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Contents
About SC&H Financial Advisors, Inc. Personal Financial Planning is not a one-time event—it is a critical, ongoing process that, if managed well, leads to financial freedom. At SC&H, we develop complete and flexible plans that are designed to meet your ongoing needs. They are complete, because you need a fully integrated and comprehensive financial strategy that incorporates all of the most important wealth care issues. They are flexible, because milestones in your life such as a marriage, a career change, the birth of a child, a divorce, or a death in the family will require adjustments to your overall financial plan. To learn more about these services, visit www.scandh.com/fa.
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Although these can be somewhat sobering topics, we hope that as you read this newsletter, you find the information helpful and you are able to apply it to your personal situation. As always, please call if we can be of assistance.
Regards, Greg Horning Can You Afford Long-term Care Insurance?
Many consumers question the need for long-term care insurance. They wonder if it is truly a necessity and if they can afford it. But the question should be, "Can I afford not to own long-term care insurance?" Long-term care insurance is a rapidly-emerging priority for many people. Consumers see the merit of protecting their assets from the massive cost of an extended stay in a long-term care facility. Long-term care insurance, however, can be expensive, especially at older ages. A typical benefit package, $200 per day for three years of coverage with a 90-day elimination period and inflation protection, might cost $2,000 per year at age 60. But these premiums are very inexpensive when compared to the costs you and your family could incur without long-term care insurance. Suggestions that can make the purchase of this valuable coverage more affordable to purchase include the following:
One thing to remember is that long-term care insurance should not be viewed as nursing home care insurance. In fact, it is "anti-nursing home care" insurance. A nursing home is the last option to be considered, usually after home heath care services, adult day care services, and assisted living options have been exhausted. When properly implemented, long-term care insurance is truly an asset protection tool. Should you have any questions about whether long-term care insurance might fit with your needs, please contact your SC&H advisor.
Few of us would ever consider going without car insurance or homeowners' insurance. And most people have some amount of life insurance. If your home or vehicle is destroyed, or someone close to you dies, that insurance will be used and you will be grateful that you paid the premiums. However, there is a greater risk out there, and many people aren't adequately insured against it - the risk of becoming disabled. We have a one in five chance of becoming disabled at some point in our lives. The disability might be the result of surgery or an accident, and it might last for one month or one year. No matter what the cause of the disability or the length of time you are disabled, there is a good chance you will notice the financial impact from the loss of income. Social Security will pay disability benefits, but only if you meet the very strict qualifications, which include extreme physical or mental impairment that is expected to last at least 12 months or result in death. If you are fortunate enough to have long-term disability coverage through your employer, the coverage or benefit period may not be enough to get you through this difficult time. Therefore, it is important for all income earners to consider the impact their disability could have on their financial situation, and possibly consider the purchase of disability income insurance. Disability income insurance is a product designed to protect against loss of income. Insurance companies may describe disability using one of two common definitions. The first definition, known as "any occupation," pays benefits only if you are unable to perform the duties of any job for which you are reasonably qualified. This can be a high hurdle to overcome, and could put you in a situation where you are forced to accept a lower-paying job. The second definition, known as "own occupation," is preferable. If your disability policy uses this definition, and if you are not able to perform the duties of your own occupation, you may be eligible for full benefits. Assuming you meet the disability definition for your policy, payments will not begin until the elimination period ends. Upon expiration of the elimination period, which typically ranges from 30 to180 days, the benefit period begins. Benefit periods can be as short as 13 weeks, or extended until the age of 65. The benefit paid by the policy typically ranges from 60 to 80 percent of the policy holder’s income before the disability. Shorter elimination periods and longer benefit periods will increase the insurance premiums, but may be necessary if you don't have an emergency fund available to offset the loss of income. It is important to protect against the loss of income, and the hardships that can accompany this loss, using disability insurance. When a disability occurs, expenses must still be covered, and some costs, such as medical bills, will most certainly increase. Disability income insurance helps you maintain your standard of living while you are unable to earn an income.
Irrevocable Life Insurance Trusts An irrevocable life insurance trust (ILIT) is an estate and wealth-transfer planning technique that, when properly designed and utilized, can be a very powerful tool. As the name implies, an ILIT is a permanent trust that holds life insurance. In its simplest form, an individual (usually with his or her spouse), creates the trust. After naming an independent trustee, designating the trust beneficiaries and determining the distribution terms of the trust, the creator funds the trust with cash or an existing insurance policy. If cash is used, the ILIT then purchases life insurance on the individual. Upon the insured's death, the insurance proceeds are paid into the trust. Since the policy is owned by the ILIT, the proceeds are not included in the estate of the insured, thereby escaping estate tax. In some cases, the trust creator may not be insurable, but he/she may own an existing life insurance policy. It is possible to transfer the existing policy to the ILIT. This transfer is considered a gift, which must be valued for gift tax purposes. In addition, the insured must survive for at least three years after the transfer to avoid having the insurance proceeds pulled back into the estate and taxed, thereby eliminating the usefulness of the trust. Payment of insurance premiums by the trust must be handled carefully. The insured individual's transfer of money to the trust to pay the insurance premiums is considered a gift of a future interest. Under IRS rules, a gift of a future interest does not qualify for the annual gift tax exclusion. A well-known tax case, the Crummey decision, can be used to support an alternative solution to this issue. Each year, written notice must be given to the trust beneficiaries that a gift to them in the amount of the annual premium will be made, and they have a temporary right to withdraw this gift from the trust for their own use. If the beneficiaries decline to take advantage of this right, the funds can then be used to pay the annual premiums. The right to take the gift is a demand power, which converts the gift into a present interest gift and makes it eligible for the annual exclusion. As stated, upon the death of the insured, the insurance proceeds are paid to the ILIT. Assuming all legal requirements have been met, these funds will not be subject to estate or income tax and can therefore be used as intended by the trust creator: to provide needed cash in an illiquid estate; to replace wealth transferred to individuals or charities other than the beneficiaries; or to be invested to grow over time and create additional wealth for the beneficiaries. As an example, assume John and Mary Smith are 60 years old, in good health, and have an estate worth 8 million dollars. They have set up marital trusts to take full advantage of the current 2 million dollar maximum unified credits, but that still leaves a potential taxable estate of 4 million dollars. Federal taxes alone could be $1.8 million. If John and Mary want to leave as much as possible for their son James, they can set up an ILIT. If they apply their annual gift allowance of $12,000 each to fund the ILIT, the annual premiums of $24,000 could be used to purchase $2,000,000 of second-to-die life insurance. Upon the second spouse's death, the $2,000,000 would be paid into the trust, thereby replacing the funds used to pay taxes. John and Mary can stipulate if these funds should be paid out immediately to cover the taxes (which may be necessary if the majority of their assets are illiquid), or over a period of time. In any event, the use of the ILIT will help to ensure that James is in the same place financially as he would have been without the tax bite.
Securities offered through Triad Advisors, Inc. Member FINRA/SIPC. Advisory Services offered through SC&H Financial Advisors, Inc. SC&H Financial Advisors, Inc. and Triad Advisors Inc. are unaffiliated entities. |
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