Insurance Strategies: Giving Old Life Insurance a New Purpose

Later in life

 when your children are on their own, you’ve retired, or you’ve paid off your mortgage — you may think you no longer need to keep your life insurance coverage, or that the benefit isn’t worth the cost.

If you own permanent life insurance, the policy may have a cash surrender value (CSV), which you can receive upon surrendering the insurance. Any gain resulting from the surrender (generally, the excess of your CSV over the cumulative amount of premium paid) will be subject to federal and possibly state income tax. Also, surrendering your policy prematurely may result in surrender charges, which can reduce your CSV.

You may be able to preserve tax-deferred gains in a permanent life insurance policy that you have owned for a long time by exchanging it for a new life policy with different benefits, or another type of stand-alone insurance product that better meets your needs. Under the federal tax code, this is known as an IRC Section 1035 exchange. However, it’s possible that you may not qualify for a new insurance policy because of your age, health problems, or other reasons.

Provide for Long-Term Care

You might consider exchanging your old policy for new life insurance with a rider that pays some long-term care expenses, a combination life insurance and long-term care policy, or a tax-qualified long-term care insurance (LTCI) policy.

With an LTC rider, any payouts for covered expenses reduce (and are usually limited to) the death benefit, and they are typically much less generous than those of a traditional LTCI policy. Optional benefit riders are available for an additional cost and are subject to the contractual terms, conditions, and limitations outlined in the policy; they may not, however, benefit all individuals.

For the same premium, a combination life/LTCI policy typically has a smaller death benefit than a life policy with an LTC rider, but payouts for covered long-term care expenses could be greater. Many of these hybrid policies require a substantial up-front premium that could be paid through an exchange, and buyers don’t have to worry about future rate increases or the issuer canceling the policy, both of which can happen with a long-term care insurance policy. Still, an individual should have a need for life insurance and evaluate the policy on its merits as life insurance.

A traditional LTCI policy may not accept lump-sum premium payments, but you could possibly make several partial exchanges from the cash surrender value of your existing life insurance policy to cover the annual premium cost. A complete statement of coverage, including exclusions, exceptions, and limitations, is found only in the policy.

Create an Income Stream

Another option is to exchange the CSV of a permanent life insurance policy for an immediate annuity, which can provide a stream of income for a specific period of time or for the rest of your life. Each annuity payment will be apportioned between taxable gain and nontaxable return of capital. By exchanging the CSV for an annuity, you will be giving up the death benefit. Annuity contracts generally have fees and expenses, limitations, exclusions, termination provisions, holding periods, and terms for keeping the policy in force. Any annuity guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company.

A 1035 exchange must be made directly between the insurance company that issued the old policy and the company issuing the new policy or contract. The rules governing 1035 exchanges are complex, and you may incur surrender charges from your current life insurance policy. In addition, you may be subject to new sales, mortality, expense, and surrender charges for the new policy.

Weighing a Wider Range of Health Plan Options  

The Affordable Care Act (ACA) does not require small businesses with fewer than 50 full-time employees to offer health insurance. Still, many would like to do so, in part to stay competitive in a tightening job market.

It is often difficult for small businesses to find affordable health coverage. For companies with 3 to 199 employees, the average annual premium for family coverage was $17,615 in 2017.1

In response to an executive order issued by the president, the U.S. Department of Labor is easing restrictions on association health plans (AHPs), which could make it easier for small employers and sole proprietors with shared interests to join forces and buy insurance as a group.

Association Health Plans

Under the new rule, AHPs will be permitted to serve employers in a city, county, state, or multistate metropolitan area regardless of industry, or in a particular industry nationwide. The Congressional Budget Office estimated that up to 4 million people could switch their coverage to AHP plans by 2023.2

An AHP may have more bargaining power and can spread risk among a larger pool of employees, which can help lower premiums. In addition, AHPs don’t have to meet ACA rules requiring coverage for all 10 essential health benefits (such as maternity, prescription drug coverage, hospitalization, and mental health care).

AHP plans must cover pre-existing conditions, however. They will also be subject to the same consumer and health-care anti-discrimination protections that apply to large businesses.

ACA-Compliant Plans

Small businesses with 1 to 50 employees can still purchase comprehensive small-group health insurance that meets ACA standards through the Small Business Health Options Program (SHOP). Employers must have an office or worksite in a state to use that state’s SHOP and must offer coverage to all full-time employees. Businesses with fewer than 25 employees may receive a tax credit of up to 50% of premium costs for SHOP plans only.

Self-employed individuals and others without access to group health plans can buy individual coverage from state-based exchanges. Consumers can compare plans online, and families with incomes up to 400% of the federal poverty level may be eligible for tax credits that reduce premiums. (Subsidies are not available for AHP plans.) Information about ACA-compliant health plans for individuals and small businesses can be found at healthcare.gov.

