Family "Values": Protecting Your Loved Ones

Unfortunately, life may sometimes bring with it an unexpected twist. Because many families today depend on two incomes to maintain a standard of living, the tragic death of a spouse can dramatically change everything. Even with single-income families, the at-home spouse may provide incalculable "non-cash" services such as maintaining the home and rearing the children. If one income suddenly stops, or you are forced to begin paying for services that once were "free," the impact on your family`s finances and lifestyle could be devastating.

This is where life insurance can be of great value. Adequate insurance can help replace the income of a spouse or provide additional income so your children will be adequately cared for and family life will continue to run on course.

To underscore the point, look at the income in real dollars if both you and your spouse work. What would the extent of that lost income cost your family? The other side of the problem is how much cash would it take to replace all that the "non-working" spouse contributes to your family?

Things become even more complicated if you have a child with special needs. If your non-working spouse is providing care for that child, who will handle those duties in the event of your spouse`s death? Insurance may help ensure the child continues receiving the proper care.

Customizing Life Insurance with Policy Riders

When most people think of life insurance, the first thing that usually comes to mind is, "How much do I need?" However, there are other aspects of life insurance policies that are worth considering and that can provide important benefits. For example, riders essentially allow policy owners to give themselves and their beneficiaries added protection if certain events happen. Among the large number of riders that life insurance companies offer, one of the more frequently utilized is the "waiver of premium."

The waiver of premium rider protects you in the event that you are disabled and can no longer afford to pay your life insurance premiums. This rider has been compared to having a miniature disability income policy on your life insurance contract. Not only does the insurance company pay your premiums pursuant to the terms of the contract, but if you own a whole life policy, the policy cash values and dividends generally continue to grow. These increasing policy values can be a ready source of income that you can use to help pay your expenses if you are disabled and can no longer work. You could access these values through loans or surrenders. (Note that loans and withdrawals may result in adverse tax consequences and loans carry interest. Cash values and death benefits may be affected, too.)

Eligibility Requirements
Like a life insurance applicant's insurability, the availability of the waiver of premium rider may also be based on certain risk factors, such as general health and past medical history. In addition, once issued, most policies contain important eligibility requirements before the waiver of premium rider will take effect. Policies generally contain a specific waiting period (e.g., six months) before premiums begin to be paid under the rider. Some policies apply waiver of premium coverage differently for a disability occurring prior to age 60, compared to one occurring between the ages of 60 and 65. Under many policies, the waiver of premium provision terminates at age 65.

While the waiver of premium rider on term and whole life policies will generally waive the entire premium, the waiver may work a little differently on other types of policies, separating the premium waiver for the cost of insurance from that associated with the cash value or investment fund.

The definition of "disability" in your policy is also crucial, because it determines when your obligation to pay premiums ends. The key is usually whether you are "totally disabled" under your policy's definition. While some policies consider you totally disabled when an illness or injury leaves you unfit for the type of work that you have always done, other policies may contain a clause that states you must be unfit for any type of work.

Policy riders tend to take a "back seat" when planning insurance needs, because so much of the initial focus is on how much coverage is necessary to provide adequate protection. However, part of the process of determining adequate protection should also involve taking advantage of the opportunities to customize your life insurance policy so it fully meets your needs.

Consider Inflation When Developing Your Insurance Plan

Because inflation affects our future purchasing power, it also affects our future life insurance needs. For families like the Bartons, inflation means that what may have been adequate life insurance coverage several years ago, may no longer be sufficient. With this in mind, let`s take a quick look at three of the more common life insurance needs that are often affected by inflation.

Purchasing a new home with a mortgage.
Until recently, it seemed that once you bought a house, you stayed in it forever. Times have certainly changed. Today, Americans are mobile. Increasing employment opportunities and dual incomes have changed the dynamics of family finances. In many cases, a growing family can now afford paying a mortgage on a lot more "house" than at anytime in the past. Does this trend minimize the reality of inflation and the rising costs of homeownership? Not at all. The fact is, escalating real estate prices have translated into larger mortgage loans. Therefore, if you`ve recently purchased a home, consider increasing your life insurance to cover your new mortgage.

