Beneficiaries To Life Insurance Policies, IRA’s and 401k’s
Beneficiaries To Life Insurance Policies, IRA’s and 401k’s: Who is the right beneficiary? Who have you chosen to inherit your assets? It may be wise to review your choices.
Here’s a simple financial question: who is the beneficiary of your IRA? How about your 401(k), life insurance policy, or annuity?
You may be able to answer such a question quickly and easily. Or you may be saying, “You know … I’m not totally sure.” Whatever your answer, it is smart to periodically review your beneficiary designations.
Your choices may need to change with the times. When did you open your first IRA? When did you buy your life insurance policy? Was it back in the Eighties? Are you still living in the same home and working at the same job as you did back then? Have your priorities changed a bit - perhaps more than a bit?
While your beneficiary choices may seem obvious and rock-solid when you initially make them, time has a way of altering things. In a stretch of five or ten years, some major changes can occur in your life - and they may warrant changes in your beneficiary decisions.
In fact, you might want to review them annually. Here’s why: companies frequently change custodians when it comes to retirement plans and insurance policies. When a new custodian comes on board, a beneficiary designation can get lost in the paper shuffle. (It has happened.) If you don’t have a designated beneficiary on your 401(k), the assets may go to the “default” beneficiary when you pass away, which might throw a wrench into your estate planning.
How your choices affect your loved ones. The beneficiary of your IRA, annuity, 401(k) or life insurance policy may be your spouse, your child, maybe another loved one or maybe even an institution. Naming a beneficiary helps to keep these assets out of probate when you pass away.
Many people do not realize that beneficiary designations take priority over bequests made in a will or living trust. For example, if you long ago named a son or daughter who is now estranged from you as the beneficiary of your life insurance policy, he or she will receive the death benefit when you die, regardless of what your will states.1
You may have even chosen the “smartest financial mind” in your family as your beneficiary, thinking that he or she has the knowledge to carry out your financial wishes in the event of your death. But what if this person passes away before you do? What if you change your mind about the way you want your assets distributed, and are unable to communicate your intentions in time? And what if he or she inherits tax problems as a result of receiving your assets? (See below.)
How your choices affect your estate. Virtually any inheritance carries a tax consequence. (Of course, through careful estate planning, you can try to defer or even eliminate that consequence.)
If you are simply naming your spouse as your beneficiary, the tax consequences are less thorny. Assets you inherit from your spouse aren’t subject to estate tax, as long as you are a U.S. citizen.2 For example, a spouse can roll assets inherited from a 401(k) plan into an IRA without incurring taxes on the wealth transfer.3
When the beneficiary isn’t your spouse, things get a little more complicated … for your estate, and for your beneficiary’s estate. If you name, for example, your son or your sister as the beneficiary of your retirement plan assets, the amount of those assets will be included in the value of your taxable estate. (This might mean a higher estate tax bill for your heirs.) And the problem will persist: when your non-spouse beneficiary inherits those retirement plan assets, those assets become part of his or her taxable estate, and his or her heirs might face higher estate taxes. Your non-spouse heir might also have to take required income distributions from that retirement plan someday, and pay the required taxes on that income.4
If you designate a charity or other 501(c)(3) non-profit organization as a beneficiary, the assets involved can pass to the charity without being taxed, and your estate can qualify for a charitable deduction.5
Are your beneficiary designations up to date? Don’t assume. Don’t guess. Make sure your assets are set to transfer to the people or institutions you prefer. This is one of the main reasons to have your current life insurance policies reviewed by The LIFE Study. For more information why it is important to review your life insurance policies read “Why should I compare?“. Let us help you choose the right policy or review your current life insurance policy by using The LIFE Study. Click here to start the process.
1 seattlepi.nwsource.com/lifestyle/356213_consumer25.html 2 smartmoney.com/taxmatters/index.cfm?Story=20020830 3 online.wsj.com/public/article/SB119948578270968559.html?mod=yahoo_free 4 news.morningstar.com/articlenet/article.aspx?id=212411 5 news.morningstar.com/articlenet/article.aspx?id=212411
Term Life Insurance
Term Life Insurance
Insurance is defined as shifting the economic risk of an occurrence to another party. Auto insurance shifts the risk associated with a car accident. Homeowners’ insurance shifts the risk associated with a fire, hurricane, or flood. Life insurance shifts the risk of the financial devastation left by a person’s death.
In our previous posting, “what is the best life insurance policy“, we briefly discussed the different types of life insurance; whole life insurance, universal life insurance, variable life insurance and term life insurance. Today we are going to further discuss the advantages and disadvantages of term life insurance.
Term life insurance is the purest form of life insurance. Here’s the deal - if you die during the policy coverage period (or “term”), the insurance company will send a check for the contractually agreed upon death benefit to your beneficiaries. If you don’t die during this period, typically you receive no benefit (we’ll discuss an exception later). That’s it - pretty simple.
However, there are different types of term life insurance (just to complicate things!). There is ten year term, twenty year term, thirty year term, annual renewable term, decreasing term and return of premium term life insurance. We’ll look at each type but first let’s discuss how a premium is calculated.
Insurance companies use very bright people called actuaries to calculate what premiums must be charged so that the insurance company can pay death claims and make a profit. The actuary does this by using an enormous amount of data and statistical probability. If the insurance company knows the statistical probability of, for example, a 40 year old healthy female dying in the next 10 years (and it is very small), they can calculate a premium to accomplish their goals. Common sense would tell you that the probability of dying for a 50 year old would be higher than a 40 year old - so logically, the premium would be higher for the older person for the same amount of insurance.
