Special Planning Strategies and Considerations

How can insurance be used in other planning strategies?

Insurance has many uses in addition to what you probably think of as its traditional purpose. Life insurance is often the cornerstone of estate plans. You can use life insurance as a savings tool for your children’s education, for your own retirement, even for gifts to charity. Corporations and small businesses also depend on insurance to cover their key executives, attract and compensate employees, and fund buy-sell agreements. Married and unmarried couples use life insurance as part of real estate, nuptial, and divorce agreements. Life insurance can be vitally useful if you become terminally ill or need long-term care, because it may be possible to receive death benefits early. These are just a few of the special planning strategies and considerations for insurance.

Life insurance trusts

Revocable and irrevocable life insurance trusts are funded, at least in part, by life insurance policies or proceeds. The main purpose of a revocable life trust is often to provide liquid funds for the payment of estate taxes, debts, and other expenses. An irrevocable life insurance trust is generally used to help minimize gift, estate, and generation-skipping transfer taxes. The irrevocable life insurance trust also may protect trust assets from claims that creditors might make against the estate. For further information, see Revocable Life Insurance Trust and Irrevocable Life Insurance Trust.

Life insurance as a savings vehicle

Permanent life insurance has a savings component called cash value. This cash value typically increases every time you make a premium payment. You can borrow against the policy’s cash value to pay for college tuition, or you can give yourself a loan now and then. For more information, see Cash Value Life Insurance and Cash Value Life Insurance for Education Savings.

Life insurance and retirement planning

Many people use cash value life insurance both to save for their retirement and to provide a death benefit for their beneficiaries. Some companies offer their employees life insurance purchase options under their retirement plans. Some people also use cash value life insurance as a substitute for a qualified retirement plan. If your company does not offer a retirement plan or if you have already contributed the maximum amount to your qualified retirement plan, a cash value insurance policy can offer tax benefits. For more information, see Use Cash Value Life Insurance for Retirement Savings.

Life insurance and estate planning

Life insurance is a crucial part of most estate plans. It can ensure that your loved ones get money without going through the potentially lengthy and sometimes expensive probate process, and it can solve cash flow problems caused by your death. In order to use your life insurance effectively for estate planning purposes, you need to structure the policy properly and be aware of various issues. Ownership of the policy, beneficiary designation, and tax consequences are all important factors to consider. For more information, see Life Insurance and Estate Planning.

Life insurance and charitable giving

Life insurance can give you an outlet for your charitable inclinations. You can do this by setting up a charitable remainder trust or naming a charity as a beneficiary on your life insurance policy. In addition, you can enjoy the tax breaks that result from your generosity. For more information, see Life Insurance and Charitable Giving.

Business use of life insurance

Life insurance is an integral part of a smart business plan in several ways. It is often used to fund buy-sell agreements. It can also be used as an incentive to attract and retain employees. The company may own insurance policies on key employees so that in the event of a key employee’s death, the company is compensated for the financial loss of the employee, as well as the cost of hiring and training a new employee. For more information, see Business Use of Life Insurance.

Taxation and life insurance

There are various tax issues associated with life insurance. For example, it is important to understand the taxation of benefits and dividends and the tax-deferred buildup of cash value. For further information, see Taxation and Life Insurance.

Modified endowment contracts (MECs)

In 1988, Congress changed the tax law to eliminate the favorable tax treatment available for certain life insurance policies that were funded too rapidly (generally in one large payment). These policies are termed modified endowment contracts (MECs). Prior to enactment of the MEC rules, it was possible to place large amounts of cash into a single premium life insurance policy whereby cash value grew tax deferred. At death, the proceeds passed tax free to the beneficiary. These policies were being used in place of investment vehicles that were subject to tax on the earnings. Under the revised tax law, money withdrawn from a MEC is included in income to the extent that the cash value of the policy exceeds the basis in the contract. Distributions from a MEC before age 59½ may also be subject to a 10 percent penalty tax. For more information, see Modified Endowment Contracts (MECs).

Insurance concerns for couples, married and unmarried

Although married and unmarried couples face many of the same insurance issues, they may not be able to solve them in the same way. For example, Social Security pays survivor’s benefits to a surviving spouse but not to a surviving partner in an unmarried couple. Moreover, many employers do not allow unmarried partners to be covered under a family health insurance plan. Life insurance is more commonly used as a wealth-replacement tool for unmarried couples, since tax laws do not allow property to pass tax free to a surviving unmarried partner. For more information, see Insurance Issues that Affect Married Couples and Insurance Issues that Affect Unmarried Couples.

Life insurance and divorce

Divorce can have a major impact on your life insurance picture. You will likely need to re-evaluate your coverage, consider choosing a new beneficiary, and make sure your children (if you have any) will be provided for should you pass away. You may also use life insurance as part of a divorce settlement. For more information, see Life Insurance and Divorce.

Terminal illness and the use of life insurance

If you are terminally ill, a viatical company may purchase your insurance policy from you at a discount from the face value. The company will then name itself as beneficiary on your policy. You won’t receive your full death benefit, but you will be able to get money to pay for your treatment. Critical illness insurance can also be important in this situation. Finally, your life insurance policy may contain an accelerated benefits rider that allows you to collect all or part of your death benefit before you die to pay for medical treatment or long-term care. For more information, see Terminal Illness and the Use of Life Insurance.

Claiming life insurance benefits and survivor’s benefits

During a period of mourning, figuring out how to claim death benefits from an insurance policy or survivor’s and death benefits from various government agencies will probably be the last thing on your mind. But there are certain issues of which you should be aware. Finding out about these now can help you circumvent additional stress in the future. For more information, see Claiming Life Insurance Benefits and Claiming Survivor’s and Death Benefits.

Travel insurance

Travel insurance may allow you to get your money back if you become suddenly ill and must cancel a prepaid trip. Your travel agent will likely ask you whether you want to purchase travel insurance when you book your trip. In many cases, this coverage is an unnecessary expense, but there are circumstances under which it is a wise purchase. For more information, see Travel Insurance.

Our CFS* Financial Advisors can guide you through setting priorities so you can take care of your family. Call us at 336.774.3400 to set up an appointment today!

*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Allegacy Federal Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018

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