finding individually-owned life insurance policies

Your spouse or family member may have owned one or more permanent or term life insurance policies. Individually-owned term or permanent policies are what most people think of as life insurance. These policies are purchased by one person, and pay benefits when the insured person dies. If your spouse or family member owned one of these policies, he or she probably kept it with his or her important papers; in a file, or in a safety deposit box. However, if you know that your spouse or family member owned an individual policy and you can't find it, call his or her insurance agent or company to check. If you're not sure if your spouse or family member owned a policy, you can contact the American Council of Life Insurance. Its members can do a free search for you.

Finding group life insurance policies

Group life insurance policies provide coverage to many people under one policy. Group insurance policies may be issued through an employer, bank, credit agency, or other professional or social organizations, and they often pay benefits in specialized circumstances. Because the group holds the actual policy, the insured person receives a certificate of insurance as proof that he or she is insured. Look for these certificates in your spouse's or family member's personal papers, files, and safety deposit box. However, even if you can't find any certificates, this doesn't necessarily mean your spouse or loved one wasn't insured. You should still check with your spouse's or family member's employer, bank, or credit agency, or study loan paperwork or purchase contracts. Read the following sections for information about types of group policies your spouse or family member may have owned.

Employer-based group life insurance

If your spouse or family member was employed at the time of his or her death, you may be the beneficiary of a life insurance policy issued through his or her employer. Because some employers offer their employees a certain amount of life insurance at no cost, you may not even be aware that your spouse or family member was insured by a group policy because he/she did not pay his/her own premiums. In addition, your spouse or family member may have had the option of purchasing additional group life insurance through his/her employer, paying the extra premiums himself/herself. Thus, before assuming that your spouse or family member did not have group life insurance, you should check his/her pay stubs, and call his/her employer.

Accidental death and dismemberment policy

Your spouse or family member may have been offered an accidental death and dismemberment policy through an employer, credit card, or bank. These policies pay benefits if an insured individual dies accidentally. This is another type of life insurance you may be unaware that your spouse or family member had because, occasionally, these policies are offered as part of a loan package, or even issued as a free benefit by banks, or as a rider to an employer-issued insurance policy. If your spouse or family member died accidentally, look for such a policy in his or her files, or contact his or her employer, bank, credit card issuer, or insurance company.

Travel accident insurance

If your spouse or family member was killed while traveling by air, boat, or train, you may be eligible to receive the proceeds from a travel accident insurance policy he or she may have purchased when buying tickets. In addition, if your spouse or family member used a credit card to purchase travel tickets, you could be automatically entitled to a life insurance benefit payable if he or she dies as a result of an accident when using those tickets. Some travel agencies and road and travel clubs also routinely issue travel accident insurance policies, and employers sometimes pay death benefits to employees who are killed while traveling on company business.

Mortgage life insurance

If your spouse or family member owned a house, he or she may have purchased mortgage life insurance. A mortgage life insurance policy pays off the balance of the policyholder's mortgage upon his or her death. If you're not sure whether your spouse or family member purchased such a policy, check with the mortgage lender.

Credit life insurance

Banks and finance companies routinely offer credit life insurance when someone takes out a loan, or is issued a line of credit. This insurance will pay off the outstanding balance of a loan or account if the insured individual dies. A few extra dollars is added to the monthly loan payments to pay the premiums. Many institutions try to sell this type of policy when someone finances a purchase, or signs up for a line of credit, and occasionally they add it to a contract before the individual signs it. Thus, it is likely that you won't find out that your spouse or family member owned such a policy unless you check with credit card companies, banks, or any lenders to whom your spouse or family member owed money at the time of his or her death.

How do you file a life insurance benefit claim?

  1. Notify the insurance company that the policyholder has died

    You should contact the insurance company as soon as possible. Call the policyholder services department directly, or if the life insurance policy was issued through our agency or an employer, ask us/them to notify the company for you to begin the claims process.

