Speak with a team who understands 480.729.8000
Life Insurance and Estate Planning

Life Insurance and Estate Planning

Life insurance has come a long way since the days when it was known as burial insurance and used mainly to pay for funeral expenses. Today, life insurance is a crucial part of many estate plans. You can use it to leave much-needed income to your survivors. Or, provide for your children’s education, or pay off your mortgage. It can simplify the transfer of assets. Life insurance can also be used to replace wealth lost due to the expenses and taxes that may follow your death. Or, it can be used to make gifts to charity at relatively little cost to you.

We will illustrate how life insurance can help you plan your estate wisely. Let’s compare what happened upon the death of two friends. Frank, who bought life insurance, and Dave, who did not.

(Please note: that these illustrations are hypothetical)

Life insurance can protect your survivors financially by replacing your lost income

Frank bought life insurance to help ensure that his survivors wouldn’t suffer financially when he died. When Frank died and his paycheck stopped coming in, his family had enough money to maintain their lifestyle and live comfortably for years to come.

And since Frank’s life insurance proceeds were available very quickly, his family had cash to meet their short-term financial needs. Life insurance proceeds left to a named beneficiary don’t pass through the process of probate. Thus, Frank’s family didn’t have to wait until his estate was settled to get the money they needed to pay bills.

But Dave didn’t buy life insurance, so his family wasn’t so lucky. Even though Dave left his assets to his family in his will, those assets couldn’t be distributed until after the probate of his estate was complete. Probate typically takes six months or longer. Dave’s survivors had none of the financial flexibility that a life insurance policy would have provided in the difficult time following his death.

Life insurance can replace wealth that is lost due to expenses and taxes

Frank planned ahead and bought enough life insurance to cover the potential costs of settling his estate. Including taxes, fees, and other debts that his estate would have to pay. By comparison, these expenses took a big bite out of Dave’s estate. His estate had to sell valuable assets to pay the taxes and expenses that arose as a result of his death.

Life insurance lets you give to charity, while your estate enjoys an estate tax deduction

Using life insurance, Frank was able to leave a substantial gift to his favorite charity. Since gifts to charity are estate tax deductible, this gift was not subject to estate taxes when he died. Dave always dreamed of leaving money to his alma mater. However, his family couldn’t afford to give any money away when he died.

Life insurance won’t increase estate taxes–if you plan ahead

Before buying life insurance, Frank talked to his attorney about the potential tax consequences. Frank’s attorney told him that if he was leaving behind a taxable estate worth less than a certain amount, his survivors generally wouldn’t owe estate taxes on a life insurance policy left to them. Frank’s estate was larger than that. Frank and his attorney put a plan in place that helped minimize the estate tax burden on his family.

Be like Frank, not like Dave

Throughout his life, Dave worked hard to support his family. Frank did, too, but went one step further–he bought life insurance to protect his family after his death. Here’s how you can be like Frank:

  • Use life insurance to ensure that your family has access to cash to help them meet both their short-term and long-term financial needs
  • Plan ahead–buy enough life insurance to cover the potential costs of settling your estate and to ensure that the assets you leave to your survivors aren’t less than you intended
  • Consider using life insurance to give to charity
  • Consult an experienced attorney about income and estate tax consequences before purchasing life insurance

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Insuring Your Home Business

Insuring Your Home Business

If you have recently started your own business and work out of your home, you’ll probably need to upgrade your insurance program. At-home business owners often make the mistake of assuming that their homeowners policy covers their business equipment. In fact, your homeowners policy may include little or no coverage for your business property and business liability exposure. You also should consider the need for business interruption insurance, workers’ compensation coverage, and business automobile coverage. Finally, you should examine your need for life, health, and disability insurance.

Homeowners policy

Homeowners policies generally cover business property on your premises only to a certain limit. This is usually about $2,500. Coverage for business property away from your premises is even more limited. Most policies have a $250 maximum. That is the extent of insurance coverage for your business in the typical homeowners policy. You are not covered for business liabilities, including such things as a deliveryperson or a client injuring themself while on your property.

For a higher premium, some insurance companies offer an endorsement that you can add to the standard homeowners policy. An endorsement allows you to increase the liability limit for business property and add a small amount of general liability coverage. The endorsement is designed for very small businesses. However, even with an endorsement, your business is left with uncovered exposures.

