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Insurance Planning:
Frequently Asked Questions
Q: How much life
insurance do I need?
A: As much as it will take to indemnify your family for as many
years of income as you feel is financially feasible and appropriate.
Q: Should I buy disability
income coverage?
A: Yes, income requirements continue in good times and bad times;
in good health and poor health.
Q: Is life insurance
tax free?
A: Yes, it is Income Tax free, Capital Gains Tax free, Gift Tax
free, avoids Probate and is Estate Tax free when properly structured.
Q: I have my favorite
charities; is there any way life insurance might benefit them?
A: Yes. The “tax deductible” cost of charitable life
insurance funds the charities’ endowment program providing
continuity and stability.
Q: Does life insurance
make any sense inside a closely-held family business?
A: Yes. Insurance proceeds provide for the orderly transfer of the
business from one generation to the next by providing liquidity
for stock or partnership redemption. Bank loans and other forms
of debt are cancelled from the cash derived from the insurance proceeds;
profits are stabilized by the influx of cash during this period
of business trauma; a “key person” replacement can now
be considered from the cash reserve provided by the insurance; and
the tax-free life insurance proceeds also provide funds for inventory,
acquisition and plant expansion
Q: If only one of
my children wants to be involved with my business and continue the
firm, how do I level the “playing field” so the other
children receive equal value?
A: Make the other non-involved children the owner and beneficiary
of an estate life insurance policy equal in value to the value of
the firm.
Q: Does buying life
insurance to pay my Federal Estate Tax really make any sense?
A: Yes. An event certain to occur and unavoidable is our death.
You can “immediately” fund this certainty appropriately
for 2%-4% per year of the value of the insurance proceeds. It makes
good economic sense for the stability of your estate and business
to fully retire your tax liability in a timely manner. Installment
payment alternatives over the years can be and are expensive as
well as complicated and involved, and certainly not healthy should
it place the continuity of a family business at risk.
Q: What do I do when
my business receives a significant cost increase in my group health
benefits?
A: Ask your broker to give you concrete situations where he has
dramatically reduced costs for other clients. “Believe it
or not” there are options an experienced professional broker
can employ to dramatically reduce the cost. A particularly powerful
tool is to demonstrate “in actual figures” how an increase
in deductible will impact upon the company’s reducing costs
(e.g., 10%, 20%, 30%, 40%, 50% deductible usage.) Our experience
is the average business use of the deductible is approximately 22%-25%.
The significant savings generated by using a higher deductible can
be financially illustrated. It really pays and dramatically assists
helping to reduce future cost increases
Q: What is the smallest
number of employees required for group health coverage and why is
group health coverage so superior to individual coverage?
A: “Two” or more employees are all that is required
for your business to have a Group Health Plan. Group “Guaranteed
Issued”, no Waivers, Exclusions or Rejections (which are commonplace
in individual coverage). And because you are a group your experience
is averaged in with the other small groups in your community, thus
helping to control cost.
Q: I purchased my Universal Life Policy when interest rates were
higher; will the policy remain in effect for the whole of my life
as I was initially so advised?
A: A current “In-Force Policy Illustration” should be
obtained from the insurance company to know the answer. The in-force
policy illustration will show two columns side by side, one with
the “Guarantees”, and the other with the “Non-Guarantees”
current interest rates assumptions, etc, which can and often do
change from year to year. Only under the “Guarantee”
column with death benefits guaranteed to continue to age 110 or
120, can you be sure your coverage will remain viable and in effect
for the whole of your life. Without this assurance of continuity
under the “Guarantee” column you have a policy which
may well terminate before your death (as we have seen with so many
Universal Life programs).
Q: Is it possible
to salvage a Universal Life policy that will terminate before I
die?
A: Yes, “possibly”! A large deposit of cash will be
needed to extend the policy’s longevity. In our experience,
this is often 25%-35% of the face amount of the insurance which
most of us cannot afford, and therefore is not a viable option.
Another option, if one is still fortunate to be insurable, is to
make a tax-free transfer of the accumulated funds to a new policy
with better internal guarantees of lifetime continuity. Though you
would be older at this point, the reduction in insurance cost over
the years often makes this a viable option.
Q: Can I pay my Universal
Life premium in the 31 day grace period following the policy due
date, which I was told I could do?
A: You do not want to do this, even though you have a legal right
to do so, BECAUSE the guarantees in so many Universal Life policies
are calculated based upon the premium being paid on a “timely
basis”, which means the due date. Should you use this extra
31 day grace period, you have denied the funds to the insurance
company for one month, which often can and does impact upon how
long your policy will remain in effect. Therefore, a word to the
wise, never go past the actual policy due date when paying your
premium in a Universal Life policy.
Q: Is term insurance
a reasonable form of coverage since it terminates at some future
point in time, not continuing for the whole of life?
A: Yes, term insurance is brilliant protection and often provides
five to six times more coverage per dollars than Universal Life.
It is true that term insurance terminates at some future point in
time, for example, at the end of ten years, twenty or thirty years;
however, your risk exposure may only be for this limited period
of time and not required thereafter. Also, a quality term product
provides a “Guaranteed Conversion Option” which allows
you to change to a permanent form of coverage in the future before
your policy terminates without any additional medical evidence of
insurability. Often this conversion option can be structured until
ages 65, 70 or 75.
Q: Is one form of
life insurance more advisable than another?
A: All Term and Universal Life products are mathematically and actuarially
equal. The answer to your question lies in how long you need or
want your protection to remain in effect. Quite often, a combination
of products is the best alternative. Which form of coverage is best
for you is a personal decision. Obviously it is wise to have input
from knowledgeable, experienced advisors; however, when all is considered
it is your decision, as it well should be.
Q: I am thinking
about insurance but I may put it off for a while. Is this OK?
A: Life insurance is the only asset in one’s estate in which
good health is required for its purchase. So long as your health
is reasonably good, you can buy life insurance whenever you wish;
however, should health change, you will either have to pay more
for your insurance since you are now a greater risk or you may not
be able to obtain insurance at any price. As we all have seen, one
can be healthy today or unhealthy the next day. Therefore, a sense
of immediacy appears to be wise when considering the purchase of
life insurance.
Q: Is the old Whole
Life still a viable form of insurance coverage?
A: No, in our professional opinion: the cost per $1,000 is too expensive
(almost double that of Universal Life at so many ages) and the internal
rate of growth quite minimal. Cash accumulation inside a Universal
Life Policy should be, in our opinion, the very least amount of
money required to keep the policy in effect for the whole of one’s
life under the ”Guarantees” illustration in the policy.
Q: Should I purchase
Long Term Care Insurance?
A: Based upon our study (and opinion) the majority of Long Term
Care claims occur between the approximate ages of 84-92. The average
length of stay for long term care claims is approximately 2.8 years.
The majority of the population, probably close to 75%, will be deceased
by mid-80s. Of the remaining approximately 25%, roughly 1/3 may
need long term care coverage, based on all of the statistics we
have read over the years. This means in reality that out of 100
people approximately 93% will not require long-term care and approximately
8% may need coverage. The question then becomes does one purchase
the product? Question: would one be better off purchasing a Class
B share of Berkshire Hathaway over the years and build his own reserve?
There are two situations where we feel the purchase of long term
care is very appropriate: one is where there has been a high incidence
of disabling in a family at early ages. The other is if there is
a little voice in one’s head continually telling you this
is something you must do. Anything short of this, in our opinion,
is questionable whether the purchase is justified.
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