  2. File a claim form

    You'll begin the claims process by filling out and signing a proof of death form, and then attaching to it an original or certified copy of the policyholder's death certificate. If you are too distraught to fill out the form yourself, we may fill it out for you, although you'll still have to sign it. If there is another beneficiary named on the policy, that person must also fill out a claim form. You may also have to fill out Form W-9 (Request for Taxpayer Identification Number and Certification), which will enable the insurance company to notify the Internal Revenue Service of any interest it has paid to you on the value of the policy. To expedite your claim, follow the insurance company's and/or policy instructions carefully.

  3. Wait for the company to process the claim

    Life insurance claims are usually paid quickly, often within a few days. First, however, the insurance company will ensure that you are the beneficiary of the policy, that the policy is current and in force, and that all conditions of the policy have been met. This is usually a simple matter, and does not delay the claims process. Claims are more often delayed because the insurance company has not received a valid death certificate. The insurance company also has a right to challenge or deny a claim if it believes that a specific policy provision has been violated.

How should you receive the life insurance proceeds?

In a lump-sum cash payment

Life insurance proceeds are often paid as lump-sum cash payments. Most people elect this form of payment because it enables them to control how the insurance money is invested or spent. In addition, if you elect to receive a lump-sum payment, you will not owe income tax on the life insurance proceeds.

Through a settlement option

A settlement option is a way of paying the proceeds of a life insurance policy other than in a lump-sum cash payment. Many types of settlement options are available, but all are designed to ensure good money management in situations where the beneficiary is unable or unwilling to manage a lump sum of cash. Either the policy owner chooses the settlement option at the time he or she purchases the policy, or the beneficiary chooses the option at the time the benefit becomes payable (unless the policy owner had chosen an irrevocable option).

If you receive the proceeds of an insurance policy through a settlement option, the insurance company will keep the policy proceeds, invest them, and pay you interest. Or, you may be allowed to withdraw part of the proceeds or receive periodic payments of both principal and interest.

Reading Policies

Most life insurance policies are filled with fine print, legalese, and technical insurance jargon. However, if you can find the time and muster the patience, it's probably a good idea to sit down and read through your policy. If you do, you'll understand your policy better and gain an understanding of your rights and obligations under the contract.

Here are some common provisions to look for when you read your policy:

Entire contract clause

When your life insurance policy takes effect, the application for insurance that you filled out is incorporated into the contract. The statements you made on the application become contractual provisions and can be used as evidence in a dispute over the contract's validity. Typically, states require that a clause be inserted in your policy stating that the policy and the application attached to it together form the entire contract between you and the insurer. This clause is beneficial to you because if your insurer accuses you of misrepresentation and seeks to void the contract, they're prevented from using other evidence outside of the contract. They can only void the contract if you made false statements on your application.

Ownership clause

A life insurance policy is a piece of property. The owner of the policy may be the individual whose life is insured under the contract, it may be the beneficiary, or it may be someone else. In all likelihood, if you are the insured, you are also the owner of the policy. As the owner, you have certain privileges of ownership, including the right to transfer or assign the policy, the right to change the beneficiary, the right to receive the cash value and dividends (if applicable), and the right to borrow against the cash value (again, if applicable).

Beneficiary clause
The beneficiary clause allows you to name the person who will receive the policy's death benefit proceeds upon your death. The designation of your beneficiary is an important decision, enabling you to control the disposition of the insurance money. While you may designate yourself as beneficiary under certain types of retirement income policies, the beneficiary under a traditional policy will generally be either your estate or an individual. It's usually not advisable to name your estate, however, because then the proceeds will have to pass through probate and payment of them will be held up. If you name a specific individual, the proceeds will be paid directly to him or her upon your death without delay. A beneficiary designation may be revocable (can be changed by you at any time) or irrevocable (can't be changed). In addition, a beneficiary may be primary or contingent. Basically, the primary beneficiary is the person first entitled to the policy proceeds at your death. If the primary beneficiary dies before you (and thus before any proceeds are paid), the contingent beneficiary takes his or her place.

Incontestogglele clause
This is an clause that is required in most life insurance policies. Typically, it states that the validity of the contract cannot be questioned or challenged for any reason whatsoever after the policy has been in force for a period of two years during your (the insured's) lifetime. The reason for this clause lies in the long-term nature of the life insurance contract. Its purpose is to give the insurer ample time to review the contract while providing you and your beneficiary with some assurance that you will not be harassed by lawsuits long after the policy was originally bought.

