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.)

Using Whole Life Insurance as a Roth IRA

Would you like to contribute to a Roth IRA but cannot due to high-income limitations? Are you making maximum contributions to a Roth IRA and wish you could contribute more? Would you like to have a source of tax-free income in retirement? Would you like to pass something to your heirs’ income tax-free? If you answered YES to any of these questions, perhaps Whole Life Insurance would be just the thing for you.

While a Roth IRA and Whole Life Insurance share several important attributes, whole life insurance offers features that are not available with a Roth IRA. First, contributions to both are made with after-tax dollars. However, annual contributions to a Roth IRA are limited to $6000.00 ($7000.00 for Age 50 and over) plus if you make a certain amount of income, you could be ineligible to contribute.  Most Whole Life Insurance policies will usually allow for extra premium payments which are greater than Roth IRA contributions.

A second characteristic shared by a Roth IRA and Whole Life Insurance is the contributions to each grows on a tax-deferred basis.  This is a great way to build wealth free of taxes.  There is a difference between the two on how the contributions are invested. Most Roth IRA contributions are invested in mutual funds which are subject to market risk which, in turn, will cause the value of the account to fluctuate.  On the other hand, premiums paid to a whole life insurance policy are put into interest-paying investments that provide a fixed rate of return free of market volatility. This return is the policy’s cash value and compounds over time.

A third shared feature between a Roth IRA and Whole Life Insurance is that the distributions from each is tax-free.  After age 59 ½ and the Roth IRA has been in existence for five-years, distributions are tax-free. Distributions can be taken from  Whole Life Insurance at any time as a tax-free loan as long as there is cash value to cover it and the policy is in-force.*  In addition, life insurance companies will occasionally return some of their profits to their whole life policyholders as dividends.  These dividends are considered the return of premium and by IRS rules are tax-exempt.

A final hallmark of both a Roth IRA and Whole Life Insurance is each has a beneficiary feature.  When a Roth IRA is opened, the account owner must name a beneficiary (usually a spouse) if he/she passes away.  However, a Roth IRA is included in the account owner’s gross estate and could be subject to federal and state estate taxes where applicable. Whole Life Insurance pays a tax-free death benefit to the insured’s beneficiary.  

When deciding on whether to use Whole Life Insurance instead of or in conjunction with a Roth IRA, you need to consider your present and future tax situation, goals, and estate plan. An advisor, a tax professional, and estate attorney will all prove useful in this decision.

* If Tax-Free Loans are taken and the policy lapses, a taxable event may occur.

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.)

Disclosures: 1. Life Insurance Cash Values Grow Without Being Subject to Current Taxation. Dividends are Not Guaranteed.  Certain conditions apply if the policy is classified as a Modified Endowment Contract.  Always Consult a Tax Professional regarding your personal situation to determine the suitability of the use of whole life insurance.

Life Insurance as a Business Planning Tool: Key Person Insurance

When it comes to business ownership, maintaining a comprehensive business plan is extremely important. A business plan is a blueprint for a company's operation.  It lays out policies, procedures, and principles which guide the business and the tools to be used.  Of the many planning tools at the disposal of a business, there is one that is often overlooked. It is Life Insurance. 

Life Insurance has many uses in business beyond a group plan as an employee benefit. Life Insurance can actually be used to safeguard a business in the event of the loss of an important employee. This strategy is Key Person Insurance.

One of the worst things to happen to any business is for one of its managers, high producing salesperson, lead technician, chef,... to pass away.  This person's loss could possibly result in a loss of revenue, credibility, or leadership.  A Key Person policy offsets any potential drop in profits or pays for the replacement of this individual.  The business is the owner and beneficiary of this insurance policy. The business must have the key person's permission to take the policy on his/her life. Premiums are paid by the business which is NOT tax deductible.  However, the proceeds from the policy are received by the business free from income taxes.

No matter whether the business is large or small, all have that one (or more) individual whose loss would be a potential blow to the bottom line or operations.  Safeguarding your business by insuring the life of this employee could prove to be a prudent move.  

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.)

What to Consider About Life Insurance By Matt Dressel

The decision to purchase life insurance is very important.  It is a key part of your financial plan.  It pays your final expenses, provides funds to replace your lost income as well as to settle debts such as a mortgage, medical expenses, credit cards, or student loans. However, many individuals buy life insurance based solely on the cost of the premium without considering the features and benefits of the policy as well as how it meets their overall life situation. So what things should you consider when looking to obtain a life insurance policy?

Let’s start with the base policy.  The death benefit is the major feature of any life insurance policy. Ask yourself is the benefit payment going to be enough?  Will it keep pace with inflation?  These two questions are crucial if you have debts such as a mortgage or future plans for sending a child to college. Another thing to consider is what else is offered as part of the base policy at no charge.  For example, many insurers offer an Accelerated Death Benefit.  This rider allows the insured to access a certain percent of the death benefit in the event of a terminal illness.  If you have a family history of terminal illness this benefit could cover a large portion of the medical bills. Some insurers offer this benefit as a rider for an additional cost but why pay an added charge if you don’t have to?  Finally, if you are looking at a Whole Life or Universal Life Policy, the Cash Value will need to be considered. Will the interest rates build the cash value you need to help meet any goals or challenges, especially during your retirement or if you are in a high-income tax bracket?  Also, does the insurer have a past history of paying yearly dividends?  When looking at the base policy make sure it is aligned with your individual needs and financial goals in a cost effective manner.

