Why Life Insurance

The main benefit of life insurance is to leverage funds to create an estate that can provide for survivors or to leave something to charity. Single-premium life (SPL) is a type of life insurance in which a lump sum of money is paid into the policy in return for a death benefit that is guaranteed to remain paid-up until you die. Here we look at some of the different versions of SPL available, which offer a wide range of investment options and withdrawal provisions.

With single-premium life insurance, the cash invested builds up quickly because the policy is fully funded. The size of the death benefit depends on the amount invested and the age and health of the insured. From the insurance company's perspective, a younger person is calculated to have a longer remaining life expectancy, giving the funds paid in the premium more time to grow before the death benefit is expected to be paid out. And, naturally, the larger the amount of capital you initially contribute to your policy, the greater your death benefit will be as well. For example, a 60-year-old female might use a $25,000 single premium to provide a $50,000 income-tax free death benefit to her beneficiaries ; whereas a 50-year-old male's $100,000 single premium might give a $400,000 death benefit.

Living Benefits
While the death benefits of insurance policies provide you with an efficient means to provide for your dependents, you also need to consider unexpected expenses which can crop up in your old age. You probably understand the importance of long-term care insurance, as long-term care can often turn out to be an expensive predicament. But suppose you have put off buying this important coverage because you can't bring yourself to pay the annual premiums? SPLs can offer a solution. (To learn more, see Long-Term Care Insurance: Who Needs It? and Taking The Surprise Out Of Long-Term Care.)

Some SPL policies will give you tax-free access to the death benefit to pay for long-term care expenses. This feature can help protect your other assets from the potentially overwhelming cost of long-term care. The death benefit remaining in the policy when you die will pass income-tax free to your beneficiaries. And if you don't use any of it, the money will go to your loved ones just as you had originally planned. Therefore, your SPL plan allows you to cover your long-term care needs as required, but still leaves the maximum possible amount of your death benefit intact for your dependents.

A number of SPL plans also include a feature that will let you withdraw part of the death benefit if you are diagnosed with a terminal illness and have a life expectancy of 12 months or less. This flexibility can make the decision to sink away a large single-premium payment into a SPL policy less daunting for some people, and it is important to consider if you have limited financial assets outside of your SPL.

Investment Options
There are two popular single-premium policies that offer different investment options.

• Single-premium whole life pays a fixed interest rate based on the insurance company's investment experience and current economic conditions.
• Single-premium variable life allows policy owners to select from a menu of professionally managed stock, bond and money market subaccounts, as well as a fixed account.

Your choice should depend on your ability to handle market changes, the makeup of the other assets in your portfolio , and how you plan to use the policy's cash value. With a fixed interest rate, you can depend on the safety and stability of the constant growth rate in your policy, but you miss out on potential gains if the financial markets have a good run. The minimum death benefit is established when you purchase the policy, but if the policy's account value grows beyond a certain amount, then the death benefit can go up as well.

On the other hand, if you prefer the possibility of underperformance over the certainty of a fixed interest rate, a variable life insurance policy with subaccounts invested in equities and bonds may make more sense for you.

Withdrawal Options
SPL policies give you control over your investment, allowing access to the cash value for emergencies, retirement or other opportunities. One way to tap into the cash in the policy is with a loan.

You can generally take a loan equal to 90% of the policy's cash surrender value. This will, of course, reduce the policy's cash surrender value and death benefit, but you have the option to repay the loan and re-establish the benefit.

Companies will also let you withdraw funds and deduct the withdrawal from the policy's cash surrender value. They usually have a minimum amount ($500 to $1,000) that you can remove. The amount you can take out each year without paying a surrender charge might be 10% of the premium paid in or 100% of the policy's gains, whichever is greater.

However, an extra cost can arise from withdrawals or loans from your SPL, since SPL policies are usually considered modified endowment contracts. This means there is a 10% IRS penalty on all gains withdrawn or borrowed before age 59.5. You will also have to pay income tax on those profits. Plus if you cash in the policy, the insurance company might hit you with a surrender charge.

Tax Treatment
Your investments will grow tax-deferred inside the policy. As noted above, you will only pay tax on the earnings if you withdraw or borrow from the policy. Your named beneficiaries, however, will receive the benefits income-tax free and without the time delay and expense of probate . This is an important benefit, as you do not want the effort and expense you devoted to providing death benefits for your dependents to be muted by undue time delays and probate costs.

Drawbacks
The minimum amount you can invest in a SPL policy is generally $5,000, which can make it cost-prohibitive for many investors. Nor are additions allowed. And you should only consider using funds that you had intended to pass on to the next generation or to help fund a long-term goal, such as retirement. Also, you will have to meet the insurance company's medical underwriting standards to qualify for SPL.

Conclusion
If you have a lump sum of cash that you don't need right now and you want guaranteed life insurance protection for your family or your favorite charity, single-premium life insurance may be the ideal product for you. It is also an excellent way to begin a child's life insurance program.

For instance, you could specify a child or grandchild as the insured and keep the policy in your name. That way you would still have control over the cash value. Or you could make him or her owner as a way to remove the policy from your estate. However you choose to use a single-premium life insurance policy, remember to consider your personal financial situation and other retirement vehicles already in use so you can select and shape your policy to best match your needs.