Misstatement of age clause

This is somewhat of an exception to the incontestogglele clause. The incontestogglele clause does not apply when you, the insured, misrepresent your age. The reason is simple. Because age is a key factor in determining whether a company offers you life insurance and in setting premiums, some applicants are tempted to understate their age in order to pay a lower premium. Understandably, insurers wish to avoid this. The misstatement of age clause provides that if you have misrepresented your age, the insurer will lower the face amount of the policy to the amount of insurance that the premium paid would have purchased at the correct age.

Grace period
Your policy specifies the due date for premiums (e.g., monthly, quarterly, semiannually). Whatever the due date, you generally must pay your premiums on or before that date. If you fail to do so, you will be in default and technically the policy will lapse. This rule is subject to a disclaimer, however, in the form of a grace period during which the policy still remains in force if a premium hasn't been paid on time. For example, if you have a premium due on January 1 and don't pay it by that date, you might have until February 1 to make the payment before the policy would lapse. If you died on January 15, the death benefit proceeds would still be paid, but minus the amount of the premium in default.

Reinstatement clause
Many life insurance contracts contain a clause allowing you to reinstate or reactivate a lapsed policy (i.e., one for which you stopped paying the premiums). However, reinstatement is not your unconditional right. If available, it will be subject to a number of very specific requirements on your part. First, if it's a cash value policy, reinstatement will be possible only if at the time of the policy's lapse you did not withdraw its cash surrender value. Second, reinstatement must be accomplished within a specified time period, normally five years after the lapse. Third, you must resubmit proper evidence of your insurability. Not only must your health still be satisfactory to the insurer, but other factors such as your income and personal habits must not have changed greatly either. Finally, an insurer will generally only permit reinstatement if you pay all the overdue premiums (plus interest) and if you pay (again, with interest) or reinstate any indebtedness from loans that may have existed at the time of lapse.

Suicide clause

Almost all life insurance policies exclude suicide during a specified period after the policy is issued. Under this clause, the typical period during which coverage for suicide will be denied is two years (although some policies limit it to one year). Assuming you are the insured, this means that if you commit suicide (whether by insanity or not) within two years after purchasing your policy, the insurer will not pay any death benefits to your beneficiary. The insurer would be responsible for refunding the premiums paid by you, but that would be the extent of their financial obligation under these circumstances.

Aviation exclusion

At one time, almost all life insurance policies excluded death resulting from aviation. Today, most policies will provide coverage if you die in an airplane accident, although you may have to pay an extra premium to cover the heightened risk if you're a private or commercial pilot (or a crewmember).

War clause

During war time or when a war seems likely to occur, insurance companies may insert a war clause into their policies. This clause usually states that if you (the insured) die in a war, the insurer does not have to pay the death benefit proceeds that would ordinarily be payable under the policy. Instead, all they have to do is return the premiums you paid plus interest.

Special provisions, riders and options
Note that the provisions described here are only the ones that are more or less common to all life insurance contracts. In most cases, you have the choice of purchasing riders and optional coverages that allow you to expand your coverage and tailor the policy to your needs. In addition, certain types of policies may have special provisions of their own. Cash value policies, for example, generally include provisions relating to policy loans and the surrender of all or part of the cash value.

Estate Planning & Life Insurance

Life insurance has come a long way since the days when it was known as burial insurance and used mainly to pay for funeral expenses. Today, life insurance is a crucial part of many estate plans. It can:

  1. provide much-needed income that is immediately accessible to your survivors
  2. allow you to replace wealth lost due to estate shrinkage (i.e., the estate taxes and expenses associated with your death) and
  3. allow you to give money to your favorite charity.

What are the estate planning benefits of life insurance?

Life insurance can protect your survivors financially:

You can buy life insurance to help ensure that your survivors don't suffer financially when you die. You can protect their long-term financial needs by planning so that they will have enough money to pay their bills and live comfortogglely for years to come. You can also use life insurance to protect your survivors' short-term financial needs. Because life insurance proceeds normally don't pass through probate, your loved ones will have enough money to pay their bills right away--they won't have to wait until your estate is settled.

