Is Life insurance a good idea

Hope you enjoy the podcast.  It’s all about life insurance.  The full transcript is below…

Well, hey there everybody. It’s Ryan Cravitz here, and it is September, September 13th to be exact over here, September 13, 2017. And September is known as Life Insurance Awareness Month. Life insurance is one of the oldest financial tools that we have available, but so often I find it’s one of the tools that so few people really understand. The people that are informed, utilize life insurance in a variety of ways which can help them to enhance their planning. It can include tax savings, living benefits, and potential tax-free income benefits. So I’m going to take a deep dive into all this, talk about the different types of plans, and all the rest of this. So I’m just kind of go forward here.

You know it’s September again and there’s an industry wide campaign that’s aimed at educating Americans about the importance and the many aspects of life insurance. Now most people understand how important life insurance protection is especially if you have a family. It’s absolutely critical that you carry enough life insurance protection in order to make sure that you have enough in order to pay off your debts, and replace your income if you pass away prematurely. Having life insurance for this purpose provides great protection. A life insurance policy also provides many other important benefits that most people just simply aren’t aware of. In today’s very complex and very changing world, life insurance has adapted. It has many uses, and it provides a lot of different types of benefits.

For example, were you aware that life insurance can provide benefits to you while you’re still living? What, probably not, right? Most people when you think of life insurance, you think…oh well… jeez; I don’t want to think about that. That’s only something that can help me if I’m no longer here. Yes I love my family; I want to protect them and all those things. But for a lot of people thinking about life insurance isn’t something you want to think about. But another question for you, were you aware that life insurance has some very valuable tax savings benefits? We all like hearing that, don’t we? Were you aware that certain types of life insurance properly set up and funded correctly can provide a tax-free income in retirement, as well as college funding and long-term care funding?

Most people aren’t aware of all these potential benefits a life insurance policy can provide, but some very smart and some very wealthy people are, and these people have been utilizing these benefits to their advantage for a long time in order to maximize as well as protect their nest egg. So today, in honor of Life Insurance Awareness Month, I want to spend some time and just educate you and explain all the different uses and benefits of life insurance that could very well enhance your retirement plans. So let’s get started, all right.

I think the best way that we should start is I’m going to quickly explain the three different types of life insurance and where they fit in best. So if you don’t know me, what you want to know about me which is probably most important is that I always try to make things as simple as possible, just break things down, and remove all the complexities so that you can really understand. When it comes to life insurance there is essentially three types. You have Term, Universal Life, and Whole Life. So let’s start first and we’ll talk about the simplest type which is Term insurance.

Okay, now Term insurance is death benefit protection only. Term Life insurance is basic coverage; it doesn’t build up any equity. So premiums for Term coverage are usually initially lower than other types of life insurance because the policy only provides a death benefit for a temporary and defined period of time. Like where you have a mortgage for instance, or when you’re saving for a college education to replace your income from work or something like this.

For example maybe you have a couple of kids, and your youngest child is five years old. You want to make sure that if God forbid you were to pass away prematurely especially while your children are still minors, that there’s enough money there that’s going to be available, so that they’re not going to have to suffer, maybe so that there’s enough money that’s available for college or whatever else you might want to make sure is taken care for you. So having a Term policy, and a policy to last for a certain period of time maybe 10, 15, 20, 30 years might be the ideal solution for something like that.

 

Now, if you decide at some point that you want to keep the coverage, some Term policies can be extended, or more specifically to use the industry word, they can be converted into some type of permanent coverage. Again Term Life insurance is generally the cheapest, and it’s usually used for a large need for a short period of time.

The next type of life insurance is called Universal Life.  Universal Life is considered a permanent type of life insurance, because it can provide protection for your entire life without expiring if it’s funded properly. Now this is a flexible premium type of insurance that also provides the opportunity to build cash value. It just depends on the product type. This cash value is also called equity. The cash value or equity in a Universal Life policy is determined by the amount of premiums that you pay. It’s also determined by the declared interest rate crediting set by the insurance company, or the crediting strategy that’s used, and of course the policy’s charges. This equity can be used by the policy owner during their lifetime for a wide variety of reasons, which I will get into in just a little bit here.

The third and final type of life insurance is Whole Life. Whole Life insurance is also a permanent type of life insurance. It also builds cash value and equity. And a Whole Life insurance is generally the most expensive of the three types of insurance mainly because it provides the most guarantees with the ability to be paid up after a certain amount of time. Whole Life is not a flexible premium type of insurance like Universal Life, meaning that premium payments are generally fixed, and they have to be paid by a certain time. Whole Life is generally used by people who want coverage for their lifetime with the potential of being paid up some day.

