Life insurance is designed to protect your family and loved ones after you’ve passed away. Investing in life insurance is especially important if you’re financially responsible for a child, partner, aging parent, or disabled loved one.
Why? Life insurance helps to provide financial security for your family and loved ones following your departure. Let’s discuss how to protect your family and loved ones with life insurance.
What is Life Insurance?
Life insurance is a contract between a policy owner and a life insurance company. In this contract, the life insurance company promises to pay a designated beneficiary a death benefit upon the passing of the insured.
Most of the time, that death benefit is paid income tax-free to the beneficiary.
Life Insurance Options
There are two main categories of life insurance available:
Term life insurance, and
Permanent life insurance
Simply put, term life insurance is less expensive and lasts for a period of years whereas permanent life insurance lasts for an insured’s lifetime, and is, therefore, more expensive. Permanent insurance also has a tax-advantaged cash value component that can be accessed by the policy owner during the insured’s life.
Life insurance coverage can help in the following ways:
Provide Financial Security
Life insurance can help replace lost income after one passes away. The death benefit of a life insurance policy can be used for any number of reasons, including to:
Pay monthly bills and day-to-day expenses
Pay off debt (i.e. mortgage, car loan, or credit card)
Pay federal and/or state estate taxes
Provide an inheritance
Cover End of Life Expenses
Death is expensive—and often is a cost most families don’t want to be troubled with, especially following the death of a loved one. Life insurance can help a family pay for end-of-life expenses like burial and funeral services, cremation, burial plots, caskets, etc.
Pay for Medical Bills
Life insurance can help a family pay for hefty medical bills if the insured passes away from health-related issues. There are also policies with optional benefits that can help pay for ongoing chronic or terminal illness care expenses.
Supplement Educational Expenses
If the deceased loved one has children or grandchildren, life insurance can help pay for educational expenses (i.e. college or private school).
Consider Cash Value Life Insurance
Cash value life insurance is permanent coverage—insurance that is designed to last for the insured’s lifetime—that includes a tax-favored investment account that the policyholder can use while the insured is still alive.
(Yes, cash value life insurance allows you to financially help your family and loved ones while you’re still living – and it grows tax-deferred!)
The cash value can be used to offset future premiums and/or accessed tax-free, for any reason, using either policy loans or withdrawals. This component adds flexibility and provides an immediate tax-favored source of income for retirement, travel, healthcare needs, or emergencies.
Partner with Acumen Insurance Solutions to Protect Your Family
There are many other benefits to owning life insurance. Life insurance could help keep a family business running or provide a charitable legacy—the options are endless.
Remember, it’s better to buy life insurance sooner than later. Why? Life insurance is less expensive the younger and healthier you are.
Moreover, your life insurance needs will evolve over time – so best to get familiar with your options now. Interested in learning more? Read on to see how your life insurance needs might change in our article “Can I Change My Life Insurance?”
https://acumeninsurancesolutions.com/wp-content/uploads/2022/09/How-to-Protect-Your-Family-Using-Life-Insurance.png6281200The Acumen Teamhttps://acumeninsurancesolutions.com/wp-content/uploads/2022/07/Acumen_No-Trademark_Brand-Identity_RGB_Signature_Vertical_Full-Color-1030x622.pngThe Acumen Team2022-09-18 07:00:002022-09-09 08:50:31How to Protect Your Family Using Life Insurance
Life insurance is a crucial component of maintaining and growing a successful company
Most smart business owners recognize the importance of using life insurance to protect themselves, their families, and their companies. They use life insurance as a financial tool to solve problems associated with maintaining and growing a successful company, as well as to meet retirement, succession, and estate planning goals.
Succession Planning for Business Owners
Protecting the entity and deciding when and whom to eventually transfer it to, is a critical aspect of succession planning for business owners.
The particular tools and techniques used in a business succession plan will depend on the goals and objectives of the four groups most impacted:
The senior generation business owner
The junior generation family member involved in the business
Key non-family employees, and
Family members not involved in the business
Below are the top six reasons why smart business owners use life insurance as a key component in their strategic business succession, retirement, and estate planning.
#1: Protect the Business at the Death of an Owner or Key Person
In many small businesses, the owner is also the key person in the company.
Key-person life insurance is purchased on the business owner’s life to protect the company if they unexpectedly die. In fact, the death of a key person in a small company without key-person insurance often results in the immediate shuttering of the company.
With key-person insurance, the company:
Purchases a life insurance policy on the key employee
Pays the premiums, and
Is the beneficiary of the policy
If that key person unexpectedly dies, the company receives the insurance proceeds.
The Benefits of Key-Person Life Insurance
Key-person life insurance for the business owner can provide much-needed stability. If the business owner dies, the business receives the policy proceeds and can use the funds to:
Pay expenses while searching for and hiring a capable replacement
Retire debts
Distribute money to investors
Pay severances to employees
Explore options other than immediately going out of business, and/or
Buy time until the business can be closed, and the assets liquidated
In addition, many family-owned businesses depend on non-family employees for the company’s continued success.
To guard against financial loss due to the death of a key employee and to ensure that the business stays in the family, many privately-held companies acquire key-person life insurance for their key employees.
#2: Protect the Owner’s Family and Ensure the Survival of the Business
A buy-sell agreement is a legally binding contract that states that in the event of an owner’s death, disability, retirement, or separation from the company, the owner’s interest in the company must be sold back to the business or to the remaining owners at agreed-upon terms.
Buy-sell agreements are crucial for small and closely-held companies where, as in many cases, the death or disability of a business owner creates a significant financial burden on the family, the business, and the remaining owners.
A buy-sell agreement guarantees a market and a fair price for the business interests, ensures control over the business by the remaining owners, and can set the value of the business interest for estate tax purposes.
Life insurance for each owner is the best way to provide the cash necessary for the business or the surviving owners to purchase the deceased owner’s share of the business. Death benefits are typically paid as a tax-free lump sum to the entity or surviving owners.
In many instances, the cash surrender value in a permanent life insurance policy can also be accessed tax-free via policy loans and withdrawals to help pay for a lifetime purchase of a business owner’s interest, such as due to retirement or disability.