Life insurance can replace wealth that is lost due to estate shrinkage:

Life insurance may be the number one method of replacing wealth that is lost due to estate shrinkage. To ensure that the estate (money and assets) you leave to your survivors isn't less than you intended, you can buy enough life insurance to cover the expenses associated with your death, such as taxes, fees, and other debts that your survivors will have to pay.

Life insurance can be given to charity:

If you want to leave money to charity when you die, consider using life insurance. Not only does life insurance allow you to make a substantial gift to charity at relatively little cost to you, but there are certain tax benefits as well. For instance, depending on how you structure your gift, you may be able to take an income tax deduction equal to your basis in the policy or its fair market value. Or, you may be able to deduct the premiums that you pay for the policy. In addition, gifts to charity may reduce estate taxes owed when you die.

Plan carefully if you expect to leave behind a substantial estate
Your survivors generally won't owe income tax on any life insurance proceeds that you leave to them. However, they may owe estate taxes if you leave behind a large enough estate but don't plan ahead. In general, if you're leaving behind a taxable estate worth less than a certain amount, your survivors won't owe estate taxes on a life insurance policy that you leave them. But, if you intend to leave an estate larger than that amount, you may want to consider the estate tax consequences of owning life insurance.

In general, to avoid life insurance-related estate taxes, make sure that you don't:

  • Own the policy or have any incidents of ownership in the policy
  • Make the proceeds payable to your estate
  • Make the proceeds payable to your personal representative (executor)
  • Make the proceeds payable to a beneficiary to satisfy a debt or to pay alimony or support
  • Pay the premiums

Taxes & Life Insurance

How is life insurance taxed?

Historically, life insurance has been accorded liberal tax treatment. As insurance products have become more sophisticated, however, the line separating insurance products from investment products has become a bit more complicated, depending on the type of policy(s) you own. As a result, a mix of complex rules and exceptions now govern the taxation of insurance products. Familiarity with these rules will help you avoid an unwary consequences and help you plan accordingly.

Tax considerations

Taxes are typically levied whenever cash changes hands. During the term of any life insurance policy, there are a number of occasions when money can and does change hands. The only question is whether the transaction amounts to a taxable event that triggers current income tax liability. For instance, in most cases, premiums are paid with after-tax dollars. To the extent they are deemed a return of premiums, benefits paid out during your lifetime are usually paid out tax free. Typically, death benefits are received tax free by your beneficiaries after your death. But, the sale or surrender of your policy during your lifetime triggers a tax on the realized gain.

Premiums may be paid with pre-tax dollars:
If your company offers the option to purchase life insurance through a qualified retirement plan, then your pre-tax contributions to the plan (and/or your company's contributions) can be used to buy a life insurance policy. However, not many companies offer their employees the option to purchase life insurance through their qualified retirement plan. If you do not purchase the insurance policy through a qualified retirement plan, then the premiums have to be paid with after-tax dollars.

Cash value accumulates tax deferred:

As the investment element of your policy grows, you realize gains. Generally, you are allowed to defer taxes on those gains provided you don't sell or surrender the policy. There are a few rare--but important--exceptions.

Dividends are typically not taxable:

Dividends are paid out of the insurer's surplus earnings for the year. Regardless of whether you take them in cash, or keep them on deposit with the insurer, they are considered a return of premiums. As long as you don't get back more than you paid in, you are merely recouping your costs and no tax is due.

Cash withdrawals in excess of basis are taxable income:
When you begin to withdraw cash from a cash value life insurance policy, the amount of withdrawals up to your basis in the policy will be tax free. Your basis is the amount of premiums you have paid into the policy. Any withdrawals in excess of your basis will be taxed as income. If the policy is classified as a "modified endowment contract," then untaxed earnings must be withdrawn first and taxed. Keep in mind, though, that only certain types of cash value policies even allow withdrawals in the first place.

Policy loans usually not taxable:
If you take out a loan against the cash value of your insurance policy, the amount of the loan is not taxable (except in the case of a modified endowment contract). This result is the case even if the loan is larger than the amount of the premiums you have paid in. Such a loan is not taxed as long as the policy is in place.

Interest on policy loans usually not tax deductible:
The interest on any loans you take out against the cash value of your life insurance is usually not tax-deductible.