So these are the different types of life insurance, and how they work. Now, most people understand the main purpose of life insurance is to insure someone’s life. However, the value of life insurance goes beyond this risk protection. It can be and it is used oftentimes in a lot of different ways. So what I want to do is spend some time or take a look at some of the other effective and strategic uses of life insurance as a death benefit, and then we’ll get into the living benefits that life insurance can provide.

So one very effective use for life insurance is through what’s called a buy-sell agreement. A buy-sell agreement is an effective tool for the succession of a business when business owners or key people pass away. Think about it, the death of a business owner or a key business person may lead to internal turmoil, there could be customer erosion, there could be a disruption in revenue flow, all kinds of things. So to protect against this, many times life insurance is purchased on owners or on key personnel.  We call that key person life insurance.

If that owner or key person should pass away prematurely, then the money that’s needed becomes available through the insurance, and it can be used for covering the bills for a while for the business, it can help just kind of keep the company going, have some money set aside until you can find somebody else to replace maybe the key person that was there. There could be all kinds of uses including to have liquidity within the business to just kind of keep it going. It can also provide for a partner’s family to buy out other partners. A buy-sell agreement funded by life insurance has saved a lot of businesses and families over the years.

I always say that life insurance really is the thing that can be purchased for pennies on the dollar, especially term insurance. It’s so inexpensive, and the death benefit that it can provide is huge in proportion. Another popular and very effective way of using Life insurance is through what’s called legacy planning. You know most people have a desire to leave some money to their children, grandchildren, and maybe to a good friend. But many people also have charitable desires, and they want to leave a portion of their assets to a church or a charity or a foundation, or some sort of special cause.

And in this case Life insurance can be a tremendously effective tool, because it can help somebody achieve this legacy desired by maximizing the amounts that all parties receive, and at the same time this can be structured to minimize tax consequences. Let me explain by using an example. One of the most common and popular assets in retirement is a retirement account like, an IRA, a 401k, a 403b, etc…. And most commonly these are pre-tax retirement accounts, meaning you funded them over time with pre-tax dollars, and this means the money is fully taxable when it comes out, either by you when you use the money, or by your heirs upon inheritance.

In a lot of cases, inheritors pay tax on this money at very high rates, because they receive a large lump sum, and then they just cash it out right away. Or it’s being combined with other taxable inherited assets, or just for the fact that they are in a high tax bracket already.

In this case utilizing a specially designed life insurance plan can help save a bunch of money in taxes. And in this case, if you have somebody who wants to leave money to both family and charity, then a life insurance policy could be taken out.  It can be funded by the retirement plan money during the lifetime of the person for the amount that they want to pass on to their family. And when the owner passes away, the life insurance is then inherited by the family completely tax-free. And the leftover retirement plan money can then be left to charities.

Since charities can inherit pre-tax retirement plan money tax-free, you have effectively minimized or eliminated the tax consequences of the retirement plan money upon inheritance while maximizing the amount passed on to heirs and charities. So as you can see even if you don’t necessarily need any death benefit protection from life insurance, it can still be a very effective tool in passing on your assets, and in meeting your legacy wishes with the least amount of tax consequences.

Another use for life insurance I want to talk about is in equaling things out for families, like when there’s land involved, or if there’s other type of assets that are involved that just can’t be split. So let me give you an example. A common situation…many times families have land, they have property, they have perhaps a business, whatever the case might be. And a lot of times, the value for instance of a business, could be a big part of the overall estate. But maybe not all the children that you would want to receive your assets when you pass away have any interest in the business.

So for instance maybe you have two kids, and one is interested in getting involved in the business or maybe already is, and the other has absolutely no interest. And the business maybe is a considerable part of your net worth, and you want to make sure that your kids really can inherit from you equally so that one is not favored so much. Life insurance can be used to make everything work out equally for all the heirs without having to sell or to divide up property. Or in this case to divide the business somehow because again the one child may have no interest in the business.

The tax-free insurance benefits can be given to the heir that’s not interested in land or property, and then the business can just be given to the heir or heirs who do want it. So if the value of your business is a million dollars, and your daughter wants the business and your son does not, your daughter gets the business valued at a million, and your son gets a life insurance policy for a million dollars.  We call that estate equalization. Both your children are happy, and you’re happy because you didn’t favor one over the other.

All right, so let’s move on now and let’s talk about the living benefits life insurance. This is something that most people are simply not aware of, because again life insurance is most often perceived as just death benefit protection. But life insurance can provide benefits during someone’s lifetime as well.

In addition to the death benefit there are other options that life insurance offers.   You’ll find that there’s even more ways that you can utilize this type of product in order to possibly strengthen your financial position.  I’m sure that most people again have no idea what I’m talking about when they hear me say that life insurance is for more than just death benefit features. But again so often that’s the case, and it’s a shame because the living benefits of life insurance can provide tremendous value and benefits to people’s retirement plans.