Depending on the type of buy-sell agreement, the business itself or the individual owners acquire a policy on each owner so that at death or disability, the funds needed to “buy out” the deceased owner’s interest are readily available.
#3: Accumulate Assets for Retirement
In addition to protecting the company, many business owners use cash value life insurance as a diversified vehicle, separate from the performance of the company, to accumulate assets and build future retirement income for themselves and their key employees.
Permanent life insurance policies include a cash value account that grows tax-deferred and can be accessed tax-free via withdrawals and policy loans while the insured is living. The type of life insurance policy depends on the desired objectives and other factors.
In many cases, business owners and key employees earn levels of income that exceed the contribution limits under a 401(k), profit sharing, or other qualified retirement plans. There are no contribution limits on non-qualified, private life insurance-based plans that provide additional retirement income.
The Benefits of Properly Structured Life Insurance
Properly structured life insurance in a non-qualified plan is a legitimate option to grow wealth. It can provide members of the senior generation with death, disability, and retirement benefits, especially when the senior members have transitioned the business to the junior members and are no longer receiving compensation.
This combination of tax-advantaged death benefits and cash values makes life insurance the best way to accumulate and grow funds for retirement while simultaneously providing the cash necessary for the business or the surviving owners to purchase a deceased owner’s interest.
Often referred to as “golden handcuffs,” the same concept is often used as a way to attract and incentivize key employees to remain with the business and perform with the promise of future retirement income from policy cash values. The business is simultaneously protected against the loss of a key person.
#4: Protect Assets from Liabilities and Future Creditors
Businesses assuming the risk of potential environmental contamination (i.e., waste hauling, landfills, chemicals, etc.) are subject to liability under federal and state pollution laws.
Service firms, including the following examples, are often exposed to professional liability claims:
Law and accounting firms
Physicians’ groups, and
Engineering and architectural firms
Moreover, such liability is not limited to the business itself, as the business owners also may be personally liable under such laws. As the business passes to the next generation, so does the potential liability.
Life insurance is ideal in this situation. The business owner can establish an irrevocable life insurance trust (ILIT) to last for the maximum period permitted by state law (in perpetuity for some states).
The ILIT would provide the business owner’s heirs with income and principal as needed for health, education, maintenance, and support.
If properly structured, the assets in the ILIT cannot be reached by the beneficiaries’ creditors. Additionally, in many states, life insurance cash value is protected from creditors making it an especially effective tool for business owners to use to grow their assets.
#5: Prevent a Family Feud
A senior generation business owner can use life insurance and a common legal agreement to transfer assets to other family members with “equitable” treatment.
Leaving the ownership and control of the business to the children who are active and the life insurance proceeds to the children who are inactive equalizes the inheritances among them and creates a family “bank.”
This can prevent arguments about money when the senior generation is no longer there to serve as the peacemaker and allow the family business to continue operations smoothly.
In addition, it avoids the need for active children to purchase the business interests of inactive children, perhaps when the business may not be able to afford it.
Depending on the particular circumstances, the insurance may be owned by an ILIT for the benefit of the inactive children, and the insured may be the business owner, the business owner, and his or her spouse.
#6: Say “Goodbye” to Uncle Sam
Some senior generation business owners wait until death to transfer all or most of their business interests to the junior generation.
If the business owner has a taxable estate, life insurance can provide the recipients of the business with the cash necessary to pay estate taxes. With estate tax exemptions likely decreasing in coming years, many business owners and their families will face increased transfer tax liabilities.
Using life insurance to pay estate taxes is particularly useful for business owners because their equity interests cannot be readily liquidated. The junior generation receiving the business may also need life insurance to pay estate taxes.
Usually, the insurance policy will be owned by an ILIT, as discussed above, so that beneficiaries will receive the death proceeds both income and estate tax-free.
In many cases, most of the business owner’s estate is tied up in the value of the business. Without an effective estate plan, including a business succession plan, the business may have to close or be liquidated to afford estate taxes.
With the proper use of life insurance, a business owner can provide the liquidity needed to pay any estate taxes due at death.
For example, an ILIT can be established for the purposes of owning a life insurance policy on the life of the business owner (or business owners, if married). The trustee of the trust is usually the intended beneficiary. At the owner’s death, the policy proceeds are payable to the trust which can then, at the trustee’s direction, be used to pay any applicable estate taxes.
At Acumen Insurance Solutions, we recognize that formulating the perfect succession, estate, and life insurance plans can prove difficult. Contact us today to review such plans.
*Acumen Insurance Solutions does not provide legal or tax advice, and the information contained herein should not be construed as such; consult your legal and tax professional before making important financial decisions. Life insurance is backed by the claims-paying ability of the carrier and is not FDIC insured. Withdrawals and loans can reduce death benefits and may cause the policy to lapse. See policy illustration for details.
The following federal tax code sections apply to life insurance:
IRC §101 (a): Death benefits are income tax-free.
IRC §7702 (a), (g): Cash value growth is tax-free.
IRC §72(e): Withdrawals of cash value to basis are tax-free.
IRC §72 (e)(5): Investment gains in cash value can be borrowed tax-free.
IRC §7202 (a): Modified Endowment Contracts (MECs) retain tax-free growth and tax-free death benefit, but gains are taxed first when taking loans and withdrawals.
https://acumeninsurancesolutions.com/wp-content/uploads/2022/08/Top-6-Reasons-Why-Smart-Business-Owners-Use-Life-Insurance-scaled.jpg14402560The Acumen Teamhttps://acumeninsurancesolutions.com/wp-content/uploads/2022/07/Acumen_No-Trademark_Brand-Identity_RGB_Signature_Vertical_Full-Color-1030x622.pngThe Acumen Team2022-09-14 07:00:002022-09-15 16:43:35Top Six Reasons Why Smart Business Owners Use Life Insurance
There are a lot of questions when it comes to cash value life insurance…what is cash value life insurance? What are the benefits? How can it help your organization retain top talent?
Let’s answer all of these questions below, starting with what cash value life insurance is.
What is Cash Value Life Insurance?
Cash value life insurance is permanent coverage—insurance that is designed to last for the insured’s lifetime—that includes a tax-favored investment account that the policyholder can use while the insured is still alive.