Surrender of policy may result in taxable gain:
If you surrender your cash value life insurance policy, any gain on the policy may be subject to federal (and possibly state) income tax. The gain on the surrender of a cash value policy is the difference between the net cash value and loan forgiveness amounts and your basis in the policy. Your basis is the total premiums you paid in cash, minus any policy dividends and tax free withdrawals that you made.

Policy exchanges are typically not taxable:

The tax code allows you to exchange one life insurance policy for another without triggering current tax liability. However, you must follow the IRS's rules when making the exchange.

Death benefits usually not subject to federal income tax:
Whoever receives the death benefits from your insurance policy (at the time of your death) usually does not have to pay federal income tax on those proceeds. Thus, if you die owning a cash value life insurance policy with a $500,000 death benefit, then the beneficiaries under the policy will generally not have to pay any federal income tax on the receipt of the $500,000. In addition, the payment of death benefit proceeds from a cash value life insurance policy to a beneficiary is usually not considered a taxable gift.

Insurance proceeds may be included in your taxable estate:
If you hold any incidents of ownership in an insurance policy, the proceeds from that insurance policy will be included in your taxable estate. Furthermore, if you gift away an insurance policy within three years of your death, then the proceeds from that policy will be pulled back into your taxable estate. Incidents of ownership include the right to change the beneficiary, the right to take out policy loans, and the right to surrender the policy for cash.

Savings & Life Insurance

Cash value life insurance provides both death benefits and a savings feature. When you buy a permanent or cash value policy, part of your premium pays for the life insurance protection and part goes toward the savings component. As you pay your premiums the savings portion is invested, and the principal and earnings accumulate as your cash value.

You aren't required to leave the funds in the policy, however. You can sometimes withdraw from or borrow against the accumulated cash value. You can then use the withdrawn or borrowed funds to finance your retirement, pay a child's college tuition, or assist a child with a down payment on a house, among other things. This type of insurance can be a valuable asset, both as an investment and for life insurance purposes.

Types of life insurance policies you can use to save

Whole life:

With a whole life policy, insurers generally invest the funds primarily in long-term fixed-rate securities (bonds, for example) that typically provide the policyholder with modest returns of perhaps 3 to 5 percent. Additional returns may also be achieved through dividend distributions (if applicable). Yet, because whole life premiums don't vary in frequency or amount as they might with universal life, whole life is a more predictogglele product.

Variable life:

With a variable life policy, you choose how to invest the premiums from the investment choices available in the policy. You can place them in potentially higher-yielding stock and bond funds if you desire. The funds are invested at a variable rate of return. Since you control how the funds are invested, you can choose more aggressive investments if the markets are flourishing. Over the last 20 years, the return on variable life policies has far exceeded the return on most whole life policies. A variable life policy is an appropriate choice if you can tolerate the higher degree of risk. However, variable life returns depend on market conditions. Therefore, while you'll receive strong returns when the market is soaring, your returns will drop when the market falls.

Universal life:
With universal life, the insurer invests the savings portion of your premium in a fixed-rate account that is subject to change at regular intervals. You have no control over how the funds are invested. These investments can yield fairly attractive returns when rates on fixed investments are rising. However, while you generally receive interest at close to market rates, you can't easily predict the long-term return. Since universal life policies typically allow you to raise or lower your premiums on an annual basis, you can increase your contribution when the insurer is offering a higher return. This flexibility with premium payments is one of the primary advantages of universal life.

Variable universal life (VUL)
With variable universal life, you choose how to invest the premiums. You are given a number of investment accounts to choose from, ranging from conservative to aggressive portfolios. A VUL policy is a viable choice to consider if you can tolerate the higher degree of risk involved. However, VUL returns depend on market conditions. Therefore, when the market falls, so will your returns. VUL typically allows you to raise or lower your premiums on an annual basis. This flexibility with premium payments is a key advantage of VUL.

Advantages of using life insurance as a savings vehicle

  • It provides life insurance protection for your family.
  • You can earn money on your premium payments (depending on investment performance).
  • The cash value grows tax deferred until withdrawn or surrendered.
  • Sometimes you can withdraw from the cash value (generally up to a certain percentage).
  • You can borrow from the cash value at a relatively low interest rate (the amount you can borrow will vary by policy type).
  • You may be able to combine a policy loan with a policy withdrawal.
  • You may have a number of investment choices (depending on policy type).

