Life Insurance 2.0- RISK

facebooktwitterlinkedinby featherThough statistically, nearly 70% of people will need long-term care in the future, most Americans hesitate to purchase long-term care insurance.1 The reason being, they don’t want to pay monthly premiums on a policy that may never benefit them, meaning they don’t want to lose the money they’ve invested if they never need long-term care.

But what happens if you don’t purchase long-term care insurance and your end-of-life care becomes more expensive than you planned for? Sure you could clean out your life savings, but that might leave your spouse or partner at a financial disadvantage. Long-term care insurance is no longer the only option. Your life insurance policy might have the solution.

Over the past few years, a hybrid policy has appeared which couples life insurance policies with a long-term care rider (accelerated death benefit). Simply put, if you require long-term care, you can accelerate the death benefit while you are still alive to pay for the care you need now. If you do not need long-term care services or not all of the death benefit is used up to pay the expenses, the remaining death benefit is paid out to the designated beneficiaries when the policy owner dies.1

While this option will reduce the death benefit, it may still be a more viable solution than depleting your investments.

A common question is whether or not the proceeds paid under a life insurance contract are taxable and need to be reported as income.

Life insurance is one of the few financial structures where money can be received or transferred tax free. According to the IRS.Gov web site, “if you receive the proceeds under a life insurance contract as a beneficiary due to the death of the insured person, the benefits are not includable in gross income and do not have to be reported.”

Moreover, the hybrid policy also allows the beneficiaries to receive the proceeds tax-free. The Pension Protection Act of 2006 allows policyholders to transfer money tax-free from a traditional life insurance policy to a hybrid life insurance/long-term care policy.2

So whether you are thinking about what will happen to your loved ones when you’re gone, or how to fund your long-term care expenses without becoming a financial burden to your children, the time to start exploring life insurance and long-term care options is now.

Note: Though the life insurance proceeds received by the beneficiary are income-tax free, they may still be included as part of your taxable estate. Check with your tax advisor for more information.

Please note that BH Wealth does not offer tax advice.

Footnotes:

1http://www.forbes.com/sites/jamiehopkins/2014/04/21/new-and-unexpected-ways-to-fund-long-term-care-expenses/

2http://online.wsj.com/news/articles/SB10001424052702304393704579530130606718764

“In general, accelerated benefits can range from 25 to 95 percent of the death benefit. The payment depends on your policy’s face value, the terms of your contract, and the state you live in. Some companies will permit you to accelerate 100 percent of your policy’s face value, but will reduce the amount of your benefit to compensate for the interest it loses on early payout. The amount of your benefit will also be reduced by any outstanding loans against your policy. Additionally, there may be a small service charge. Ask your insurer to provide you with a quote before you exercise your accelerated death benefit claim. In addition to adjustments made by an insurer, some state may limit the percentage and amount that can be accelerated. Check with your state insurance department to determine limitations.”

Written by Jaimie Blackman

Jaimie Blackman

Jaimie Blackman — a former music educator & retailer— is a Certified Wealth Strategist & Succession Planner. Jaimie helps business owners maximize the value of their company through education & coaching. He is a frequent speaker at the National Association of Music Merchants, (NAMM) Idea Center and has spoken at Yamaha’s succession advantage.

As a financial literacy educator he has taught at New York University and has lectured at the 92nd Street Y, Marymount Manhattan College and CUNY.

His column is published in The Music & Sound Retailer and contributes to NAMM U online, as well as other industry trade magazines.

Jaimie is CEO of Jaimie Blackman & Company, President of BH Wealth Management, and Creator of MoneyCapsules® and the Sound of Money®.

To register for Jaimie’s live webinars, or to subscribe to his podcasts, visit jaimieblackman.com.

The purpose of this post is to educate. Our content should not be construed as advice. If legal, tax or other advice is required by the readers, professional advice should be sought.

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