First to Die (Joint Life)

Transcription

1 First to Die (Joint Life) What is a joint life first-to-die policy? A joint life first-to-die life insurance policy insures more than one life under one insurance contract. While a joint life policy can cover an unlimited number of lives, insurance companies usually limit the number of people covered. The death benefit is paid at the first death. After the first death, coverage would cease unless a guaranteed insurability rider was purchased with the policy. When can it be used? A joint life first-to-die policy may be appropriate when the proceeds are most needed at the first death. Working couples Joint life first-to-die policies can be used to cover a two-income husband and wife. The policy would provide a benefit to replace the loss of income from the death of the first spouse or to fund a goal or objective that would depend on the presence of both incomes, such as repayment of a mortgage or payment for a child's college education. Often, a joint life first-to-die policy is used along with a second-to-die (survivorship) life insurance policy. Business use Buy-sell agreement funding--when used to fund a buy-sell agreement, a joint life first-to-die policy can guarantee that funds are available for the buyout, regardless of which party dies first, while also reducing premium costs. Riders can be purchased with the policy to allow continued coverage for the surviving business owners. Key person protection--joint life first-to-die policies can be used to cover a selected group of key employees so that at the loss of any one employee, the company will receive insurance proceeds that can be used to find, recruit, and train a replacement employee. A joint life policy can be significantly easier to manage and more cost-efficient than separate policies on all key employees. Some insurers have started selling joint life policies designed specifically for these types of business use. Strengths Joint life policy can provide higher death benefit for same premium than multiple individual policies with same face amount

2 A joint life policy can provide a higher death benefit than possible under multiple individual policies. Example(s): A joint life policy covering two lives with a death benefit of $500,000 would be less expensive than two individual policies, each with a death benefit of $500,000. Coverage offered in variety of forms Joint life first-to-die policies are generally offered in many forms, including term life, whole life, current assumption whole life, or universal life. Of these options, term life is perhaps the least commonly used form, as separate term policies on each life would probably cost about the same amount and would not provide the benefit of continued insurance coverage for the survivor(s). Coverage can generally be continued after first death--see Tradeoffs A joint life first-to-die policy can generally be continued after the first death occurs. When the original policy covered a married couple, the surviving spouse may be able to buy an individual policy. If the original coverage was for more than two people, generally another first-to-die policy can be purchased. Caution: It is possible that the survivor may have become uninsurable since the original policy was taken out, which could make it difficult or impossible to get continued coverage. Tip: When considering a joint life first-to-die policy, look for one with a guaranteed insurability rider. This rider allows the surviving insured to buy additional coverage even if they have become uninsurable since the original policy was issued. Tradeoffs IRS may try to include proceeds in estate of first to die Due to the joint ownership of the policy, the insured parties always hold incidents of ownership in the policy. The IRS could try to include the policy proceeds in the estate of the first person to die even though the estate does not receive the proceeds. However, if the proceeds are payable to the surviving spouse, they should qualify for the unlimited marital deduction. Original policy terminates after first death After the first death occurs and the death benefit is paid, the policy terminates. The survivor(s) could be left without insurance and may have become uninsurable. When coverage continued for survivor, premiums may be higher

3 If continued insurance coverage is allowed for the survivor under a joint life policy, the premiums are based on that person's attained age, not the person's age when the original policy was issued. Premiums become more expensive with age, so continued coverage might be prohibitively expensive. How to do it Determine your life insurance need and overall financial goals Before you buy life insurance, you need to know how much insurance you need. Insurance need is based on numerous factors, including your current age and income, marital status, number of incomes in the household, number of dependents, long-term financial goals, level of outstanding debt, and existing insurance and other assets. Your overall financial, estate, and tax-planning goals and your planning horizon should be considered as part of your insurance need evaluation. Tip: Consult with your financial advisor concerning your need for insurance. Some of the calculations can be complicated. Complete the insurance application and name your beneficiary Before the insurance company can issue your policy, it must receive a completed application form. The application includes general health questions, and the process may include a physical examination, which is usually paid for by the insurance company. A critical part of the application is the beneficiary designation--the naming of the person or persons to receive the policy proceeds when you die. Unless you make an irrevocable beneficiary designation, you can change the beneficiary designation by adding or removing a beneficiary or by changing the percentages of the proceeds distribution. Buy the policy and pay your premium It is all well and good to know how much insurance and what type of policy is appropriate for your particular situation. But if you don't actually buy the policy, you haven't accomplished your goal! Not only that, but insurance becomes more expensive with age, so you won't be doing your wallet any favors by delaying. An additional risk of delaying is that your health could change adversely. In other words, just because you are healthy and insurable today doesn't mean you will be that way later. Deterioration in your health can mean higher premiums or an insurer considering you to be uninsurable. Review your insurance need periodically The amount of life insurance you need may change over time and with the occurrence of lifetime events. As a result, you should periodically review your life insurance coverage. As a rule, you should review your coverage every three years. Major lifetime events (such as the purchase of a home, birth or adoption of a child, marriage, or divorce) are also appropriate times to review your coverage. By routinely checking your insurance need, you can prevent the mistake you can't fix after you die: not having enough life insurance.

