Frequently Asked Questions (FAQs)
Individuals and Families
It depends, first ask yourself - “is anyone financially dependent on me?” You may not have a spouse who is dependent on you but what about other family members? Even if no one is dependent on you, you may want to consider purchasing life insurance to cover the repayment of debts, taxes, funeral and other final expenses.
But before you make a final decision, think to the future. If you get married and have children someday, you may want to have life insurance coverage. If you buy coverage today while you're young and healthy, you'll get much better premium rates than if you wait. Rates increase as you age and if your health deteriorates.
You are never too young to plan for your future and an annuity may be a good choice for your long-term savings goals, such as for retirement. The question you need to ask yourself is - “will I need to access the money before I am 59 ½?” Although you can take a distribution from an annuity prior to age 59 ½, the distribution may be subject to a 10% premature distribution penalty. If you think you may need to access this money on a more short term basis, an annuity may not be the right savings vehicle for you.
The idea of buying life insurance for your child is something no one wants to consider because it forces us to consider the unthinkable. But purchasing a policy for a child isn't just about having financial protection if the unthinkable happens; it's about ensuring the child's financial future.
Purchasing a policy also locks in the child's insurability. Usually, children don't have to go through a medical underwriting process - the parents simply answer a few medical questions. As long as the policy remains in force, the child will always have life insurance. Most insurance policies today also offer optional riders that will allow the child to increase their insurance coverage when they reach certain milestones in life.
Yes you can. You may have access to policy cash value through either a withdrawal or as a loan from the insurance company using the policy as collateral. If you take a withdrawal, your policy values will immediately be reduced by the withdrawal amount. If you take a loan, depending upon the type of insurance you have, your policy values may continue to grow. You are not required to repay the loan, or the loan interest, during your lifetime. However, if you choose not to, any outstanding loan balance will reduce the amount of death benefit payable to your beneficiary.
Annuity and life insurance policy values are not reported on the Free Application For Federal Student Aid (FAFSA). Non-Qualified annuities, however, are counted as an asset on the CSS Profile, the other aid form that about 200+ colleges, mostly private, require in addition to the FAFSA when assessing a student’s eligibility for their own institutional financial aid dollars.
More importantly, and as often is the case at most state universities, your income may be too high to qualify for need-based financial aid anyway.
The other benefit of life insurance and annuities for college planning, is the ability to accumulate cash values that can be used to help pay for college costs.
Often annuities are used to fund a Roth IRA and Roths offer the option for a penalty free distribution if used for higher education costs. However, you will need to consider the annuity contract free withdrawal feature and surrender charges when deciding to access your Roth annuity.
You can also take a loan or withdrawal from your life insurance policy - potentially tax-free - to help offset some of the cost of college.
You can name any legally competent person as a beneficiary, including your spouse, children, other relative or friend. You can also name an entity as a beneficiary, such as a trust or charity.
The proceeds of your policy will be paid directly to your beneficiary, privately and without the delays of probate. If your needs are more complex, perhaps to take care of an aging parent or a special needs child, you may want to consider utilizing a trust as your beneficiary. The trust will outline the provisions of how the proceeds will be distributed and a trustee of your choosing can be named to manage the proceeds on behalf of the beneficiary.
Money taken from an annuity is considered earnings and is taxable as ordinary income and must be considered in determining taxation of your Social Security benefits. Money received from an annuity that are a return on premiums paid, are received income tax-free and should not affect the taxation of Social Security benefits.
Money taken from your life insurance policy through, a loan or withdrawal, generally are received income tax-free and should not affect the taxation of your Social Security benefits.
Please be sure to consult with your tax advisor on your specific situation.
If you are a regular donor to charity, life insurance could enable you to make a much larger gift to the charity. Instead of making contributions directly to the charity (particularly if the charitable income tax deduction isn’t a signficant benefit to you on your tax return), you could use the contribution amount to pay premiums on a life insurance policy naming the charity as the beneficiary of the policy. Upon your death, the charity would receive the death benefit from your policy which will be a much larger amount than the sum of the premiums paid. (If your charitable deduction is important, you may continue to make the cash contribution to the charity and the charity may use that cash to pay for a premium on a policy on your life that the charity owns.)
In addition to the leveraging potential of gifting through life insurance, you may also receive certain income, estate, and gift tax benefits. The actual benefits you realize will depend on how the donation is structured.
Life Insurance
If your insurance protection is Term life, you will have a grace period to make your payment. If by the end of the grace period you have not made a payment, your policy will lapse and you will no longer have coverage.
If your insurance protection is permanent life insurance, you will have a grace period to pay your premium plus some additional options. It may be possible that your policy has sufficient cash value to pay the premium from those policy values. Just be aware that using policy values and benefits to pay the premium due will reduce the policy's cash value and death benefit, and may increase the risk of lapsing the policy. If you don't have sufficient cash value to pay the policy premiums, you may have the option to reduce your face amount to a level that doesn’t require a premium payment.