College education costs.
If you`re planning on sending your children to college, you`re probably concerned about the rising costs of higher education-and, rightfully so! The average annual cost for attending a four-year, private college has doubled over the last twenty years! To combat rising college costs, factor inflation into your college savings plan. In addition, make sure you have a contingency plan in place-that is, adequate life insurance protection in the event of an untimely death. As you evaluate your education savings plan, consider increasing your life insurance coverage so that it best reflects the future cost of education.

Everyday expenses.
Shopping at the grocery store. . .pizza on Friday nights. . . taking your children to the movies. . .filling up your gas tank. . . replacing the roof on your house. Over the course of time, the costs associated with these necessities and "treats" of everyday life are greatly impacted by inflation. As a result, your family`s future lifestyle could be affected, too. By basing your life insurance needs on your current income and today`s cost of goods and services, you are potentially shortchanging your family`s future. Be sure to include inflation in your life insurance plan to help maintain your family`s current lifestyle.

A Medical Power of Attorney Can Protect Your Health Care Rights

WA Living Will is not Enough

Several cases that made the news in the past, have highlighted the family trauma, confusion, and expense that arise due to a failure to provide complete instructions regarding medical treatment. A living will, which an individual draws up to outline his or her health care preferences in advance (in the event he or she becomes incapable of making and communicating decisions), may not anticipate the broad range of situations and conditions where decisions will need to be made. A living will typically does not appoint a specific decision maker to fill this void.

An alternative to living wills is to assign authority for medical decision-making to a specific person in a “durable medical power of attorney.” The typical power of attorney document does not provide for medical decision-making authority, thus there is a necessity for separate designations.

Benefits of a Durable Medical Power of Attorney

In essence, the durable medical provision allows you to specify, in advance, the person you want to make critical decisions regarding your health care and well-being, should you become incapable of making and communicating these decisions for yourself. This option is particularly useful for elderly people who may fear cognitive impairments in the closing stages of life; people with debilitating or degenerative diseases; or people facing medical treatment that might render them temporarily or permanently incapacitated.

Without a named durable medical power of attorney, frontline health care providers- such as nursing home administrators, some health agencies, and hospital social service departments- may be unclear or conflicted about what the appropriate level of health care is for a particular patient. In many cases, these decisions, such as whether or not to resuscitate a terminally ill patient, are made in a crisis or emergency mode. The absence of a named durable medical power of attorney can result in an inappropriate conservatorship or guardianship that could frustrate the patient’s family and that might not meet the patient’s wishes.

The durable medical power of attorney provides protection through a legal document (as does a health care proxy) that allows a person to designate an “agent” to make informed choices about health care matters based on, and with respect to, the person’s life view and religious, as well as philosophical, beliefs. This document often complements a financial power of attorney and a revocable trust providing complete coverage for all planning needs in the event of incapacity.

Disability Income Insurance- Policy Considerations

Imagine what would happen if your ability to earn income were to suddenly disappear. What would your life be like? Even though your income had abruptly stopped, your living expenses would continue. The mortgage and car payments would be due- missing several payments could result in foreclosure or repossession. You and your family would still have to eat, use electricity, heat your home, etc. How would you cope? The best way to protect yourself from the financial harm that a disability can cause may be to purchase disability income insurance. Disability income insurance is designed to replace lost income in the event that a disabling illness or injury prevents you from working. It makes an enormous difference at a time when you should be focused on your health and recovery- not on how your bills are going to be paid.

Key Policy Features
When selecting an individual disability income policy, the following are important coverage areas to check:

	Definition of disability Policy definitions can vary. Does the policy define disability as the inability to perform your own job or any job? Select a policy that will pay benefits when you are unable to work in your occupation or one appropriate for your education and experience
	Extent of coverage Are benefits available for total or for partial disability? Are full benefits paid for loss of sight, speech, hearing, or use of limbs whether or not you are able to work? Does the policy cover both accidents and illness?
	Amount of monthly benefit What percentage of income will the benefit replace? Most insurers limit benefits from all sources to 70% or 80% of net monthly income.
	Waiting period Will benefits begin 30, 60, or 90 days, or even six months, after the onset of the disability? The longer the waiting period, the lower your premiums will be.
	Duration of benefits Are benefits payable for one, two, or five years, to age 65, or for a lifetime? Most people need a benefit period that covers their working years, at least to age 65 or normal retirement age.
	Inflation rider Does the policy offer a cost-of-living adjustment? This important rider should always be considered, for as the cost of living continuously increases you will want your benefit to keep pace with inflation
	Renewability Is the policy noncancelable, guaranteed renewable, or conditionally renewable? A noncancelable policy will continue in force at the same premiums and benefits, as long as you pay timely premiums; a guaranteed renewable policy will be automatically renewed for an entire class of policyholders, but the premiums may be increased; optionally or conditionally renewable policies are extended each anniversary or premium due date if the company decides to do so.
	Waiver of premiums How long must you be disabled before premiums are waived? Under most policies, you won’t have to pay any more premiums after you have been disabled for 90 days.
	Option to buy more coverage Can coverage be increased without further evidence of insurability?