And as I said before, permanent life insurance policies like Universal Life and Whole Life build equity called cash value that can accumulate over time either through interest or dividends. The accumulation of cash value along with the great tax advantages available with the permanent life insurance policy creates many living benefits. So let’s take a look at these.

First, permanent life insurance is granted some of the absolute best tax advantages of any financial tool out there. Cash value inside life insurance grows tax deferred, meaning you do not have to pay taxes each year on any interest or growth. That is only part of the benefit. Through policy loans, cash value or equity can also be withdrawn from life insurance tax-free. Yes you heard that right, it’s tax-free just like a Roth IRA where you can take money out tax-free. But in the case of permanent life insurance there are no age restrictions or rules for withdrawing the money like there are with IRAs or other types of retirement accounts. So you can access this money at any time which can be tapped to purchase a home, you can invest in a business, you can handle financial emergencies, or you can just take income for retirement. There are many uses for this type of tax-free money.

Now one of the main uses here is having flexible funds for retirement. Here is the thing…one of the big drawbacks of 401k plans and IRA plans is the 59 and a half rule, right? You can’t access money from those plans except for under certain exceptions before the age of 59 and a half without paying a penalty. So, you know I run into people all the time that have done well, become successful and all the rest of it, and they’re planning to retire before the age of 59. Or maybe they’re planning to semi retire before the age of 59 and they’re looking for solutions.  What can they do in order to provide some additional income? Obviously they don’t want to pay the penalties.

You can use permanent life insurance cash value in order to supplement your retirement income.  The nice thing about it is that you do not have the requirements and limitations that do apply to 401k accounts, IRA accounts, SEP IRA accounts, and all the rest of it. You have to understand that you have to fund the policy properly in order to have equity in the life insurance plan, and that withdrawing money from a life insurance policy will affect the death benefit.  This is something that is an advanced thing to do with life insurance. You really have to know how to do it correctly and work with somebody that knows how to do this, because again in order for the policy to work well, it needs to be properly funded and properly designed from the get go.

Assuming that’s the case and assuming there’s been plenty of time in order for the policy to continue to grow this can be a tremendous strategy in order to access that tax-free money even before the age of 59 and a half. And of course there’s no penalty involved in accessing that money from the life insurance policy before 59 and a half like there would be from a 401k, or an IRA. Here’s the other thing too, you can also use this money for retirement, or college savings, there’s a number of things you can use it for. The cash value of a life insurance plan can be used for anything at any time.  A very popular use is for college savings.

The reason why life insurance is popular for college savings is that it’s one of the few assets that are not considered in the federal college financial aid calculations. Families that have children that are getting ready to go to college that have permanent life insurance policies not only can use the policies cash value by taking out loans to pay college tuition and the costs for housing, but since it’s not considered in the financial aid calculations, you might also benefit from greater financial aid opportunities as well, That again can be a huge benefit. So there are lots of different benefits to life insurance.

Another common living benefit of life insurance today is for possible long-term care funding.  This is getting more and more popular as people are continuing to live longer. Life insurance has adapted in several ways over the years, and providing long-term care benefits is just one of the ways that it has done this. There’s a few different ways where this can be done. One is just by using the equity or the cash value in order to pay for long-term care expenses.

And another way is with the long-term care rider attached to the policy.  This can be set up by having a separate value for long-term care benefits, or some policies can be set up to where you can use the face amount for the death benefit or for long-term care benefits. That can be extremely helpful in a world where long-term care illness is a probability for most people at some point in their lives, and also because of the extremely high and increasing expense of long-term care.

I’ll give you an example. If you bought a $500,000 life insurance policy and it had a long-term care rider attached to it… and there are several different companies that offer life insurance policies with long-term care riders. But depending upon the particular policy, the particular plan, maybe for instance it’s one where it’s set up so that you could have access to $20,000 per month if you needed money to pay for long-term care costs. If you took out $20,000 from your $500,000 policy, and then you were to pass away, there would still be $480,000 left for your beneficiaries.

Essentially, by having the long-term care rider attached to the policy, it allows you to utilize the death benefit during your lifetime in order to pay for these types of long-term care expenses.  It’s a good financial vehicle for a lot of people. Now what I want to do is I want to share two specific strategies that involve life insurance that most people aren’t aware of. They could very well help you with your retirement plans.