1) 2017 Employer Health Benefits Survey, Kaiser Family Foundation
2) Congressional Budget Office, 2018

Health Savings Account: Funding an HSA Could Help You Prep for Retirement

By one estimate, the average 65-year-old couple retiring in 2017 could spend more than $404,000 on health-care expenses in retirement. This figure includes lifetime premiums for Medicare, supplemental insurance, dental coverage, deductibles, coinsurance, and other out-of-pocket costs.

The primary purpose of a health savings account (HSA) is for workers to set aside pre-tax income to pay current and future medical expenses not covered by health insurance. This is why HSAs are sometimes called Medical IRAs. They incentivize saving with three powerful tax advantages: (1) the dollars you contribute are deducted from your adjusted gross income, (2) investment earnings compound tax-free inside the HSA, and (3) withdrawals are untaxed if the money is spent on qualified health-care expenses. (Depending on the state, HSA contributions and earnings may or may not be subject to state taxes.)

Another benefit is that account funds not needed for health expenses are available for any other purpose after you reach age 65. When HSA money is spent on anything other than qualified medical expenses, withdrawals are taxed as ordinary income but don’t incur the 20% penalty that applies to taxpayers under age 65.

Eligibility and Contribution Limits

To be eligible to establish or contribute to an HSA in 2019, you must be enrolled in a qualifying high-deductible health plan (an HDHP with a deductible of at least $1,350 for individuals, $2,700 for families). Qualifying HDHPs also have out-of-pocket maximums, above which the insurer pays all costs. In 2019, the upper limit is $6,750 for individual coverage or $13,500 for family coverage, but plans may have lower caps. This feature could help you budget accordingly for a worst-case scenario.

Premiums are typically lower for HDHPs than they are for traditional HMO and PPO health plans; members usually pay more upfront for services such as physician visits, surgical treatment, and prescriptions, but they typically receive the insurer’s negotiated discounts.

Contribution Rules

The maximum HSA contribution limit in 2019 is $3,500 if you have individual coverage or $7,000 if you have family coverage. An additional $1,000 can be contributed starting the year you turn 55. Some employers make an annual contribution to employees’ HSAs.

Once in your lifetime, you can make a tax-free rollover from your IRA to an HSA (subject to maximum annual contribution limits), as long as you have HSA-eligible HDHP coverage. Transferring money to an HSA avoids the tax bill and potential penalty you would have if you withdrew money from a traditional IRA to pay medical bills. However, you must continue to be enrolled in an HSA-eligible HDHP for 12 months after the transfer, or the IRS will consider it to be a taxable IRA distribution.

Another Retirement Resource

A well-managed HSA could play an important role in your long-term retirement strategy. Although HSA funds cannot be used to pay regular health plan premiums, they can be used for Medicare premiums and qualified long-term care insurance premiums and services during retirement. Once you sign up for Medicare, however, you can no longer contribute to an HSA.

If you can afford to fund your HSA generously while working, some of those dollars could be left untouched to compound on a tax-deferred basis for a number of years. When HSA balances reach a certain threshold, the money can be steered into a paired account with investment options similar to those typically offered in a workplace 401(k).

You could also pay current medical expenses out of pocket and preserve accumulated HSA assets for use during retirement. But save your receipts — you might want to reimburse yourself down the road if you have an unexpected cash crunch.

Where There's a Will...

A 2017 survey found that only 42% of U.S. adults — and only 36% of those with children under age 18 — had a will or a living trust.1 (A living trust can serve some but not all functions of a will; you should have a will even if you have a trust.)

The most common reasons given for not taking this simple step are procrastination and not having enough assets.2 In fact, creating a will does not have to be difficult or time-consuming, and everyone should have one regardless of his or her assets. Here are three good reasons.

Distribute property. A will enables you to leave your property at your death to anyone you choose: a surviving spouse, a child, other relatives, friends, a trust, or a charity. Transfers through your will take the form of specific bequests (e.g., heirlooms, jewelry, or cash), general bequests (e.g., a percentage of your property), or a residuary bequest of what's left after your other transfers. It is generally a good practice to name backup beneficiaries.

Your spouse may have certain rights with respect to your property, regardless of the provisions in your will. Also, assets for which you have already named a beneficiary pass directly to the beneficiary (e.g., life insurance, pension plans, IRAs).

Appoint a guardian. In many states, a will is the only way to specify who you want to act as legal guardian for your minor children if you die. You can name a personal guardian, who takes personal custody of the children, and a property guardian, who manages the children's assets. This can be the same person or different people.

