Four in 10 Americans do not own a life insurance policy, according to LIMRA, even though this important tool can provide liquidity and help the policy owner’s heirs cover future expenses. Life insurance not only can supply necessary funds for a surviving spouse and children, but it also can help survivors pay estate taxes, or allow a surviving business partner or farm heir to buy out the business.
“People most often think of life insurance as providing their loved ones with financial security,” says Eric Henderson, Nationwide’s senior vice president of life insurance and annuities. “However, life insurance can be a much more versatile tool. Advisors should help clients understand how they could benefit from different life insurance and rider options.”
When advising a client on life insurance, the first step is determining his or her goals. How will the money be used? While many clients likely understand the concept of using life insurance to provide for their heirs, they may be less familiar with more sophisticated strategies, such as using life insurance to shelter funds from estate taxes, cover long-term care costs or helping with business succession plans. 

Consider the following uses:

Replacing income
“Too many Americans make the mistake of assuming that simply providing what may appear to be a large lump sum of money for their beneficiaries will be enough to protect them,” says Henderson. “Instead, they should think about how much of their income the insurance money will replace. If it doesn’t replace a high percentage of it, their family faces the risk of financial disruption or a reduced standard of living.”
Life insurance can help fund retirement, especially if a client is already contributing the maximum amount to a 401(k) and/or IRA. Whole or universal life insurance is a natural fit for estate plans because these types of policies build in a savings mechanism. These plans typically allow policy owners to make after-tax contributions and to withdraw some or all the policy’s cash value at any time. The accumulated cash savings can supplement a family’s income needs after one or both spouses is no longer working.

Long-term care coverage
According to the U.S. Department of Health and Human Services, seven out of 10 people turning 65 today can expect to use some form of long-term care, but only one out of 10 has a plan in place to pay for that care. 

“We know the ‘use it or lose it’ aspect of long-term care coverage options makes it a less than desirable investment to advisors and consumers,” says Henderson. “Life insurers in recent years have offered an alternative. Long-term care riders accelerate the death benefit to help pay for care if there is a qualifying long-term care need. If there is not a need, then the beneficiary still gets the full death benefit.”

Covering estate taxes
High net worth clients may be particularly interested in using life insurance to offset estate taxes or shelter assets from estate taxes. In 2016, individuals can leave up to $5.45 million to heirs without triggering estate tax liability; for married couples, the total exemption rises to $10.9 million. 
Generally speaking, while life insurance benefits are income tax-free, they are considered part of the policy owner’s taxable estate. However, if a life insurance policy is placed in an irrevocable life insurance trust (ILIT), the proceeds will not be counted as part of the estate. The trust owns the policy and distributes benefits according to the rules set forth in trust documents.
One of the key concerns for those who have wealth is that the assets they worked hard to retain throughout life will immediately go to paying off taxes rather than to their heirs. With an irrevocable trust, the estate doesn’t have to liquefy assets to cover taxes. An ILIT may allow the policy holder to distribute additional assets to heirs as well.

Help with a business succession plan
Heirs to a farm or business will be subject to taxes on any assets, such as property and equipment. Life insurance can help them pay the tax bill or compensate family members who may not inherit as great a stake in the farm or firm as others.
In the case of business partners, each partner can buy a policy on the other. When one partner dies, the policy can provide the necessary cash to buy out the partner’s interest or continue operating the business with the family of the deceased. 
Incorporating life insurance into an estate plan can bring added security to your clients, but there can be tax or legal implications. Refer your client to an estate attorney or a tax professional for additional guidance.

May 6, 2016

 

Source: Penton

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