Small Tax Change Makes Big Impact on Permanent Life Insurance

Typically, when Congress passes a bill, it has many additional items in the small print that can be quite impactful. Late in December 2020, federal lawmakers’ gigantic year-end spending package included a barely noticed tax code revision which is of enormous benefit to those who have, or are planning to purchase, permanent life insurance (Source: Wall Street Journal, 2021).

Life insurance is one of the most profoundly beneficial financial planning tools that money can buy. Life Insurance transfers financial risk upon death (i.e. loss of income, future earning potential, loss of benefits, and more), off of an individual, and onto the financial institution that holds your life insurance policy. It has many tax advantages to other financial products, and it is a cornerstone of a balanced estate.

There are two types of life insurance of which you may be aware: term life insurance and permanent life insurance.

Term Life Insurance

Term life insurance is often the most affordable option and it is limited by a specific amount of time—the term of your policy—be it 20, 30 years, etc. You make your payments to the policy on a regular basis, either monthly or annually. The price is fixed for the policy and during that term, you immediately have built an estate for yourself upon death, which is equal to the death benefit you purchased with your policy. The stated policy’s death benefit is transferred to the policy beneficiaries income tax-free. If you do not pass away during the term, the policy expires, and other than having insured yourself in case of the worst-case scenario, you will not receive further benefit at the end of the term.

Permanent Life Insurance

Permanent life insurance is a different beast—and it is the beneficiary of the recent tax code changes, for which you should be aware.

Permanent life insurance includes Whole Life Policies and Universal Life Policies. These two options are typically more expensive than term life insurance. Once purchased, as long as premiums are paid according to your payment schedule, these policies last the duration of your life. You make your payments to the policy on a regular basis, either monthly or annually. The price is fixed for the policy and upon its inception, you immediately have built an estate for yourself upon death, which is equal to the death benefit you purchased with your policy. Whole life insurance builds up a cash value inside of the policy, while universal life insurance generally does not. Owners of permanent life insurance policies defer the taxes on their investment gains inside of the policy, and their stated beneficiaries receive the death benefit income tax-free. Choosing a whole life insurance policy is usually based on the benefits your estate is looking for, and the amount of premium that you can afford. However, once in place, the policy does not expire.

Many things have changed in insurance since the 1980s, including interest rates. Life insurance is an estate planning tool—quite powerful, indeed. In 1984, Congress sought to identify investment products disguised as life insurance, as life insurance receives a favorable tax treatment. They hoped to find policyholders who were stuffing large sums of money into these tax-advantageous policies, in hopes of bypassing tax billings from the government. In this rule—Section 7702—the 1984 tax code adopted an assumption of a guaranteed 4% growth rate in cash value for a permanent life insurance policy to enjoy its tax advantages.

As you may be aware, the life insurance world has changed substantially- not only in the types of products available for consumers, but also in the interest rate environments in which these policies have resided in, since the 1980s. This 4% assumption has been particularly problematic for whole life insurance policies, which is a very popular type of policy for middle class families and small business owners—the bedrock of America.

Life insurers earn part of their profits by investing customer’s premiums until they are needed for a payout. Many profitable life insurance companies are heavily invested in high-quality bonds. These portfolio yields peaked in the 1980s at nearly 16%, whereas the 10-year Treasury yield is currently just over 1%.

After the recent pandemic-related promise of continued low interest rates, life insurance trade groups lobbied Congress to switch that floating interest rate, saying that without the change, whole life insurance policies would likely go extinct. This law lowers the minimum interest rate used to determine whether combination savings and death benefit policies inside of permanent life insurance are too much like investments to qualify for the tax advantages granted to insurance.

Because of this rule change, companies that offer these policies are likely to continue to offer permanent life insurance policies, and this lowered threat to such products is likely to lead to a resurgence in quality permanent life insurance options, with greater benefits for consumers who want to take advantage of one the most powerful financial vehicles available.