Name an executor. A will allows you to select an executor to act as your legal representative after your death. An executor carries out many estate settlement tasks, including locating your will, collecting your assets, paying legitimate creditor claims, paying any taxes owed by your estate, and distributing any remaining assets to your beneficiaries.

Though it is not a legal requirement, a will should generally be drafted by an attorney. There may be costs involved with the creation of a will or a trust, the probate of a will, and the operation of a trust.

Consider the Pros and Costs

It's exciting to discover an opportunity to expand the size or scope of your business, and sometimes more workers are needed to make that happen. In the fourth quarter of 2017, 32% of small-business owners said they intend to increase the number of jobs in their companies over the next 12 months.1

How do you know if your business is really ready to take on new employees? Start by estimating the potential revenue and profit gains, in light of the additional costs.

Help Wanted?

Here are a few more signs that it may be time to hire.

• Customer demand for your company's goods or services is steadily increasing. It may take some time to confirm that growth is consistent and not a seasonal or temporary surge. 
• You (and/or your staff) can no longer handle critical work in a timely manner, and customer service is suffering. 
• You regularly pay current employees a significant amount of overtime. 
• You would like to act on attractive growth opportunities, such as opening a new location. 
• One or more people with a particular skill set are needed to help develop a new product or add to your menu of services.

Run the Numbers

A new employee's salary can be substantial by itself, but Social Security, Medicare, and unemployment taxes add to the employer's total costs, as do legal requirements such as workers' compensation insurance. For example, U.S. employer costs averaged $35.28 per hour worked in June 2017, with $24.10 going to wages and $11.18 for benefits.2 Of course, an employer's actual costs will vary widely by industry, region, and the type of position.

Small businesses may not offer workplace benefits (such as health insurance and retirement plans) commonly provided by large companies. Even so, offering a more generous benefit package might be helpful for recruiting and retaining qualified employees, a task that has become more difficult in competitive job markets.

There may be additional expenses associated with screening applicants, training new workers, and complying with various federal and state regulations, some of which may be specific to your industry. In fact, you might consult an accountant to help determine whether you can afford to hire extra help.

1) Gallup, 2017
2) U.S. Bureau of Labor Statistics, 2017

Social Security is complex, and the details are often misunderstood even by those who are already receiving benefits. If you’re looking forward to Social Security, whether in one year or 30 years, it’s important to understand some of the basic rules and options and how they might affect your financial future.

Full retirement age (FRA). Once you reach full retirement age, you can claim your full Social Security retirement benefit, also called your primary insurance amount or PIA. FRA ranges from 66 to 67, depending on your birth year (see chart).

Claiming early. The earliest you can claim your Social Security worker benefit is 62. However, your benefit will be permanently reduced if claimed before your FRA. At age 62, the reduction would be 25% to 30%, depending on your birth year. Your benefit may be further reduced temporarily if you work while receiving benefits before FRA and your income exceeds certain levels. (When you reach FRA, an adjustment is made and you will regain any benefits lost due to excess earnings.)

Claiming later. If you do not claim your benefit at FRA, you will earn delayed retirement credits for each month you wait to claim, up to age 70. This will increase your benefit by two-thirds of 1% for each month, or 8% for each year you delay. There is no increase after age 70.

Spousal benefits. If you’re married, you may be eligible to receive a spousal benefit based on your spouse’s work record, whether you worked or not. The maximum spousal benefit, if claimed at your full retirement age, is 50% of your spouse’s PIA (regardless of whether he or she claimed early) and doesn’t include any delayed retirement credits. It you claim a spousal benefit before reaching your FRA, it will be permanently reduced.

Dependent benefits. Your dependent child may be eligible for benefits after you begin receiving Social Security if he or she is unmarried and meets one of the following criteria: (a) under age 18, (b) age 18 to 19 and a full-time student in grade 12 or lower, (c) age 18 or older with a disability that started before age 22. The maximum family benefit is equal to about 150% to 180% of your PIA, depending on your situation.

Survivor benefits. If your spouse dies, you can claim a reduced survivor benefit as early as age 60 or a full survivor benefit — 100% of your deceased spouse’s PIA and any delayed retirement credits — if you wait until your full retirement age. If you are eligible for a survivor benefit and one based on your own work record, you could claim a survivor benefit first and switch to a benefit based on your work record at your FRA or later, if it would be higher.

Divorced spouses. If you were married for at least 10 years and are unmarried, you can receive a spousal or survivor benefit based on your ex’s work record. If your ex is eligible for but has not applied for Social Security benefits, you can still receive a spousal benefit if you have been divorced for at least two years.

These are just some of the fundamental facts to know about Social Security. For more information, including an estimate of your future benefits, see ssa.gov.