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Hecht Insurance Advisors, LLC Blog

Second-to-Die Life Insurance

4/1/2020

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Second-to-Die Life Insurance: Ideal for Estate Tax Planning and More

Federal estate tax generally applies when a person's assets exceed a certain level, $11.4 million in 2019 and $11.58 million in 2020, at the time of death. The tax rate can be up to 40%. On top of that, some states also assess estate taxes.

That's where survivorship life insurance - also called "second-to-die" life insurance - comes in. A second-to-die life insurance policy pays out an immediate cash benefit, tax-free, upon the death of the second spouse - not the first.

​One common purpose for second-to-die life insurance is to provide a large amount of liquidity to pay estate taxes. 
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This can be important when a family's wealth is tied up in illiquid assets that are difficult to sell. With a second-to-die life policy in place, the family or estate executors receive the tax-free cash death benefit right away, and can use that to pay estate taxes, rather than be forced to sell off assets like small businesses and real estate to raise the cash.

Otherwise, heirs may be forced to sell assets in the estate at heavily discounted prices, or at a very poor time in the market to sell, to meet the estate tax deadline.


Second-to-die policies also typically have lower premiums for a given death benefit than standard single-insured life insurance policies.

 
Use of trusts to move life insurance out of the taxable estate
Who owns the insurance policy itself? It may be prudent to set up an irrevocable trust, and have the trust own the life policy, rather than own it directly in your own name.

Otherwise, the life insurance policy would be considered part of the taxable estate, which would increase your tax bill. Setting up a properly constructed irrevocable trust will help you avoid this problem.


To set up the trust, speak with a qualified attorney and your tax advisor. Only a licensed attorney can write the documents required to set up the trust and ensure that it meets the requirements necessary for the assets in the trust to be considered separate from the taxable estate of the deceased.


Once the trust is established, the trust can then become the owner of the life insurance policy.


But, the applications of the second-to-die life insurance policy don't stop there. Even if you don't expect your estate to be big enough to be subject to federal estate tax, there are a number of other uses for this type of life insurance:
  • Funding for buy-sell agreements, where married couples operate their interests in a company together.
  • To provide for equal distribution of an illiquid estate to children. For example, one child may be able to run an inherited family business or farm, while other children may not have the interest or aptitude. Life insurance allows one child to receive the business and the others to receive cash, rather than forcing them all to liquidate a viable family-owned business.
  • Funding for special-needs children, who will still require support even after the death of the second parent. The parents can set up a special-needs trust to support the child - now an adult in many cases. This provides for their support without compromising their ability to qualify for Medicaid, food stamps or other need-based assistance.
  • To provide funding for the education of grandchildren.
 
There are other specialized applications where second-to-die life insurance works extremely well as a planning tool. To see if this type of policy would benefit your family, call us at 540-712-2199, schedule an appointment, or video chat.
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Five Smart Things You Can Do with Life Insurance Cash Value

2/25/2020

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Five Smart Things You Can Do with Life Insurance Cash Value

If you have accumulated significant cash value within a permanent life insurance policy, congratulations. Your planning and decision to save within such a policy is likely paying off.

Thanks to the tremendous tax advantages that Congress has given to provide incentives for families to protect themselves with life insurance, and to the protection aspect itself, a life policy is a great place to keep money.

​
That said, let's look at some of the most common options for dealing with your policy's cash value:
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Stay put -Let life insurance be life insurance. Your money is growing tax-deferred within the policy. And in the event of your death, an amount much greater than your current cash value will generally pass to your heirs, tax-free.
That's a significant benefit right there, and a compelling reason not just to let your policy grow, but to add more premium to it if you can.

Borrow against the death benefit - You can withdraw accumulated dividends, and then borrow against the rest of it, generally with no tax consequence, as long as you don't completely surrender the policy.
Interest will accrue, but you don't have to repay the loan yourself unless you want to. If you don't pay it back, the insurance carrier will simply subtract the balance due from any death benefit they pay to your beneficiaries.

