727.441.9022
611 Druid Rd E • Suite 105 • Clearwater, FL 33756
V. Raymond Ferrara, CFP®
Chairman
Chief Executive Officer
LIFE INSURANCE ONCE YOU ARE RETIRED AND DON’T NEED IT
SEPTEMBER/OCTOBER 2017 | TAMPA BAY MAGAZINE 91
Eric R. Ebbert, MBA, CFP®
President
Chief Operating Officer
One of the first financial decisions made by many of us is to
buy life insurance. This usually happens after getting married and
almost certainly after having children. You bought it to protect
your family from your premature death. We believe that life
insurance is needed for three reasons: replace income; pay debts;
and/or to help pay estate taxes. We generally recommend term
insurance to our clients unless the insurance need is permanent.
But now you are retired and you still have that life insurance.
Why? Because you have always had it and you just can’t give it
up. What else should you consider?
First, you can always keep it assuming you can continue to pay
the premiums, but if your spouse doesn’t need the money at your
death, you may want to change the beneficiary to the children/
grandchildren. If it is a dividend paying policy, you might use
the dividends to help reduce and perhaps even pay the premium.
Next, if it is a cash value policy, you may want to consider setting
up a withdrawal program to supplement your retirement cash
flow. Another option is to have the company convert it to a paid
up policy at a lower face amount.
If you have a concern about long term care, then you may
want to consider a 1035(a) tax free exchange to a new policy
that provides an advance on the death benefit in the event you
are confined to a long term care facility. Sometimes home health
care is also covered. There are considerable issues that need to be
considered before replacing life insurance such as, but not limited
to; commissions, fees, expenses, surrender charges, premiums,
and new contestability period.
Life insurance proceeds are income tax free, but not estate tax
free. If you have a large estate, how can you get it out of your
estate? You can set up a life insurance trust and make a gift of the
policy to the trust. If you live three years after the gift, it will not
be included in your estate. You can then make gifts to the trust
each year to pay the premiums. It may be just as convenient to
gift the policy to the children/grandchildren directly. They can
continue to pay the premiums, or cash it in. You can also gift it to
a charity where you will get a tax deduction. In each case, the gift’s
value will usually be equal to terminal interest (about the value
of the cash) which can be obtained from the insurance company.
But what if you don’t want to keep the life insurance? What are
your options? Here are a few ideas. You can cancel the policy and
take the cash value for investment elsewhere. Be sure to check on
the cost basis of the policy because any amount over this will be
taxed as ordinary income and this might put you into a higher
tax bracket.
What if you want to spread the taxes out over a period of time?
You can do a 1035(a) tax free exchange to an immediate annuity
over a set number of years or even your lifetime. In today’s world
of low interest rates, the fixed rate annuities are not an exciting
investment, but it may be worth it to spread the taxes out. If you do
not need the income you can delay paying the taxes by doing the
exchange to a deferred fixed or variable annuity. This will delay
the taxes until the money is taken out during lifetime or at death.
Another approach is to consider selling your policy to a third
party in what is known as a viatical settlement. In this case an
investor will buy the policy from you and perhaps pay you more
than the cash value of the policy. At death, the investor receives
the proceeds. The older you are and the less healthy you are the
more the investor will generally pay you for the policy.
Like any asset you want to maximize its value for your benefit
and eventually to your heirs. These are just a few ideas to consider
in accomplishing that goal. If you would like to look at these
alternatives, we are pleased to provide you with a complimentary
meeting with one of our thirteen financial advisers. Please give
us a call.
About ProVise Management Group, LLC: ProVise is a financial planning and investment management firm registered with the Securities and Exchange Commission (SEC)
and has been in business since 1987. Our 13 professional advisors serve approximately 1075 clients in over 30 states. As of 3/31/17 we were managing approximately
$1.3 billion for our individual, corporate, not-for-profit and 401k retirement plans. Please visit our website at: provise.com. Investment Advisory Services offered through
ProVise Management Group, LLC. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations
are complex and are subject to change.
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