Home office policy

Many insurance companies now offer the home office policy. This is a combination of a homeowners policy and a business owners policy. This policy provides adequate business liability coverage, business interruption coverages, and increased limits for your business property. Along with the traditional coverages found in a homeowners policy.

The business property limits typically begin at $10,000. Depending on the policy, the business liability limits may range from $300,000 to $1 million. The policy covers lost income and continuing expenses for up to one year in the event your home is damaged and you’re unable to work. The policy also covers loss of valuable papers and accounts receivable. All while offering higher limits for equipment breakdown coverage and business property used off-premises.

Business owners policy

This type of commercial policy is designed specifically for small businesses. Traditional business owners policies (BOPs) are very comprehensive because they cover buildings, business property used on- and off-premises, and liability. Also covered are computers and other business equipment, software, data, loss of income, continuing expenses, and professional liability for certain occupations.

Some insurance companies have created a new kind of BOP designed specifically for the at-home business. This policy is less expensive, and it provides broad-enough coverage for a larger business without duplicating your coverage. Please note, the new BOP would not cover your home structure, because it is already covered by your homeowners policy.

Umbrellas and professional liability

An umbrella policy provides increased liability limits beyond those in separate policies. For example, say you have a BOP with a general liability limit of $3 million. If you think you’ll need more than $3 million for your business, an umbrella policy will pick up where the BOP leaves off. If you purchase an umbrella policy with a $5 million limit, your total limit of liability would be $8 million.

For those in occupations that are particularly vulnerable to professional liability, a separate professional liability policy, usually called malpractice coverage or errors and omissions coverage, is a must. Examples of such professions include law, medicine, architecture, day care, and personal beauty.

Automobile insurance

If you use your personal automobile extensively for your own business, you’ll probably need to purchase a commercial automobile insurance policy. Examples of such small businesses are painters, caterers, and contractors. If you use your automobile as part of your business (e.g., a taxi service), you definitely need a commercial policy.

If you rent automobiles in the course of traveling for your own business, check your personal auto policy to see if it covers nonowned autos. Your auto insurance provider can help you determine the extent of your coverage and fill in any gaps.

Workers’ compensation

Even if you have only one employee, you need workers’ compensation insurance. Each state has its own minimum requirements for this type of coverage–contact your insurance agent or state insurance department for details.

Life insurance

Chances are, you already have a life insurance program in place. Though your individual life insurance needs may not change when you start an at-home business, the amount of insurance you have may change. For example, if you lost employer-sponsored coverage when you left your previous job, you may want to make up the difference so that you’re still adequately protected. You may also need more insurance to cover any debts or liabilities you took on to develop your business.

Key person life insurance

Key person life insurance covers financial loss to your business due to the death of your partner or a key employee. If the covered individual dies, your company receives a death benefit. There are several creative ways you can set up a key person life insurance plan. Contact your financial professional to set up the best arrangement for your business.

Disability insurance

This type of insurance is very important to consider when you have your own business. Ask yourself if you have enough resources to support your family if you became disabled and could not work. If you do have some savings, how long would they last? Most people need disability insurance to protect against the loss of income that can result from disability. Your ability to produce an income is an asset that should be covered like your house and your car.

Health insurance

Health insurance for the self-employed can be expensive and difficult to find. One affordable alternative may be to join a professional association that offers group health insurance to its members. Chances are, your profession has its own specific association in your area or state. If not, there are associations for small-business owners in general. Finally, your local chamber of commerce may have a health insurance program for its members.

Individual health insurance is very expensive. One way to buy yourself protection before finding a permanent health plan may be to purchase short-term health insurance. You will need to check if those policies are allowed in your state. These policies run from one to six months and are relatively inexpensive.

Meet with a trusted insurance advisor

With all you have to think about in starting and running your own business, reviewing and updating your insurance program can seem like an overwhelming task. Call us today and set up a complimentary consultation with one of our experienced and licensed insurance advisors. We can identify your needs, familiarize you with the relevant state laws, and recommend a suitable insurance program to meet them.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Life Insurance and Charitable Giving

Life Insurance and Charitable Giving

Life insurance can be an excellent tool for charitable giving. Not only does life insurance allow you to make a substantial gift to charity at relatively little cost to you, but you may also benefit from tax rules that apply to gifts of life insurance.

Why use life insurance for charitable giving?