As with all life insurance policies, there is still a large death benefit paid to the beneficiaries when the insured passes away.
But the cash value component can have tremendous value as well, since it’s available to the policyholder, for any reason, while the insured is alive. It grows tax-deferred and can be accessed tax-free via policy loans and withdrawals of principal. This adds flexibility and provides a tax-favored source of income for retirement, travel, healthcare needs, or emergencies.
The Key Benefits of Using Cash Value Life Insurance to Retail Top Talent?
There are several advantages of using cash value life insurance to retail top talent such as:
It can help attract and retain top talent by providing the beneficiaries with a valuable financial benefit in the event of an insured employee’s death.
It can help incentivize key people to stay at the company and continue to perform at a high level or risk forfeiting valuable benefits.
It can help the company address “key-man” issues by offsetting the cost of recruiting and training new talent should an insured employee pass away.
It can help improve morale and motivation among employees by providing them with a financial safety net in the event of their death.
It can help create a sense of loyalty and commitment among employees by providing them with a benefit that they may not be able to get from another employer.
Which Life Insurance Plans Offer Cash Value Components?
The following types of permanent life insurance policies may include a cash value feature:
Whole life insurance
Universal life insurance
Indexed universal life insurance
Variable universal life insurance
Term life insurance—which is life insurance for a period of years—does not offer the cash value feature. Rather term life insurance only has two components: the premium that’s due and the death benefit.
How Does Cash Value Life Insurance Help Retain Top Talent?
So, how does cash value life insurance help retain top talent?
Legal Agreement First, a plan needs to be created using a legal agreement, then “funded” with permanent life insurance. Whether the policy is owned by the employer or the key employee depends on the situation.
The agreement outlines the employee’s obligations, typically tied to longevity and performance, that will trigger the payment of a meaningful retirement income over a period of years (for example, 75% of average salary paid each year from age 66 to 80).
This can help incentivize top talent to stay for a longer period of time and perform. If they do, they’ll receive a retirement benefit and if they don’t, they typically won’t receive anything.
Using Cash Value During Life
Cash value life insurance is the preferred method of funding these agreements. First, the cash value grows tax-deferred and serves as the source of the retirement income that is eventually paid to the key employee. Many policies offer competitive cash value yields without risk of loss or direct market exposure.
Death Benefits
If the executive passes away unexpectedly, the death benefit is used to replace the projected income stream for his/her family that the executive would have received in retirement. The organization may also be entitled to a portion of the death benefit to compensate for the cost of losing and replacing the key person.
Offering a stream of income in retirement is a powerful retention tool, but the “self-completing” feature that life insurance death benefit provides can be so meaningful to the executive’s family that it can make it almost impossible for the executive to leave.
It’s important to note that the organization could fund the plan with something other than life insurance, such as mutual funds, stocks, and/or bonds. However, these investments are taxable every year whereas the growth of the life insurance cash value is tax-deferred.
In addition, there is typically a risk of loss with these investments and they do not offer a self-completing feature like the life insurance death benefit. Lastly, life insurance carriers are some of the oldest and strongest companies in the world and can be trusted with these important assets.
Funding Executive Retention and Executive Retirement Programs
Funding these plans isn’t free, so having a mechanism in place to offset costs can make approval by the organization’s decision-makers easier.
In contrast to the policy used to fund the executive retention and retirement plan, above, our firm also uses a special life insurance-based program that allows organizations to earn 3.5-to-6.0% currently on their cash assets, without sacrificing safety or liquidity.
If these funds are currently earning 1.0-to-2.0% in the bank, CDs, or short-term bonds, the organization can shift them to the life insurance-based program and use the “found” earnings to fund the executive retention plan.
Using life insurance as a mechanism to fund executive retention and retirement plans, and as a way to offset the costs of such plans, can make these arrangements truly a win-win for the executives, their families, and the organization.
*Important Notes: Please refer to 26 U.S. Code §101(a) regarding tax-fee death benefit and 26 U.S. Code § 7702 (a) (g) regarding tax treatment of cash value. Policy performance is based on current rates as charges, and some values are not guaranteed. Medical and financial underwriting is required. Withdrawals and loans from life insurance policies classified as Modified Endowment Contracts (MEC) may be subject to income tax and a federal tax penalty, if taken prior to age 59½. Excessive policy withdrawals and loans may cause the policy to lapse, which will result in the loss of death benefit and adverse tax consequences. Life insurance is backed by the claims-paying ability of the carrier and is not FDIC insured. See policy illustration for details. Acumen Insurance Solutions, LLC does not provide tax, legal, or investment advice, and is not FINRA registered.
https://acumeninsurancesolutions.com/wp-content/uploads/2022/08/Using-Cash-Value-Life-Insurance-to-Retain-Top-Talent.png6281200Amanda Rogershttps://acumeninsurancesolutions.com/wp-content/uploads/2022/07/Acumen_No-Trademark_Brand-Identity_RGB_Signature_Vertical_Full-Color-1030x622.pngAmanda Rogers2022-08-28 07:00:002022-12-16 11:08:32Using Cash Value Life Insurance to Retain Top Talent
There are many reasons why you may no longer want or need your life insurance policy.
Perhaps your beneficiaries will no longer need the life insurance proceeds after you are gone. Maybe premiums for the coverage have become unaffordable. Perhaps you need to use all of the policy’s cash value to bolster retirement income or fund a healthcare need.
Maybe the original need for insurance protection—to pay off a mortgage, fund an educational expense, or provide income replacement for your spouse—has changed. You might have an expiring term policy that is that you are not planning to renew. The list of reasons goes on.
So, what do you do if you don’t need your life insurance policy anymore? Luckily, there are ways to get out of these policies.
Let’s sit down with David Jacobs, J.D., Principal at Acumen Insurance Solutions to talk about understanding life insurance settlements: What is a life insurance settlement? How does it work? What are some exit strategies for life insurance policies?
Let’s find out.
What is a Life Insurance Settlement?
A life insurance settlement refers to the sale of an existing insurance policy on someone’s life to a third party.