Estate Planning for Blended Families

Every family has a unique culture which brings about unique challenges. In a blended family, determining what’s “yours, mine, and ours,” is an issue that is better addressed proactively, rather than reactively. Have these important talks with those who would be impacted in case of a death or disability. Doing so proactively helps to ensure that priorities and intentions are communicated before there is a misunderstanding or the loss of a loved one. Utilize this article as a blueprint or a checklist to help remove the emotion as you work through the myriad issues that need to be reviewed when you blend a family.

Discovery

The first step in developing an estate plan in a blended family is for you and your spouse to have a very open conversation to discover:
  • Plans that you may have from previous marriages — To understand how previous arrangements might impact your new plan, you will need to review any plans that you have in place from previous marriages, including wills, trusts, beneficiary designations, guardianship, etc. For example, your current spouse may not be entitled to a retirement account if it was part of a divorce settlement specifying that it goes to your previous spouse.
  • Goals and wishes — Each of you needs to clearly define your goals for upholding previous obligations, how guardianship will be handled for both biological and stepchildren, and how you want your separate or combined assets distributed. This is extremely important, because how assets are owned determines how they will be distributed in the future. For example, imagine if your spouse passes away and unbeknownst to you, all assets were left to the children from a first marriage, while you don’t have enough money to pay the monthly bills. Straightforward communication is the key to developing a blended estate plan.
  • Together or separate — Commingling or keeping assets separate can depend on several factors a couple needs to decide. If one party brought in significant assets, you may decide to keep those separate while commingling assets that you build together. Children also play a major role in this decision. Maybe you already have college accounts or trusts established for your children from a previous marriage and those assets should remain separate. Many parents feel strongly about setting aside assets specifically for their children from a previous marriage. Again, forthright communication is key.
  • Review the marital property laws in your state — Make sure you understand how your state laws govern the way you hold assets. For example, if you live in a community property state, any assets not identified as separate will be considered equally owned as community property of the couple, even if they were assets you intended to keep separate because they were acquired prior to the marriage.

Documentation

While you may feel it’s overkill, you need to document every detail of your estate plan to avoid potential issues down the line, especially if you have children and former spouses. Also, this legal documentation will help avoid the expensive and potentially emotional issues involved with probate court.
  • Wills — You should create a will that provides clear instructions on how all of your assets are to be distributed, guardianship for minor biological and stepchildren, healthcare directives, and any other wishes to be carried out should either of you become incapacitated or die.
  • Trusts — Blended families should consider developing a trust, which holds the assets on behalf of and defines how and when the assets pass to the beneficiaries. A trust can also last for years, through the lifetimes of a surviving spouse, children, and even future generations. For blended families, certain types of properly established trusts can provide financial support for your spouse and still make sure something is left for your children.
  • Account titles — Even if you have a will or trust, you will also want to make sure that accounts such as a retirement account have defined beneficiaries. Additionally, other accounts can be owned as joint tenants with right of survivorship or transfer on death, making the owner’s intentions clear that the assets go directly to the party named on the account.
This is one of the most important ways we can provide resources for you. We’re here to help.

 

Copyright © 2020 This article is published in its original form from its original publication with Investment Answers and Integrated Concepts, a separate, non-affiliated business entity. The original newsletter publication, Investment Answers Financial Success Winter 2020, is intended to offer factual and up-to-date information on the subjects discussed but should not be regarded as a complete, evolving, or personalized analysis of the topics, and should not be construed as personalized investment advice. Qualified financial professionals should be consulted before implementing a personalized financial plan. Please reference the original publication for additional disclaimers. 

 

Keep Track of Retirement Accounts

Most of us change jobs at least twice before retiring, leaving a trail of retirement nest eggs behind us. Now that defined-contribution plans are much more prevalent than defined-benefit plans, we have more responsibility for financing our retirement.  So it’s important to manage our retirement accounts actively.  But how can you do that if your accounts aren’t even located in one place?  Here are a couple of tips:

Organize Your Records

As long as you continue to hold your account in a former employer’s plan, you should receive statements.  Keep them all in a file —or even better, enter them all in a spreadsheet, tracking the combined balances and amounts in each type of investment.