Life insurance allows you to make a much larger gift to charity than you might otherwise be able to afford. Although the cost to you is relatively small, the amount the charity will receive can be quite substantial. As long as you continue to pay the premiums on the life insurance policy, the charity is guaranteed to receive the proceeds of the policy when you die. Since life insurance proceeds paid to a charity are not subject to income and estate taxes, probate costs, and other expenses, the charity can count on receiving 100 percent of your gift.

Giving life insurance to charity also has certain income tax benefits. Depending on how you structure your gift, you may be able to take an income tax deduction equal to your basis in the policy or its fair market value (FMV). As well, you may be able to deduct the premiums you pay for the policy on your annual income tax return. When an insurance contract is transferred to a charity, the donor’s income tax charitable deduction is based on the lesser of FMV or adjusted cost basis.

What are the disadvantages of using life insurance for charitable giving?

Donating a policy to charity (or naming the charity as beneficiary on the policy) means that you have less wealth to distribute among your heirs when you die. This may discourage you from making gifts to charity. However, this problem is relatively simple to solve. Buy another life insurance policy that will benefit your heirs instead of a charity.

Ways to give life insurance to charity

The simplest way to use life insurance to give to a charity is to name a charity to receive the benefits of your policy. You, as owner of the policy, simply desi givinggnate the charity as beneficiary. Designating the charity as beneficiary may allow you to make a larger gift than you could otherwise afford. If the policy is a form of cash value life insurance, you still have access to the cash value of the policy during your lifetime. However, this type of charitable gift does not provide many of the income tax benefits of charitable giving. This is due to the fact that you retain control of the policy during your life. When you die, the proceeds are in9cluded in your gross estate. Although, the full amount of the proceeds payable to the charity can be deducted from your gross estate.

Donate an existing policy

Another alternative is to donate an existing policy to charity. To do this, you must assign all rights in the policy to the charity. You must also deliver the policy itself to the charity. By doing this, you give up all control of the life insurance policy forever. This strategy provides the full tax advantages of charitable giving because the transfer of ownership is irrevocable. You may be able to take an income tax deduction equal to the lesser of your adjusted cost basis/ FMV. The policy is not included in your gross estate when you die. Unless, you die within three years of the transfer. In this case, your estate would get an offsetting charitable deduction.

A creative way to use life insurance to donate to a charity is simply for the charity to insure you. To use this strategy, you would allow the charity to purchase an insurance policy on your life. You would make annual tax-deductible gifts to the charity in an amount equal to the premium. The charity would then pay the premium to the insurance company.

Charitable remainder trust

One final method is to use a life insurance policy in conjunction with a charitable remainder trust. This strategy is relatively complex, but it provides greater advantages than other, simpler methods. You set up a charitable remainder trust and transfer ownership of other, income-producing assets to the trust. The income beneficiary of the trust will get the income from the assets in the trust. At the end of the trust term the property in the trust would pass to the charity. You’ll receive a current tax deduction when you establish the trust for the FMV of the gifted assets. The amount is reduced according to a formula determined by the IRS. Life insurance can then be purchased to replace the assets that went to the charity instead of to your heirs.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

How Much Life Insurance Do You Need?

How Much Life Insurance Do You Need?

Your life insurance needs change as your life changes. When you are young, you may not have a need for life insurance. However, as you take on more responsibility and your family grows, your life insurance needs increase. Your needs may then decrease after your children are grown. You should periodically review your needs to ensure that your life insurance coverage adequately reflects your life situation.

Estimating your life insurance need

There are a couple of simple methods that you can use to estimate your life insurance need. The calculations are sometimes referred to as rules of thumb. It can be used as a basis for your discussions with your insurance professional.

Income rule

The most basic rule of thumb is the income rule, which states that your insurance need would be equal to six or eight times your gross annual income. For example, a person earning a gross annual income of $60,000 should have between $360,000 (6 x $60,000) and $480,000 (8 x $60,000) in life insurance coverage.

Income plus expenses

This rule considers your insurance need to be equal to five times your gross annual income plus the total of any mortgage, personal debt, final expenses, and special funding needs. For example, assume that you earn a gross annual income of $60,000 and have expenses that total $160,000. Your insurance need would be equal to $460,000 ($60,000 x 5 + $160,000).

There are several more comprehensive methods used to calculate life insurance need. Overall, these methods are more detailed than the rules of thumb and provide a more complete view of your insurance needs.

Family needs approach

The family needs approach requires you to purchase enough life insurance to allow your family to meet its various expenses in the event of your death. Under the family needs approach, you divide your family’s needs into three main categories:

  • Immediate needs at death (cash needed for funeral and other expenses)
  • Ongoing needs (income needed to maintain your family’s lifestyle)
  • Special funding needs (college funding, bequests to charity and children, etc.)

