Estate Tax Issues

In response to the NY Times article titled Estate Tax Will Return Next Year, but Few Will Pay It, I’d like to say this:

The reduction in the estate tax to its lowest rate since 1931 is outrageous. The estate tax has no real effect on jobs- most of the value in estates is from stocks. So the recession is not relevant to estate tax policy.

What is relevant for estate tax policy is that the wealthiest 0.25% will now be able to pass up to $10 million tax free to their heirs. Less of their money will be paid as taxes, further increasing the deficit and the likelihood that middle class people in coming years will pay higher taxes and/or see public programs they count on cut.

This new estate tax means that estates will pay a lower effective tax rate than wage earners. How is that fair by any standard? Shouldn’t estates pay the same effective rate as lottery winners, which have no exemption?

I hope President Obama fights hard for a stronger estate tax.


What’s the best life insurance policy?

Wall Street Journal had an article titled “Honestly, What’s the best policy?” about a couple named Rich & Misty who question the life insurance policy they bought.  One of the comments on the site was completely on-point, IMO:

Rich & Misty, I think your purchases were sound decisions made with a reputable provider of life insurance. You were not “fleeced”, as long as you are comfortable with the total amount of insurance selected and the time horizon for its use. As it’s been said, the best policy is the one in-force, bought for the least amount of dollars, the day you die. If history repeats itself, your whole life policies will have an internal rate of return (IRR) in the 4-5% area. Exciting? No, but it is a safe, fixed income product with favorable tax treatment.

Sure, my perspective is as a life insurance agent. This article was written with a built in bias against either (a) professional and commissioned insurance agents or (b) the insurance industry in favor of the investment community. Over the course of your policy, my compensation will be about 2% of your premiums-on par with other investment programs.

I would like to see the authors, who write these pieces, complete a few CLU insurance courses offered by the American College. Perhaps this may change their perspective on the subject.

The Life Insurance Underwriting Process

In order for a life insurance company to issue an insurance policy on an individual (applicant), the applicant has to supply extremely personal information to the insurance company as well as submit to a medical exam. The underwriting process could take as little as one week or as long as several months.

Step 1: Information Gathering
An insurance company will request various personal information of the applicant, including but not limited to:

  • Medical history
  • Family medical history
  • Hazardous avocation/occupation
  • Income
  • Lifestyle

Step 2: Medical Exam
The average medical exam (which is at no cost to the applicant) takes 20 minutes. The examiner will ask details related to current and past medical history. The applicant will be required to give a blood and urine specimen and, in some cases, an ECG (electrocardiogram). Depending on how the medical questions are answered, an insurance company may ask your medical doctor(s) for more detail on any conditions in question. This gathering of information is practically a standardized method used with all domestic insurance companies

Step 3: Underwriting Review
Once all of the information has been gathered, an individual from the insurance company (called an underwriter) evaluates the data. At this evaluation, the underwriter assigns debits or credits based on the company’s very own guidelines. For example, a credit would be assigned when the height and weight fall into a prescribed underwriting guideline; a debit would be given for a cholesterol/HDL ratio that is higher than company guidelines. The company weighs the balance of the debits and credits. The company determines the policy’s cost by considering the debits and credit in relationship to a hypothetical policy.

As a consumer, here is the hard part to understand in getting a policy: insurance companies have different underwriting guidelines. This is why the least expensive policies are the most stringent on their guidelines.

Most life insurance companies will help you out during the underwriting process. Throughout every step of the underwriting process, my company Life Ant, will provide you with details, keep you abreast of where you stand in the process, and help guide you and answer any questions you may have. Ultimately, making the underwriting process less intimidating and more manageable.

Term Life Insurance FAQ

Q: How long do term life insurance policies last?

A: Term policies are typically issue 10 year term, 20 year term or 30 year term policies. As the term of the policy increases it tend to take on more of the characteristics of permanent life policies. In fact, level premium term insurance to age 100 is, by definition, ordinary whole life insurance.

Q: What is a “renewable” term policy?

A:Term policies are either renewable or non-renewable. This means, for a small additional premium, the policy owner has the contractual right to continue the contract. If the policy is renewable, the policyholder may unconditionally renew the coverage for successive terms at higher premiums (appropriate for the given renewal age) merely by paying the indicated premium. No forms must be signed or evidence of good health must be given at each renewal period.

If the policy is non-renewable, at the end of the term of coverage the policyholder has no legal right to continue the insurance. This means the policy owner must apply for new insurance. If the insured’s health has deteriorated, he or she may no longer qualify for coverage, or coverage may be obtained only at a significantly higher rate.