Most importantly, if you are having trouble making your payment, contact the insurance company customer service area. They will be able to give you specific options for your policy.
It is best if you do not name them as the direct beneficiary because most states require that a guardian be appointed to administer the proceeds payable to the minor child and will result in a time delay in creating the guardianship, and therefore, delay in payment of the benefits and potentially additional costs.
The best thing to do is name a guardian, perhaps your spouse, when you establish your beneficiary designation. Another option may be to establish a trust to receive the insurance proceeds for the benefit of the minor child. Your insurance agent and/or attorney can assist you with the proper beneficiary designation if you have minor children.
In many cases, yes, if the ownership of the two policies is the same. You will need to go through new underwriting for the new coverage. To avoid taxation on the cash value in your policy in excess of premiums paid, you will want to consider an exchange under Code Section 1035. 1035 Exchanges allow for a tax-free exchange of one life insurance policy for another. There may be circumstances where replacing one policy for another is suitable for your circumstances, but in most cases we believe that replacing an existing policy for a new one is usually not in your best interests. Work with your agent to get all the facts before making such a decision.
Yes, however, if someone other than the person who is insured owns the life insurance policy, that person should also be the beneficiary. Otherwise, at the death of the insured, the death benefit will be treated as a taxable gift from the owner of the policy to the beneficiary.
Living Benefits
No. The actual payment you receive will be less than the portion of the death benefit accelerated because the benefits are paid prior to death. Values are based on current interest rates, the age of the policy, and your age and health.
Yes, if your annuity was purchased through a qualified account, such as an IRA, 403(b) or 401(K), all payments will be subject to ordinary income taxes. If your annuity was purchased with after-tax dollars, you will receive the earnings first, which are taxable as ordinary income. Once you have received all of your earnings, payments will be made from the premiums you made to policy which are received tax-free. If you purchase an income rider on your annuity, once your account value has been exhausted, you will continue to receive guaranteed payments for life, however, those payments will be received income taxable.
Annuities
Yes you can. IRC Section 1035 allows for a tax-free exchange of one annuity for another. Before you decide to exchange one annuity for another, you will also want to consider any surrender charges that may be applied upon surrender of the contract as well as the new surrender penalty schedule for the new annuity you plan to purchase.
Withdrawals from annuities purchased after August 14, 1982, are taken from earnings first. You will be required to pay income taxes on all earnings taken from the contract. Once you have withdrawn earnings, withdrawals will be made from the premiums paid into the policy. Withdrawals of premium are not subject to income taxes.
If you take withdrawals prior to age 59 ½, withdrawals that are made from the earnings in your contract may also be subject to a 10% premature distribution penalty. Withdrawals of premiums paid are not subject to the premature distribution penalty.
Yes, beneficiaries will be taxed on the tax-deferred interest when they receive those dollars. However, if a beneficiary is the spouse of the owner and the owner dies, he/she may elect to continue the annuity and postpone taxes. If the beneficiary is not the spouse and the owner dies, then the funds must be totally withdrawn within five years or they may be received over the beneficiary’s life expectancy, as long as the beneficiary elects this option within the first 12 months following the annuity owner’s death.
Mutual Funds
A closed-end fund has a limited number of shares. If you want to purchase a piece of the fund, you have to purchase an existing share that someone else is selling. An open-end fund has an unlimited number of shares. If you want to purchase a piece of the fund, the fund creates a new share and sells it to you. There are significantly more open-end funds than there are closed-end funds.
There are many mutual funds that are diverse enough alone, however it may be a good idea to spread your risk by diversifying across the different mutual fund types, such as stock funds, bond funds and money market funds.
Although your IRA or 401(k) can help defer taxes, you may not want to limit your mutual fund holdings to these accounts. With that said, you need to understand when you may be subject to taxes if your mutual fund is purchased with after-tax dollars.
For example, if a stock holding in your mutual fund pays dividends, then the fund manager later sells the stock at a higher value than he or she paid for it, you'll owe tax on two levels: 1) A dividend tax, which, generally, will be taxed as income, and 2) A capital gains tax, which will be taxed at capital gains rates. Even if you haven’t sold any shares, it is possible that you could receive a long-term capital gain distribution, assuming the mutual fund held the stock for more than a year. Therefore the taxes distributed to you are due to the activities within the mutual fund, not due to your own investing activities.
You will also want to make sure that you are correctly reporting capital gains when you sell your mutual fund. Remember if you reinvest dividends, your basis is increased which, in turn, will lower the amount subject to capital gains when you sell.
IRA
Participation in any company plan at any time during the year triggers the deduction phase-out rules tied to your adjusted gross income and filing status.
Yes you can as long as the total combined amount of your contributions don’t exceed the IRS maximum annual allowed amount.
As long as the child has earned income, they can contribute to a Minor IRA. It can be opened as a Traditional IRA or a Roth IRA. To establish a Minor IRA, the account must be opened and held by an adult, as guardian, in the name of the minor. While the guardian is authorized to perform transactions on the account, the minor is considered the registered owner for tax purposes
Business Owners
You may already be offering health, disability and a retirement program. If you aren’t you may want to look into your options. If you are, what else can you do?