Consolidate Your Accounts

It’s much easier to manage your assets if they’re all in one place.  Fill out the paperwork necessary for rolling them over into one account.  That single consolidation account could be the plan you are currently contributing to if it permits rollover contributions.  You can also open a rollover individual retirement account (IRA) and have the funds from your other accounts directly transferred there.

If You’ve Lost Track of Accounts

If you’ve lost track of one or more of your accounts with a former employer, contact your old employer and ask them to confirm that you participated in the plan and the steps you need to take to get a current statement of your account. Or find an old statement and look for a contact phone number or address.  As long as there are assets in the account, the financial institution can probably still account for them.

 

Copyright © 2020 This article is published in its original form from its original publication with Investment Answers and Integrated Concepts, a separate, non-affiliated business entity. The original newsletter publication, Investment Answers Financial Success Winter 2020, is intended to offer factual and up-to-date information on the subjects discussed but should not be regarded as a complete, evolving, or personalized analysis of the topics, and should not be construed as personalized investment advice. Qualified financial professionals should be consulted before implementing a personalized financial plan. Please reference the original publication for additional disclaimers. 

 

5 Reasons to Start Saving Money

If you’re interested in getting started with savings or want to save more, here are five reasons to help keep you motivated.

1. You’ll Be Prepared for Emergencies

Here’s an alarming fact: most Americans don’t have enough money saved to cover even relatively small unexpected expenses. Without cash on hand to cover these irregular but inevitable costs, you’re more likely to turn to credit cards or loans when the need arises. Plus, the more debt you have, the more difficult it is to save. The result? A downward financial spiral that can be difficult to pull yourself out of.

2. You’ll Be More Independent

With a healthy amount of savings, you can feel more free to take risks, like starting your own business, heading back to school to train for a new career, purchasing a home of your own, or moving to a new city. Plus, without savings, you’re living on the financial edge.

3. You’ll Be Able to Reach Your Goals

We all have goals. Maybe you simply want to enjoy a comfortable retirement one day. Or perhaps you’re dreaming of a second home by the lake, sending your kids to college, or starting your own business. Whatever your dreams, they likely have one thing in common — they probably require some money to become a reality. Few of those dreams are achievable if you don’t save for them.

4. You’ll Be Able to Earn More Money

Saving isn’t just about setting aside what you’ve already earned. It’s also about putting your money to work for you. Depending on where you save and invest your money, you can earn more just by being diligent about saving. Because of the power of compounding earnings, even relatively small amounts can grow significantly, provided you don’t touch your principal.

5. You’ll Be Happier

Money isn’t the only thing that can make us happy. But there’s evidence that saving money, even in small amounts, can make us happier. In contrast, having debt (often a consequence of a lack of savings) tends to lead to unhappiness.

 

Copyright © 2020 This article is published in its original form from its original publication with Investment Answers and Integrated Concepts, a separate, non-affiliated business entity. The original newsletter publication, Investment Answers Financial Success Winter 2020, is intended to offer factual and up-to-date information on the subjects discussed but should not be regarded as a complete, evolving, or personalized analysis of the topics, and should not be construed as personalized investment advice. Qualified financial professionals should be consulted before implementing a personalized financial plan. Please reference the original publication for additional disclaimers. 

 

The Psychology of Saving Money

Saving money sounds simple. You set aside a portion of what you earn on a regular basis and watch your money grow. As a result, you’re more prepared for emergencies, feel more financially stable, and are better able to achieve what you most want. But in reality, saving is a little more complicated. Sometimes, our own minds work against us when it comes to setting aside some of the money we earn. A basic understanding of the psychology of saving can help you overcome roadblocks and achieve your goals.

