Wednesday, May 11, 2011


You can take a note from this post :
  • Naming Beneficiaries
  • Setting Up Trust
  • Tracking your dividends, rates of return, and annuities
  • Looking into viatical settlements

Although income protection for their survivors is clearly the main reason that most people buy life insurance, estate planning is a close second. The goal of estate planning is to ensure not only the smooth distribution of your wealth to your heirs, but also that the government doesn’t take too big a bite. And the wealthier you are, the bigger the tax bite. This chapter looks at the role that life insurance plays in planning for your retirement, including dividends, annuities, and tax consequences. The chapter also focuses on how life insurance can help ensure a seamless transfer of your estate to your heirs.


When you purchase a life insurance policy, one of the first things you must do is decide who will be the recipient of the benefits — hence the term beneficiaries. Most people designate their spouse as the primary beneficiary, which means that the spouse gets the entire death benefit when the policyholder dies. If you’re single, your primary beneficiary is likely to be your children, if you have any.

However, your circumstances may give you reason to name more than one beneficiary, especially if your estate is sizable. Naming additional beneficiaries is extremely important in the event that the primary beneficiary dies at the same time you do or that person dies before you.

The following sections outline four reasons why you may (or may not) choose to name someone other than your spouse or children as your beneficiary.

Minor children

You may not want to choose your children as your beneficiaries if they are still minors.

Under the current law, children under the age of 18 can’t collect insurance benefits directly, even if they’re the rightful heirs. If you die and your children are the beneficiaries, the proceeds can only go to them in a trust fund, which an adult must manage. If you don’t select this adult (perhaps a lawyer or an accountant, or an organization such as a bank), the probate court selects someone or some organization to oversee the money. When your children reach the age of maturity, usually 18 years old, the funds automatically go to them. Before that time, the trust fund administrator controls how the funds are invested and spent.

Avoiding tax consequences
As my posted before, estates larger than $650,000 (in 1999) may face some potential tax consequences. (This applicable exclusion amount, as it’s called, is set to increase over the next several years, as illustrated in Figure 3-1.) The first $650,000 can go to your beneficiaries tax-free, but your heirs (excluding your spouse) have to pay income taxes on anything over that amount. If you have a large estate, you may want to ensure that more of your estate goes into your beneficiary’s hands, rather than to the government.

Spreading the wealth
You may also stray from the norm when selecting your beneficiaries if you want to donate part of your estate to charity.

For business owners

Owning a business may be another reason you choose beneficiaries other than family members. Some business owners who are in partnerships arrange to have the proceeds of their life insurance policy tied to the price of the business. When an owner dies and the death benefit goes to the family (the heirs), that death benefit becomes the payment for the deceased’s share of the business. In this way, the other partners can buy the business without having to negotiate the price.


A trust is an account that you set up for someone else but for which you decide the terms. You can set up a trust from your assets or from your life insurance policy, and you can continue to add to it or not. The following sections describe the three kinds of trusts that most affect life insurance policies.

Revocable trusts
A revocable trust is a means by which you can allocate your property, including your life insurance death benefit, to another person. You can change the provisions of this trust fund any time during your life, making the trust “revocable.” You still manage and have total control of the fund, and you can even abolish it if you choose.

Your minor children can’t be the direct beneficiaries of your life insurance death benefit. You must set up a trust fund in their names.

Trusts serve to ensure that certain funds go directly to a beneficiary (your minor children, for example). But you can also use a trust to save on taxes. For example, you can set up a bypass trust, which allows you to pass some of your estate on to your grandchildren, thereby “bypassing” any tax consequence to your children.

Because of the legal and tax implications, consult an attorney if you are considering setting up any sort of trust.

Irrevocable trusts

An irrevocable trust, as its name implies, means that you cannot amend, change, or alter the terms of the trust. The trust becomes a legal entity unto itself and, in that sense, has certain rights. People commonly use  irrevocable trusts to make large gifts to children, grandchildren, and even great-grandchildren without creating any liability for estate taxes.

The tax law permits giving any one individual (or any one irrevocable trust) $10,000 per person per year without that individual having to pay taxes on the gift. When you die, the death benefit from an irrevocable trust goes directly to the trust, also with no tax liability.

Because your spouse pays no estate tax on funds that go to him or her, you need to set up an irrevocable trust only for your children and/or grandchildren.

Charitable remainder trust
As its name implies, a charitable remainder trust fund is set up by people who want to give their property to a charity. The property can come in any form: cash, real estate, stocks, bonds, or the proceeds from a life insurance policy.