There are two types of settlements. Either where:
A lump sum is given to the policy owner. The policy is surrendered to the new buyer and the new buyer takes over those premium payments and collects the death benefit; or,
You can sell a portion of your life insurance policy to reduce or eliminate premiums and retain a portion at the same time. This is known as a hybrid settlement.
How Did Life Insurance Settlements Begin?
So, how did life insurance settlements come to be? Well, we’re glad you asked because there’s quite an interesting story behind it.
In 1911, Dr. Grisby and his patient, John Buchard, enacted one of the first documented private sales of life insurance.
“Grigsby offered Buchard $100 and a medical procedure for his life insurance policy. In exchange Grisby would be fully responsible for the premiums, while receiving Buchard’s death benefit when he passed.”
What happened next? The case was taken to the Supreme Court! “After an appeal, Supreme Court justices ruled in Grisby’s favor, setting the precedent that life insurance policies are property and can be bought and sold freely and legally.”
This case set the stage and is the foundation for allowing third parties to purchase existing life insurance policies today.
Exit Strategies for Life Insurance Policies
So, what do you do if you just don’t want your insurance policy anymore? There are a few options:
Allow your policy to lapse
Surrender your policy
Give the policy to charity
Have beneficiaries continue the policy
Use a life insurance settlement
Let’s talk about each of these options in a bit more detail.
Allow Your Policy to Lapse
You can stop paying premiums and just let your policy lapse. Your policy will just eventually die on the vine; however, you don’t get any benefit from this option unless you pass away while the policy is still in force.
500,000 seniors a year lapse their life insurance policies, leaving behind $100 billion in benefits and walking away with little or nothing. Policies that lapse can be a significant source of revenue for the life insurance carriers, since they have collected premiums for years on them yet never paid out a death claim.
Surrender Your Policy
On the other hand, you can return a permanent life insurance policy to the life insurance carrier for its cash surrender value. This value may be less than what you’ve paid in premiums over the years. Cash value gains are subject to income tax when the policy is surrendered.
Give the Policy to Charity
Next, you could donate your life insurance policy to charity. There are, however, some additional factors to consider in this option. You must:
Have some charitable intent
Be comfortable with theoretically taking the money “away” from your heirs and instead diverting it to a charitable organization
Find a charity that will accept donations of life insurance policy
Calculate the charitable deduction you’ll receive by giving the policy away
Have Beneficiaries Continue the Policy
If you cannot afford the premiums any longer, you could offer your beneficiaries the option to take over the policy and pay the required premiums. This might be particularly attractive if you have had a decline in health since you originally purchased the policy. This option may require making some administrative changes to the policy with the carrier.
Use a Life Insurance Settlement Option
The final exit strategy is to use a life insurance settlement option. Life insurance settlements are available for both term and permanent life policies when the insured is age 65 and over.
(Note: If you have a term policy, it has to be convertible to a permanent policy for this to work.)
A third-party investor who wants to take over the policy will analyze your contract and your current health to estimate how much the premium is and how long they expect to pay it. The older and less healthy you are, especially compared to when you purchased the policy, the higher the settlement value can be.
This estimate will determine how much they’re willing to write a lump sum check to you for, today, in order to take over the policy. The settlement amount is often much higher than the cash surrender value option, mentioned above.
When the policy changes hands, the third-party purchaser becomes the owner and beneficiary of the policy and assumes payment of its premiums. The buyer also then receives the death benefit when the insured passes away.
The insured and current policy owner need to be comfortable with this arrangement. However, the purchaser is not an individual investor; rather, it is typically a large pension fund or institution that can afford to buy policies at scale to take advantage of the law of large numbers.
In addition, the purchaser may use its estimates to make a hybrid offer, where you agree to take a smaller lump sum amount today in exchange for retaining a portion of the death benefit for your beneficiaries when you are gone.
Why People Choose Life Insurance Settlements
Again, the benefits of a life settlement for the seller of the policy are obvious. The seller has the opportunity to benefit from their policy while they are still alive and receive a far higher amount than using the policy surrender option. The proceeds from the sale can be used for anything, including funding long-term care, medical treatments, travel, or family activities.
When an individual sells their policy, they’re essentially trading long-term benefits for short-term gain. The investor, on the other hand, is paying in the present day to receive a larger payout down the road.
Additional Considerations
Most states highly regulate life settlement transactions and require that agents hold a specialized license. The settlement paperwork can be significant and requires notarized signatures from current policy owners, beneficiaries, and insureds. The insured’s current medical records are typically required by the purchaser in order to calculate its settlement offer. The buyer also has the right to periodically obtain updates on the insured’s future health through a designated representative and physicians’ records.
Also, remember that settlement proceeds can be subject to tax. In general:
Proceeds received up to the tax basis (total premiums paid) are free of income tax.
Proceeds received that are greater than the tax basis up to the amount of the cash surrender value are taxed at ordinary income rates.
Proceeds received that are in excess of the amount from Tier 2, above, get taxed as capital gains.
Please consult your legal and tax advisor before moving ahead with a life settlement.
Life Insurance Settlement Calculator
Do you want to find out the value of your life insurance policy? Use our life insurance settlement calculator below.
Still have questions? What are the tax consequences of completing a life settlement transaction? What will happen to my policy after I sell? Get in touch with our team at Acumen Insurance Solutions today. We will help you learn the true value of your policy today.
https://acumeninsurancesolutions.com/wp-content/uploads/2022/08/Exit-Strategies-for-Life-Insurance-Policies.png6281200Amanda Rogershttps://acumeninsurancesolutions.com/wp-content/uploads/2022/07/Acumen_No-Trademark_Brand-Identity_RGB_Signature_Vertical_Full-Color-1030x622.pngAmanda Rogers2022-08-08 13:02:012022-08-08 13:02:04Exit Strategies for Life Insurance Policies
When it comes to life insurance, there are two main categories: Term life insurance and permanent life insurance. Today, David Jacobs, J.D., Principal at Acumen Insurance Solutions will be discussing permanent life insurance; more specifically, what options are available to you?
Let’s dive in.
What is Life Insurance?
First things first, what is life insurance?
Life insurance is a contract between a policy owner and a life insurance company. In this contract, the life insurance company promises to pay a designated beneficiary a death benefit upon the passing of the insured.
