Life Insurance Benefits for the Living

For many individuals, life insurance is an extremely uncomfortable subject.  It conjures up images of their own mortality and the reality that someday we will all pass away.  In the past, life insurance was only considered useful for paying final expenses and leaving funds for survivors. However, as time progressed, life insurance has developed far beyond providing death benefits

Today life insurance can be used by the living for many different purposes. So, let’s take a quick look at how life insurance can be used for the living.

• Education Funding- If you have a permanent policy such as Whole Life or Universal, the cash value could be very helpful with paying for college. The policy owner may take out tax-free loans from the policy’s cash value to pay for tuition and/or expenses. This strategy could lessen the need for the student to take a loan or supplement any withdrawals from a college savings account. Furthermore, a student may qualify for a greater financial aid amount because current FAFSA guidelines don’t count your life insurance policy’s cash value as an asset.

• Retirement Savings and Building Wealth- Whole Life Insurance and Universal Life Insurance could be of great value due to the buildup of cash value inside the policy. Roth or Traditional IRAs have contribution limits and in some case income restrictions for contributing to these accounts. A life insurance policy may allow you to save more with no limitations on eligibility based on income. Cash Value policies have a history of paying higher interest rates than savings accounts and money markets. Furthermore, the life insurance cash value is free from stock market volatility.

• Retirement Income Supplement- This is another area where the cash value inside whole life insurance and universal life insurance is a great resource. The policyholder may take out tax-free loans from policy’s cash value to supplement retirement income. In addition. Whole Life Insurance can potentially pay dividends to policy owners. These dividends are considered the return of premium and are tax-exempt. Using Life Insurance cash value to supplement your income can be very useful for individuals in high-income tax brackets by helping limit the required distributions from a Traditional IRA or 401(k).

• Living Benefits for Critical, Chronic, or Terminal Illness- Depending on the issuing insurance company, many Whole Life, Universal Life, and Term Life Policies carry some or all of these features. This feature allows the policy owner to access the policy’s death benefit or a portion of it to pay for medical treatments, hospice, and other related expenses associated with one of these illnesses. Keep in mind, these payments are subject to guidelines by the issuing company. Accessing this benefit can preserve a family’s finances from the high cost of medical care so they will not have to dip into their savings or other assets.

Life Insurance has many present days uses in addition to its original purpose. If you don’t have life insurance, perhaps these living benefits will help you consider getting it. If you currently have a policy, now would be a good time to have it reviewed. A financial advisor and/or a life insurance agent can work with you to structure a policy or use your current policy to meet your financial goals. Matt Dressel is the Owner of the Independent Financial Solutions Group, a Registered Investment Advisor. He is an Investment Advisor, Life Insurance Agent and does Financial Planning. Securities provided by Trade PMR, Member FINRA, SIPC. If you have any questions about this article, he can be reached at 252-515-0242 or matthewdressel.ifsg@gmail.com. Disclosures:

1. Distributions, for any purpose, are not taxed under the current law provided the policy avoids Modified Endowment Contract (MEC) status and remains in force. If tax-free loans are taken and the policy lapses, a taxable event may occur. Loans and withdrawals from life insurance policies classified as modified endowment contracts may be subject to tax at the time the loan or withdrawal is taken and, if taken prior to age 59½, a 10% federal tax penalty may apply.
2. Withdrawals and loans reduce the death benefit and cash surrender value. Withdrawals from 529 plans are tax-free if used for qualifying education expenses. 
3. Benefits are subject to the claims-paying ability of the issuing life insurance company.  You should consult a tax professional before taking any distributions.

What Can a Buy-Sell Plan Do for Your Small Business

In 2016, there were 28.8 million small businesses according to the Small Business Administration. Small Business accounts for 99.7% of U.S Businesses, which employee 56.8 million people. Here in Carteret County, the overwhelming majority of businesses are small businesses. Many are owned by partners while others are entities (C or S Corps).

No matter the ownership or number of employees, one issue that should be of concern is the death of one of the owners.  This occurrence brings several questions. What will happen to the business? Will the deceased owner have a family member who wants to step into his/her position? If so, will this person be qualified to do so? What impact will the death have on the operational and financial stability of the business? These issues and others can be addressed by a Buy-Sell Agreement funded with life insurance.

There are two types of Buy-Sell Agreements, Cross Purchase, and Entity Purchase. A Cross Purchase Agreement is usually best when a business has 2-3 owners.  In this type of agreement, the partner(s) purchase a life insurance policy on each other.  The death benefit will be approximately equal to an agreed upon purchase price. The owner and the beneficiary is the same person and the other partner is the insured. The owner pays the policy premiums which are not tax-deductible.  At a partner’s death, the surviving partner(s) receive a death benefit income-tax free from the life insurance policy owned on the deceased. The surviving partner(s) use the life insurance proceeds to buy the deceased partner’s share of the business from his/her estate at the agreed upon purchase price.  

An Entity Purchase is best used when a business has 4 or more owners. The Business and the owners enter into an entity purchase buy-sell agreement.  The Business purchases a life insurance policy on each owner. The Business is the owner and beneficiary of each policy.  

The Business pays the policy premiums which are not tax-deductible. At an owner’s death, the business receives a death benefit tax-free from the life insurance policy. The Business uses the policy proceeds to buy the deceased partner’s share of the ownership from his/her estate at the agreed upon purchase price.

With any business sale/purchase, there will be taxes involved. When it comes to the taxation of a buy-sell agreement, there are some similarities and differences between the cross-purchase and entity agreements. In both agreements, the Death Benefits are received tax-free by the partner(s) or business; however, make sure policy ownership is properly arranged so the death benefits will not be included in the deceased’s estate.  Also, in both cases, if the amount received by the estate equals the fair market value of the partnership or business at the time of death, there will be no taxable gain for federal income tax purposes. In an Entity Purchase, the business must obtain notice and consent from the insured prior to the policy being issued otherwise the death benefits will not be received tax-free. In addition, with an Entity Purchase, some C Corporations may be subject to the Alternative Minimum Tax (AMT).

A Buy-Sell Plan is a strategy most small businesses should consider. However, it is important to assemble the appropriate team to make sure the plan is structured correctly.  An attorney is required to draft the agreement so it will be legal and binding.  A Tax Professional is needed to make sure the agreement provides the desired tax results. Finally, an Advisor/Agent is necessary to write and service the life insurance policies. When done correctly, a buy-sell plan can provide an orderly succession of ownership for a business at a difficult time.

(Note- In the case of a single owner business, the owner may enter into a buy-sell agreement with an employee or interested buyer.)

Matt Dressel is the Owner of the Independent Financial Solutions Group, a Registered Investment Advisor. He is an Investment Advisor, Life Insurance Agent and does Financial Planning.  If you have any questions about this article, he can be reached at 252-515-0242 or matthewdressel.ifsg@gmail.com.

(Life Insurance Benefits could be subject to the claims-paying ability of the Life Insurance Company.)