Why It’s Hard to Save

What is one of the biggest obstacles most people face when saving? We tend to prefer the certainty and immediate gratification of short-term rewards over the potentially greater — yet perhaps more uncertain — benefits of longer-term rewards. One study found that most adults would prefer to have $50 today rather than $100 two years from now, for example. Part of the difficulty with saving for long-term goals is that people may tend to think of their future selves as different or separate from their current selves. That disconnect can make it hard to prioritize saving for the future. Researchers studying this issue looked at whether encouraging people to think of saving for retirement in terms of a social responsibility to their future self, rather than in terms of their basic self-interest, would lead them to save more. The study found that the former appeal led to higher savings rates. In a related vein, another group of researchers found that seeing pictures of their future selves encouraged people to save more. In fact, there are a number of studies that suggest changing our mentality might allow us to set aside more money. A recent study found that people who adopted a cyclical mindset to saving, where they focused on making saving routine in the short term, saved more than people who set more ambitious longer-term goals. Those with a traditional linear mindset saved about $140 over two weeks, while those with a cyclical mindset saved $223 over the same time period. Overall, the evidence seems to suggest that if we can change the way we think about the future — and our future selves — we may be able to boost our savings rates.

The Psychological Advantage of Saving

Once you commit to savings, there’s a good chance you’ll see a psychological boost from doing so. In 2013, a survey by Ally Bank found that 38% of people with a savings account reported being extremely happy, compared to only 29% of people who didn’t have a savings account. That same survey found that 82% of people reported saving made them feel independent. Those feelings of success, well-being, and independence may in turn lead to even more saving. In fact, feeling powerful and having high self-esteem can lead people to save more, perhaps because increasing their net worth and financial stability helps people maintain their powerful feelings. There might even be a formula for spending and saving that could lead to more happiness. Ryan Howell, a professor of psychology at San Francisco State University, found that happy people tended to demonstrate a particular pattern of spending and saving, earmarking 25% of their money for savings and investments, allocating 12% to charitable giving or gifts to others, and spending about 40% on life experiences they considered meaningful. While our mental quirks might make saving difficult, being aware of the obstacles our mind creates can help us conquer them. And that, in turn, may lead to greater savings and increased happiness overall.

 

Copyright © 2020 This article is published in its original form from its original publication with Investment Answers and Integrated Concepts, a separate, non-affiliated business entity. The original newsletter publication, Investment Answers Financial Success Winter 2020, is intended to offer factual and up-to-date information on the subjects discussed but should not be regarded as a complete, evolving, or personalized analysis of the topics, and should not be construed as personalized investment advice. Qualified financial professionals should be consulted before implementing a personalized financial plan. Please reference the original publication for additional disclaimers. 

 

Investment Answers Winter 2020 News

With the turning of the decade, many important changes for inherited IRAs have gone into effect.  As of January 1, 2020, the SECURE Act (Setting Every Community Up for Retirement Act of 2019) has gone into effect.

This Congressionally approved bill is intended to: 1) Help reduce the costs associated with setting up retirement plans for small employers, 2) Increase access to lifetime income options (annuities) inside of retirement accounts, 3) Make significant changes to the Required Minimum Distribution (RMD) requirements of IRAs, and 4) Make changes to the IRA contribution restrictions allowing for continued contributions beyond age 70 1/2.

This new law has the potential, according to the Congressional Research Service, to increase tax revenue by $15.7 billion dollars just in Federal tax revenue, not to mention State tax revenues for Inheritance and Income taxes.

Because this is the largest retirement planning bill since the Pension Act of 2006, we will be utilizing our presentations and published content as ways to get as much information to you as possible to help you better understand how these changes can impact your accounts, your beneficiaries, and the retirement planning adjustments you may need to make.

Please consider joining us for our State of the Markets events in March where this will be addressed in detail.  We will also reference some key points from the SECURE Act during our February and March Social Security presentations and in our Empowering Women Investors events.

Your Parent’s Estate Plans

To help ensure your parent’s estate is settled quickly according to their wishes, you should find out:

Where Important Estate Planning Documents are Located

There can be many professional contacts and life documents that need to be located. Utilize our Peace of Mind Checklist to help organize their important information and to help ensure they have the correct documents in place so their wishes will be carried out.  Find out if they have a durable power of attorney and a healthcare proxy.  List the names, addresses, and phone numbers of lawyers, accountants, and financial advisors on their checklist.

Their Rationale for Distributing Their Estate

If your parents are reluctant to discuss this now, suggest they leave a personal letter with their estate-planning documents explaining their rationale for distributions.

