Tax planning is one of the most important pieces of a financial plan that often goes ignored. If you make mistakes with your taxes it could cost thousands before and during retirement. Did you know the contribution limits for TSP changed in 2023? You can now contribute $22,500 to your retirement account if you are under age 50. If you are over 50 you can do an additional catchup contribution of $7,500. How much should you contribute to ROTH? What are the tax consequences of ROTH vs Traditional? If you have questions email or contact our office for help. We have a network of CPAs around the country to assist.
Understanding Types of Life Insurance
Term life insurance vs whole life insurance
Term Life Insurance lasts for a set number of years before it expires. If you die before the term is up, a set amount of money, known as the death benefit, is paid to your designated beneficiary. Term life is considered the simplest, most accessible insurance policy. When you make your payments (known as your premium), you are paying for the death benefit that goes to your beneficiaries in the event of your death. The death benefit can be paid out as a lump sum, a monthly payment, or an annuity. Most people elect to receive their death benefit as a lump sum.
Term life insurance policies are more affordable than other types of life insurance policies, usually costing $30-40 a month for a 30-year, $500,000 policy for healthy people in their 20’s and 30’s. The policy expires at the end of the term, which can last up to 30 years.
Whole life insurance, on the other hand, is considered a permanent life insurance policy because it does not expire. It has a death benefit but also a cash value, which is a tax-deferred savings account that is included in the policy. The cash value accrues interest at a predetermined fixed rate. Each month, a certain portion of your premium will go into the cash value of the policy, which offers a guaranteed rate of return (the exact amount that goes into savings is determined by your individual policy). The policy’s cash value grows over time.
Due to the fees and the extra feature, a whole life insurance policy can cost five to 15 times as much as a term life policy for the same death benefit amount.
Whole life lasts for as long as you pay the premiums. However, the cash value component can make whole life more complex than term life because you must consider surrender fees, taxes, and interest as well as other stipulations.
Still, it may be worth it if you need the cash value to cover things like endowments or estate plans, which might benefit from the greater options that a whole life policy provides.
Universal Life Insurance has a cash value, just like a whole life insurance policy. Your premiums go toward both the cash value and the death benefit.
Basically, although you have a minimum premium to keep the policy in force, you can use the cash value to pay that premium. That means if you have enough money in the cash value, you can use that to skip premium payments entirely, letting the accrued interest do the work.
Indexed Universal Life Insurance
What if you could get the flexible adjustable life insurance premiums and face value and an opportunity to increase cash value—would you go for it? What if you could get this without the inherent downside risk of investing in the equities market? All of this is possible with an indexed universal life (IUL) insurance policy. Some IUL’s also offer many options such as long term care payments. If you would like more information email our office or sign up for a financial analysis today.
- Indexed universal life (IUL) insurance lets the policyholder decide how much cash value to assign to either a fixed account or an equity indexed account.
- IUL insurance policies offer several well-known indexes, such as the S&P 500 or the Nasdaq-100.
- IUL insurance policies offer the possibility of cash accumulation while still providing a death benefit.
Variable Life Insurance is similar to whole life insurance in that they both have a cash value, but the functions of the cash values are quite different.
With a whole life insurance policy, the cash value component is a savings account. That’s why, although the growth might be small compared to other investment options, there is a guaranteed minimum rate. It also includes dividend payments from the life insurance company.
A variable life insurance cash value is more akin to investing. The money paid into it goes into a series of mutual fund-like sub-accounts where you can get some decent growth, but you can also lose money depending on the market. The cash value is more or less placed in the stock market.
Variable Universal Life Insurance
If you think variable universal life insurance is just some aspects of universal and variable life insurance policies mashed together…well, you’re mostly right.
A variable universal life insurance policy takes the best (or worst, depending on how you look at it) of the other two policies: You can adjust the premium and death benefit amount while investing the cash value in the policy’s cash value.
Simplified Issue Life Insurance
Typically when you apply for life insurance, you go through a paramedical exam as part of the underwriting process so the insurer can find out how risky you are to insure. The exam helps them set your premium rate.
With simplified issue life insurance, you can skip the medical exam. That is the “simplified” part of this policy type. This is also known as a “no exam policy” You are not out of the woods completely, though. You do not need to go through the medical exam, but you do need to fill out a health questionnaire, answering questions like if you smoke, have been diagnosed with serious illnesses, and so on.
People in poor health may have to take the exam if they have too many health issues, and they could flat-out be denied by insurers. For healthier people in a hurry it can be a way to skip scheduling the paramedical exam, which adds some time to the underwriting process. Simplified issue tends to be more expensive than an underwritten policy
Guaranteed issue life insurance takes the concept of simplified issue life insurance, forgoing the health exam, a step further in that you do not have to answer any questions about your health, either. As long as you can pay the premium, the insurer will cover you needing only your age, sex and state of residence. That makes it appealing for older people, whose declining health makes it prohibitively expensive to get coverage with other insurance types. Guaranteed issue life insurance is useful for elderly applicants, but others can likely get more life insurance coverage at a lower cost with a different policy type.
Group Life Insurance (FEGLI)
FEGLI is a Group Life Insurance benefit provided by the Federal Government. It is not technically a life insurance type, but it is important to know how it is different from privately purchased term life.
FEGLI is annually renewable term. The real reason we bring it up, though, is that most people think their employer life insurance is enough, when in most cases it is not.
Make no mistake: If your employer is offering life insurance at a reduced cost to you, it is a great benefit. But if you need life insurance to protect your family, FEGLI coverage may not be sufficient.
FEGLI life insurance provides fairly low coverage, a maximum of your base and up to five times with option B, when you could need $1,000,000 or more in coverage in order to meet your financial obligations and provide enough income for your family in the event of your passing. FEGLI will also become more expensive when you separate from Federal service. Option A, B and C premiums are age based and become more expense over time. Group life insurance can be summed up as “I did not make it home from work insurance” and is not generally used for estate planning.