Life Insurance Cost

Borrowing money is a routine and often essential way to do business in America. Businesses often collateralize their loans with certain assets like inventory, equipment or real estate. Or in some cases the collateral may be more indirect such as company profitability, management integrity, and general business assets.

The smaller a business is, the more that management integrity comes into play. This is usually the business owner, the single driving force of the person. He or she is who the lender will be looking at as the essential way that a business will have the ability to repay their loan as well as the interest. But what if the business owner dies?

In order to protect against the business owner’s potential death resulting in a company not being able to repay a loan or portions of it, there are many lenders who will require the business to have life insurance. It’s a logical and simple concept. In the event the business owner should die, life insurance proceeds are used to pay a portion or all of the business’ outstanding debt.

It would seem logical that premiums for these types of insurance policies should be deductible business expenses. However, courts consistently have said that life insurance premiums for securing business debts aren’t deductible. In a key court case it was reasoned that if the owner does live and pays off the loan, the policy becomes a personal asset to the owner. If it’s the corporation that owns a life insurance policy, the same logic applies. Once the debt is paid off, the insurance policy becomes one of the corporation’s general assets. There is one consolation. When a death benefit is received, the proceeds are one hundred percent income tax free. However, when it comes to estate tax proceeds from life insurance are taxable.

Tax Tips For Owners of Closely-Held Businesses

When it comes to nonqualified deferred compensation (NDC) plans in terms of how they affect family-owned businesses, from a tax perspective they can be either an absolute disaster or great. Joe Owner, for example, is going to receive $350,000 in $50,000 increments over the course of seven years. The amount is often based on the average salary of Joe’s over his last two years employed with the company multiplied by 2.5. Payments will generally start at the time that Joe reaches a certain retirement age or he becomes disabled or dies. If Joe dies the payments that are remaining will go to his beneficiaries.

How is an NDC plan taxed? Nothing is taxed until payments are made. The company will then get a tax deduction as they make the payments. Joe will pay tax as he receives the payments. If the company’s tax bracket is higher than Joe’s, then this can be a great deal. However, if Joe’s tax bracket is high and he happens to die before receiving all the payments, the company’s tax consequences do not change. However the payments that Joe’s family receive get taxed twice: for income tax just as they would have been if Joe was alive, and the second tax is for estate tax. The result is if Joe’s estate tax bracket is 50% and his children happen to be the 40% income tax bracket, after taxes the $100,000 will be reduced to around $30,000.

Instead of setting up an NDC plan, a death benefit only (DBO) plan is a better choice. The main difference between the two plans is that the DBO doesn’t start paying until Joe dies. Estate taxes do not apply to DBO plan payments. The DBO payments due also reduce your business’ value which reduces the estate tax further. Take note that not all rules are covered here.

When it comes to insurance policies, life insurance is certainly one of the more powerful forms of insurance that an individual can have. Unfortunately trying to decipher a life insurance contract can be a difficult process. There is also not any easily accessed collection or database of insurance laws encompassing all states that is readily available. Because of this lack of knowledge a lot of misconceptions and misinformation regarding who is eligible to buy life insurance and the amounts and types that are allowed are fairly common.

In simple terms there are no legal limits in terms of the number of life insurance policies an individual can own or how many from each type. There isn’t any existing legislation that restricts how many life insurance products or polices an individual can buy or own.

The ability that individuals have to own multiple life insurance policies makes it possible for individuals who have limited financial means to purchase additional life insurance policies or coverage as their financial abilities increase. For individuals who may not be able to afford the premium initially on the life insurance policy that has the death benefit most appropriate for their needs, they can purchase one that is more affordable instead. Then over time, as the individual has more money available to spend on life insurance due to earning more money or eliminating debt, they can buy a new life insurance policy that has a death benefit that when combined with their earlier purchase will add up to the appropriate death benefit for their particular situation.

There aren’t any laws that prohibit an individual from buying more than one life insurance policy. However there could be some complications in trying to buy multiple policies at the exact same life. Applicant information on a life insurance policy gets sent to an organization called Medical Information Bureau (MIB). In addition all insurance carriers will research all new customer files before they issue new policies. MIB provides data such dates for earlier life insurance applications, the policy face amounts, a customer’s underwriting class, and whether a policy was either issue or declined. If an individual tries to buy multiple life insurance policies at the exact same time, or within a short span of time, concerns could be raised by the insurance carrier’s underwriting department. That could result in delays or sometimes even a rejection.

In addition to not having any legislation prohibiting or restricting how many life insurance polices an individual can buy or own, there isn’t any legislation in terms of where one can buy a policy or from which companies. Because most insurance gets regulated on the state level, there really isn’t any way that state courts can control an individual’s insurance coverage. No matter where the headquarters of an insurance carrier are located, they can obtain a license quite easily to advertise and sell their insurance products in many states. These cross-border capabilities makes it a lot easier for individuals to buy life insurance that matches their individual needs as well as their financial abilities most appropriately.

There are no laws that restrict the death benefit amount that a beneficiary can obtain either. The value placed on an individual’s life is subject to opinion. The life insurance industry does have several accepted methods to use to help determine appropriate levels of coverage. However, although there isn’t any legislation prohibiting extremely large death benefits, many insurance companies do have internal policies that address very high death benefit amounts. Individuals who apply for life insurance policies with death benefits that are consider higher than what a particular insurance company considers ordinary and normally might need to provide a more detailed explanation or additional documentation for that type of request.

Another benefit of being able to purchase multiple life insurance policies is that it gives an individual the opportunity to address unforeseen financial liabilities or obligations that could develop in the future. Adding a child to the family, for example, will create new financial liabilities and responsibilities for the parents. Because of the flexibility that exists with insurance, the parents can easily buy additional coverage in order to adequate protect their new family addition.

Purchasing multiple life insurance policies is also a strategy used by individuals with enough financial means to do so in order to take capitalize on some sophisticated financial concepts. Purchasing a permanent as well as term life insurance policy simultaneously can give an individual sufficient protection for their financial liabilities that over time will decline. At the same time this ensures they will continue to have coverage.

When it comes to choosing the beneficiary for your life insurance policy, you have the ability to name whomever you want. However, there are a few things you should consider before you actually name your beneficiaries on your life insurance policy documents. For one thing, you need to be name specific. Simply stating “my spouse”or “my wife” could put you at risk of an ex-spouse or partner trying to claim benefits after a divorce. Another thing that many insurance professionals advise people to do is name a secondary or contingent beneficiary. This is for situations where you end up out living your primary beneficiary.

You should always name actual family members as your beneficiaries rather than just allowing the proceeds from your life insurance policy to end up in your estate. A major advantage to death benefits on a life insurance policy is usually they get paid out to beneficiaries very quickly. Normally beneficiaries will be paid within 60 days of filing their claim. This avoids having to go through a lengthy probate court process along with your other assets that are part of your estate.

You can change your beneficiaries on your life insurance policy whenever you want to. However if there are important life changes such as divorce or death of your beneficiary, you do need to make sure you actually do remember to change your beneficiary. It’s possible for your survivors to challenge your named beneficiary. However the process is an expensive and lengthy one.