Preferences for the Future

Find out your parent’s preferences if they’re not physically able to live in their current home.  Do they want to move in with relatives or live in an assisted-living facility?  Discuss in detail what procedures they want or do not want performed to prolong life.  Determine their preferences for funeral arrangements and if they have pre-purchased any burial plans.

 

Copyright © 2019 This article is published in its original form from its original publication with Investment Answers and Integrated Concepts, a separate, non-affiliated business entity. The original newsletter publication, Investment Answers Financial Success Fall 2019, is intended to offer factual and up-to-date information on the subjects discussed but should not be regarded as a complete, evolving, or personalized analysis of the topics, and should not be construed as personalized investment advice. Qualified financial professionals should be consulted before implementing a personalized financial plan. Please reference the original publication for additional disclaimers. 

 

Having “The Talk”

Take a moment and pretend your older sister and her husband pass away unexpectedly, leaving their three young children behind. You are called into their lawyer’s office immediately. You learn that you and your husband were named guardians of your three nieces and the family dog. You’ve also been designated as full beneficiaries of your sister’s estate. While you love your nieces, your life just changed in the blink of an eye. You went from being a professional, childless, young couple in a condo to a five-person family with a dog and a two-story home. Situations like this don’t just happen in movies—they happen to people in real life, and not as infrequently as you might think. Now imagine you are the parents of those three children. What if your younger sister and her husband weren’t able (or willing) to care for your children? What if they decided to pass guardianship on to the next person; or worse, what if the children had to go live in foster care? Or what if your sister and her husband accept guardianship of your children, but move them into that condo in the city? Is that what you would have wanted? These conversations are absolutely critical if you have dependents, no matter how young and healthy you are. Say you don’t have dependents. Does that mean you don’t need an estate plan, or don’t need to talk about your plans with your family? It doesn’t. Take another example: Bill and Connie have two adult children who both have families of their own. When Bill and Connie sat down to create their estate plan, they realized that their two largest assets were their home and their life insurance policy. They weren’t sure how they should allocate between their two children, so they all sat down to talk about it. Their daughter was very connected to their home and it was important to her to keep it in the family. On the other hand, their son already had a home with his family and would have preferred to receive the cash benefit from the life insurance policy. So Bill and Connie left their home to their daughter and the life insurance policy to their son. In many families, finances and estate talk are taboo. Other families laugh and make jokes about inheritances. No matter what kinds of family dynamics exist in your life, talking about what will happen after a person dies can be painful and scary, but necessary. It’s important to talk with your loved ones about what you want, what they want, and what is laid out in your will.

Keep It Light

Having this discussion can bring up a lot of emotions for your loved ones; thinking about losing someone you love so dearly is painful. So keeping the conversation light but to the point can help keep it on track and productive. There may also be tensions that arise through the process — maybe multiple people want the same thing, or someone gets offended by how you’ve decided to split your money. You might consider having conversations with people individually to avoid upset.

Talk Openly and Honestly

A decision you have made may hurt someone’s feelings. There may be things you don’t want to tell people about, but it is crucial to be open and honest with your beneficiaries. For example, if you have an adult child who does not handle money well or has exhibited reckless behavior, you may feel it is appropriate to have a trust in place for that child. Both the beneficiary and the trustee should be aware of the situation. If you have children from more than one marriage, being open and honest with all of them is especially crucial.

Discuss Values, Not Just Valuables

When you die, how do you want people to remember you? What traditions, values, family names, rituals, religious beliefs do you want to live on? This is an important matter to bring up during discussions with your family. Think back on times that meant a great deal to your family or traditions that have brought joy. Talk about these things with your family to share how you feel and to learn how they feel.

Have a Professional Present

Having a neutral party present, such as an estate planner or a qualified financial planner can be helpful, and in some cases, necessary. Utilize these important resources available to you, and allow them to answer questions your loved ones may have. You might have a family-only conversation first and then a second conversation with your family and the estate planning and financial planning professionals. Like any important discussion, this may be difficult. Our 2nd podcast episode, The Talk, goes in- depth about this important topic. Our podcast is available on our website’s Knowledge Center and wherever you may listen.

