Life Insurance 101: Preparing for the Unexpected in Illinois

Let’s face it, no one likes to think about, let alone, discuss dying. The unfortunate reality is that accidents, sudden illness, or terminal illness happen every day. Life insurance ensures that your family or business can continue financially without you. Are you protected?

Some basic key facts about life insurance:

  • 6 in 10 people own life insurance
  • 30% of households know they need more life insurance
  • 40% of all households would feel the financial burden within 6 months if the primary wage earner passed away, including households making more than $100,000
  • Individuals should own their own life insurance policy—not just through an employee benefit
  • Non-wage earners need life insurance also
  • 60% of life insurance purchases are done through a local agent

Some uses of life insurance:

  • Create an estate
  • Pay estate (death) taxes
  • Pay off a home mortgage
  • Provide an education fund
  • Create or supplement a retirement fund
  • Replace lost income
  • Comply with a court order
  • Make a gift
  • Fund a business transfer, business continuation, or buy-sell agreement
  • Reward and retain valuable employees
  • Protect a business from the loss of a key person
  • Final expenses such as funeral expenses

Factors that determine the rate and premium:

  • Death benefit amount or type of policy contract (term, whole, or universal)
  • Age at issuance
  • Male or female
  • Height and weight
  • Tobacco use
  • Medications and medical history
  • Family history

Basic Types of Life Insurance

Term – Temporary insurance purchased for a specified period of time—usually 10, 20, 25, and 30 year term contracts. They are usually purchased when the need is the greatest and premium is small. They can be used to pay off a mortgage or loan payoff, income replacement, provide an education fund, or used in a business situation like key man insurance. It usually has an initial low cost and the premium remains the same through the term contract. Many term policies can be renewed or converted to a permanent product. It does not build any cash value.

Whole Life – Permanent policy form where the face value amount is paid upon the death of the insured whenever the death occurs. It can be used for permanent protection, college planning, estate protection, and retirement planning. It does build cash value, and you can even borrow against the cash value in the policy. The premium remains the same throughout the life of the contract.

Universal Life – Permanent policy that has the advantage of a flexible premium and adjustable life benefit. The cash value is built up in the policy and can increase or decrease the face amount of the death benefit. If enough cash value is built up, it can even be used to make premium payments.

Taxation of Life Insurance

  • Generally, death proceeds are not subject to federal income tax when received by the beneficiary. There are minor exceptions to this rule so talk to your life insurance agent or tax advisor.
  • Life insurance premiums are not tax deductible. The only exception to this is when the premium is paid by an employer for the benefit of the employees in a group life policy.
  • Cash values grow tax deferred until received FIFO. When cash values are withdrawn, those that exceed the premium outlay are subject to ordinary income tax. Cash values are paid in addition to a death benefit—such as Option B in a universal life contract—are considered death benefits, and are not normally subject to income tax.

Life insurance serves as a foundation for any quality financial plan. Life insurance policies can be used for something as simple as a grandmother purchasing a whole life policy when a grandchild is born to use the cash value to fund college expenses or as complex as offsetting estate taxes. We always suggest that you speak with your attorney and accountant for legal and financial advice. Life insurance can be used as another tool in managing personal or business risk portfolios.

Disability Insurance

Disability insurance is the broadest type of coverage to replace a worker’s income if they are not able to work due to an illness, injury, sickness, or accident.  This provides 24 hour coverage.

Types of Disability Insurance:

  • Employer paid
    • Short-term disability
    • Long-term disability
  • Employer-sponsored coverage paid by the employee-sometimes known as worksite or voluntary plans
  • Individual Disability Coverage- purchased and paid for outside the workplace

If your employee offers disability coverage-there is unlikely a reason to not sign up or you may be automatically enrolled. If you don’t have coverage at work or you are self employed, you may want to purchase an individual disability policy.  They are usually more expensive and will be subject to individual underwriting.  If your employer pays the premium, it is important to note that your benefits, should you become disabled, will be subject to income tax.  If you pay the premiums yourself, generally the benefits would be tax free.