The charitable remainder trust has two benefits:
  • The charity or organization you choose gets the property.
  • Your heirs aren’t responsible for any taxes on the appreciated value of the property, if the property value has increased (and it probably has). Of course, this benefit is only important if your estate is valued at over the $650,000 exemption.
Rates of Return

The two basic forms of life insurance policies (which I cover in greater detail in the following chapters) are term life — in which you buy protection for a specified period of time (the term) — and cash-value. With cash-value insurance policies, you pay more than just the cost of the premium into an account that is yours and accrues interest. In effect, cash-value policies are like a savings plan.

For a life insurance policy to be part of your estate planning, you must know your rate of return — how much interest your money earns.

When a company quotes you a price for a cash-value policy, it also quotes a guaranteed rate of return. At the same time, you will likely be given one or two other rates of return and will be shown charts and tables demonstrating how much your money will yield after just a few years.

Be very wary of these tactics. Don’t think you’ll make a killing! Assume your money will earn very close to the guaranteed minimum, and consider anything over the guaranteed minimum as a bonus.

The return you receive from your cash-value policy is to :
  • Increase your surrender value (the amount that you can expect to receive if you withdraw the funds)
  • Increase your death benefit
  • Pay the expected increase in the cost of your protection each year

Many insurance companies are mutual companies, meaning that the policyholders own the company’s stock. When the insurance company does well, the owners receive dividends. The amount of the dividend relates directly to how well the company performs.

Dividends from mutual insurance companies go directly to lowering the premiums. These dividends can be quite substantial, as high as 50 to 70 percent of the premium.

You can’t count on getting this dividend each year. However, with term insurance, you buy only one term at a time. So if the insurance company doesn’t declare a dividend consistently, you can look elsewhere for a better rate from a company that does offer a dividend. On the other hand, you don’t want to constantly jump from one company to the next. For one thing, you can’t always be sure that you’ll qualify for the life insurance. So choosing the right company at the very beginning is one of the most important decisions you will make.

Most people think of life insurance as the primary way of protecting survivors or heirs. However, some life insurance policies, called annuities, provide an income to the insured person later on in life. Annuities are basically investment Vehicles in which you plop down a bunch of money, either as a lump sum or in years of payments, in exchange for a promise from an insurance company that it will pay you a monthly income, usually after a defined period. Of course, that period won’t arrive until well after the company has received enough money from you to make paying you financially viable for them. Two types of annuities are available:
  • Fixed annuities: With a fixed annuity, the company pays you a guaranteed rate of growth, based on the amount you have paid in premiums and the terms you have agreed upon beforehand. These payments can be either for a set number of years or until you die.
  • Variable annuities: With variable annuities, you can direct how and where the money is invested. The
    amount you’re paid varies depending on how successful you and the company’s investment funds are. You can instruct the company to invest in any combination of funds that the company offers — stock funds, bond funds, fixed income funds, or other investment funds. Most insurance companies that offer annuities offer a pretty wide array of funds from which to choose, ranging from growth stock funds to global investment funds. Some are higher risk, some lower.
As an investment opportunity, annuities aren’t the greatest options. You can usually do better in other funds and with other accounts. However, with an annuity, you’re investing and being insured at the same time, which may be an attractive benefit for you.

Viatical Settlements
Life insurance offers a relatively new benefit called viatical settlements, which may affect your estate planning. With this program, terminally ill patients can, in effect, “sell” the proceeds of their life insurance death benefit to a third party and receive the cash they need while they’re alive. 

To qualify for this benefit, your doctor must certify that your life expectancy is no more than two years based on the fact that you have a terminal disease. The company then purchases your life insurance policy (including any cash value) for 60 percent of the face value. If your disease has progressed even further, and your doctors certify that you have less than six months, the viatical company will purchase your life insurance policy for up to 80 percent of the face value.

The purpose of the settlement is to ensure that terminally ill patients have the bulk of their life insurance benefit available to pay for their medical and living costs. On the other hand, terminally ill people must decide whether the life insurance benefits are for them or for their survivors. 

As you would expect, this issue is fairly controversial. You can learn more about this kind of policy by checking with an insurance company that offers viatical settlements. You should also check out the information made available by the Federal Trade Commission (FTC), which you can reach by writing Federal Trade Commission, P.O. Box P, Room 403, Washington, DC 20580, or its Web site at


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