Understanding the threat of estate taxes on your life insurance proceeds is the first step in protecting these funds from unnecessary taxation. The next steps are determining the appropriate ownership of your policy and selecting a beneficiary. Although there are other alternatives, a life insurance trust can help avoid potential threats to the policy's proceeds.
Variable universal life insurance is among the most flexible products on the market today. It is permanent insurance that provides guaranteed lifetime protection, combining the adjustable premium and adjustable coverage of universal life with the growth potential of variable life. (Guarantees are subject to the claims-paying ability of the insurer.) You control nearly every aspect of the policy, including when and how much you pay in premiums (within limits), the amount of the death benefit, and the way your money within the policy is invested.
How a variable universal life policy works
There is no fixed, required premium that must be paid on a variable universal life policy. Instead, you must simply pay in enough money to cover the insurance company's expenses and the cost of the pure insurance, known as the mortality cost. Generally, however, you'll instruct the company to send you a premium notice for a planned premium, which you can pay, skip, or increase, depending on the policy values at the time.
Each time you make a payment, the insurance company deducts its sales and administrative expenses related to your policy. The remainder of the money is credited to a cash value account, from which the company deducts its monthly cost for insuring your life. You'll need to monitor your cash value to make sure you have enough money in the policy to pay this monthly cost, or the policy will expire (lapse). If you pay in more than is needed to keep the policy in force, the excess remains in the cash value account and is invested in subaccounts, separate from the insurance company's general account.
The separate account
Unlike the cash value in other types of policies, money in a variable insurance policy, including variable universal life, is controlled by the policyowner. Your cash value is placed into an account separate from the insurance company's general account. You choose from a variety of accounts known as subaccounts, including stock funds, bond funds, and money market accounts, into which to invest your cash value. You may generally allocate your money to as many subaccounts at any time without charge, up to certain limits.
Because these subaccounts are securities-based, they have the potential to grow faster than the cash value accounts contained in nonvariable insurance policies. But, of course, with this potential for rapid growth comes greater volatility and the possibility of loss. Growth is not guaranteed, and your cash value will fluctuate on a daily basis. You'll need to pay close attention to the performance of your subaccounts and may want to consult an investment professional. Also, because the cash value of your variable universal life insurance policy is regulated as an investment product by the Securities and Exchange Commission, you should receive a prospectus. The prospectus contains detailed information about investment objectives, risks, charges, and expenses, so read it carefully before purchasing a policy.
Adjustable death benefit
You may change the amount of your policy's death benefit to adjust to your changing financial situation, subject to the insurance company's guidelines. For instance, if you pay off your mortgage, your need for insurance might be reduced. But keep in mind that if you want to raise the amount of your coverage, you must again go through the underwriting process, which may include a medical exam. Also, when your policy is issued, you may have the opportunity to choose between a level or enhanced death benefit option, which you may later switch.
Option 1 (or option A) calls for a level benefit. If your cash value grows, the amount you are charged for ongoing insurance coverage is reduced by an equal amount. For example, if your $200,000 policy has $50,000 of cash value, you will be paying the cost for $150,000 of pure insurance coverage. Your premium requirement is less than if you have no cash value and are paying for the full $200,000 of coverage. Your beneficiary still receives $200,000 at your death.
With option 2 (or option B), your cash value is added to the amount of the death benefit. For example, if you have a $200,000 policy with $50,000 of cash value at the time of your death, your beneficiary receives the combined total of $250,000. But this additional amount is not free. Throughout the life of the policy, you'll pay for $200,000 of insurance coverage, no matter how high your cash value grows.
Partial withdrawals and policy loans
As with most permanent life insurance, your cash value can be used as collateral to secure (generally) tax-free loans from your insurance company. You will be charged a fixed or fluctuating interest rate on the outstanding balance of any loan. If you do take out a loan, that portion of your cash value designated as collateral is transferred to the company's fixed interest account. This is because the chance exists that the balance of your variable subaccounts may fall below the amount of your loan due to market fluctuations. The company charges interest on loans at a rate a few percentage points higher than the return you receive in the fixed account. Consequently, loans have a permanent effect on the performance of the subaccount investment return.