Factors that determine the cost of premium:

  • Age
  • Health history
  • Occupation
  • Current income
  • Key plan options selected

Plan options:

  • Elimination period – the time you must wait for benefits to begin, usually 30, 90, or even 180 days is common
  • Benefit period – how long the benefits will last. Two, five, ten, or until age 65 are common options.
  • How much of your income will be replaced- usually 40-65% of your pre-disability earnings at the time of purchase. Consider if the plan has options to include inflation factors.
  • What disabilities are covered:
    • Own occupation – A policy with an own occupation definition will pay benefits if your disability stops you from doing the job you had at the time of disability
    • Any occupation– A policy with any occupation definition will pay if your disability prevents you from doing any work for which your educaiton and experience are appropriate.

For more information on disability insurance, please visit http://www.disabilitycanhappen.org

Contact Northern Insurance to discuss options for Group and Individual Disability Insurance.

Long Term Care Insurance

Long term care policies reimburse policyholders a pre-selected daily amount for services to assist them with activities of daily living such as bathing, dressing, or eating. It can be purchased as a standalone policy or as a rider on many life insurance policies.

Why Should You Purchase Long Term Care Insurance?

  • Protects your assets and standard of living
  • Avoid being a burden on your family and preserve your independence
  • Guarantee choice of care and caregivers (allows you to stay at home as long as possible)
  • Leave more assets to family, church, or other worthy causes
  • Peace of mind

It can provide coverage for:

  • In home
  • Assisted living facility
  • Adult day care
  • Hospice care

Long Term Care Facts:

  • The average nursing home costs $6235 per month for a semi private room
    • $3293 per month for care in assisted living facility
    • $21 per hour for home health aid
    • $67 per day at an adult day health care center
  • Medigap coverage does not extend to long term care coverage
  • Health insurance will follow the same rules as Medicare coverage—the skilled nursing stay must follow recent hospitalization for the same related condition and is limited to 100 days
  • Coverage of home care is limited to medically necessary skilled care
  • Most forms of private insurance do not cover custodial or personal care services
  • Disability insurance does not cover medical care or long term care services
  • Medicaid pays for LTC at or below poverty level. You will be required to divest your assets before being eligible for Medicaid.

Business Continuation and Succession Planning

You’ve worked long and hard to accomplish one of the American dreams: owning your own business. Have you thought about what would happen if you became disabled and couldn’t work? Have you planned on who will carry on the business after you die or if you want to sell it to a partner or a competitor? It’s important to have a plan in place.

Some planning tools can be:

Buy/Sell Agreement – Discuss with your attorney and accountant the best plan of action. A buy/sell agreement should address the following: death, disability, retirement, termination of employment, valuation method, first right of refusal to purchase the business, and possible terms of finance. Life insurance can be used to fund the plan. You can also purchase key person life insurance. You can also have buy/sell disability and key person disability coverage.

Business Overhead Expense – Provides reimbursement of eligible expenses in the event of disability of the person specified in the policy, the owner, and the primary revenue earner in the business. The policy will reimburse for wages paid to support staff unless they are in the same profession as the insured person. It can also be endorsed to provide funds to hire a replacement for the insured person.

Key Person Life Insurance – Used to protect the business from the adverse economic effect if their key person dies or becomes disabled. The business applies for the insurance on the key person, pays the premium, owns the policy, and is the beneficiary upon the death of the key person. The business can use the proceeds to hire a replacement, sell the business, or use for business continuation. Life insurance can help bolster credit for the business, cash accumulation can be used to borrow against, and it can improve morale.

Executive Bonus Plans (162 Plans) – Life insurance can be used to keep key executive employees. The employer pays the life insurance premium either directly or indirectly to the insurance company by means of a bonus paid to the executive. The additional income used to pay the premiums are deductible by the employer and reported to the executive as compensation. Oftentimes, the employer will gross up the income (called double bonus) to cover the extra taxes associated with the increased income. The employee is the actual owner of the life insurance policy.