Once you determine the total amount of your family’s needs, you purchase enough life insurance. Taking into consideration the interest that the life insurance proceeds will earn over time, to cover that amount.

Income replacement calculation

The income replacement calculation is based on the theory that the family income earners should buy enough life insurance to replace the loss of income due to an untimely death. Under this approach, the amount of life insurance you should purchase is based on the value of the income that you can expect to earn during your lifetime. This takes into account such factors as inflation and anticipated salary increases. As well, as the interest that the lump-sum life insurance proceeds will generate.

Estate preservation and liquidity needs approach

The estate preservation and liquidity needs approach attempts to calculate the amount of life insurance needed upon your death to settle your estate. This includes estate taxes, and funeral, legal, and accounting expenses. The purpose is to preserve the value of your estate at the level prior to your death. As well, to prevent an unwanted sale of assets to pay estate taxes. This method takes into consideration the amount of life insurance needed to maintain the current value of your estate for your family. This is while providing the cash needed to cover death expenses and taxes.

We can review your current life insurance policy and find what you need

Contact us today to set up your complimentary consultation. One of our financial advisors can sit down with you and review your current life insurance policy. We can help you make the best decision for your current and future needs.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Understanding Long-Term Care Insurance

Understanding Long-Term Care Insurance

It’s a fact: People today are living longer. Although that’s good news, the odds of requiring some sort of long-term care increase as you get older. And as the costs of home care, nursing homes, and assisted living escalate, you probably wonder how you’re ever going to be able to afford long-term care. One solution that is gaining in popularity is long-term care insurance.

What is long-term care?

Most people associate long-term care with the elderly. But it applies to the ongoing care of individuals of all ages who can no longer independently perform basic activities of daily living (ADLs)–such as bathing, dressing, or eating–due to an illness, injury, or cognitive disorder. This care can be provided in a number of settings, including private homes, assisted-living facilities, adult day-care centers, hospices, and nursing homes.

Why you need long-term care insurance

Even though you may never need long-term care, you’ll want to be prepared in case you ever do, because long-term care is often very expensive. Although Medicaid does cover some of the costs of long-term care, it has strict financial eligibility requirements–you would have to exhaust a large portion of your life savings to become eligible for it. And since HMOs, Medicare, and Medigap don’t pay for most long-term care expenses, you’re going to need to find alternative ways to pay for long-term care. One option you have is to purchase a long-term care insurance policy.

However, long-term care insurance is not for everyone. Whether or not you should buy it depends on a number of factors, such as your age and financial circumstances. Consider purchasing an long-term care insurance policy if some or all of the following apply. If you:

  • Are between the ages of 40 and 84
  • Have significant assets that you would like to protect
  • Can afford to pay the premiums now and in the future
  • And are in good health and are insurable

How does Long-term Care Insurance work?

Typically, an long-term care insurance policy works like this: You pay a premium, and when benefits are triggered, the policy pays a selected dollar amount per day (for a set period of time) for the type of long-term care outlined in the policy.

Most policies provide that certain physical and/or mental impairments trigger benefits. The most common method for determining when benefits are payable is based on your inability to perform certain activities of daily living (ADLs), such as eating, bathing, dressing, continence, toileting (moving on and off the toilet), and transferring (moving in and out of bed). Typically, benefits are payable when you’re unable to perform a certain number of ADLs (e.g., two or three).

Some policies, however, will begin paying benefits only if your doctor certifies that the care is medically necessary. Others will also offer benefits for cognitive or mental incapacity, demonstrated by your inability to pass certain tests.

Comparing Long-term Care Insurance policies

Before you buy long-term care insurance, it’s important to shop around and compare several policies. Read the Outline of Coverage portion of each policy carefully, and make sure you understand all of the benefits, exclusions, and provisions. Once you find a policy you like, be sure to check insurance company ratings from services such as A. M. Best, Moody’s, and Standard & Poor’s to make sure that the company is financially stable.

