Old life insurance policies can now be sold for more than cash value, while new policies offer more ways to protect family and assets. "For those over 50, life insurance can protect home and business assets, cut taxes and improve lifestyles," says Paul Mauro, CLU ChFC, founder of Legacy Financial Advisors, Milford, MA.
Young couples with a whopping mortgage and small kids are rightly urged to buy inexpensive term life insurance, which provides maximum death benefits at the lowest possible cost.
However, age and assets have a way of creeping up. By age 50 it is time to look hard at how life insurance can protect home and other assets, cut taxes, cover long-term medical care and keep a family business running efficiently.
"Nowadays young families need a minimum of $1 million to cover expenses should the breadwinner die and half as much to cover childcare costs if the principal caregiver dies. The only way most young people can afford such protection is to buy term life insurance without the saving, cash value or investment component included in what is commonly called universal life insurance," says Paul Mauro, CLU, ChFC and founder of Legacy Financial Advisors in Milford, MA.
Do not discontinue old insurance policies without checking
Those who did purchase cash value policies decades ago and are thinking about dropping them because they can no longer afford the premiums or have borrowed nearly the entire cash value, may be in for a pleasant surprise. "Life Settlement" companies now exist to purchase those policies for a third or half of the death benefit while the settlement company continues paying premiums. This can be a solution for elderly individuals who want to cover the cost of remaining in their home for a few years. Don’t let the policy lapse or terminate before talking with a qualified financial advisor," states Mauro. "Many times you can get more than your cash value by doing a settlement."
Mauro explains how insurance has been reshaped, revamped and improved to satisfy the needs of aging baby boomers. Here are other ways to use life insurance as a financial planning tool.
You want to leave the house to your kids.
"Many empty nesters heat, paint and pay taxes on overpriced, oversized homes they plan to leave to their kids. Make sure they want that house, especially in regions where house prices have soared beyond expectation. Given the choice, most adult children would rather have a million dollars in cash than the million dollar house they grew up in," says Mauro adding, "So instead of shelling out to keep your house, sell it. Use part of the proceeds to buy a smaller home, part of the proceeds to live better and, for about $100,000 couples can buy a joint and last survivor or second survivor insurance that pays a million dollar death benefit to the children when both parents die. Everybody wins. The parents have more money and the kids are not saddled with a home they did not want in the first place." In some cases the maintenance-cost savings will pay for the insurance policy over time.
Mauro warns: Beware of how you leave a vacation home to the kids. It will only lead to squabbles if they cannot equitably share in its use and maintenance costs.
Paying for a nursing home
When it comes to nursing home care, there are many alternatives to costly long-term care insurance. "The Federal Deficit Reduction Act disqualifies those whose home equity is $700,000 or greater from Medicaid. This discriminates against seniors of modest means who live in areas where real estate values are high," says Mauro.
Mauro adds, "There is a two-step solution. Reduce the equity in your $700,000 home to $600,000 (or less) by taking out a reverse mortgage. This will allow you or your spouse to live in your home and qualify for Medicaid should this be needed. The $100,000 from the mortgage proceeds may be used to purchase a $700,000 life insurance policy with a Guaranteed Lifetime Death Benefit for the kids or their trust. Usually $ 250,000 of the $700,000 can be made available for nursing care - If you need that before you die.
Protect your family business
Family business is the backbone of our economy. But when a family business owner dies, there are few breaks for the family. Small business valuations, for example, often result in big tax bills. To cover state death tax and federal estate tax, buy out heirs and have money to continue, life insurance is essential. Fortunately, newer policies have been much improved and can be 100% tax deductible when used as part of a retirement plan. The insurance can make the cost of the taxes as low as 10 cents on the dollar.
Cut taxes on IRA distributions
IRAs that allowed Americans to salt away money tax-deferred for years are subject to income taxes when the money is distributed. This is fine if the money is taken out piecemeal by a non-working couple. However, when the IRA owner dies, the surviving spouse may need a lump sum to pay off the mortgage or for medical costs and the tax consequences can be severe. Likewise, grown children or grandchildren who inherit IRA assets when they are at peak earnings will face a big income tax bill. "To lessen the tax consequences, use a portion of the IRA assets to purchase life insurance. The death benefit then passes to heirs with no income tax due," states Mauro adding, "Use a little creativity when planning your IRA disposition. Why scrimp in retirement to try and pass on a lump sum that is 100% taxable? Spend freely in retirement using interest and yes even the principal and leave the kids a tax-free life insurance check. Your kids do not care if they get a $300,000 IRA account or a $300,000 life insurance check. Plus using life insurance liberates retirees to spend down their estate on themselves."
Says Mauro, "Most people consider life insurance during the big life passages -- first job, marriage, children, first home. They then stick the policies in a file, pay the premiums for years and focus on building their careers, investing in mutual funds, or contributing to their 401(k) plan or IRAs. Do not ignore insurance as part of retirement or estate planning. It can be a valuable financial tool that can preserve what you have worked for and improve both security and lifestyle."
Legacy Financial Advisors Inc. (www.lfsadvisors.com) has extensive experience in helping families plan for the issues of aging and was featured in the PBS special "And Thou Shalt Honor" broadcast last year by WGBH-TV. With over 30 years of experience in the area of planning for aging, Legacy often employs new products and plans including those referred to as Principal Protected Investing. Legacy Financial Advisors, Inc., 321 Fortune Blvd., Milford, MA 01757 tel. 800-427-9781, ext 213.
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