As we mentioned, when it comes to life insurance, there are two main categories: term life insurance and permanent life insurance. Remember that, no matter which type you own, the death benefit is generally paid income tax-free to the beneficiaries.
Now, let’s focus on the different types of permanent life insurance options available.
Permanent Life Insurance: The Basics
Permanent life insurance, sometimes also referred to as whole life insurance, is designed to last for your lifetime, not just for a period of years. Since it’s designed to last for your entire lifetime, permanent life insurance is more expensive than term.
Permanent life insurance has the benefit of lasting longer than term, with premium flexibility and a cash value. The cash value is tax-advantaged and serves as a living benefit that the policy owner can access for any reason before the insured has died.
Three components make up permanent life insurance:
Premiums
Cash value, and
Death benefit
When you make a premium payment, what happens? Well, part of that premium goes to pay for the cost of insurance, or rather the cost to insure your life for the death benefit amount, as well as for policy fees, state premium taxes, and commissions.
The remainder of their premium goes into your cash value account, which can grow for you to use for any purpose at a later time.
Some of the main differences between the types of permanent policies have to do with what mechanism grows that cash value account.
Let’s discuss.
Types of Permanent Life Insurance
There are a few different types of permanent life insurance contracts to note. Again, the main difference between them is how the cash value (the living benefit account) grows.
Remember that, no matter which type of permanent insurance you own, the cash value grows tax-deferred and can be accessed tax-free using policy loans and withdrawals.
Whole Life Insurance
A whole life policy cash value grows based on a guaranteed interest rate plus a non guaranteed dividend that the insurance carrier declares every year. Dividends are positively-correlated to interest rates and move slowly over time.
Universal Life Insurance
With a universal life insurance policy, the cash value grows based on a crediting interest rate that the insurance company declares annually, and is also positively-correlated to interest rates.
Index Life Insurance
With an index universal life policy, the cash value grows based on the performance of a specific stock or bond index; typically it’s the S&P 500, however, other index accounts are available.
Index life policies are not directly invested in the market but instead track the movement of the chosen index.
Typically, index policies have a floor and a cap mechanism. For example, if the index declines over a policy year, the cash value is credited at a 0% gross rate to protect against downside risk; but, if the index increases, the cash value is credited at that rate, up to the cap. It’s like investing with guardrails. Caps can vary among carriers and usually float on an annual basis.
Variable Universal Life Insurance
The last type of policy is called a variable universal life policy. Variable life policyholders use mutual-fund-like sub-accounts to grow the cash value. Policy owners are accepting market volatility in exchange for the opportunity to potentially earn higher returns.
These types of policies are considered securities by the Securities and Exchange Commission (SEC), whereas whole, universal, and index are considered general account policies.
Learn About Term Life Insurance Next!
We hope this discussion delineated the differences between term life insurance and permanent life insurance, and that you learned more about the types of permanent life insurance that are available on the market today.
Important Notes: Please refer to 26 U.S. Code §101(a) regarding tax-fee death benefit and 26 U.S. Code § 7702 (a) (g) regarding tax treatment of cash value. Policy performance is based on current rates as charges, and some values are not guaranteed. Medical and financial underwriting is required. Withdrawals and loans from life insurance policies classified as Modified Endowment Contracts (MEC) may be subject to income tax and a federal tax penalty, if taken prior to age 59½. Excessive policy withdrawals and loans may cause the policy to lapse, which will result in the loss of death benefit and adverse tax consequences. Life insurance is backed by the claims-paying ability of the carrier and is not FDIC insured. See policy illustration for details. Acumen Insurance Solutions, LLC does not provide tax, legal, or investment advice, and is not FINRA registered.
https://acumeninsurancesolutions.com/wp-content/uploads/2022/07/pic1.jpg13332000The Acumen Teamhttps://acumeninsurancesolutions.com/wp-content/uploads/2022/07/Acumen_No-Trademark_Brand-Identity_RGB_Signature_Vertical_Full-Color-1030x622.pngThe Acumen Team2022-07-24 07:00:002022-07-25 09:45:07Permanent Life Insurance: What Options Are Available to You?
Welcome to Life Insurance 101. We’re here to make things simple for you. Today, we have David A. Jacobs, J.D., Principal at Acumen Insurance Solutions on camera to discuss the difference between buy-sell and key-person insurance.
Let’s dive in.
What is Buy-Sell Life Insurance?
Buy-sell life insurance is different from key-person (or key-man in the old days) life insurance. Buy-sell life insurance is used to protect a departing owner and his/her heirs, as well as the business and its remaining owners.
An Example of Buy-Sell Life Insurance
Let’s say Bob and Rick are in business together; they are 50-50 owners. Bob happens to pass away unexpectedly. In this case, Rick would then be in business with Bob’s beneficiaries, which is likely not an ideal situation for any party.
Therefore, the payout from a life insurance policy on Bob’s life is used as a way for Rick (or the business) to immediately obtain the financial resources necessary to buy out Bob’s beneficiaries, and vice versa. This way, Bob’s beneficiaries walk away with cash, and Rick with the shares of the business.
Make sense?
What is Key-Person Life Insurance?
Key-person life insurance, on the other hand, provides money to the business that’s lost a key employee which can be used to help replace lost revenue and offset costs to identify and train a replacement.
When Do You Use Buy-Sell Life Insurance?
There’s often a legal agreement between partners in a business—a shareholders’ agreement. The buy-sell portion of this agreement dictates what happens when a triggering event occurs and ownership needs to change hands.
These triggering events, to name a few, might include:
Death
Disability
Divorce of a partner, or
Retirement
Regardless of the triggering event, the organization and/or the partners need to have the funding available in order to buy out the departing partner or the departing partner’s heirs, if necessary.
Life insurance is a great way to do that.
Using Permanent Life Insurance to Fund Buy-Sell
Permanent life insurance (whole, universal, index, and variable) with cash value can help you handle all of those triggering events, whether the departing owner leaves due to death or another reason.
If an owner happens to pass away, the life insurance death benefit is used. However, if another triggering event occurs, the life insurance cash value can be tapped in order to meet that obligation and prevent using company cash flow or having to borrow at high interest rates.
