Brian Gruss Licensed Insurance Planner

Tax Advantages of a Permanent Life Insurance Policy

Most of us are aware of the benefits of obtaining a life insurance policy – the death benefit.  The death benefit protects your family from the financial hardship that may arise after your death.  But there is a second benefit of life insurance.  Permanent or cash value life insurance can offer unique tax advantages that cannot be found through other options.

Permanent life insurance, including whole life and universal life, provides long-term life insurance for the policyholder.  Most policies feature a level premium over the life of the policy.  You will always know your premium amount so you will not be surprised by increases, as you might be if you renewed a term policy.  Because of the permanent nature of this type of insurance, you also have the added benefit of accumulated cash value.  That cash value can be used by the policyholder through loans and other withdrawal options, and can be an important addition to your retirement planning.

There are several unique tax advantages of permanent life insurance that are not found with other financial tools.

o       Cash value accumulates free of taxation.  You will not be required to pay income tax on interest or other earnings that are credited to cash value.

o       Borrowing the cash value may be done without having to pay income tax.  Loans are generally treated as debts and are not subject to income tax.  In addition, these loans may not need to be repaid.  If you build up a large amount of cash value and maintain a minimum death benefit to cash value ratio, you can borrow against the cash value for systematic payments that can supplement your retirement income.  Be aware, however, that the cash value may be subject to income taxes when there is a withdrawal from or surrender of the policy, or if the cash value to death benefit ratio is not maintained.  Also, loans accrue interest and they can reduce the overall value of the policy.  And lastly, if the policy is a modified endowment contract, the loan may be taxable upon issuance.

o       Your beneficiaries receive the death benefit free of income taxation.  This tax advantage is true of both term and permanent policies.

o       By arranging the beneficiary designations in accordance with current laws, you can avoid potential estate taxes and probate costs.  By placing ownership and naming beneficiaries outside your estate, you may be able to avoid the proceeds of the policy going into your estate and thus being subject to estate taxes.  Keep in mind, however, that to avoid estate inclusion for existing policies, you must transfer the policy at least three years before your death.

Permanent life insurance policies offer unique tax advantages, as well as the traditional death benefit enjoyed by all life insurance policies.  Consult your insurance agent, Brian Gruss, and attorney to discuss the advantages of this financial product so that you and your loved ones may reap all the benefits it has to offer.

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Five Reasons Why You Need Life Insurance During Your Retirement Years

Every stage of life has its own unique financial planning and insurance needs and the retirement years are no different.  If you are still carrying the same life insurance coverage as you had twenty years earlier then your coverage is probably not well suited to your age.  Likewise, dropping all life insurance coverage is not a smart move either.  Though you may not need as much coverage at this stage in your life, life insurance is still an extremely important component of a sound financial plan.

A few reasons why you still need life insurance are:

1.      Funeral Expenses – According to the National Funeral Directors Association, the average funeral, including the vault and casket, but not cemetery costs or a tombstone is $6500.00.  This can easily rise to a much higher amount that could heavily burden your surviving loved ones.  Paying for the costs associated with death is a crucial role of life insurance.

2.      Healthcare Expenses – Should you incur hefty healthcare costs before you pass on, life insurance can help pay these bills so they don’t get passed on to your loved ones.

3.      Estate Taxes – Depending on the size of your estate, your heirs could be responsible for paying estate taxes at a rate of 37 percent or higher.  Life insurance can be used to cover substantial estate taxes and can secure more of your hard-earned estate for the next generation. Furthermore, proceeds from your life insurance policy are likely more readily available than your other assets.

4.      Caring for Dependents – Life insurance can help a surviving spouse continue to enjoy a comparable lifestyle especially if he or she will not be receiving your full retirement income, pension or social security benefits.

5.      Charity – Some people choose to draw up a life insurance policy to benefit a not-for-profit organization.  Before you do this, however, make sure the organization has obtained 501 (c) (3) not-for-profit status and that they will accept your policy.  Some organizations are not equipped to go through the necessary processing to handle these types of donations and others can do so only if the policy is structured in a specific way.  You can deduct the cost of premiums from your taxes if you name the charity as both beneficiary and owner.

There are countless other reasons to continue carrying life insurance in retirement.  Brian Gruss can help you calculate what type and level of life insurance coverage will best serve your individual needs.

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Increase Your Retirement Income with Pension Maximization

Most people try to hedge their bets when it comes to their finances, and planning for retirement is no exception. The goal is usually to earn the maximum return possible on the money we invest. One way to accomplish this is through a concept known as Pension Maximization. You should explore this strategy with Brian Gruss if you plan to use pension income to generate your retirement income, because Pension Maximization may allow you to increase your monthly payments.

When a couple decides to start drawing on their company pension, they generally choose a joint and survivor option, which will provide a monthly income until both spouses die. The amount of your monthly income is based on how long an actuary thinks both of you will live based on your current age. The longer both of you are expected to live, the lower the monthly income.

With Pension Maximization, you can reverse this. Instead of opting for a joint and survivor payment, you take the single life, or straight life, option. Since the insurer is only providing income for the life expectancy of one person, the monthly income will be higher than that provided by the joint and survivor option. You also will receive a higher income because you aren’t receiving a term, or period certain, guarantee with this option.

However, if the covered spouse dies suddenly, monthly payments stop. To compensate for this risk, you can use some of the additional income-the difference between the higher monthly income that the straight life option pays and the lower monthly income of the joint and survivor option-to purchase a life insurance policy on the covered spouse. So, guaranteed ongoing income for the surviving spouse is provided through the life insurance policy instead of through the deceased spouse’s pension. Even though the survivor loses the pension income, he or she has the death benefit from the life insurance policy, which can be used to purchase an income annuity that provides a monthly payment. And it’s likely that the survivor is now much older, so he or she may be able to generate a higher income due to a decreased life expectancy.

So far we’ve only discussed what happens if the person covered by the pension dies first.  But what if their spouse dies first?  With a traditional joint and survivor option even when one spouse dies the other spouse continues to receive the same monthly check.  But with the Pension Maximization strategy, the covered spouse now has the option to either keep the life insurance policy, perhaps for estate liquidity or charitable purposes, or surrender it and receive any cash value. Plus they’ll have the higher income provided by the single life pension option for the rest of their life.

Keep in mind that this Pension Maximization strategy doesn’t work in every instance especially if the covered spouse is not likely to qualify for life insurance based on their health history.  In any case, before you make an irrevocable decision regarding your pension payments, please give us a call to learn if Pension Maximization is right for you.

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