Pay close attention to these common features and provisions:

  • Elimination period: The period of time before the insurance policy will begin paying benefits (typical options range from 20 to 100 days). Also known as the waiting period.
  • Duration of benefits: The limitations placed on the benefits you can receive (e.g., a dollar amount such as $150,000 or a time limit such as two years).
  • Daily benefit: The amount of coverage you select as your daily benefit (typical options range from $50 to $350).
  • Optional inflation rider: Protection against inflation.
  • Range of care: Coverage for different levels of care (skilled, intermediate, and/or custodial) in care settings specified in policy (e.g., nursing home, assisted living facility, at home).
  • Pre-existing conditions: The waiting period (e.g., six months) imposed before coverage will go into effect regarding treatment for pre-existing conditions.
  • Other exclusions: Whether or not certain conditions are covered (e.g., Alzheimer’s or Parkinson’s disease).
  • Premium increases: Whether or not your premiums will increase during the policy period.
  • Guaranteed renewability: The opportunity for you to renew the policy and maintain your coverage despite any changes in your health.
  • Grace period for late payment: The period during which the policy will remain in effect if you are late paying the premium.
  • Return of premium: Return of premium or nonforfeiture benefits if you cancel your policy after paying premiums for a number of years.
  • Prior hospitalization: Whether or not a hospital stay is required before you can qualify for LTCI benefits.

When comparinglong-term care insurance policies, you may wish to seek assistance. Consult a financial professional, attorney, or accountant for more information.

What’s it going to cost?

There’s no doubt about it: long-term care insurance is often expensive. Still, the cost depends on many factors, including the type of policy that you purchase . Premium cost is also based in large part on your age at the time you purchase the policy. The younger you are when you purchase a policy, the lower your premiums will be.

If you’re considering adding a long-term care insurance policy to your portfolio, contact us today for your complimentary consultation! We can find the best option that works for you and your financial situation and goals.

The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

How Much Life Insurance Do You Need?

How Much Life Insurance Do You Need?

Your life insurance needs change as your life changes. When you are young, you may not have a need for life insurance. However, as you take on more responsibility and your family grows, your life insurance needs increase. Your needs may then decrease after your children are grown. You should periodically review your needs to ensure that your life insurance coverage adequately reflects your life situation.

Estimating your life insurance need

There are a couple of simple methods that you can use to estimate your life insurance need. These calculations are sometimes referred to as rules of thumb and can be used as a basis for your discussions with your insurance professional.

Income rule

The most basic rule of thumb is the income rule, which states that your insurance need would be equal to six or eight times your gross annual income. For example, a person earning a gross annual income of $60,000 should have between $360,000 (6 x $60,000) and $480,000 (8 x $60,000) in life insurance coverage.

Income plus expenses

This rule considers your insurance need to be equal to five times your gross annual income plus the total of any mortgage, personal debt, final expenses, and special funding needs (e.g., college). For example, assume that you earn a gross annual income of $60,000 and have expenses that total $160,000. Your insurance need would be equal to $460,000 ($60,000 x 5 + $160,000).

Several more comprehensive methods are used to calculate life insurance need. Overall, these methods are more detailed than the rules of thumb and provide a more complete view of your insurance needs.

Family needs approach

The family needs approach requires you to purchase enough life insurance to allow your family to meet its various expenses in the event of your death. Under the family needs approach, you divide your family’s needs into three main categories:

  • Immediate needs at death (cash needed for funeral and other expenses)
  • Ongoing needs (income needed to maintain your family’s lifestyle)
  • Special funding needs (college funding, bequests to charity and children, etc.)

Once you determine the total amount of your family’s needs, you purchase enough life insurance, taking into consideration the interest that the life insurance proceeds will earn over time, to cover that amount.

Income replacement calculation

The income replacement calculation is based on the theory that the family income earners should buy enough life insurance to replace the loss of income due to an untimely death. Under this approach, the amount of life insurance you should purchase is based on the value of the income that you can expect to earn during your lifetime, taking into account such factors as inflation and anticipated salary increases, as well as the interest that the lump-sum life insurance proceeds will generate.

Estate preservation and liquidity needs approach

The estate preservation and liquidity needs approach attempts to calculate the amount of life insurance needed upon your death to settle your estate. This includes estate taxes, funeral, legal, and accounting expenses. The purpose is to preserve the value of your estate at the level prior to your death and to prevent an unwanted sale of assets to pay estate taxes. This method takes into consideration the amount of life insurance needed to maintain the current value of your estate for your family while providing the cash needed to cover death expenses and taxes.

Are you considering adding a life insurance policy?

Contact the experts at Sterling Advisor Group to get started on designing a policy that’s right for you. Set up a meeting with a financial partner today.

Disclosure: The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.