The Importance of Life Insurance
Even if you don’t have a business partner, it’s important to make sure you protect your family by having insurance on your life for the current value or projected value of your business. If you pass away unexpectedly, your family will lose the income you generated and the value of your business will likely decline or perhaps disappear. It would be a shame for your family to not be able to reap the rewards of your hard work if you’re no longer there.
Welcome to Life Insurance 101. We’re here to make things simple for you. Today, we’ve got David A. Jacobs, J.D., Principal at Acumen Insurance Solutions on camera to discuss the difference between term life insurance and permanent life insurance in a way you can understand.
Let’s dive in.
What is Life Insurance?
Life insurance is a contract between a policy owner and a life insurance company. In this contract, the life insurance company promises to pay a designated beneficiary a death benefit upon the passing of the insured.
Most of the time, that death benefit is paid income tax-free to the beneficiary.
Term Life Insurance vs. Permanent Life Insurance
Interestingly enough, life insurance comes in a couple of different flavors. There are two main categories of life insurance: the first is called “term” life insurance, and the second is known as “permanent” life insurance.
The main difference between permanent and term insurance is that permanent insurance is designed to last for the insured’s lifetime and permanent insurance has a tax-advantaged cash value component.
But more on this later! Let’s discuss each individually.
Term Life Insurance
Term life insurance is exactly what it sounds like. It is life insurance that’s for a period of years; typically 10, 15, 20, or 30 years.
When it comes to term life insurance, there are only two components:
The premium that’s due either every year, quarter, or month, and
The death benefit, which is paid when the insurer dies within that term
Generally, premiums are level and the death benefit is guaranteed for that period. At the end of the term, the insurance policy stops, and the benefit is gone.
Lastly, some term life insurance policies have a special benefit that allows you to “convert” the term insurance to a permanent insurance policy without medical underwriting.
This can be a tremendously beneficial feature if the insured experiences a health issue that would prevent them from being able to qualify for new insurance after the term policy ends. These convertible term policies tend to cost more and require more effort to find than traditional term policies, but can be worth it depending on your unique circumstances and desires.
Permanent Life Insurance
The second type of insurance category is permanent insurance. The terms “permanent” and “whole life” insurance are sometimes used interchangeably.
Just as the name implies, permanent life insurance is designed to last for the insured’s lifetime, not just for a period of years. Since it’s designed to last longer, permanent life insurance is more expensive than term.
Permanent life insurance, however, has the benefit of a) lasting longer and b) having a cash value component. The cash value can be accessed for a variety of reasons and grows without tax.*
A Permanent Life Insurance Policy’s Cash Value Component
Let’s discuss more about the cash value component that is unique to permanent life insurance.
The cash value component of a permanent life insurance policy is available to the policy owner while the insured is alive, and grows tax-deferred. This cash value component can be accessed tax-free using either policy loans or a withdrawal of the principal.
This cash value component allows the policy to last as long as the policyholder wants it to. Permanent insurance is similar to a car; the more gas you put in, the longer it will drive. The same thing goes for permanent life insurance: the more premium you put into the policy, the longer the policy will last and the more cash value it will build.
Now, let’s briefly discuss the different types of permanent life insurance.
Types of Permanent Life Insurance
There are a couple of different types of permanent life insurance contracts to note, including:
Universal life
Index life
Whole life
Variable universal life
The difference between them all is how the cash value (the living benefit account) grows. For example:
Does it grow based on a dividend? That’s a whole life policy.
Does it grow based on an interest rate calculation or declaration? That would be a universal life policy.
Does it follow an index, for example, the S&P 500, but with a “floor” and a “cap” mechanism? That would be an index policy.
Or, does it involve the market (i.e. mutual fund-like accounts)? That would be a variable universal life policy.
Regardless, all of these policies have the same feature; as long as you continue to pay premiums and cash value remains in the policy, it will last until the death of the insured.
In the meantime, however, the policy owner can reach in and use the cash value for a variety of purposes. For example, it can be used to help pay premiums in certain years, fund education needs, supplement retirement, and/or support healthcare costs, all without triggering tax.
These are all things that the policy owner can use the cash value for while the insured is still alive.
A Recap on Term Life Insurance vs. Permanent Life Insurance
To review, the differences between term and permanent are:
Term life insurance lasts for a period of years and has two components: a premium and a death benefit.
Permanent life insurance lasts as long as you want it to (typically a lifetime) and has three components: a premium, a death benefit, and a cash value.
No matter what type of life insurance you own, however, it is an asset. Moreover, it is an asset class that needs to be reviewed, monitored, and serviced regularly. Why? To make sure that the policy is keeping up with your goals as well as to make sure that the industry and the policy are still performing as anticipated.
Important Notes: Please refer to 26 U.S. Code §101(a) regarding tax-fee death benefit and 26 U.S. Code § 7702 (a) (g) regarding tax treatment of cash value. Policy performance is based on current rates as charges, and some values are not guaranteed. Medical and financial underwriting is required. Withdrawals and loans from life insurance policies classified as Modified Endowment Contracts (MEC) may be subject to income tax and a federal tax penalty, if taken prior to age 59½. Excessive policy withdrawals and loans may cause the policy to lapse, which will result in the loss of death benefit and adverse tax consequences. Life insurance is backed by the claims-paying ability of the carrier and is not FDIC insured. See policy illustration for details. Acumen Insurance Solutions, LLC does not provide tax, legal, or investment advice, and is not FINRA registered.
https://acumeninsurancesolutions.com/wp-content/uploads/2022/07/Insurance-101-Term-Life-Insurance-vs.-Permanent-Life-Insurance0.png6281200The Acumen Teamhttps://acumeninsurancesolutions.com/wp-content/uploads/2022/07/Acumen_No-Trademark_Brand-Identity_RGB_Signature_Vertical_Full-Color-1030x622.pngThe Acumen Team2022-07-15 07:00:002022-08-01 14:14:56Term Life Insurance vs. Permanent Life Insurance
Read on for a little context on business succession planning at Acumen. Then, we’re handing over the reins to Forbes to talk about how succession planning can help boost employee retention during this time.