NOTE: Depending on the specific type of cash value policy, some of these advantages may apply in varying degrees or not at all.

Self Employment

Life insurance is meant to provide proceeds that will help to replace your income and/or pay off liabilities in the event of your death. If you are self-employed, you may have an even greater-than-average need for life insurance. Not only will you want to protect your family after you die, but you'll want to protect the financial needs of your business as well.

Why life insurance is important

Like most people, you probably get your money by working. As long as you are alive, your income-producing capability is relatively secure, and you and your family can enjoy the lifestyle you have estogglelished. Even in hard economic times, most people are industrious enough to produce an income or manage to get by until the situation improves. When an income earner dies, however, the surviving family could face economic hard times that won't end. The financial needs for the surviving family may include:

  • final expenses, such as burial and funeral costs
  • unpaid medical bills
  • income replacement for survivors
  • mortgage balance
  • education fund for children
  • unplanned emergency expenses

Why life insurance may be even more important for the self-employed
When the income earner is a self-employed individual, there may be an even greater need for insurance. As a sole proprietor, you are personally liable for all the debts of your business. There is no legal distinction between personal and business assets. By legal definition, a sole proprietorship terminates when the owner dies. Any losses or financial obligations at the death of the sole proprietor become the responsibility of the estate. It is possible that personal assets may have to be sold or transferred to settle business debts. Business debts may include:

  • business loans
  • mortgage or lease payments on business location
  • accrued payments due to suppliers, vendors, consultants, employees, etc.
  • taxes due to local, state, and federal taxing authorities
  • fees to lawyers, accountants and other advisors to settle business affairs

Life insurance can be used to cover these financial responsibilities, as well as to provide for the ongoing needs of your family after your death.

What to do about it
Talk to use and we will help you assess your need for life insurance and design a program to fit your specific situation.

Insuring Children

The topic of Life insurance for children is understandably a difficult issue for many parents. If your child dies, it would be a serious tragedy. But a child's death does not normally create a unrealistic financial hardship for the child's family. After all, the general purpose of life insurance is to replace income after a death. Unless the child is a substantial wage earner (like an entertainment star), no income is lost if the child dies. Although a child's death does create one immediate financial problem: funeral expenses.

Isn't it smart to buy insurance now, while the rates are low?
It's true: life insurance policies for young children are very inexpensive. But there's a reason for that. Children's insurance policies are usually for smaller amounts, like $10,000 and are typically added to the parents policy in the form of a rider.

Insurance policies for teenagers and young adults are pretty inexpensive, too. In terms of insurance costs. As your child ages and you take on added financial responsibilities in order to provide for their needs and education your need to have this type of insurance on your child may also increase.

Isn't it smart to buy insurance now, in case my child develops a medical condition?
It's a common sentiment: you want to protect your child now, in case he or she develops a medical condition and can't buy insurance later. If you believe your child is at risk to develop a medical condition, buying life insurance now might ease your mind. If you lose sleep over the possibility that your child will become uninsurable, then by all means purchase a life insurance policy now.

What you can do instead
If purchasing Life insurance on your child is something you are uncomfortogglele with, consider this:

To protect your child, you may want to purchase additional coverage on your own life and/or on your spouse's life. As wage earners, your death would profoundly affect your child's financial future. Make sure the coverage on both parents' lives ensures there will be enough money for day-to-day living as well as college expenses, even if something happens to one of you.

Charity & Life Insurance

Life insurance can be an excellent tool for charitogglele giving. Not only does life insurance allow you to make a substantial gift to charity at relatively little cost to you, but you and the charity may benefit from tax rules that apply to gifts of life insurance.

Why use life insurance for charitogglele giving?
There are several advantages to giving life insurance to charity:

Life insurance allows you to make a much larger gift to charity than you might otherwise be able to afford:

Although the cost to you (your premiums) is relatively small, the amount the charity will receive (the death benefit) can be quite substantial.