Show your employees that you care through low-cost, high-value employee benefits. Consider things like flexible work schedules, social activities, and discounts to local establishments (support your local business community). Look to promote healthy lifestyles, consider offering gym memberships and free healthy food options at the office such as fruit, nuts and soft drink alternatives.
You could also offer financial service counseling for your employees and make it available during work hours.
The biggest advantage of incorporation is that the business assets of the corporation are separate from your personal finances. As a result, your personal assets generally can be shielded from creditors of the business.
Selecting to be treated as a C Corporation may also allow you, the business owner, to be eligible to participate in certain fringe benefit programs available only to workers classified as employees of the corporation.
To maintain this legal separation you must keep corporate assets separate from personal assets, hold periodic shareholder meetings, and file reports required by various government agencies, including a separate tax return. There is a cost associated with establishing and maintaining corporate formalities, and should be considered before making any decision. You will want to consult with your legal and tax advisor regarding the impact for your business.
When doing business as a C Corporation there are certain tax implications to consider and should be reviewed with your legal and accounting team.It is possible that the Corporate tax bracket may be lower than your personal tax bracket – this may lead to some benefit opportunities. Also, remember that a distribution from the C corporation to you as a shareholder may be treated as a dividend. This is sometimes referred to as double taxation – the earnings were taxed at the corporate level then again as a dividend when received by the shareholder. Whether this results in a higher tax cost than might be available through other business entities will actually depend on the corporate tax rate and the dividend tax rate.
Before deciding to incorporate, you should seek legal and tax advice on what type of ownership best suits your business.
The answer is it depends. It depends on what you anticipate your future individual tax rate to be and whether you can put the funds in a tax deferred asset as an alternative to the qualified plan. If you anticipate that your personal tax rate will be lower at retirement, then it may make sense for you to contribute to a qualified plan (and receive a current tax deduction and tax deferred growth). If you think your tax rates will be the same or higher in the future you need to factor in other issues. Determine if you will be able to use the potential tax savings from the contribution to the qualified plan and contribute the tax savings to a tax deferred growth fund. The combination of current tax savings, contributions to the qualified plan and the growth of the tax savings if contributed to a fund, may overcome the ultimate tax cost on withdrawals from the qualified plan.
Work with your tax advisor to see if a qualified plan makes sense for you.
Through the use of a so called Intentionally Defective Grantor Trust (funny name but that’s what the tax code calls them), you may be able to minimize both income and estate taxes.
By selling the business to the trust, any future appreciation of your business will be removed from your estate.It may be possible for you to receive a stream of payments from the Trust (as payment for the business) which may provide cash flow to you for retirement. Under current tax rules, the sale of the business through an installment note to the grantor trust should not result in taxable gain and the installment payments may also avoid current personal income taxes.
This area of planning is complex, and you will want to work with your legal advisor on the best solution for you.
Qualified Plans
If your businesses are considered a controlled or affiliated service group, which would be the case if you owned 100% of both businesses, then both businesses have to be covered by the plan. To determine if you are a controlled or affiliated service group, you will want to consult with your legal/tax advisor.
Yes. Employers, regardless of your entity type, are eligible for a tax credit of up to $500.00 for three years if they establish a qualified plan that covers rank and file employees.
No. As long as you do not have any employees, and your plan assets are less than $250,000, you do not have to do annual 5500 filings.
Non-Qualified Plans
Three common methods that are used. The simplest method is the multiple of income method and often a multiple of five or seven is applied. Another method is the cost of replacement method. This method considers such things as expenses to recruit, hire, and train as well as salary. Slightly more complicated is the contribution to earnings method. Your legal or tax advisor can assist you with which method is most appropriate for your business.
No. There are no formal requirements to establish an Executive Bonus program. The employee will apply for, and own, the life insurance policy. Your business will pay the premium directly to the insurance company. The premium will be considered as a “non-cash” fringe benefit for withholding purposes and are reported as other compensation on the employee’s W-2, subject to FICA and FUTA.
Business Continuation
There are three common methods that are used. The simplest method is the multiple of income method and often a multiple of five or seven is applied. Another method is the cost of replacement method. This method considers such things as expenses to recruit, hire, and train as well as salary. Slightly more complicated is the contribution to earnings method. Your legal or tax advisor can assist you with which method is most appropriate for your business.
No.There are no formal requirements to establish an Executive Bonus program.The employee will apply for, and own, the life insurance policy.Your business will pay the premium directly to the insurance company.The premium will be considered as a “non-cash” fringe benefit for withholding purposes and is reported as other compensation on the employee’s W-2, subject to FICA and FUTA.
Business Transition
No. Although the premiums are not deductible, the death benefit will be received income-tax free (as long as the notice and consent requirements under IRC Section 101(j) are followed).
If your life insurance is permanent insurance that has accumulated cash values, you may be able to withdraw, or take a loan against, those cash values to provide cash towards your purchase of their interest.
