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As an advisor, you know that your clients have very specific plans as to how they want to use their money in retirement as well as how they want to pass on their wealth after they die. Unfortunately, despite their unique goals and objectives, most of your clients’ money and/or assets will probably be distributed in a manner they did not intend. More than 90% of estates are allocated in the following order:

  1. The Nursing Home
  2. The Internal Revenue Service (IRS)
  3. Their Children/Grandchildren
  4. A Special Person
  5. Their Favorite Charity

Your clients probably aren’t aware of all the benefits that life insurance can provide. Life insurance, if properly structured, can ensure that your client’s money will go where they intend. Certain types of policies have features that can address the areas above by either mitigating their financial impact or providing a tax-efficient vehicle for transferring wealth. Below is a list of ways in which life insurance may provide:

1. Funding for the Nursing Home

Life insurance is there to protect your clients’ family financially after they’re gone, through a death benefit. But what if they need the money sooner? Some life insurance policies allow them to accelerate the death benefit or access their cash value early through an option called “living benefits insurance” or a “living benefit rider,” should they suffer from a qualifying critical, chronic, or terminal illness. This would allow them and their family to maintain their standard of living if they are financially impacted by a serious illness.

2. Mitigate Impact by the IRS (TAXES)

For the purposes of this article, I am referring specifically to cash value life insurance, as it provides both a guaranteed death benefit as well as a cash accumulation feature. Cash value life insurance falls into the category of permanent life insurance. A portion of its premiums go into an account to build the cash value, while the other portion pays for the policy/death benefit. Its cash value accrues tax-deferred over time. The owner can access the money tax-free by taking withdrawals and/or policy loans provided it is structured properly. Once the owner passes away, the death benefit is paid to the beneficiary(ies) tax free.

3. Provide a Legacy for Children/Grandchildren

Life Insurance is a powerful tool that your clients may utilize when planning a legacy for multiple generations. If properly structured, life insurance can provide a guaranteed death benefit across generations that is passed on to heirs tax-free and is not subject to estate taxes.

4. Pass on Wealth to a Special Person

The most well-known feature of life insurance is its death benefit. For life insurance policies, death benefits are not subject to income tax and named beneficiaries ordinarily receive the death benefit as a lump-sum payment. The policyholder can structure how the insurer pays the death benefits. For example, a policyholder may specify that the beneficiary receives half of the benefit immediately after death and the other half a year after the date of death. Also, some insurers provide beneficiaries with different payment options instead of receiving a lump sum. For example, some beneficiaries elect to use their death benefit proceeds to open a non-qualified retirement account or elect to have the benefit paid in installments. Death benefits from retirement accounts are treated differently than life insurance policies, and they may be subject to taxation.

5. Pass on Wealth to a Charity

A charity can be named as beneficiary of a new or existing life insurance policy. No current charitable income tax deduction is allowed since you will still have full ownership rights, primarily the right to change the beneficiary designation. However, a charitable estate tax deduction is available for the full value of the proceeds transferring to charity at death. You can also make cash gifts equivalent to the premium amount on a new life insurance policy on your life, owned by a charity. Like any cash gift, an income tax deduction is available for the amount of the cash given directly to charity.

Ask Your Clients

Advisors Resource strives to help you help your clients make smart financial decisions. I urge you to share this flyer with your clients and prompt them to consider how their money and assets will be allocated later in life. There’s no better time than now to ensure that your clients’ financial goals and objectives are on track:

Access Flyer - Where do your clients want their money to go?

Post by Travis Pence
February 18, 2022