Insurance Policy Review:  An Often Neglected Piece of Your Overall Financial Plan

It is often suggested that as you prepare information for income taxes, it is also a good time to perform an overall personal financial review. However, this can be a much larger task than most of our clients are ready to take on all at once.  It is possible to address different areas of your finances separately and build up to a thorough and comprehensive overall financial review.  Over the course of the next several issues, we will address different areas that you may consider as separate, but important and related pieces of an overall financial review.

This month’s article will focus on life insurance.  Life insurance has many valuable functions in an overall financial plan.  Common uses include income replacement, wealth transfer and liquidity creation.  Insurance can be considered one piece of a strong base on which to build your wealth, as it protects you from potential catastrophic events that can topple even the strongest of plans.

Life insurance can be a very powerful tool with many tax and financial benefits.  As important of a financial vehicle as life insurance is, we often find that it is the least monitored and evaluated.  For this reason, we have partnered with two highly-regarded firms, Mesirow Financial and NFP JR Katz, that specialize in this complex and changing area.  With their assistance, we are offering a comprehensive insurance review.

Why You Should Review Policies Now

• New, more efficient products may have entered the market that can provide a more stable and efficient method of meeting your insurance goals.
• Variable life products are imploding due to unstable equity and bond markets.
• You may be facing substantial premium increases if your level premium term policy period is about to expire.
• Policy funding has not been kept current with significant drops in credited interest and dividend rates which may require increases in future premiums or policies lapsing well before expected mortality.
• Your initial insurance needs may have changed over time and existing policies are no longer adequate or have become unnecessary.
• Older, unwanted policies could create large income tax events if cashed in.
• Your life insurance carrier ratings may have dropped significantly.

Life insurance can be an important part of your overall financial plan so long as you periodically review your policy or policies to make sure that your needs are being met.  We strongly recommend that you perform a review of your current insurance policies to ensure that they are working as planned.

If you would like more information on how you can obtain your insurance review, please contact your ORBA advisor or Frank Washelesky at [email protected] or call him at 312.670.7444.

Gifts That Last a Lifetime

Often, parents and grandparents wish to make gifts to younger family members, but are not interested in the complications of establishing trusts for each beneficiary or providing unfettered access to the assets.  There are several ways you can begin a gifting program now that can have significant estate and income tax benefits over time and also provide sound financial footing for a child or grandchild as they start out.

First, let us review the basic gift exemptions. For 2014, each U.S. citizen can gift $14,000 to as many individuals as they like without any gift or estate tax consequences.  For instance, a married couple with two married children and five grandchildren can give $252,000 that is gift and estate tax free (nine gifts of $14,000 each).  This is a significant reduction in the grandparents’ gross estate, particularly when done annually and growth in the gifted assets is considered.

In addition, certain education and medical costs can be paid directly on behalf of others without a gift or estate tax cost.  For instance, if children or grandchildren are in college or private schools, this can be another way to help them while providing you with an estate and gift tax advantage.

As you can see, in just a few years, a married couple with a family can remove substantial dollars from their estate.  While making large annual gifts can be an excellent estate planning technique, you may be concerned about giving large amounts of money to younger children or grandchildren without restrictions.

The following are a few suggestions of ways to make annual gifts to young people with some restrictions (real or perceived) on their ability to access or use the funds immediately:

1. Fund ROTH IRA accounts to the extent that the younger children or grandchildren have earned income and qualify.  The ROTH IRA account will grow income tax free for decades, provide protection from creditors, and while the owner can reach the funds, they must request a distribution from the account.
2. Fund permanent insurance policies for the younger children or grandchildren to lock in lower insurance rates and build up tax-free cash value amounts.  Again, the asset offers some creditor protection and is more difficult to turn into spendable cash.  This type of gift can be particularly valuable if the insured has ongoing health issues or experiences health issues later in life which would make insurance cost-prohibitive.
3. Utilize a Family Limited Partnership (FLP) for gifts.  By establishing a FLP, you can control the general partner of the partnership and the general partner will control investment strategy, distributions and other major decisions.  By making gifts of limited partnership interests, you can pass wealth to the younger children or grandchildren, but initially limit access to the funds and provide creditor and marital dissolution protection over the assets held in the partnership.

If you have any questions about these or other estate and gift options, please feel free to contact your ORBA advisor or Frank Washelesky at [email protected] or call him at 312.670.7444.