4 Tax considerations Income Tax Premium payments not deductible Life insurance premium payments are generally not tax-deductible expenses. Cash withdrawals may not be taxable Life insurance policy cash value withdrawals are considered a nontaxable recovery of your policy basis until the entire policy basis has been withdrawn. Example(s): You own a life insurance policy with a cash value of $15,000. Your basis in the policy equals $12,500. You plan to take a withdrawal of $7,000 now to pay for part of your son's tuition. You won't have to pay tax on this withdrawal amount because it will be considered a return of your basis. Balances before Amounts Balances after Subject to Tax Cash Value Your Basis $15,000 - $7,000 $8,000 $12,500 - $7,000 $5,500 $0 Caution: s in excess of your basis are treated as taxable distributions of interest or gain. Caution: Cash value withdrawals that occur in the first 15 years of the policy and are accompanied by a reduction in the death benefit may be treated as first coming from interest. Policy loan proceeds generally not taxable When you take out a loan against your life insurance policy (except a policy classified as a modified endowment contract, or MEC), the amount you receive is not considered taxable income. This rule applies even when the loan is larger than the amount of premiums you have paid in. Example(s): You own a life insurance policy (not an MEC) with a cash value of $20,000. Your basis in the policy is $14,000. You decide to take a policy loan to pay your daughter's college tuition. Under the terms of your policy, you are allowed to take a loan for an amount up to 90 percent of the policy cash

5 value--in this case, $18,000 ($20,000 x.90). You are not currently subject to tax on the amount of the loan, even though the loan is larger than your basis. Caution: If you cancel your policy while there is a loan balance outstanding, you could be subject to income tax on the amount of the loan that exceeds the investment or basis in the contract (plus any accrued but unpaid interest). Policy loan interest not deductible Inerest you pay on a policy loan is generally not a tax-deductible expense (under certain circumstances, interest on loans used for business or investment purposes may be deductible). Policy cancellation may be taxable If you cancel (surrender) your policy for cash, the gain on the policy is subject to federal income tax. The gain on a canceled policy is the difference between the net cash value and loan forgiveness amounts and your policy basis. Caution: You may be subject to surrender charges. Check your policy. Caution: Policy fees and expenses are usually charged against the policy in the first few years. As a result, policy surrenders during the first few years of the policy may provide little cash value. Caution: If you surrender your policy while there is a loan balance outstanding, you could be subject to income tax on the amount of the loan that exceeds the investment or basis in the contract (plus any accrued but unpaid interest). Policy lapse may be taxable If you allow your policy to lapse, you could be subject to income tax even if you don't receive any cash from the policy. A policy lapse can occur when you stop paying premiums and don't have cash values available that can be used to pay the premiums. If you have an outstanding policy loan, it is possible you could be subject to tax on the amount of the loan plus any accrued but unpaid interest. Death benefits generally not subject to federal income tax Policy death benefits are generally not subject to federal income tax. One notable exception is when the policy has been sold by one policyowner to another, subjecting it to the transfer-for-value rule. Gift Tax Policy proceeds not considered gift to beneficiary When the proceeds of your life insurance policy are paid to a beneficiary, they are not treated as a gift for gift tax purposes. Policy premium payments generally not subject to gift tax

6 When you are the owner of a policy on your own life, with another party as the beneficiary, premium payments made by you are not considered a gift to the beneficiary for gift tax purposes. If, however, someone else pays the premiums on a policy you own, the premium payments are considered a gift to you and may be subject to gift tax. However, policy premiums generally qualify for the annual gift tax exclusion. Estate Tax Policy proceeds included in estate value in some cases The proceeds of a life insurance policy are included in the value of your estate if you held any incidents of ownership at any time during the three years before your death or if the proceeds are payable to you or your estate or executor. Incidents of ownership include (among other things) the right to change the beneficiary, take out policy loans, or surrender the policy for cash. If you are an owner on the joint life first-to-die policy, it is possible that the IRS may try to have the value of the death proceeds included in the value of your estate. However, proceeds payable to a surviving spouse qualify for the estate tax unlimited marital deduction. In the case of a jointly covered unmarried couple, the proceeds would be included in the estate of the first to die, and the unlimited marital deduction is not available. Policy proceeds often exempt from state inheritance tax In many states, life insurance proceeds are exempt from state inheritance taxes.

7 IMPORTANT DISCLOSURESBroadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.to the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.these materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.