When it comes to life insurance, many successful executives can find themselves in a whole new world. There are many different types of insurance, features, funding options and venues to purchase through. With so much at stake for your family, we are going to cover a few common mistakes we see made and how to avoid them.
1. Wrong Type of Life Insurance
In the life insurance world, there are many different types of insurance each with different features, benefits and drawbacks. In general, the types of insurance boil down into four major categories: Whole Life, Variable Life, Universal Life and Term. For the sake of keeping you awake, I won’t bore you with the details of each.
It is not uncommon for us to have new clients come in with the wrong type of life insurance. It is common to see families owning Whole Life (the most expensive type of insurance) when they should be utilizing Term insurance (the lowest cost). Also, it is common to meet new folks who own Term insurance when they should own Guaranteed Universal (the lowest cost permanent insurance).
The insurance options you leverage should fit the unique needs of your family. By ensuring you have the right type you can often save your family a great deal of cost and hassle.
2. Wrong Ownership Structure
Whenever I explain to a new client that the death benefit of their life insurance will be taxed due to the way it was purchased, owned or funded, they often look at me as if I have three heads. "But, I have been told life insurance death benefits are tax free" is the usual response. That is correct. BUT, if the ownership of your insurance is not structured properly it may be included in your taxable estate and as a result become a taxable asset in your estate tax calculation.
Here’s a simple illustration of how it happens: When someone passes away, the total value of their estate is calculated to determine estate tax liability. All assets owned are included in this calculation. If the decedent owned their life policy (as most people do), the value is included in the value of their estate and as a result may increase the estate tax liability. Imagine the person who lives in Connecticut and owns a $3 million life policy. This person is already exceeding the Connecticut Estate Tax Exemption (currently $2 million) and as a result has a taxable estate. So yes, this person’s insurance death benefit will be paid tax free but it also increased their estate tax.
So what’s the simple solution? Well, often the simple solution is the creation of an Irrevocable Life Insurance Trust (ILIT) to own your life insurance policies. By having a properly structured ILIT, you can put your insurances on the other side of the tax fence to prevent them from being included in your taxable estate.
3. Using the Wrong Purchasing Channel
Where you purchase your insurance can also be a determinant of whether you have the proper insurance. In general, there are two ways to purchase life insurance, either through a captive agent or an independent agent. To keep it simple, a captive agent is an insurance salesman employed by a specific insurance company (i.e. MetLife, Guardian, Lincoln, etc.) while an independent agent is not employed by any insurance provider and typically has access to a wider breadth of insurance providers and solutions.
So why does it matter where you purchase your insurance? A captive agent is often incentivized to sell the employing firm insurances over external providers. This can result in the purchase of coverage that may cost more or not have all the features you need that may have been available elsewhere.
An independent agent is more likely to consider multiple competing insurers to gain access to policies that better fit your need. They typically have access to most of the "captive" insurance companies (i.e. an independent agent can have access to the same MetLife policies as a MetLife captive agent) and those policies have the same cost whether purchased through an independent or a captive.
In many cases, life insurance is treated like a commodity. Typically bought, or sold, to the lowest bidder. Today’s successful executives need more than a product, they need the right solution. It is prudent to ensure the commodity you are leveraging is being utilized in the most efficient manner for your family.
If you would like to privately discuss your personal insurance planning needs, including how to reduce cost and increase efficiency, please contact our team today.
Spurstone Executive Wealth Solutions