Is Life Insurance A Good Estate Planning Tool? Can I use it to help with planning to protect a sizable estate?

Life insurance is protection for those left behind after the death of someone important to a family or business.  So many times families are devastated financially at the loss of a key breadwinner who supports a family, businesses close or are sold to unrelated parties due to the death of a key employee or owner, and estates are broken up and paid away in taxes after the death of someone with substantial assets who failed to properly plan for their death.

What life insurance does is provide a lump sum of money (or a stream of money in some special cases, and also in some cases additional benefits) to those left behind after the death of the insured person.  The cash payment is used as needed/desired by those who are the beneficiaries. The policy is purchased by the policy owner and often that is also the person who is insured.  The benefits paid to the beneficiaries are most typically family members left behind and generally the money is used to pay final expenses and ensure the family members left behind are able to financially survive the next several years of their lives.

Families buy life insurance on the main breadwinners and also when planning well on the main caretaker of the children. The loss of the breadwinner (person who earns the money to pay for housing, transportation, insurance, food, and other needs) can create for many families’ situations where the existing lifestyle will change dramatically.  Thus, for families the cash helps replace income lost with the death of the breadwinner. In the case of a stay at home spouse who cares for kids, the insurance offers cash necessary to hire domestic help who can help with the chores and child care once provided by the stay at home spouse.

In special need circumstances such as estate planning or business owners the cash benefits are there to help pay estate taxes or buy out the deceased partner out of the business. There are other special cases for life insurance but generally the payout goes towards specific needs of the special situation. For brevity we will not try to cover all special circumstances here.

The purchase of a life insurance policy has several components. (1) Identify and quantify the need, which is part of the sales process; (2) Identify the appropriate carrier based on insured health and insurance need; (3) Write an application for insurance; (4)Submit the application for Underwriting; (5) Complete Underwriting, which may include medical exams (paramed), review of medical records, review of the MIB (Medical Information Bureau) reports, or review of special circumstances; (6) Receive a policy, counter offer, rejection, or postponement from the insurance company, and finally (7) Implementation of the policy.

The underwriting process and timeline are important especially when purchased for special needs. There may be circumstances when temporary coverage is available but often it is not for special needs or for amounts requested.  The process of underwriting is generally described above.  In addition to the above it is important to know and understand that the underwriter is dependent on many others to get the process completed. The insured also can impact the process by responding timely to additional information requests and completing any paramedical reviews requested timely.

Generally a life insurance policy, except for instant or rapid issue low death benefit higher cost policies, take a month to two or three months to get from application to policy issued in force.   The time line is affected primarily by securing medical records, getting the para-medical review completed, and providing answers asked by the underwriter.  Medical record acquisition is typically the biggest hold-up for most life insurance cases. 

When a life insurance company wants to review medical records it is typically for a more in depth review of a medical situation listed on an application. For instance if someone lists high blood pressure with a single medicine to treat it and associated tests when the diagnosis was rendered, it is likely the underwriter will want to review the medical records from the cardiologist to validate the information on the application, especially if the diagnosis is within the past year.  This helps determine if there are other likely to develop medical conditions which would affect the rating issued by the insurance company.   Because this information is needed to fully understand the health status of the applicant the insurance company requests the medical records. 

Companies that specialize in securing medical records are used to secure the medical records from the attending physician. These companies have different ways of securing the records. They do pay physicians to produce the records, and also provide to the physician the signed HIPAA authorization which is part of the application.  Why then is this a slow down spot in the processing of an application? Often doctor’s offices are very slow to respond to requests for medical records even though they are being paid.  The proposed insured can help speed this along by letting the doctor’s office know the importance of getting medical records to the insurance company if requested.

Once the underwriter has all data about the proposed insured, they will review the health status and based on internal guidelines set by each carrier, which are unique to the carrier, the individual is scored and based on the score assigned a rate for the policy requested. Thus health status, amount of insurance requested, amount of insurance to be held in total, and the length of a rate guarantee all will factor into a final rate.  Insurance type is a key factor in determining the price of a policy. Term insurance is less expensive than permanent insurance. Shorter terms 10 years are less expensive than 20 or 30 years, but of course if you need the policy longer than the initial term the rates go way up.

Estate Planning is one purpose for life insurance. The reason for the life insurance is not to leave cash behind for survivors to use for their own needs but instead it is left to help pay or totally pay any estate taxes that may be due on the estate of the insured individual.   Life insurance, typically permanent policies because it is expected they will be kept until a death occurs, are purchased in amounts expected to be adequate to pay some, most, or even all of the estate taxes which would be due at the time of the death of the insured.

Life insurance proceeds are counted as part of the estate of the person who receives the payment, so often a trust is set up to both own the insurance and receive the benefits. The trust has to be set up in a manner that it defines who has access to the cash deposited and for what use the money can be used. It often also needs to specifically indicate primary and secondary beneficiaries for the trust.

The reason many use the life insurance for the payment of the estate taxes is to ensure the full value of their estate is passed along to beneficiaries (people, companies, or charities).  These folks often see the cost of the insurance as a small price to pay to ensure their beneficiaries don’t lose estate value. This also allows a long term payment stream to be made to cover the estate taxes.  Further with a good Whole Life or Universal Life policy, it’s possible that the cost of the coverage will be far less than the actual estate taxes which if viewed from an actual total cost vantage point, it is the most economical way to cover the estate taxes costs.

