Insurance should always be one of the topics you address in financial, retirement and estate planning.
"Life insurance is one of those things that is easy to brush aside when you are younger, but it takes on greater importance in our more financially productive years. Anticipate your needs if you can, and if there is one thing that you over-do in your financial planning, make it life insurance."
Planning for the future of your family can involve many complex issues. Some issues may not be very evident, or as evident today as they will be five or ten years from now. Life insurance should always be one of the topics you address in financial, retirement and estate planning.
At age 49, I can tell you that shopping for life insurance after age 40 is expensive. The problem is that we usually reach our most financially productive years of life around age 35 and continue until age 55. At this stage in life you may find yourself taking on projects or ventures where you need additional life insurance protection.
If you did not over-plan for your life insurance needs when you were younger, and lock in the lower rates, you will learn what I'm talking about. At age 25 I had no idea that I would buy a multi-million dollar business at age 34. When I was 38, I didn't know that in ten years I would build a colonial style home on a five acre estate. Sometimes I think we get so involved with our day-to-day and perhaps year-to-year plans, we don't consider what we might be doing ten years down the road.
If I had planned properly, I should have over-planned my life insurance needs. Looking back, I recall a couple of clients (good friends) advising me to get more life insurance. I think at the time I shrugged it off. Why did I shrug it off? I was unmarried and couldn't see what the future held. Instead of only considering my current need for life insurance back then, I should have anticipated my future needs.
Anticipating future needs can be difficult, but when it comes to life insurance, I think this is one area you should over do things if possible. If I could go back in time, here's what I would do differently when it comes to life insurance.
First I would have bought a minimum of $1 million dollars death benefit. I would not buy just one big policy. I would buy four policies for $250,000 each. Breaking the death benefit up into separate policies would have given me the flexibility to; drop or cash out a portion easily, assign one or more individual policies to a lender, perhaps change ownership of individual life insurance policies to a trust and utilize other policy benefits in different ways on different policies (i.e., paid-up life insurance, extended term, etc.).
I would buy permanent life insurance, not term policies that expire or increase the premiums with age. I dropped a term life insurance policy this year because at the policy anniversary date, the premium became prohibitive. A lot of insurance advisors will tell you to get the cheapest coverage during the time you need it the most. Well, the time most of us will need it the most is at age 72!
The biggest cost factor I've witnessed first hand is the difference between smoker and non-smoker rates. The smoker rate was more than double the non-smoker rate for life insurance. The other factor that affects the premium of life insurance is medical problems. When we're young and healthy we take our health for granted. Blood pressure and blood sugar problems are things that happen to the other guy.
For example, I always had very good eye sight and never pictured myself needing glasses. Well at age 45 I had to get reading glasses. At first I was devastated. Luckily I have a client that is an eye surgeon. I went to him and he fixed me up with some very cool reading glasses that I enjoy (as much as that is possible).
IRC section 79 provides an exclusion for the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by an employer. There are no tax consequences if the total amount of such policies does not exceed $50,000. The imputed cost of coverage in excess of $50,000 must be included in income, using the IRS Premium Table, and are subject to social security and Medicare taxes.
Carried Directly or Indirectly by the Employer
A taxable fringe benefit arises if coverage exceeds $50,000 and the policy is considered carried directly or indirectly by the employer. A policy is considered carried directly or indirectly by the employer if: The employer pays any cost of the life insurance, or The employer arranges for the premium payments and the premiums paid by at least one employee subsidize those paid by at least one other employee (the "straddle" rule). The determination of whether the premium charges straddle the costs is based on the IRS Premium Table rates, not the actual cost. You can view the Premium Table in the group-term life insurance discussion in Publication 15-B.
Because the employer is affecting the premium cost through its subsidizing and/or redistributing role, there is a benefit to employees. This benefit is taxable even if the employees are paying the full cost they are charged. You must calculate the taxable portion of the premiums for coverage that exceeds $50,000.
Not Carried Directly or Indirectly by the Employer
A policy that is not considered carried directly or indirectly by the employer has no tax consequences to the employee. Because the employees are paying the cost and the employer is not redistributing the cost of the premiums through an insurance system, the employer has no reporting requirements.
Example 1 - All employees for Employer X are in the 40 to 44 year age group. According to the IRS Premium Table, the cost per thousand is .10. The employer pays the full cost of the insurance. If at least one employee is charged more than .10 per thousand of coverage, and at least one is charged less than .10, the coverage is considered carried by the employer. Therefore, each employee is subject to social security and Medicare tax on the cost of coverage over $50,000.
Example 2 - The facts are the same as Example 1, except all employees are charged the same rate, which is set by the third-party insurer. The employer pays nothing toward the cost. Therefore there is no taxable income to the employees. It does not matter what the rate is, as the employer does not subsidize the cost or redistribute it between employees.
Coverage Provided by More Than One Insurer
Generally, if there is more than one policy from the same insurer providing coverage to employees, a combined test is used to determine whether it is carried directly or indirectly by the employer. However, the Regulations provide exceptions that allow the policies to be tested separately if the costs and coverage can be clearly allocated between the two policies. See Regulation 1.79 for more information. If coverage is provided by more than one insurer, each policy must be tested separately to determine whether it is carried directly or indirectly by the employer.
Coverage for Spouse and Dependents
The cost of employer-provided group-term life insurance on the life of an employee's spouse or dependent, paid by the employer, is not taxable to the employee if the face amount of the coverage does not exceed $2,000. This coverage is excluded as a de minimis fringe benefit.