The Importance of Business Succession Planning
At Acumen, we do our fair share of business succession planning for clients. Most commonly, life insurance is utilized by business owners as a mechanism to:
Protect their families in case they are no longer there to provide income
Protect their businesses in case a key person dies
Provide the liquidity needed to redeem shares when an owner leaves the company or passes away
Provide non-equity compensation to fund executive incentive and retention programs
There are, however, additional succession planning elements that can increase employee retention during the Great Resignation.
Interested in learning what they are? Continue reading for the full Forbes article.
Struggling to Keep Employees Amid the Great Resignation? Look to Succession Planning.
The Great Resignation has been prevalent for some time now, and unfortunately for businesses, the search for greener pastures is still picking up pace. Nearly 4.3 million people left their jobs in January 2022. In February, another 4.4 million people called it quits. An estimated 44% of workers said they actively looked for new jobs at the end of 2021 or planned to find new employment at the beginning of 2022, so these numbers could continue to jump for the foreseeable future.
Needless to say, employee retention has become a top priority. Some companies have chosen to go the monetary route, using compensation increases to attract and retain employees. Others have given more perks to reengage their teams, offering greater flexibility, remote work options, and paid parental leave. These solutions can work in some instances, but they don’t truly address the root cause of the Great Resignation problem.
The pandemic gave people time to step back, reassess their lives, and unlearn the old ways of working. Many people have realized that life’s too short to stay in jobs that aren’t fulfilling, especially when staying doesn’t allow them to grow. An increasing number of employees now want future-oriented job opportunities, so a solution to the Great Resignation can be found in the unlikeliest of sources: succession planning.
Succession planning is often just thought of as a means for identifying and developing future company leaders. Though that’s certainly true, succession planning is also vital for every other area of a business—especially employee retention.
Establishing a companywide succession plan
Although no two succession plans will look the same, certain elements have proven to be most successful when retaining and attracting talent. The following should be part of your succession planning process:
1. Create a mentorship program.
It’s no secret that mentorship programs benefit employers and employees alike. Such initiatives can support career development, strengthen onboarding efforts, reduce training costs, and even help nurture a culture of learning. Mentoring is also essential to succession planning and talent retention, as it develops your future leaders and can even increase the momentum of a mentee’s growth within your company.
How you go about establishing a mentorship program is entirely up to you. Vince Dawkins, president and CEO of Enertia Software, suggests a systematic approach: “Assess your workforce and ask yourself where you see each person fitting within your operations. Then, carefully pair junior employees with more seasoned team members.”
“For your mentorship program to work, however, don’t forget to set mentoring goals,” Dawkins writes. “Each pairing will have different objectives, and participants should revisit these objectives regularly to keep knowledge transfers on track and ensure ownership among the team.” Once mentors and mentees are paired and goals are set, it becomes much easier to measure the program’s success across both development and business objectives.
2. Employ individual self-selection.
In many organizations, one of the biggest issues in succession planning—and leadership development in general—can be attributed to the selection process. Though logic would tell you to evaluate team members and select the worthiest candidates based on a mix of performance and potential, such an approach leaves room for biases. It’s akin to the unconscious biases seen in certain recruitment practices where “like hires like.”
Although evaluation will always play a role in succession planning for specific positions within your company, a much better approach is self-selection. It’s simply more inclusive. And according to Janice Burns, chief people officer at Degreed, “This creates a pipeline of unexpected (and otherwise hidden) talent committed to proving their success and, therefore, more likely to remain at the company.”
Allow team members to nominate themselves for development opportunities that put them on track for leadership roles. Ask interested individuals to provide a business case for the investment and then monitor their progress. You might be surprised at the hidden talent within your organization.
3. Prioritize organizational culture.
Culture impacts all aspects of a business. Everything from engagement and productivity to collaboration and decision-making can be traced back to the health of your organization’s culture. The time is now to review your mission, values, goals, and expectations, as they collectively serve as a North Star to guide teams and motivate employees to do their best possible work.
Culture is a living, breathing organism, so it can change when left unchecked. That change might be gradual but is still consequential to your company. So, make a habit of seeking feedback from employees. Ask your team where they might need support, resources, and so on. Invest in them, and they’ll invest in you. As writer Kat Boogaard explains, “Regularly asking employees what you can do to support them and implementing that feedback can reduce your organization’s attrition, which is even more important during ‘The Great Resignation.’”
What’s more, your efforts will create a pool of devoted employees, all with a greater understanding and appreciation for your organization’s mission, vision, and values. Each one could be a future leader.
4. Practice transparency.
Individual aspirations can take an employee only so far. Sometimes, people need to hear where leadership sees them progressing within operations to truly find the right career development paths. Therefore, schedule time with each employee to discuss your plans for their future growth. And be sure to open the floor for their input. Maybe you see a sharp and talented customer service representative moving into management, but that person’s interests don’t match your vision.
The ultimate goal is twofold: identify the ideal development opportunities to keep employees happy, engaged, and content to stay at your organization and develop a succession plan for all operational roles. If you haven’t taken the time to discuss a team member’s future, you could miss out on a great leader—and you might lose the person to another company in the process.
Succession planning won’t necessarily be a cure-all for your talent woes. Recognition, respect, autonomy, and communication all contribute to whether a given employee will pull up stakes. Still, succession planning can serve as a solid foundation to build up future talent retention and acquisition efforts within your organization. It demonstrates a commitment to and an investment in your employees’ futures, which can go a long way toward keeping them engaged at your company for the long run.
What We Do
Working with owners of successful businesses also requires coordination with their estate plans; our team at Acumen is uniquely positioned to design flexible life insurance plans with both goals in mind.
However, as your personal and financial situation changes over time, so could your need for coverage. It is important that you know all your options regarding your life insurance, as well as when to audit your life insurance, so you can make informed decisions as to how to handle this valuable asset. You may have just one policy, or several life insurance contracts of varying types and designs.
Let’s discuss your life insurance options.
Life Insurance Options
Below are the four primary options available regarding your life insurance.
Option #1: Continue Your Coverage
If you still need life insurance to meet your planning goals or if your health has deteriorated, you may wish to retain your coverage. Some policies allow for premium flexibility and reduction in policy size.
