MKA Executive Planners Blog

Long Term Care Insurance has come a long way since its inception.  It is no longer a “use it or lose it” proposition, and the sources of funding for long term care coverage now include the cash value of existing life insurance and deferred annuities that may no longer be needed.

Life insurance has many tax favored advantages, the most significant of which are the potential tax-free cash accumulation, tax-free withdrawals and tax-free death benefits.  In addition, in the event of an untimely death, the beneficiaries can use funds from a life insurance policy to maintain their current lifestyle, for retirement purposes, funeral and burial expenses, probate, estate taxes, daycare, and any number of everyday expenses.  Funds can be used to pay for a beneficiary’s education or to pay debts or a mortgage.  Recent product innovations include a long term care benefit rider which allows the owner access to policy cash values or death benefit for long term care needs of the insured.

The one thing I know for certain about life insurance illustrations is that the non-guaranteed assumptions are always wrong.  The economy does not proceed at a steady growth rate, yet that is what illustrations show for non-guaranteed assumptions.  Life Insurance is an important financial instrument that needs to be monitored and reviewed on a regular basis.  Without proper review and adjustment, if necessary, the policy owner may be faced with unexpected “sticker shock.”

Basics of a Charitable Gift Annuity

Charitable Gift Annuities (CGA) are a very popular fundraising technique.  A CGA is a contractual agreement between a donor and a charity where the donor transfers assets to the charity, and in return, the charity is obligated to pay a fixed amount to the donor or donors, for a specified term, usually for life.

Individual Retirement Accounts (IRA’s) and other qualified plan assets (401(k), profit sharing plans, etc.) were designed to help individuals save for retirement in a tax advantaged way.  For simplicity, I will refer to all of these types of accounts as qualified plans.  The most significant tax advantage of qualified plans is tax deferral.  By this I mean that you contribute pre-tax dollars to the qualified plan and the contributions grow tax-free until withdrawn.   

Current Estate Planning – Tax Considerations

The interplay between basis, estate tax, and income tax requires that the estate planner take into consideration a number of factors (i.e., basis, growth potential, appreciation, federal and state estate taxes, and income and capital gain taxes) in order to determine if lifetime transfers are appropriate, and, if so, the proper asset and transfer strategy.  This is true regardless of the size of the estate.

Did You Know You May Have Both in One Product?

When it comes to discussing the pros and cons of Long Term Care, there will always be opposing views depending upon the age and outlook of the participant.  For the purposes of this article, I will assume age 50.  On the one hand, there is the “optimist” who believes that he or she will forever remain in good health and never need long term care and/or life insurance.   On the other hand there are the “realists” who understand that life and health are unpredictable, and much can happen in a span of 20 to 30 years.

Transamerica recently began sending letters to certain policyholders who purchased policies that were issued between 1987 and 1998.  The letter advises the policy owner that the monthly deduction rates (i.e., the cost of insurance charges) will be increased to cover the company’s expectations regarding its future costs of providing coverage and that the increase could be significant.  This alone may cause ongoing increased charges to cash value accumulation and the policy to lapse earlier than was previously illustrated.  For these policy owners a policy review is the only way to determine the impact of the change imposed by Transamerica.

Life insurance products may be designed to maximize death benefits or cash accumulation.  From an estate tax perspective, the need for the death benefit design has become less important.  The reason is that other than the state estate tax exposure, most people are no longer concerned with the federal estate tax, since the federal estate tax exemption is currently $5,340,000 per person.  The new wave of life insurance policies are trending toward a “cash accumulation design” for retirement income, with a number of enhancements that improve cash accumulation.

I have seen many financial plans.  A common plan will take into consideration a savings target during the income years, investment diversification, an assumed investment return commensurate with age and risk/reward profile, income need projected during the retirement years, and the impact of taxes and inflation.