These strategies really aren’t that well known so I want to take some time to just kind of go through them right now. The first one is what’s called a Modified Endowment Contract, also known as a MEC, M-E-C. Basically many people have money set aside at a bank or a savings account or a credit union, and they want to make sure they can pass this money on to their heirs. They don’t want to take any market risk with the money, so it’s just sitting there. They’re not making any interest, and they’re probably not going to make any interest for a while especially with today’s low interest rates. So it’s just stuck in a place where it isn’t going to grow, but again it’s just money that’s set aside for people to pass on to their heirs. And here is where a MEC may improve that type of money.

A MEC allows you to take a lump sum of money… for example let’s say you have $50,000, and you dump it in as a lump sum into a life insurance policy which creates a MEC. Now what it does is it buys a face amount, a face amount is another word for death benefit. So it provides a death benefit that’s generally two to three times the amount of money that you dumped in. So if you put in 50,000, then you could very well expect to get $100,000 death benefit, or maybe even $150,000 death benefit. And this will be paid out tax-free to your heirs when you pass away. So essentially what you’re doing is you’re turning that $50,000 savings account into a 100,000 or $150,000 benefit for your heirs. So by doing this you greatly enhance the value, plus it gets paid out income tax-free.

The other nice thing about a MEC is that it still keeps the money available to you should you ever need it. If you should ever need to get to that money then the equity is there and could very well continue to accumulate a little bit…at least be there in case you need it for an emergency or something else. If you withdraw the money out since it is a MEC, you will have to pay taxes on any gains you have, but the death benefit would be tax-free.  One way you can effectively utilize life insurance in a situation like that is with the MEC. And again that money is in black and white, you don’t have to rely on the market to double or triple.  It’s just done instantaneously for you.

If heaven forbid, you pass away the next day, then you have effectively moved money into a position that’s greatly worth much more than it was in a checking or a savings account. Now you do have to qualify for this type of life insurance. But if you’re in fairly good health, you very well may be able to qualify for it. I’ve helped a lot of clients do this who had absolutely no idea that this financial tool even existed. So, one type of strategy with life insurance that could possibly be a benefit is a MEC, or a Modified Endowment Contract.

Now the next one that I want to talk about today is when you don’t need life insurance anymore. So let’s say you have an old life insurance policy that you had for a long time, which has some equity in it, but you don’t need it anymore, and you don’t want to keep on paying it. This is a very common situation, but you need to understand that life insurance policies carry what’s called cost basis. So what is cost basis? Cost basis is the amount of money that you paid into the policy over your lifetime in the form of premiums. So if you have a life insurance policy that you’ve had for a long period of time that you have been paying premiums into then it has created a cost basis. Many times that basis is higher than the cash out value.

So if you don’t need that life insurance policy anymore, many people are going to cash out that policy and take the money and reinvest it somewhere else. However, you want to be careful because if you do things the correct way, you can preserve the cost basis. Before cashing out the policy you can do an exchange.  You can transfer the basis over to a new contract.  Let me give you an example. Let’s say you have an old life insurance policy, it’s worth $20,000 in cash value, but it has a cost basis that’s worth $50,000. If you would just cash it out for $20,000 and reinvest the money, then in the future you’ll have to pay taxes on any gains the $20,000 makes. So you lose your cost basis by doing it this way.

However, if you do this in the proper way, you can transfer the $50,000 cost basis over, and then reinvest the money. And with this your investment can make up to $30,000 of additional amount, and you won’t have to pay taxes on it because it’s called recovering your basis. So if you have old life insurance policies that you’re thinking about cashing out you want to be very careful here, because if you do things the proper way you could gain some tax advantages and you can utilize the basis that’s inside the policy as a tax benefit for you.

If you have old life insurance policies, then before you cash them out, make sure you do the research and make sure you find out your basis. The insurance company will be able to give that to you, because there could be a much better way to cash them out rather than doing the surrender.  So you need to be very careful here.

If you have questions about this, call me, and we can always do a three way call with the insurance company and make sure you get the information you need. Now, as you can see there are a lot of benefits to life insurance, and that’s why September is Life Insurance Awareness Month. People need to understand the benefits and the importance of life insurance. Obviously it’s there for protection and making sure your family is protected by leaving money behind, but there are also so many more uses out there for life insurance that you need to be aware that could very well greatly enhance your retirement plan if it’s used properly.

I highly encourage you to work with an expert in the life insurance field that’s also a retirement planning expert, because they can help you determine if life insurance can be a valuable thing for you during retirement. And if so how could it be. Also they can help you understand what to properly do with your current policies for making sure that they’re utilized in the best way possible.

As always if you have any questions for me, call me, e-mail me, I’m here. My number is 714-462-9155. You can email me at ryan@mstonewealth.com, or you can simply log on to the website and go to the scheduling page, and you can set up a 20 minute phone call with me, or whatever you would like to do. If you have questions, I’m here to help you getting it. So take care everybody, we’ll talk next time.

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