Term Life Insurance with a Savings Feature

In a recent post on term life insurance, we noted the advantages of this type of policy. It is a less expensive form of life insurance that permits a young couple to protect against the untimely death of the wage-earner. The negative aspect of term insurance is that it, in most instances, lacks a savings feature. When the term expires, the policy has no value.

There is a way to perhaps have your cake and eat it too. The product is a term life insurance policy with a rider that provides for a return of your premium payments at the end of the term. The insured has both the protection of the policy during the term and at the end of the term the savings in the form of the returned premiums.

Out of curiosity, we confirmed with an insurance agency that such a product does still exist.

Term Life Insurance Becoming More Expensive

Many people like term life insurance, because it is less expensive than other types of insurance. A young couple can protect against the untimely death of the working spouse by purchasing term life. The only downside to term life is that you are insuring that you will survive a period of time (20 years is typical). Once that period expires, you generally have nothing to show for it (other than you outlived the term). Even though there is no savings aspect to term life, it is a very useful planning tool. If you have thought about term life as an option, you may want to pick up the pace. According to an Article in The Wall Street Journal, the premium rates are on the rise and are expected to continue.

Survivorship or “Second-to-die” Insurance

Most of us do not need to worry about planning for the federal estate tax. With the current exemption amount at $3.5M, a married couple can pass along $7M to their children without paying any federal estate tax.

What if you are one of the fortunate few who do need to plan for the federal estate tax? Also, what if in addition to having a large estate your estate contained illiquid assets, like real estate and/or a family business? One possibility is an irrevocable life insurance trust (ILIT). The idea is that you fund the trust with a life insurance policy and the proceeds can be used by your children to pay estate taxes.

This is where survivorship insurance, also referred to as second-to-die insurance, comes into play. Since there is typically no estate tax on the first estate due to the marital deduction, you are looking for the policy to pay after both spouses have died. The second-to-die policy pays the death benefit after the second person dies. Because this insurance covers two lives, it is cheaper than a single life policy.

In most instances, a second-to-die policy is used to fund an ILIT.

A Charitable Alternative to Cashing in Your Life Insurance

In our prior post, we addressed the possibility of a life settlement as an alternative to taking the cash surrender value of an unneeded life insurance policy.  Another alternative is gifting the policy to a charity and taking an income tax charitable deduction.  The charity becomes the beneficiary of the policy and the ownership is transferred to the charity as well.

If you do not need an income tax charitable deduction and you do not want to part with the ownership of the policy, you can simply designate the charity as the beneficiary of the policy.  Your estate will receive an estate tax charitable deduction for the death benefit passing to the charity.

The Life Settlement Alternative

If a life insurance policy is no longer needed, then most people elect to take the cash surrender value.

An alternative is to sell the policy to an institution through a life settlement.  Life settlement companies will be interested in the type of policy, the amount of the policy, and the insured’s life expectancy.  If the circumstances are good, the policy can be sold for many times over the cash surrender value.

Life Insurance Review Part II – Minor Child as a Beneficiary

Another life insurance planning mistake is naming a minor child as a beneficiary.  This will almost certainly require that a guardianship be set up for the child through the probate court, incurring court costs and attorney fees.  The probate court would also determine who to appoint as the guardian.  The amount of the insurance proceeds would be public record and the court would have to approve all expenditures.  On top of that, the guardianship terminates and the assets are distributed outright to the child upon turning 18 years of age.  The solution is to create a contingent trust for minor children.

Life Insurance Review Part I – Beneficiary Designations

If you own life insurance, chances are you have designated a primary beneficiary and a contingent beneficiary.  If your primary beneficiary is living at your death, she will inherit the insurance proceeds.  If your primary beneficiary fails to survive you, your contingent beneficiary will inherit.  What happens if both your primary and contingent beneficiaries fail to survive you?  This could be trouble.  If your beneficiaries fail to survive, your policy would become part of your probate estate.  Why is this a problem aside from the fact that the proceeds may be going to someone other than whom you intended?  In Ohio, insurance proceeds passing through your probate estate are subject to estate tax and creditors.  If the policy is a large policy, an otherwise non-taxable estate could become taxable.  The teaching point is to keep current beneficiary designations with your important papers for your review.  If your beneficiary preferences change or a beneficiary predeceases you, make sure that you update your beneficiary designations.