For more help with your disability insurance planning, analyze your sources of disability income and determine whether additional insurance coverage is advisable.

Life Insurance: Changing Times, Changing Needs

When Kim Harrison purchased her life insurance policy ten years ago, she assumed her life insurance planning was complete. She figured that if she just paid her premiums on time, she could sit back and not think about life insurance anymore. True, Kim's policy has provided her with comfort of knowing by helping to protect her family. However, that doesn't mean she should let her insurance policy run on autopilot. Life insurance is just like any other piece of your financial puzzle. It should be periodically monitored as your circumstances and needs change. This way, you can help ensure that your life insurance is achieving its desired objective.

Here's a closer look at some of the things that Kim, like all policyholders, should review at least annually.

Is Your Coverage Up-to-Date?
Kim must first determine if her original reasons for purchasing her policy are still current. She should also evaluate whether or not she's developed any additional needs. For instance, when Kim initially purchased her policy, she was newly married and owned a small, modest home. Now, Kim and her husband, Jack, have three children and a much larger home. Is Kim's existing policy appropriate for these new responsibilities-covering a substantial mortgage, funding college for three, and contributing to the protection of her family's financial security? More than likely, Kim may require additional life insurance.

If Kim's existing policy is term insurance, she may want to consider converting it to a permanent contract. Permanent insurance contains a cash value component that offers the potential for tax-deferred accumulation, as well as the same death benefit features of term insurance. In later years, the cash value could come in handy to help supplement retirement income needs. Keep in mind that withdrawals and loans taken against a policy's cash value could affect the death benefit and may have tax consequences.

Beneficiaries May Change, Too
As it stands now, the primary beneficiary of Kim's life insurance policy is her husband, Jack. If Jack were to predecease Kim, the policy currently names Kim's nephew as a contingent beneficiary. Now that Kim has her own family, she will likely want to update her policy's beneficiary arrangement to name her children as contingent beneficiaries in place of her nephew. In addition, if Kim and Jack eventually set up a living trust, their legal advisor may suggest naming their trust as the policy's beneficiary.

Planning for Your Growing Estate
Regardless of the type of life insurance Kim owns and who is named as the beneficiary, the death benefit proceeds from the policy will be included in Kim's estate. It's important that Kim and Jack recognize this. As their asset base increases over the years, they should plan accordingly to reduce the effects of estate taxation.

Life insurance can help play a significant role in solidifying the family finances of couples like the Harrisons. However, it is also important to recognize that, like all financial matters, life insurance policies need to be reviewed on a regular basis with a qualified professional. A qualified insurance professional can be a valuable resource when it comes to evaluating your present situation and determining an appropriate course of action.

Copyright 2004 Liberty Publishing, Inc. All rights reserved. INLREV03

Life Insurance: Maximum Safety from Creditors

Life insurance is purchased to protect people against a variety of financial situations. In fact, if a breadwinner dies insolvent, in many instances the proceeds of a life insurance policy are all the surviving family members may be able to depend on. An important aspect of life insurance is the exemption by law in every state of some portion of cash values and death benefits from the claims of the policyowner`s creditors. This protection given to life insurance comes from recognition long ago by state legislators of the special role life insurance plays in protecting the family unit.

State exemption laws may differ in some respects. However, there are several general points which can be made. The first is identification of transactions which do not receive protection.