Option #2: Stop Paying Premiums and Let Your Coverage Lapse
Seniors over the age of 65 lapse over $100 billion of life insurance coverage every year. Your premiums will end but so will your life insurance coverage when it eventually lapses.
Option #3: Surrender Your Policy
You can surrender your policy to the insurer and cancel your coverage in exchange for the cash surrender value (permanent policies only).
Option #4: Sell Your Policy via a Life Settlement
If your permanent (whole, universal, index, or variable life) policy qualifies, you can sell it to an investor group who will pay you an amount in excess—sometimes four to five times—of the cash surrender value, in exchange for paying future premiums and eventually collecting the death benefit. Some convertible term policies can also qualify so it could be worthwhile checking before you let it lapse.
Make sure you fully understand the potential tax consequences of lapsing, surrendering, or selling your life insurance policy before moving ahead.
The Importance of Auditing Your Life Insurance Policy
In addition to knowing your options, it’s just as important to regularly audit your life insurance coverage.
Why? Taking the time to review and understand your existing policies can help you:
Reduce carrier and contract risk
Check that you are carrying the right amount and type of coverage
Ensure the policies are owned by the correct person or entity
Consider new policy features, such as critical illness coverage, and
Improve overall policy earnings over time
Remember, over the years, life insurance contracts have changed, become more efficient, and regularly offer different features and benefits. Today’s policies are different even compared to those purchased just a few years ago.
This considered it makes sense for every policy owner to periodically take a look at their existing life insurance contracts and make adjustments accordingly.
Let’s Develop a Plan – Together
Knowing your options is key. At Acumen Insurance Solutions, our trusted advisors have decades of experience to help you develop a customized plan. Please contact us for a complimentary policy review so we can help you reach your goals.
An efficiently designed gifting program funded with life insurance can help you to transfer your wealth, limit your exposure to transfer taxes, and maximize your financial legacy.
Read on to learn how combining a gifting strategy with an irrevocable life insurance trust (ILIT) can help you to make the most of your legacy.
Transferring Wealth and Enhancing Legacies: Annual and Lifetime Gifts
One of the best ways to enhance your legacy and minimize your exposure to transfer taxes is by combining:
A gifting strategy, and
An irrevocable life insurance trust (ILIT)
An ILIT is an effective estate tax reduction technique. Gifting, combined with an ILIT, allows you to meet other planning goals such as avoiding probate and increasing creditor protection. Additionally, an ILIT gives you greater control and flexibility over how your assets will be distributed.
Moreover, a lifetime gifting strategy, in conjunction with life insurance, may also increase the total amount passed on to your heirs.
Let’s discuss how U.S. transfer taxes can affect these life insurance strategies.
Understanding U.S. Transfer Taxes
The U.S. federal government imposes a tax on the transfer of wealth above certain amounts. There are three distinct types of “transfer taxes” that may apply:
Estate Tax
On the transfer of property at death.
Gift Tax
On the transfer of property during life.
Generation-Skipping Transfer (GST) Tax
On the transfer of property (during life or at death) to individuals who are more than one generation removed from the donor, commonly referred to as “skip persons” (e.g., a grandchild).
In addition to federal taxes, several states impose a state-level estate tax or inheritance tax, depending on where you live or own property.*
Maximizing Your Legacy Using Life Insurance
So, this considered, what can you do? What tools are available to you to maximize your legacy? Life insurance can be a perfect fit.
Implementing a gifting plan to fully utilize your available exemptions can help to significantly minimize or eliminate exposure to estate taxes.
One very efficient strategy is to make gifts to an ILIT using annual exclusion gifts and/or some of your lifetime exemption and have the ILIT trustee use the gifted funds to purchase life insurance. The steps are as follows:
Your attorney drafts an ILIT.
You fund the ILIT with annual exclusion gifts of $16,000 (in 2022) for each beneficiary of the trust, which can include children and grandchildren. You may use your lifetime exemption to gift larger amounts to the trust.
The ILIT trustee purchases an insurance policy on your life (or the joint lives of you and your spouse). The ILIT is the policy owner and beneficiary, with premiums paid from the gifted funds.
At your death, the ILIT receives the death benefit free from income, estate, and GST taxes. By funding the ILIT with life insurance, you not only remove the gifted assets from your estate, but the policy’s death benefit creates an income tax-free pool of money, potentially increasing the overall benefit you pass on.
How Life Insurance Can Help
Life insurance can offer a variety of benefits. Some include the following:
Income tax-free death benefit: Death benefit is received income tax-free and can be used to help pay estate taxes (if any) and secure a legacy for your beneficiaries.1
Access to tax-free income: Cash value that accumulates inside a permanent life insurance policy can be accessed tax-free and distributed to beneficiaries.2
Competitive rate of return: Life insurance death benefit can provide a higher net rate of return compared to other options through life expectancy.3
Gifts may be made directly to beneficiaries or to a trust. When gifted to an ILIT, the assets will be excluded from estate tax for multiple generations (in many jurisdictions), and the trust structure provides additional benefits4, including:
*Check your state’s regulations to verify what state-level estate tax or inheritance taxes are imposed.
Footnotes
1 Life insurance death benefit proceeds are generally excludable from income tax, with a few exceptions including transfer for value.
2 Loans and withdrawals will reduce the death benefit and cash surrender value and may cause the policy to lapse, which may cause recognition of taxable income. Policies classified as MECs may be subject to tax when a loan or withdrawal is made plus a 10% federal tax penalty if taken prior to age 59 1⁄2.
3 IRR on death benefit is equivalent to an interest rate at which an amount equal to the illustrated premiums could have been invested outside the policy to arrive at the net death benefit of the policy.
4 Acumen Insurance Solutions is not a law firm and does not provide tax or legal advice. Please consult your tax and legal professionals.
https://acumeninsurancesolutions.com/wp-content/uploads/2022/07/How-to-Maximize-Your-Legacy-Using-Life-Insurance-1.png6281200The Acumen Teamhttps://acumeninsurancesolutions.com/wp-content/uploads/2022/07/Acumen_No-Trademark_Brand-Identity_RGB_Signature_Vertical_Full-Color-1030x622.pngThe Acumen Team2022-06-26 07:00:002022-07-25 09:45:09How to Maximize Your Legacy Using Life Insurance
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