Life Insurance and Risk Management
Life Insurance and Risk Management1
Smart Planning Addresses Changing Risks
Life insurance often plays a critical role in estate and financial plans, providing several tax and non-tax reasons for obtaining multiple policies. City National's Wealth Planning experts review your policies to ensure they continue to serve your needs. Now may be the time to allow a policy to lapse or exchange it for one better suited to your situation.
Life insurance provides the smart solution for multiple risks:
- Premature death of the primary income earner
- Lifestyle funding through retirement
- Debt retirement (e.g. a mortgage)
- Specific expense coverage (e.g. college costs)
- Need for supplemental retirement funding
- Long-term care coverage needs
- Liquidity needed to pay a looming estate tax
- Equalizing inheritances (e.g. one child inherits a business, another inherits insurance)
- Owners of small estates interested in providing an inheritance
- Replacing an inheritance for those leaving the bulk of their estates to charity
- Needed liquidity for business buy-sell agreements
Estate Tax Liquidity Benefit
Life insurance can account for estate tax payments, ensuring that your executor does not need to sell your hard assets at your death. In this scenario, consider owning the policy in the name of an irrevocable life insurance trust (ILIT), otherwise, the proceeds will be included in your taxable estate. The death benefit is paid out with no income tax obligations.
Term Life Insurance
Term insurance is temporary, although some term policies are convertible to permanent insurance. The terminating events for a term life insurance policy are the death of the insured, the end of the contract period (e.g., 5, 10, 15, 20 or 30 years), or when premiums are not paid. There are three basic term policy forms:
- Annual Renewable, or Yearly Renewable
- Level Term
- Decreasing Term
Selecting the correct type of term policy is essential to avoiding surprises later. If you plan on converting to a permanent policy at a later date, we'll help you understand the available products.
Permanent Life Insurance
Permanent policies have a term-insurance component and a cash-value component, the sum of which makes up the total death benefit. Premiums may be structured for life or for a term of years, and permanent insurance reduces the premium cost as the insured gets older by shifting the death benefit over time from pure (term) insurance to the cash value built up in the policy. Dozens of varieties exist, including:
- Whole Life (participating or non-participating)
- Modified Whole Life
- Universal Life
- Variable Life
- Survivor Life
For supplemental retirement funding, the cash value grows tax-deferred and you may withdraw or borrow tax-free up to the amount of the premiums paid (non-MEC policies). This type of policy differs from the type of policy you would acquire for estate tax liquidity, which could be an MEC policy, if needed.
Permanent insurance can lapse without proper oversight, but most people receive their annual statement and believe all is well because they answer this question in the affirmative: "If I die today, will there be a death benefit?" The proper question is, "If I die 10 years from now, will the policy still be in effect?"
Remember, the cash-value component is intended to cover the increasing cost of the term insurance component. Your policy is at risk of lapsing if the cash-value is not growing, if premiums are not paid and the cash-value is diminishing (i.e. if the policy is eating itself), or if market forces are driving the values of the cash-value low.
Life insurance is a complex subject; your policies and how they correlate with your overall wealth plan should be reviewed in detail on an annual basis.
- Are Not insured by the FDIC or any other federal government agency
- Are Not deposits of or guaranteed by a Bank or any Bank Affiliate
- May Lose Value
- City National Bank its affiliates and subsidiaries, as a matter of policy, does not give tax, accounting, regulatory or legal advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies presented taking into account your own particular circumstances.