The charity is guaranteed to receive the proceeds of the policy when you die:

As long as you continue to pay the premiums on the life insurance policy, the charity is guaranteed to receive the proceeds of the policy when you die. The amount of the death benefit is fixed (or in the case of cash value insurance, perhaps even increasing), and is not subject to market fluctuations or loss of principal. Since life insurance proceeds paid to a charity are not subject to income and estate taxes, probate costs, and other expenses, the charity can count on receiving 100 percent of your gift.

Giving life insurance to charity has certain income tax benefits:
Depending on how you structure your gift, you may be able to take an income tax deduction equal to your basis in the policy or its fair market value, and you may be able to deduct the premiums you pay for the policy. In addition, an outright gift of life insurance is typically sheltered from gift tax by the charitogglele gift tax deduction, as long as you're giving a complete interest in the policy.

Giving life insurance to charity has certain estate tax benefits:

If you're worried about estate taxes, you can structure your charitogglele gift of life insurance to meet your needs. For instance, you can structure your gift so that the proceeds of the policy are not included in your gross estate. Or, you can structure your policy so that the amount of the proceeds payable to the charity can be deducted from your gross estate.

What are the disadvantages of using life insurance for charitogglele giving?

Donating a life insurance policy to charity (or naming the charity as beneficiary on the policy) means that you have less wealth to distribute among your heirs when you die. This may discourage you from making gifts to charity. However, this problem is relatively simple to solve. Buy another life insurance policy that will benefit your heirs instead of a charity.

Ways to give life insurance to charity
Name a charity as beneficiary on your life insurance policy:

This is the simplest way to use life insurance to give to charity. You, as owner of the policy, simply designate the charity as beneficiary. Designating the charity as beneficiary may allow you to make a larger gift than you could otherwise afford. If the policy is a form of cash value life insurance, you still have access to the cash value of the policy during your lifetime. However, this type of charitogglele gift does not provide many of the other tax benefits of charitogglele giving because you retain control of the policy during your life. Upon your death, the proceeds are included in your gross estate, although the full amount of the proceeds payable to the charity can be deducted from your gross estate.

Name a charity as the recipient of dividends:

Another simple way of making a charitogglele gift is to assign the dividends on your existing policy to charity. You, as owner of the policy, simply make this designation at the time of application, or at any other time while you own the policy. By assigning your dividends to charity you are able to make a charitogglele gift. You retain control over the policy and its cash value during your life. You also receive an income tax deduction as dividends are paid to the charity. However, this type of charitogglele gift does not provide many of the other tax benefits of charitogglele giving because you retain total control of the policy. Proceeds are included in your gross estate, and there's no offsetting estate tax deduction because the proceeds do not go to charity.

Donate an existing life insurance policy to charity:

In order to donate an existing life insurance policy to charity, you must assign all rights in the policy to the charity. You must also deliver the policy itself to the charity. By doing this, you give up all control of the life insurance policy forever. This strategy provides the full tax advantages of charitogglele giving because the transfer of ownership is irrevocable. You may be able to take an income tax deduction equal to your basis or its fair market value. The policy is not included in your gross estate when you die, unless you die within three years of the transfer. In this case, your estate would get an offsetting charitogglele deduction.

Donate a new life insurance policy to charity:

In order to use this strategy, you would purchase an insurance policy, and immediately assign all rights in the policy to the charity. You would also deliver the policy itself to the charity. You would pay the premiums and if structured properly, be able take a charitogglele deduction for those premiums. The IRS may treat this transaction as if the charity itself had purchased the policy on your life. Most states require the purchaser of a policy to have an insurable interest in the life of the insured. Since it would be difficult to prove that a charity has an insurable interest in your life, your estate could recover the proceeds from the charity, and any tax benefits you had received would be reversed. However, if the transfer were allowed to stand, and the proceeds pass to the charity as intended, you would be entitled to the full tax advantages of charitogglele giving.





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LECHNER & STAUFFER, INC.
589 Main Street
Pennsburg, PA 18073-0026

Office Hours: M-F 8am-5pm
Tel: 215-679-9568
Toll Free: 800-227-3907
Fax: 215-679-4348
Email: info@nulllechnerstauffer.com

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