In addition to paying estate taxes there are other special uses for life insurance. Among these include funding buy-sell agreements, covering the costs associated with the loss of a key person at a company, funding legacy donations to charities or foundations, and funding legacy trusts that are there to support economic needs of future generations.

Here are some statistics about life insurance and estate tax: 

·         In addition to Federal Estate Taxes some states have Estate taxes (with some using very low limits that trigger up to 20% estate taxes in the state on top of Federal). Exclusions exist for transfer to spouses and specific other situations.

·         30% of US Households have no life insurance *

·         44% of Households have individual life insurance  *

·         1/3 or more of homes with $100,000 annual income are underinsured *

·         Currently there is a $5,000,000 exemption on Estates under the Federal Death Tax although passing the estate to a spouse is allowed with unlimited wealth transfer.

(* = LIMRA Life Facts 2010)

Definitions to know:

Proposed Insured / Insured – the person on who the insurance is provided

Insurer – The company licensed in the state in which a policy is issued, who provides a guarantee thru the form or an insurance contract, to pay a specific death benefit at the time of the death of the Insured, less any policy loans or other contractual deductions.

Policy Owner - Individual or entity who owns the policy, it may or may not be the same as the Insured

Policy Beneficiary / Beneficiary – The person(s) or entity that receives the payout of the death benefit at the time the Insured dies.

For Life Insurance in Houston we are here to help.

Should I buy a Final Expense Life Insurance Policy?

Life insurance is important for everyone to have. It helps leave a legacy behind as well as cover bills related to the passing. Life insurance is useful for ensuring the home is paid off, kids can attend college, etc. thus, the ideal is a full life insurance policy, but for some they can only qualify or afford a lower cost policy. Final Expense policies are one of these easier to qualify for lower cost policy.

I should clarify that lower cost does not mean that you are getting a better rate for coverage than you would for a regular term or permanent coverage plan.  With Final Expense coverage you are buying a policy of somewhat limited benefit which means the death benefit will generally be anywhere from $5,000 to $25,000.  Most term and permanent coverage policies have minimum death benefits of $100,000 (a few may go as low as $50,000).

Because there is a difference in the death benefit between a final expense policy and the more traditional life policies, one may be a better fit than the other. If someone wants to ensure they get the home paid off, leave money behind for the spouse to raise the kids, get the kids thru college, etc…then a final expense policy would never make any sense.  But, if the person who needs coverage only needs to pay funeral expenses and other similar final expenses, one of these final expense policy is possibly a good fit.

If you only need to cover an amount between $5,000 and $25,000 (average funerals are running between $5,000 - $10,000 per burial, and that is not with many extras to make the funeral really nice, with those you can easily add several thousand more to the cost).  A lot of the recommendation to get final expense vs. term or permanent boils down to your specific needs. Someone young and healthy looking to pay costs of an eventual funeral would need a permanent product, which a final expense is, however if they are super healthy they can probably pay a bit more towards a traditional policy and get several times the death benefit.  Those in more near term need, less healthy, and with very limited financial resources probably need to look at a final expense policy as their option.  If you are looking to leave behind money for more than just getting your remains buried you need to look at traditional policies, again based largely in part on your needs. For help with life insurance in Houston have a quick look at some live quotes and give us a call to discuss the best overall life insurance strategy.

Disability Insurance – General Overview

Have you ever wondered what would happen if you got sick or injured and could no longer work? If you are married would your spouse be able to help take care of you and care for your home, children, and make enough money to make ends meet for the family?  Do you assume your parents, brother, sister or a friend will help you get thru the disability?

Disability insurance is intended to replace lost income when the insured becomes unable to work due to medical reasons caused by either illness or accident.  The reason it replaces income is the employee at some point will run out of sick and vacation time yet be unable to return to work at which time they need income from someplace. To that end the Disability Policy is what kicks in at that point.

Everyone who works, unless they are otherwise independently wealthy, needs to consider having a policy. There are few resources available to the yet to retired when they become disabled, to cover the cost of living. Many may assume the Government will just take care of them, and yes under certain circumstances you may be able to get money from the government, however there are various hurdles to get over first many difficult to tackle. 

Generally if you have not worked and contributed to Social Security/Medicare for at least 10 years you will not be able to claim many benefits at the Federal Government level and states offer various levels of help.  Those who have made enough of a contribution to SSI and Medicare may be eligible for SSI Disability payments and likewise Medicare benefits for those under age 65. The SSI Disability benefits are somewhat limited and will not allow you to live the lifestyle you were accustomed to living prior to the disability.  You may find yourself with less than 35% of your prior to disability income coming in as a SSI-Disability payment which for most is not enough money to live, without giving up their prior to disability lifestyle.

With a disability plan, or stacked plans from your employer and an individual plan you may be able to ultimately replace most of your income. You generally pay for the disability income with after tax money so your benefits are generally paid on a pre-tax basis which does allow you to gross less disability income than prior working income and still live the same lifestyle to which you were accustomed. 

Contact us to discuss how a Disability plan fits your individual or group needs.