Whether a benefit provided is considered de minimis depends on all the facts and circumstances. In some cases, an amount greater than $2,000 of coverage could be considered a de minimis benefit. See Notice 89-110 for more information. If part of the coverage for a spouse or dependents is taxable, the same Premium Table is used as for the employee. The entire amount is taxable, not just the amount that exceeds $2,000.
Example 3 - A 47-year old employee receives $40,000 of coverage per year under a policy carried directly or indirectly by her employer. She is also entitled to $100,000 of optional insurance at her own expense. This amount is also considered carried by the employer. The cost of $10,000 of this amount is excludable; the cost of the remaining $90,000 is included in income. If the optional policy were not considered carried by the employer, none of the $100,000 coverage would be included in income.
The Decision To Buy Long Term Care Insurance
Long-term care insurance can provide you or a loved one with the financial protection necessary during a period of serious prolonged physical illness, disability or cognitive impairment. It can also help you safeguard your assets and protect your financial stability. But before you buy, there are a few things you should know.
For starters, all long-term care insurance policies are not the same. According to the Health Insurance Association of America, there are currently more than 115 private insurance companies that offer long-term care insurance products to individuals. These policies are far from standardized. They offer a wide variety of benefits and coverages. It is important, therefore, that you take the time to find the policy that best fits your specific situation.
Make sure you are eligible for coverage.
Unfortunately, not everyone automatically qualifies for long term care insurance. So before you get involved in significant policy comparison activities, you should take the time to talk to your long term care insurance representative about any current health concerns you may be facing. If you have already been diagnosed with forms of dementia or even a small stroke, chances are you will not qualify. Other conditions that are viewed as legitimate underwriting concerns include Cancer, Multiple Sclerosis, and Insulin-Dependent Diabetes.
While this may all seem a bit disheartening, the good news is that most people do qualify, and the underwriting process is less involved than the underwriting process one goes through when trying to obtain life insurance.
Learn the ins and outs of the policy you are considering.
Take the time to become familiar with all the policy benefits associated with the insurance contract you are considering by reading the outline of coverage that should be sent with any product proposals you are reviewing. This outline not only helps you understand the conditions of your coverage, it provides information on how your benefits will be paid.
Some of the policy provisions you should become familiar with include: the policy's benefit triggers and when they are activated; if and when the policy premiums are waived; the choices of care facilities that the contract provides; and the additional features that are available. This policy analysis is one of the most important steps in any long term care insurance research and comparison process.
Understand how your benefits will be paid and for how long.
Most insurance companies pay benefits one of two ways: (1) the expense incurred method, or (2) the indemnity method. With the expense incurred method of payment, benefits are paid to either you or the provider when eligible services are received. With the indemnity method, benefits are paid directly to you and no one else without regard to services received. In general, the expense incurred method tends to be less expensive and to provide benefits for a longer period of time. It is also the method of payment used by most policies today.
Payment of your benefits, however, may not begin the first day you receive care. Most policies have an elimination period (also known as a waiting or deductible period) of anywhere from 0 to 365 days (your choice) which means your benefits will not begin until that many days after your first day of care. Of course, the shorter the elimination period, the greater the policy premium.
Policies also vary in the length of coverage. When looking into a long term care insurance policy, you need to choose the benefit period that best fits your situation. Many industry experts suggest a four year benefit period based on some average nursing home duration statistics. Lifetime or unlimited benefit periods are also available with most contracts as well as two-year, and five-year benefit periods. It is important to work with your insurance professional to design the policy with the level of benefits that suits you best.
Know your insurance company.
Take a look at the financial health of the insurance company you are considering. You want to be dealing with a company that has received high financial ratings from A.M. Best, Moody's and Standard and Poor's. Many industry experts will also tell you to go with a company that has already paid significant claims. Generally speaking, going with a stronger company does not mean you have to pay higher premiums.
Once you have decided which insurance company you are going to deal with, be sure the company is licensed in your state. If you are not sure, find out by contacting your state insurance department. Insurance companies must be licensed in your state in order to sell long-term care insurance. If the company you choose is not licensed in your state, you should start looking at other companies.
Consult a knowledgeable advisor.
If all of this information seems overwhelming, you should always consider the benefits associated with the knowledge a professional advisor can offer. Be it a financial, tax, legal or insurance advisor, do not hesitate to consult him or her about your specific needs.
If you itemize your deductions on Form 1040, Schedule A, you may be able to deduct expenses you paid that year for medical care (including dental) for yourself, your spouse, and your dependents. Publication 502, Medical and Dental Expenses, contains additional information on who will qualify as a dependent. You may deduct only the amount by which your total medical care expenses for the year exceed 7.5% of your adjusted gross income. You do this calculation on Form 1040, Schedule A in computing the amount deductible.
A deduction is allowed only for expenses primarily paid for the prevention or alleviation of a physical or mental defect or illness. Medical care expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or treatment affecting any structure or function of the body. These expenses include payments for legal medical services rendered by any medical practitioner and the cost of equipment, supplies, and diagnostic devices used for medical care purposes.
Medical expenses include insurance premiums paid for medical care or qualified long-term care insurance. The deduction for a qualified long-term care insurance policy's premium is limited. If you are self-employed and have a net profit for the year, you may be able to deduct (as an adjustment to income) amounts paid for medical insurance for yourself and your spouse and dependents. You cannot take this deduction for any month in which you eligible to participate in any subsidized health plan maintained by your employer or your spouse's employer. If you do not claim 100 percent of you self-employed health insurance deduction, you can include the remaining premiums with your other medical expenses as an itemized deduction on Form 1040, Schedule A. You may not deduct insurance premiums paid by an employer-sponsored health insurance plan (cafeteria plan) unless the premiums are included in Box 1 of your Form W-2.