The next thing to consider in obtaining a life insurance policy is the choice of riders that can be added to it.  Riders allow you to further design a policy to meet your needs and goals. Most riders come with an added charge, but some policies have free riders such as the Accelerated Death Benefit Rider described earlier. The following is a summary of the most common riders.

• The Waiver of Premium waives the premium payment if you become disabled as defined in the life insurance policy. If you work with machinery, chemicals, or any area that requires heavy exertion or heat exposure, this rider would be appropriate.

• The Accidental Death Benefit pays an additional benefit if your death is accidental. If you drive long distances regularly to work or school, work as a professional driver or delivery person, or work in construction or a construction related field, you should consider this rider.  

• The Option to Purchase Additional Insurance allows you to purchase additional coverage at specified dates in the future regardless of health or occupation. This rider is a great planning tool to protect your growing assets, your family, and your income as well as protects against inflation. If you are anticipating a salary increase, having children/more children, or assuming the care of an aging parent/relative, this rider would be valuable.

• A Term Rider allows you to buy temporary additional coverage on yourself without the expense of getting another policy.  This is a great way to help protect your assets from temporary or short-term debts associated with accessing a line of credit or a home equity line.

• The Child/Family Rider allows you to buy temporary additional coverage on a child or other family member without the expense of getting another policy. This is useful for final expense coverage or as starter coverage for a child.

• A Long-Term Care Rider allows you to pay for qualified long-term care expenses. This rider is ideal for individuals with a family history of long life spans and/or who want to avoid tapping into their other assets to pay for long-term care expenses.

Life Insurance is a major component of your financial plan.  Choosing a policy based only on the premium could be harmful in the long run. In short, you "get what you pay for".  It is important that you evaluate and design a policy to meet your financial needs and goals.  A financial advisor and/or a life insurance agent will work with you to make sure you have the right coverage.

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.)

Why People Buy Life Insurance

Life Insurance is one of the most important things to have in your financial life.  There is not another product that offers financial protection, flexibility, and in some cases tax-exempt cash growth over time. According to a recent study by LIMRA (Life Insurance Market Research Association), only 6 out of 10 Americans currently own life insurance. While this is a positive number, that still leaves 40% of Americans who are without protection not to mention the benefits offered by life insurance.  So let’s examine why people buy life insurance.

The first reason is the death benefit.  Every life insurance policy pays a benefit to your survivors.  This benefit can be used for many purposes besides paying funeral expenses. Life Insurance can replace the earning power of the policyholder. Many families rely on two incomes to meet their needs.  Imagine what would happen if one of those incomes would suddenly and permanently disappear due to the death of a “breadwinner”.  The family could lose their house, have difficulty paying monthly expenses, children could suddenly be denied the chance to attend college, and the list could go on.  Life Insurance benefit can also be used to meet expenses  such as paying off the mortgage, establishing a college fund, and make up for the lost income created by a death.  

Another reason people buy life insurance is to take advantage of the cash savings benefits that come with permanent life insurance policies such as Whole Life and Universal Life.  Whole Life and Universal Life  invest a portion of the premium payments into an interest bearing savings account inside the life insurance policy.  The build up in this savings account is called the policy’s cash value which in most cases pays a higher interest rate than a regular savings account. In addition, if the insurance company that issued the policy declares a dividend, it will be credited to the cash value. The policy owner may use the cash value to help pay for educational costs, supplement retirement income, or financial emergencies.*  

Life Insurance provides several tax advantages, a third reason why people purchase it.  

Death proceeds are received free of income tax.  This is a great benefit if estate taxes are involved.  In many instances, the death benefit will be used to pay estate taxes. Cash value accumulations inside permanent policies are tax deferred.  This means the policyholder will not pay income taxes on the interest or dividend received from the insurance company that issued the coverage.  In addition, cash value loans or withdrawals* are free of tax, as long as the policy stays in force.  

A final reason people buy life insurance is the flexibility to design coverage that fit the needs of the policyholder at little additional cost.  Individual riders can be added to a policy to protect against a variety of occurrences. The most notable riders are the accelerated death benefit, the waiver of premium for disability, and the accidental death benefit.  The accelerated death benefit rider allows the insured to access up to 50% of the policy benefit in the event of terminal illness**.  Accelerated death benefits are received free of income tax and in many cases are used to cover medical costs.  The waiver of premium rider is crucial in the event of disability.  If the insured were to become disabled, all future policy premiums are waived and coverage stays in force.**  The accidental death rider pays an additional benefit if the policyholder is a victim of an accident, not their fault.  

Life Insurance provides many benefits such as protection, savings potential, tax advantages, and flexibility.  A well-structured policy can provide peace of mind and be an important part of any financial plan, no matter what stage of life.  A knowledgeable life insurance agent and/or financial advisor can help obtain the appropriate coverage.  

Feel free to contact me at 252-515-0242, matthewdressel.ifsg@gmail.com , or http://www.independentfinancialsolutionsgroup.com/index.html   

* Withdrawals and loans will reduce the policy’s death benefit and cash value available for use.

** Certain criteria must be met for these riders to be used.

*** Death Benefit Payments are subject to the claims-paying ability of the insurance company.