There are a number of issues with respect to the ownership of life insurance that I see time-and-time again with my clients. As most of us know, life insurance is a type of insurance that insures the person’s life.
When the owner/insured dies, the life insurance company will pay a certain amount of money to a named beneficiary. For instance, Mr. Smith purchases a $100,000 policy of life insurance naming his wife as the beneficiary of the life insurance policy. When Mr. Smith dies, the life insurance company will pay $100,000 to Mr. Smith’s wife, the named beneficiary.
Life insurance is an excellent way to provide a safety net for those you support. For instance, Mr. Smith probably has a job. The money he earns working at his job supports his family. If Mr. Smith were to die, the money he earns would disappear and his family would need a supplementary source of income. Life insurance provides that supplementary source.
Personally, I think the value of life insurance deceases as the person ages. To me, a seventy year old individual has a far lesser need for life insurance than a forty year old individual does. In most instances, the forty year old has young children who depend upon his income and the seventy year old does not have a family to support. His wife may need supplemental income if he were to die, but the need for life insurance is certainly diminished.
Most of my clients fail to realize that the proceeds of life insurance are included in their estate for federal and state estate tax purposes. For instance, in New Jersey, an estate is subject to New Jersey estate tax if the value of the estate exceeds $675,000. In calculating the $675,000 value, you need to take into consideration the proceeds from any life insurance that the decedent owned.
On the other hand, the proceeds of life insurance are not taken into consideration for purposes of the New Jersey inheritance tax, if the life insurance is payable to a named beneficiary. So, for instance, if Joe dies with a $100,000 life insurance policy naming his nephew as the beneficiary of the life insurance policy, then the life insurance proceeds are not taxed for New Jersey inheritance tax purposes.
Finally, one issue I have seen with my own parents and the relatives of friends involves a low-benefit insurance policy that carries an extremely high premium. For instance, my parents were sold policies of life insurance about 25 years ago that have a $12,000 death benefit. When they first purchased the policies, the premiums were very low and my parents thought they were doing the right thing by buying a policy of insurance that would pay for their funerals.
Today, they pay about $2,000 a year in premium for these policies of insurance. The insurance has little to no cash value, and they wonder whether they should cancel the policies or continue to pay. When you are 89 years of age, you think “how much longer do I have?”
I know from friends that my parents are not the only people who bought policies of insurance such as this. When you reach an advanced old age, whether to continue paying or not paying is debatable. But if you are in your seventies, you may want to look at your life insurance policies and ask whether or not maintaining those policies is the right choice given the potential increase in premiums.
Life insurance can safeguard your family’s financial future. Choosing the right policy and understanding its role in your estate plan ensures peace of mind.
Life insurance is typically thought of in terms of what happens later, yet its presence can affect planning decisions along the way. How a policy is structured and used may carry implications that extend beyond the initial purpose.
Life insurance can serve different purposes, but it may also carry unintended consequences if not reviewed carefully. Understanding how a policy fits into a broader plan is an important step in avoiding complications.