If the life insurance proceeds are paid to the policyowner`s estate, rather than to a named beneficiary, the general rule treats proceeds as property, subjecting them to the claims of the deceased policyowner`s creditors, just as any property would be. Additionally, if a policy is assigned to a lender to collateralize a promise to repay, the general rule is that the lender`s security interest in the policy overrides the general state law exemption. Finally, as might be expected, the IRS can reach a policy`s cash values by putting a tax lien on the policy. In some cases, the IRS can even reach the policy`s death benefits.

The next area to examine is how much is protected by state law. On this point, the states take a variety of positions. When it comes to exempting cash values, some states take the position that cash values are exempt to a specified dollar amount. Other states appear to exempt cash values to a virtually unlimited degree.

Death benefits are dealt with in their own right, with the majority of states fully protecting the death proceeds of life insurance from the claims of the policyowner`s creditors (other than the IRS). Some states even protect the death proceeds from the claims of the beneficiary`s creditors. In fact, these states not only protect life insurance, but also protect endowment and annuity contracts.

During uncertain, personal economic times, when cash flow problems are common, many individuals come to appreciate firsthand how exemption laws can shield their life insurance policy`s cash value from creditors. Knowing how your state defines the exemption laws will show you, and may very well solidify, how the policy you purchased may protect you from financial situations you never considered possible.

Copyright 2004 Liberty Publishing, Inc. All rights reserved. INLD105

Taking a Look at Transfer for Value

Where insurance policies are concerned, business owners and their financial professionals understand that the proceeds of life insurance policies are generally received income tax-free. Surprisingly, there is a part of the Internal Revenue Code which provides that under certain circumstances income taxes may be paid by beneficiaries on the proceeds of life insurance. This may occur when policies are "transferred" incorrectly.

A transfer occurs when a policy owner changes the ownership, assigns an interest in the policy or makes a change of beneficiary to an existing policy. A transfer for value occurs when such interest in a policy is exchanged for valuable consideration such as money, property or reciprocal promises.

Transfers for valuable consideration may trigger income tax on the proceeds of the policy. However, there are exceptions, and not all transfers are considered "for value," in which case there are no adverse income tax consequences. To qualify for income tax-free proceeds, the real challenge is to ensure policy ownership is properly designed and if policies are transferred, they are transferred to the proper recipient.

While there are certain life insurance policy transfers which can clearly avoid the "transfer for value rule," others may squarely put policy owners in a position where, upon the death of the insured, the life insurance proceeds will be taxable. Therefore, a business must take great care to assure that a policy which has previously been sold or otherwise transferred for a valuable consideration follows the specific guidelines (IRC Sec. 101(a)(2)).

One of the main concerns of both business owners and professionals is navigating the different rules for making transfers so that the proceeds of those life insurance policies do not trigger income taxable events. Here are three basic guidelines:

	When the sale or other transfer for value of an existing life insurance policy is to the insured (IRC Sec. 101(a)(2)(B)).
	When the sale or other transfer for value of an existing life insurance policy is to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is an officer or shareholder (IRC Sec. 101(a)(2)(B)).
	A transfer where the transferee`s basis is determined in whole or in part by reference to the transferor`s basis (IRC Sec. 101(a)(2)(A)).

For a variety of reasons, an officer or shareholder of a corporation might wish to transfer an existing life insurance policy to the corporation. In this particular situation, there may be a distinct advantage. IRC Sec. 101(a)(2)(B) states that the transfer for value rule does not apply if the transfer is "to a corporation in which the insured is a shareholder or officer." In addition, if a policy is transferred more than once, and the last transfer is to a corporation in which the insured is an officer or shareholder, the proceeds will be wholly income tax-exempt regardless of any previous sale or other transfer for value (Reg. Sec. 1.101-1(b)(3)(ii)).

However, note that many professionals doubt whether holding a few shares of stock actually provides protection as a result of being "a shareholder." There is also doubt as to whether a person who is only nominally an officer with no authority or duties within the corporation should actually be considered an "officer" (Rev. Rul. 80-314, 1980-2 CB152).

Often, a case study helps to address some of the more common questions which business owners and consultants routinely ask.

Let`s assume that North Country Aerospace, Inc., had a cross-purchase plan between individual stockholders Adams and Barker, and decides to switch to a stock redemption plan . In this instance, Adams and Barker, as stockholders, will be transferring their policies on each other to North Country Aerospace, Inc. This transfer qualifies as one of the exceptions to the transfer for value rule because the insureds are shareholders of the corporation.

