Life insurance: Now For The Living! Part 3 – Surrender Value
A few years ago, I wrote a series about the innovations that allowed life insurance to protect more than just your family after you die. The first of these featured the new critical illness riders that more innovative policies have begun to offer. These features allow the policyholder to accelerate the death benefit while they are still alive should they have a qualifying medical emergency (i.e. heart attack, stroke, cancer, etc.). In this article, we dig deeper into the coverage gaps that often still exist for federal authorities using government insurance offerings (FEGLI and FEHB) and how Living Benefits could help further protect your income/lifestyle. both during your career and in retirement.
The second article expanded on the Chronic Illness Rider, which acts as a form of long-term care protection that typically allows the owner to accelerate up to 24% of the death benefit each year (up to 4 years) if he needs financial assistance. age gracefully. In Part 2 of the series, we also compared the Federal LTC Insurance Program (FLTCIP) and traditional LTC policies with the more flexible chronic disease riders. The proceeds of a Chronic Illness Rider Benefit follow the “Compensation Model”, which means that once you qualify, a check is made out to you which you can use as you see fit. . Conversely, most traditional LTC policies follow the “reimbursement model” which typically requires you to receive professional care, pay the bill, submit the bill to your LTC insurer, have it approved, and then getting reimbursed… which can be quite restrictive even after qualifying for LTC benefits. It’s also important to point out that the primary concern with traditional SLD fonts also applies to FLTCIP. Although LTC insurance can be quite expensive (not to mention that FLTCIP premiums have increased dramatically over the years), you may be surprised to learn that the number one complaint isn’t actually the cost. It’s the “use it or lose it” design that could disinherit loved ones!
Living benefits life insurance allows one policy (and set of premium payments) to address many “what if” concerns simultaneously and these features are available on permanent and term insurance for those who may qualify through medical underwriting.
But, unlike term insurance, permanent insurance has yet another feature – cash value. The cash value of a life insurance policy grows tax-deferred, can be viewed for any reason at almost any time, and can be viewed in two tax-efficient ways.
The ability to accumulate and grow cash value within a permanent policy adds another layer of flexibility that is simply not available with FEGLI. Since your entire FEGLI premium is used to purchase a death benefit, it’s not uncommon for a federal near-retirement to realize they’ve contributed $50,000+ to FEGLI and he has $0.00 to show as long as he has a pulse. Duration can be profitable, but the duration of coverage eventually ends and a healthy policy owner will have nothing but good memories to show for all their premium payments when it does.
Alternatively, with a Cash Value Life Insurance (CVLI) policy, the first thing that happens is the expense (such as cost of insurance) to purchase the desired coverage. Then, after you pay for the coverage, the excess premiums go into the cash value of the policy to start growing. Different types of policies offer different cash value accumulation strategies with varying degrees of risk, reward, and volatility. There is no single approach that is considered “best” due to the number of different ways life insurance can be designed to combine inheritance, living benefits, risk and reward market, and even tax/income planning goals. Each class of CVLI has different pros and cons that should be weighed based on your needs, medical history, and risk tolerance.
Some policies place more emphasis on providing additional living benefits, but less on cash value appreciation (and vice versa). Think of it like buying a car – while we’re not entering the field with a blank check in hand, it’s important to rank the most important features to highlight in our car search. Do you want a muscle car that emphasizes horsepower (like a policy focused on cash value growth) or would you rather trade some of that horsepower for a luxury ride with a premium sound system (such as a policy offering more robust living benefits)? The answer depends on you, your needs and your value system, so it is extremely important to thoroughly discuss your situation with a experienced professional who can help you find and design the ideal plan for your hierarchy of needs/goals.
Whether increasing your policy’s cash value is a top priority or just a tertiary benefit of your coverage, it can help fill coverage gaps for federal authorities going through a tough time — like an insurance fund. extra emergency – or it can supplement retirement income. . Let’s look at a hypothetical 52-year-old federal employee who was suddenly caught off guard by a heart attack requiring a 10-month recovery but only had sick leave to replace 5 months of income. If she had to use her emergency funds for the extra expenses of co-payments, deductibles, etc. and that the well is now dry, she could find herself in a real mess. While FEHB has helped her, neither FEHB nor FEGLI offer additional emergency funds. Long-term disability doesn’t start until after the first 12 months, so she might very well have to make a hardship withdrawal from the TSP to make up the remaining months of income. This means that she would have to withdraw the necessary funds from her budget PLUS enough to pay the taxes and the 10% penalty since she is under 59.5 years old.
If that person had living benefits, then they could accelerate a portion of their death benefit (tax-free) because a heart attack is generally an eligible trigger for a critical illness rider. If she did not want to permanently reduce her death benefit, she could choose to use some of the cash value that had accumulated in her policy and treat it as a second emergency fund. Her policy’s cash value can be viewed at almost any time and for any reason – not just qualifying medical emergencies – so whether it was our Fed’s daughter who was sick or her roof had been ripped off or even if he just wanted to take a vacation then they can use the cash value tax free via withdrawals (up to the base) or via contract secured contract loans with no extra paperwork on the way which it is used.
Think of cash value as being similar to the equity in a home. To access this equity, you can sell part of the property, but this permanently reduces the value of this property (like withdrawals would reduce the cash value of a policy), or you can take out a loan to value mortgage to borrow against your brick and mortar, reducing your equity without impacting the actual value of the home. A policy loan works the same way and although policy loans have a borrowing cost, they allow you to collateralize your cash value without depleting the account. Securing, rather than depleting, an asset can have some interesting benefits when you take the time to fully understand the pros and cons of how it works.
As Feds prepare for a retirement where 99% of their FERS pension, 85% of their SS, and 100% of their traditional TSP distributions are typically taxable, some view the potential tax advantages of a properly designed CVLI policy as the most attractive app. for their personal situation. They can worry about future taxes and design their CVLI to function as a supplemental retirement asset with unique tax benefits. Healthy people approaching or already in retirement often consider CVLI in conjunction with Roth conversions to protect their lifestyle against higher future tax rates by transferring money to the Tax-free portion of their portfolio. Don’t forget that CVLI premiums also buy a death benefit that can simultaneously help meet the owner’s inherited goals, long-term care concerns, and perhaps even critical illness emergencies. This extreme degree of flexibility makes life insurance a proverbial Swiss army knife of planning opportunities – ideal for those of us whose crystal ball isn’t working! Learn more about tax planning for the distribution phase of your life by signing up for our next free webcast – The Thrift SPENDING Plan!
While there are risks inherent in all types of financial vehicles, CVLI has the flexibility to allow a single premium dollar to do double and triple duty to protect you and your loved one during and after your lifetime. Because cash value life insurance requires applicants to go through underwriting, not everyone will qualify or be approved with cost-effective pricing. Mismanaged, expired or prematurely terminated policies can also have significant tax implications. so be sure to continue to do your due diligence.
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