Q: What is a convertable term life insurance policy?

A:This is one of the most important options a policyholder should consider in purchasing term life insurance. In return for a slightly higher premium, most renewable term life insurance policies give the policyholder a contractual right to exchange the term life insurance policy for permanent life insurance without evidence of insurability. Typically, the conversion privilege gives the policyholder an absolute contractual right to convert the term life insurance policy into permanent life insurance that builds cash value. The conversion privilege often expires after a specified number of years or after the insured reaches a certain age.

Q: What is level term life insurance?

A: As its name implies, level term life insurance means that the death benefit remains level throughout the selected term of coverage. Term policies may be issued with virtually any  initial face amount (the amount payable at death). Generally, premiums for level term life insurance increase each time the contract is renewed even though the face amount remains the same.

How Much Life Insurance Do I Need?

This is one of the most frequently asked questions people find themselves asking when shopping for life insurance. In order to make an informed decision about the right amount of life insurance to purchase, it is important to consider the reasons you are purchasing a policy. Some people purchase life insurance to make sure their family is taken care of in the event of their untimely death, while others seek insurance coverage to protect their businesses and/or business partners

Family Protection Considerations

If your primary reason in seeking insurance coverage is to make sure your family will not have to struggle financially when you pass away, you need to think about how much money they will need to live comfortably without you.

There are two ways to calculate your insurance needs, the first is the easiest of the two and consists of simply adding all your current expenses (including mortgage and all outstanding debt), final expenses (burial costs) and a college fund (if there are any children). The sum of these expenses equals the amount of coverage you will need.

The second method focuses more on replacing your income for a specified period of time. For example, lets assume you are 45 years old and your spouse is also 45 and should be retiring at age 65. The amount of coverage you would obtain will be calculated by taking your net annual income and multiplying it by the number of years your spouse has left till retirement (20 years in this scenario).

These are a couple of methods that should be used as guidelines to determining how much life insurance coverage you may need. The best, and more accurate approach, would be to speak with a licensed agent who will conduct a “needs analysis”. The needs analysis will provide the agent all the information listed above as well as other key factors which will aid in the decision making process.

Business Considerations

Business owners, on the other hand, often purchase life insurance to protect their companies and business partners from the financial loss the death of key people brings (which is often an owner). The goal being to keep the business from losing its value and being forced into bankruptcy or a discounted sale by heirs.

Life insurance is also used in buy sell agreements which are used to fund the purchase of business interest of a deceased owner instead of having to pay cash or take on the relatives of the deceased owner as partners. This helps the heirs as well since they receive a pre-negotiated price which results in a fair value for the business and a guaranteed buyer.

What is a buy sell agreement?

A buy-sell agreement (click the wiki link to view more) is a legal contract restricting the right to dispose of a business interest to specified parties according to specified terms. Typically, this arrangement requires a sale of the business interest, at a formula-determined price, upon one or more of the following triggering events:

  • Death,
  • Disability,
  • Retirement,
  • Withdrawal from the business at some earlier time,
  • in some cases upon attachment of the owner’s property by creditors or in a divorce.

These “triggering events” will vary depending on the needs, desires and circumstances of the parties involved. Life insurance is used as a funding tool that facilitates the purchase of business interest by the company, surviving partner(s) or interested party from the deceased party’s estate.

To put it in simple terms, owner A buys life insurance on owner B in the amount equal to the value of the business and owner B does the same for owner A. When owner B dies, the proceeds of the life insurance policy are received by the beneficiaries of owner B, in agreement with the terms of the buy-sell agreement. As a result, owner A retains full interest in the business and becomes the sole owner; the heirs of owner B received a fair price for the business and are not forced to sell at a significant discount.

When is the use of a buy-sell agreement recommended?

  1. When it is essential or desirable to create a market for a business interest upon death, long term disability, retirement, divorce, or bankruptcy of an owner.
  2. When a shareholder is unwilling or unable to continue running a business with the family of a deceased co-stockholder or someone outside the business.
  3. When the continuation of a business at a owner’s death involves a high amount of financial risk and it is desirable or necessary to convert the business into cash at that time. For example, if your estate is large and will not qualify for the estate tax marital deduction, a means to turn the business interest into cash at a fair price must be found so that taxes can be paid.
  4. When a highly paid owner-employee dies, his or her salary often dies too. Proceeds from the buy-sell agreement help replace the lost salary.
  5. When federal or state law make it imperative that the “closeness” of a close corporation be maintained. For example, too many shareholders or the wrong type of shareholders could result in an involuntary termination of “S” corporation status.