But now consider this example: North Country Aerospace, Inc., decides to change its insurance-funded stock redemption plan to a cross-purchase plan. North Country Aerospace, Inc., then sells a policy on stockholder Adams to stockholder Barker. Upon that event, the proceeds at death will lose their income tax-exempt status. Even if North Country Aerospace does not sell the policies but merely distributes them to Adams and Barker, there is a transfer for value. The valuable consideration here is the reciprocal promise between Adams and Barker to fulfill the cross-purchase plan.

However, a transfer by North Country Aerospace, Inc., to a shareholder would be ruled within the "exceptions" if stockholders Adams and Barker were also partners in a bona fide (although unrelated) partnership (IRC Sec. 101(a)(2)(b); PLR 9347016; PLR 9045004).

A final important consideration is that the Internal Revenue Service may closely scrutinize a partnership that has been established or created solely for the purpose of holding life insurance policies to avoid the transfer for value problem. It is therefore advisable to plan in what manner life insurance policies will be held, issued, and transferred before actually executing the transfer.

Copyright 2004 Liberty Publishing, Inc. All rights reserved

Term Insurance: One Step Beyond

Term insurance is typically purchased to protect a growing family from the catastrophic loss of a "bread winner." Lower initial premiums offer the flexibility to fit immediate needs. However, over time, a more permanent and valuable life insurance contract may be needed to provide security and more stable premium payments for the future.

The low cost/high benefit of term insurance is its most attractive feature. However, term insurance premiums typically continue to rise with age. Some term contracts do offer premiums that remain level for a pre-determined number of years, but these contracts may experience significant premium increases in the future, or death benefits that decrease yearly. A policy that has long-term value and benefits, and the flexibility to help cope with change, is important. Therefore, converting a term policy to a cash value contract may make sense.

Long-Term Benefits
A quality, cash value insurance policy provides the same death benefit protection as term insurance, while offering the opportunity for tax-deferred cash accumulation. Unlike term insurance premiums that increase with age, cash value insurance provides level premiums for the duration of the contract (although you must check with your insurer regarding premium payments over the life of any given policy).

Although cash value insurance initially costs more than term, the long-term savings could be quite substantial. The cash value build up will continue to grow on a tax-deferred basis as long as the policy remains in force. By offering the flexibility to meet future needs and budgets, a cash value policy can help provide an excellent source of funding for retirement income, college expenses, or other financial needs.

The conversion privilege available in most term policies offers those who cannot initially afford cash value insurance a great opportunity to convert to a cash value contract at a later date. Some term policies may offer a conversion credit that makes converting to cash value insurance even more economical.

One particular advantage of converting from term-rather than purchasing a new cash value policy-is that there is no need for medical or financial requalification. Significant weight fluctuations and increased blood pressure are just a few symptoms of life in today's fast-paced society. Daily pressures and expectations, both at work and at home, can contribute to both health and financial problems. Converting a term policy to a cash value contract eliminates the need to undergo a new medical examination or provide updated financial information (as long as there are no increases in the amount of coverage, or any additional riders).

Making the Move

Converting your term insurance to cash value coverage may help provide maximum security and protection. You will be comfortable knowing your family will be provided for in the event of your untimely death. In addition, you will also feel a great sense of confidence in knowing your premiums are hard at work building tax-deferred cash values, which may be important in the years to come. While this approach may not be for everyone, it is always wise to review your insurance options on an ongoing basis so they remain consistent with your needs and goals.

Copyright 2004 Liberty Publishing, Inc. All rights reserved.

The Importance of Disability Income Insurance

Most people pay little attention to how they might handle their family's living expenses should their income suddenly cease because of an unexpected illness or injury. Perhaps this is because most people feel an injury or illness will never happen to them. However, the statistics are unsettling. According to the Insurance Information Institute (III, 2002), an individual between the ages of 40 and 65 has a greater chance of missing at least three months of work due to an accident or illness than of suffering an untimely death. Indeed, the average recovery period runs a lengthy two and a half years. This is why disability income insurance should be an important part of your overall financial picture.