Cash out the policy altogether
- This option lets you get substantially all the cash in your policy. However, you may be subject to capital gains tax to the extent your cash value exceeds the amount you paid in.


Exchange for another life insurance policy
- If you choose, you can execute a Section 1035 exchange of one life policy for another, tax-free.


You may opt to do this if you find ongoing premiums at a new carrier are lower for some reason, or if you want some specific protections or riders you can't get from your old carrier. 

For example, you may be able to exchange a straight-ahead universal or whole life insurance policy for a policy that also provides a benefit in the event you need long-term care insurance.

 
Exchange for an annuity - You can also exchange a life insurance policy for an annuity, tax-free, under Section 1035.


You might choose to do this if you decide you no longer want the life insurance protection, but you do want regular and reliable income.  


For example, if your beneficiaries are grown up and no longer rely on your life insurance death benefit, you may execute a 1035 exchange to a lifetime income annuity - maximizing your income over your expected lifetime, rather than paying a large death benefit.

You can choose a joint and survivor annuity to guarantee income to your spouse as well.
 
The takeaway
Life insurance is among the most flexible and powerful resources you can have in your portfolio as you grow more established. But to have all of the above options later in life, you must plan ahead now.

Talk to us today. We can help you develop a plan that meets your needs and financial objectives.
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To Keep or Not To Keep Life Insurance in Retirement?

2/7/2020

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​Why You May Want to Keep Your Life Insurance in Retirement

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Many people, after their children have grown and they've paid off the mortgage, consider not renewing their term life insurance coverage or surrendering their permanent life policy, particularly as they near retirement.
But that may not always be the best strategy, and there are instances when maintaining a life insurance policy in your retirement makes sense. The decision should be based on your finances and life circumstances. Below are some instances where keeping a life insurance policy in retirement is the sensible course of action.

​
As a wealth transfer instrument Life insurance can help you transfer assets to your loved ones. The nice thing about life insurance is that the death benefit is income-tax-free and possibly estate-tax-free, if properly constructed.
It also provides an avenue for ensuring that your estate can be split among your children, particularly if you also have assets like a family business, which is not easy to split up if it is to continue as an ongoing concern - especially if some of the adult children are not interested in running the business. Life insurance in this case gives those who aren't interested in the family business a way to still receive a cash amount to the value of the business.
Paying for expenses The last thing you want to do is to pass on your health care debts to your surviving spouse. A life insurance benefit can ensure that your family has the funds necessary to pay your medical bills, without reaching into their own pockets. It can also help them pay off an existing mortgage and other types of debt.
In addition, it can help pay for funeral costs. The average funeral costs between $7,000 and $9,000. This includes viewing and burial, basic service fees, transporting remains to a funeral home, a casket, embalming, and other preparation. The average cost of a funeral with cremation is $6,000 to $7,000.
Paying for a chronic diseaseMany life insurance policies allow you to access benefits to pay for treatment and care for a chronic and end-of-life illness before death. Policies define chronic illness as either cognitive impairment (e.g., Alzheimer's disease) or the inability to perform two out of six activities of daily living. The catch is you need to get a certification from a medical professional.
As a charitable giftSome retirees have a non-profit organization to which they wish to leave their life insurance policy benefit. If so, do make sure that the organization will accept your policy and has a 501 (c) (3) not-for-profit status. Some organizations might need the life insurance policy arranged a certain way or not be able to handle the donation at all.
If you name the charity as the owner and beneficiary of the insurance policy, then you can deduct the premiums from your federal taxes. 
The Takeaway
While the above are all benefits of keeping a life insurance policy in force while in retirement, keeping the policy also has costs to you, including paying the premium. And if you at some point dropped coverage and decided to get a new policy after retirement, you have to be prepared for much higher premiums due to your age.

Also, any health issues you might have developed during the intervening period could prevent you from obtaining coverage at the same rates, if you are able to get coverage at all. 
That said, if you maintain coverage past the age of 65, you can ensure that your loved ones can be well taken care of and that any associated expenses or debts can be paid for by them after you pass.


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