 

Copyright © 2019 This article is published in its original form from its original publication with Investment Answers and Integrated Concepts, a separate, non-affiliated business entity. The original newsletter publication, Investment Answers Financial Success Fall 2019, is intended to offer factual and up-to-date information on the subjects discussed but should not be regarded as a complete, evolving, or personalized analysis of the topics, and should not be construed as personalized investment advice. Qualified financial professionals should be consulted before implementing a personalized financial plan. Please reference the original publication for additional disclaimers. 

 

When Tax Planning Matters

The certainty of having to pay taxes only seems relevant to most people when it’s time to file. When people neglect to plan for taxes over the course of their lifetimes, they end up facing an unfortunate likelihood: paying more taxes than necessary. Taking the time and effort to plan for taxes saves you money in the short term, helping you in the long term.  This pre-planning can make all the difference when you’re on fixed income or when your estate is passed on.

Short Term

Making a tax plan at the beginning of the year can help lower your tax bill by ensuring that you are taking advantage of as many tax strategies as possible. The best way to make sure you haven’t missed anything is by going over your tax situation and strategies with an accountant or qualified financial advisor.

Long Term

Maximizing retirement plans, paying down debt, saving for big expenses like college tuition for your kids or grandkids, unexpected medical bills that may arise- these are areas that tax savings can be applied to to help ensure long-term financial stability. Overall, the more you save on taxes, the more you have to put toward your financial goals.

Retirement

As you plan for your retirement and continue to contribute to your 401(k) plan or IRA, it is helpful to know the amount you contribute annually can be deducted from your taxes annually. Understanding contribution limits, potential employer matches, and catch-up contributions can help your 401(k) optimize it’s potential. It takes a lot of money and careful planning to retire comfortably, and a tax plan is an essential part of the process.

Legacy

When you think about what you hope to leave behind for your heirs or your favorite charity, you might not initially consider the tax ramifications. Knowing the tax consequences of each account can help you build a plan where your assets go to the most tax-advantageous beneficiary. You can also take advantage of the annual gift tax exclusion by transferring funds to your heirs while you are still alive. Donor-advised funds, life insurance, and various types of trusts can all offer other solutions to the tax aspect of your legacy.

 

Copyright © 2019 This article is published in its original form from its original publication with Investment Answers and Integrated Concepts, a separate, non-affiliated business entity. The original newsletter publication, Investment Answers Financial Success Fall 2019, is intended to offer factual and up-to-date information on the subjects discussed but should not be regarded as a complete, evolving, or personalized analysis of the topics, and should not be construed as personalized investment advice. Qualified financial professionals should be consulted before implementing a personalized financial plan. Please reference the original publication for additional disclaimers. 

 

A Financial Plan Is a Living Document

Creating a financial plan that you are committed to can be a way to help gain peace of mind in your finances while you’re still living, and for your loved ones after you’re gone.  It can take time and effort to organize and prepare a financial plan that meets your needs. How often should you revise your plan? The easy answer is this: whenever there’s a major change in your life circumstances — a birth or a death, a promotion or the loss of a job, when substantial, unexpected bills pop up, during stock or real estate market swings that may impact your portfolio. Even without those major events, an annual review is a good idea. It’s important to check your status and progress toward your long-term goals. Wide divergences from your plan may mean you need to save more, devote more of your income to other needs or goals, or change your asset allocation strategy. We prioritize being available to our clients for questions or concerns any time of the year they pop up. One of the most important services we offer is an annual review for clients.  They can be as surface-level or intensive as you need.  We’re here to help.

 

Copyright © 2019 This article is published in its original form from its original publication with Investment Answers and Integrated Concepts, a separate, non-affiliated business entity. The original newsletter publication, Investment Answers Financial Success Fall 2019, is intended to offer factual and up-to-date information on the subjects discussed but should not be regarded as a complete, evolving, or personalized analysis of the topics, and should not be construed as personalized investment advice. Qualified financial professionals should be consulted before implementing a personalized financial plan. Please reference the original publication for additional disclaimers.