 

Choose The Right Executor

Most people know that they should have a will , but few individuals understand how important it is to select the right executor to help manage their affairs and distribute their assets to heirs upon their death. The fact is that picking the "right" executor will mean that loved ones will receive their inheritance on a timely basis. Picking the wrong one could lead to lengthy delays, tax problems and possibly even a " will contest".

In order to provide a better understanding of why it is so important to select a capable executor, we'll explore in this article what happens to your estate (and the executor's involvement) after you pass away. (To find out more about making a will, see Why You Should Draft A Will and Three Documents You Shouldn't Do Without.)

Your Estate Is Opened
In order to officially "open" your estate in the U.S. and begin the process of probating your will, the executor will file paperwork with the county where he is stating that he is the executor and will be representing the estate. The executor must also then notify creditors and/or other interested parties of your death and their right to make a claim against your estate. (To keep reading about estate planning, see The Importance Of Estate And Contingency Planning and Getting Started On Your Estate Plan .)

Some probate courts will require that certified letters are sent to potential creditors. Others simply require that a notice be published in a local newspaper. But in any case, it is up to the executor (with some help from the court) to identify those creditors and to properly notify them. To be clear, notification errors could lead to lawsuits from beneficiaries , heirs and/or creditors. Therefore, the task definitely warrants a mature individual. (Find out how to choose your beneficiaries in Update Your Beneficiaries, Problematic Beneficiary Designations - Part 1 and Part 2.)

So what is probate? For those unaware, probate is a process conducted by a court (typically referred to as a probate court) that determines the validity of the deceased's will. The court also helps to identify and locate beneficiaries and supervises the distribution of assets. (Find out how to avoid probate costs in Skipping-Out on Probate Costs.)

Collecting Assets
It is the executor's job to take an accurate inventory of the deceased's assets. This includes making a list of all bank, brokerage and retirement accounts, as well as any property the deceased owned. Additionally, an inventory of personal effects, such as collections, antiques or other valuables must be tabulated and presented to the probate court for review.

Obviously, this can be an extremely time consuming task. It may mean going through the deceased's personal paperwork for information, interviewing heirs or perusing ownership documents at the local town hall. And again, the information is expected to be accurate and complete so that the heirs receive their inheritance(s) on a timely basis.

Managing the Estate
The executor is charged with using the estate's funds to pay any bills that the deceased had outstanding (such as utility or credit card invoices) at the time of his or her death. The executor must also collect any money that is owed to the deceased. This is extremely important because the money must then be passed on to the beneficiaries according to the provisions of the will.

If a business is involved, the executor may have to buy or sell certain assets, make payroll distributions and otherwise temporarily run the enterprise (or at the very least, find someone to do it) until it is passed on to heirs (again as per the provisions of the will).

In short, this means that having a business-savvy executor is also a must.

Dealing with Taxes
It is up to the executor to find an attorney or an accountant to calculate any estate taxes that are due (or do it themselves), and then to file the appropriate tax return to make the payment. In addition, the executor is responsible for filing a final income tax return (form 1040 ) for the deceased. The purpose of this is to pay any taxes that are due on income that was earned in the last year of the deceased's life, and/or to receive any refunds (that would ultimately be passed to the beneficiaries). Again, these tasks require an intelligent, disciplined individual who is able to appreciate the implications of his or her duties. (To read more about estate taxes, see Get Ready For The Estate Tax Phase-Out.)

Closing the Estate
This is a process where the executor must prove to the probate court that he or she has adequately notified all potential creditors of the deceased's death. The executor must also prove to the court that he or she has paid all bills and taxes that were due. As part of the process, the executor may also have to show releases from the state that all liabilities have been settled, and provide a thorough accounting of any income earned or disbursements made by the estate after the death of the deceased.

Distributing Assets
After all debts have been settled, it is up to the executor to distribute the assets to heirs as per the provisions of the deceased's will. This may mean paying funds to heirs directly, or, if the will provides for it, funding a trust for minors.

While this may sound like an easy task, it isn't. After all, the executor may have to deal with jealous family members or others that feel cheated that they didn't get their due. Therefore, it's up to the executor to meet with and explain the distributions to heirs. In other words, to be a "people person". Incidentally, the goal here is to prevent will contests (where an entity files suit trying to obtain funds not bequeathed to them in the will) which could drag the distribution process out even longer.

Choosing The Right Person
Most individuals tend to choose family members or other close friends or relatives to act as an executor and to administrate their wills upon their death. But because of the intricacies that go part and parcel with the job, people must realize that the most competent individual (not the closest in relation) should be chosen. As mentioned before, this does not mean that the chosen individual must do everything themselves. Executors are allowed to hire others to help with various aspects of the process (such as an accountant to help with the taxation portion).

With that in mind, if you don't have a friend or a relative that you think can complete these duties in a satisfactory manner, don't worry - attorneys, accountants and other professionals can act as an executor for a fee, usually derived from the deceased's estate. And while that fee may be in the hundreds or even thousands of dollars (depending upon the size of the estate and difficulties involved) it may be worthwhile, especially if it means that your family will receive their inheritance intact and on a timely basis.

The bottom line is that most people assume that being an executor is an easy task that can accomplished by anyone, but because the probate process is so involved and may entail interaction with tax and legal professionals, only an intelligent, dependable person should be named as executor.