Protecting Your Most Valuable Asset
Disability income insurance protects your most valuable asset-your ability to earn an income. You pay a periodic premium and, in exchange, if you are disabled and cannot work, the insurance company promises to pay you a predetermined benefit amount.

In order to understand the right type and amount of disability income insurance for your needs, you'll first need to examine if you already have some coverage in place. For instance, you may have some form of disability income insurance through your employer. If you do, it may be a good idea to find out if you have short-term and/or long-term coverage, and exactly how long the benefits last. Knowing what coverage you already have in place will help you determine if you need additional coverage to help pay for your home or apartment, automobile(s), utilities, food, clothing, education, etc., in the unfortunate event you ever became disabled.

Likewise, if you're self-employed, you need to carefully examine how a disabling injury or illness could affect you, your family, and your business. Because workers compensation insurance is often confused with disability income insurance, you need to know that workers compensation (required of employers in most states) only covers disabilities that occur while you're on the job. Hence, in order to qualify for benefits, the illness or injury must be work-related.

Better Safe than Sorry

Since disability income insurance protects your potential future earnings, you should consider it an important part of your insurance program. Remember that individual contracts can be specifically tailored to help meet your personal and/or business needs. Because features and benefits vary widely from policy to policy, you may wish to discuss your needs with a qualified insurance professional-one who can answer your questions and concerns, assess your needs, and help you make an informed decision.

Copyright 2004 Liberty Publishing, Inc. All rights reserved. INDGEN1

Touching All the Bases with Policy Ownership

While it is common to think of life insurance planning in terms of type and amount of coverage, a more complete analysis should include policy ownership. In many cases, the proceeds of a life insurance policy may be unnecessarily included in your taxable estate unless you plan ahead to avoid this event.

Without insurance, many taxable estates fall below $1,500,000. This is the level at which your wealth becomes subject to federal estate taxes (for 2004). The proceeds of life insurance can push your estate into the area where the IRS (Internal Revenue Service) will make substantial claims. Indeed, the federal estate tax is a sliding scale that reaches 48 percent for taxable estates (gross estate less the $1,500,000 exemption) that exceed $1,500,000.

There are two ways to keep insurance proceeds out of your estate:

1. Give your insurance policies to someone else, generally the beneficiaries, or
2. Transfer the policies to a trust.

Either option, if done properly and in a timely manner, will decrease your federal estate tax. You may not need to worry about changing ownership of a policy that names your spouse as the sole beneficiary. However, if the purpose of the insurance is to pay estate taxes or provide for heirs other than your spouse, you may benefit from transferring your policy out of your estate. The unlimited marital deduction allows the policy proceeds to automatically escape estate taxation.

The paperwork involved in changing insurance policy ownership is relatively simple, requiring a form provided by the insurance company. However, you do have to sign away all rights to your policies (except the right to pay the premiums). That means the gift must be absolute and irrevocable. You cannot change your beneficiaries, and in the case of policies with cash value, you no longer have the right to borrow against them or cash them in.

If the transfer is done within three years of your death, the policy proceeds are counted as part of your estate, regardless of ownership. Thus, proper planning is necessary in order to ensure the desired results.

Ownership of individual and, in most cases, group insurance can be transferred to anyone in or out of your family who is old enough to handle money. However, insurance experts advise against giving policies to an outsider in exchange for anything of value because that individual might be required to pay income tax on the proceeds. It is usually best to give policies to the beneficiaries or, in the case of a minor, to a trust that is designed for the benefit of the child.

It is important to review the consequences carefully before signing away insurance. Gifting insurance may have gift tax consequences if the transfer is to anyone other than your spouse. The annual gift tax exemption is $11,000 for 2004, ($22,000 for gifts made jointly by husband and wife) per gift to any single donee. In addition, you should never give insurance away if you want to get any value out of it or if you think you`re going to change your mind.

For those in higher tax brackets, a better way to shelter large policies from estate taxes and to protect the interests of children as beneficiaries may be to transfer ownership to an irrevocable life insurance trust . When you die, the trustee named by you will distribute income to your beneficiaries or, if necessary, use the proceeds to pay estate taxes.

The issues of policy ownership are no less important than the considerations of what type of policy and how much insurance you need, to fulfill your objectives. In planning your insurance program, take care to touch all the bases.

Copyright ã 2004 Liberty Publishing, Inc. All rights reserved.