Ten, twenty and thirty year term life insurance policies are called “level term” policies because the annual premium is the same for the entire period of coverage. You can purchase a tremendous amount of insurance for very little premium if you are young and in good health. This works well for a young couple with small children where the death of either spouse would leave the surviving spouse with a stressful and difficult financial situation.
Annual renewable term life insurance is basically a “one year at a time” policy whereby the premium increases for each year of coverage. This is usually used for a short-term need (1 to 5 years) such as collateral for a loan. Usually, the policy allows for coverage to age 80 or 85 but the annual cost gets prohibitive as you get older.
Decreasing term life insurance is typically sold as “mortgage protection” insurance or some other emotional marketing pitch. The death benefit decreases annually to coincide with your decreasing mortgage balance (that is, if you have an amortized loan). There is nothing wrong with this type of product but typically a good agent will discuss the overall needs (i.e. coverage) of the family, not just a policy to pay off a certain item.
I mentioned earlier that typically with term life insurance there is no benefit if you don’t die during the term period. There is one exception to this rule. Many companies now have “return of premium” term life insurance whereby if you don’t die during the coverage period, the insurance company will refund all of your premiums at the end of the term. It should be obvious that this type of policy would cost more than a traditional term life insurance policy. But if the idea of paying premiums with little probability of a benefit bothers you, this might be an option.
Many agents will tell you that permanent policies are the only type to buy. However, as we mentioned in our previous posting, many factors come into play in determining what type of policy is best for you. If getting the most coverage for the least amount of dollars for a certain period of time is your goal, term life insurance is probably the way to go. Let us help you choose the right policy by using The LIFE Study. To learn how much life insurance cost Click here to start the process.
What Is The Best Life Insurance Policy?
If you’re just starting to look into life insurance or you’re reviewing your life insurance portfolio, the myriad of choices can be confusing.
Man is Mortal. That makes life insurance a little unique and interesting, doesn’t it? We purchase things like health insurance, car insurance and home insurance, then hope we never have a need to use them. Life insurance is different, because it’s a widely accepted fact that sooner or later, each one of us will die.
So many choices. When it comes to life insurance, there are many options. What is the best life insurance policy? You may have heard terms like “whole life insurance”, “term insurance” or “variable insurance” … but what does it all mean? And what are the differences? Well, first let me point out what they have in common: all life insurance policies provide payment to a beneficiary in the event of your death. Except for that basic tenet, the differences between policies can be major. In this post I will discuss the basics of the different types of life insurance. In future post I will go into detail of each type of life insurance and go through the options and the pros and cons of each.
Whole life insurance. This type of insurance covers your entire life (not just a portion or a “term” of it). It is considered permanent life insurance which is used to cover you for your “whole life.” Whole life insurance policies tend to cost more than “term” policies. This is both because they grow what is known as “cash value”, and because after a time you will be able to borrow against or withdraw from your whole life benefits to supplement your retirement. Most whole life insurance policies will have guarantees on both the cash value and death benefits.
Term life insurance. Rather than covering your whole life, “term” insurance covers a pre-determined portion of your life. Common terms are ten, twenty and thirty years, if you die within that term, your beneficiaries receive a death benefit. If not, generally you get nothing. To put it simply, term life insurance allows you to purchase more coverage for less money. Basically, you are betting on the probability of your death occurring within that specified “term”.
Variable life insurance. Variable life insurance is a permanent insurance. However, unlike whole life insurance, variable insurance allows you to invest the cash value of your policy in “subaccounts” (which can include money market funds, bonds or stocks). Variable insurance offers a bit of control, as the value and benefit depend upon the performance of the subaccounts you select. However, that means there could be significant risk involved, since the performance of your subaccounts cannot be guaranteed.
Universal life insurance. With universal life insurance, it all comes down to flexibility. It is permanent life insurance that provides access to cash values that build up tax-deferred. You can choose the amount of coverage you feel is appropriate, and you retain the ability to increase or decrease that amount as needs change (subject to minimums and requirements). You also have some flexibility in determining how much of your premium goes towards insurance, and how much is used within the policy’s savings element.
So, which is right for you? Many factors come into play when deciding what type of life insurance will best suit your needs. The best thing to do is to get a quote or review your current policies using The LIFE Study. It is very quick and easy, click here and let us assist you in looking at all the factors and help you to find the right life insurance policy at the right price for your specific needs.
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What is The LIFE Study
The LIFE Study is a personalized independent objective evaluation of your existing life insurance. In addition The LIFE Study is a great way to find out how much a new life insurance policy would cost. Created by financial advisors (not by life insurance companies), The LIFE Study is uniquely designed to uncover the hidden, overlooked, and lesser-known opportunities to lower your costs and improve your coverage. Life Insurance is often one of the most valuable assets within a family’s financial portfolio. Yet very few people ever give it the same kind of attention as they might give their other investments. Think of reviewing your life insurance in the same way you might consider refinancing your mortgage. Just as there can be lower interest rates enabling you to save money on your mortgage, there can be improved conditions to strengthen your life insurance. The difference is that these benefits are not as widely published or known as are mortgage interest rates!
Sometimes referred to as a ‘life insurance audit’, The LIFE Study approach is unique. It’s a quick yet comprehensive analysis that weighs your personal and policy information to determine where your policy ranks within the most up-to-date insurance market data. In addition, we’ll look at the top life insurance companies and their policies to see where improvements may be found and present you with a comprehensive report of our findings.
Click here for a sample LIFE Study Report!
Best of all, this information comes to you from a seasoned, objective third-party, Your LIFE Study Analyst!