If you have an outstanding loan on the books when you die, the death benefit paid to your beneficiary will be reduced by the amount of the loan plus accumulated interest. Another method of accessing the money in your variable universal life policy is through a partial withdrawal (partial surrender). Since this is not a loan, you're charged no interest for such a withdrawal, but your death benefit will be permanently reduced. Also, a partial withdrawal could trigger a taxable event if the policy is a modified endowment contract or if the withdrawn proceeds exceed the premiums you have paid into the policy.
Sales charges and other fees
With most variable universal life policies, a sales charge is imposed on every premium payment. This charge is generally not sufficient for the insurance company to pay all of the insurance costs incurred in the acquisition of the policy. Over time, the insurance company will recover these costs out of the profits it earns on the policy. However, if you surrender (cancel) your policy before all of these costs are recovered, a surrender charge is imposed against your cash value. In addition, the fund managers of your variable subaccounts will deduct their fees as they would with any mutual fund.
Note: Variable life insurance and variable universal life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company issuing the policy. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and consider this information carefully before purchasing a variable life insurance policy.
This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.
The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.
The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.
The Markets (as of market close February 7, 2020)
Stocks rebounded and long-term bond yields rose last week amid reports of China's plans to cut tariffs on some American imports. The S&P 500, Dow, and Nasdaq reached all-time highs during the week, and global stocks soared. Also helping push stocks higher was a round of favorable fourth-quarter corporate earnings figures and a strong labor report. Investors seemed intent on locking in gains by last week's end as stocks fell somewhat. Nevertheless, each of the benchmark indexes listed here posted solid gains, led by the Nasdaq, which gained more than 4.0%. The large caps of both the Dow and S&P 500 advanced by 3.0% and 3.17%, respectively. The small caps of the Russell 2000, which had been reeling for the past several weeks, climbed 2.65%. Year-to-date, the Nasdaq is more than 6.0% ahead of its 2019 closing value. Only the Russell 2000 is slightly behind last year's mark.
Oil prices dropped again last week, closing at $50.47 per barrel by late Friday afternoon, down from the prior week's price of $51.61. The price of gold (COMEX) plunged last week, closing at $1,573.90 by late Friday afternoon, down from the prior week's price of $1,592.70. The national average retail regular gasoline price was $2.455 per gallon on February 1, 2020, $0.051 lower than the prior week's price but $0.201 more than a year ago.
|
Market/Index
|
2019 Close
|
Prior Week
|
As of 2/7
|
Weekly Change
|
YTD Change
|
|---|---|---|---|---|---|
|
DJIA
|
28538.44
|
28256.03
|
29102.51
|
3.00%
|
1.98%
|
|
Nasdaq
|
8972.60
|
9150.94
|
9520.51
|
4.04%
|
6.11%
|
|
S&P 500
|
3230.78
|
3225.52
|
3327.71
|
3.17%
|
3.00%
|
|
Russell 2000
|
1668.47
|
1614.06
|
1656.78
|
2.65%
|
-0.70%
|
|
Global Dow
|
3251.24
|
3161.86
|
3252.04
|
2.85%
|
0.02%
|
|
Fed. Funds target rate
|
1.50%-1.75%
|
1.50%-1.75%
|
1.50%-1.75%
|
0 bps
|
0 bps
|
|
10-year Treasuries
|
1.91%
|
1.52%
|
1.57%
|
5 bps
|
-34 bps
|
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Last Week's Economic News
- Job growth soared in January with the addition of 225,000 new jobs. The average monthly gain of new jobs added in 2019 was 175,000. Notable job gains last month occurred in construction, health care, and transportation and warehousing. The unemployment rate inched up 0.1 percentage point to 3.6%, representing 5.9 million unemployed persons (5.8 million unemployed in December). The labor force participation rate edged up by 0.2 percentage point to 63.4%. The employment-population ratio, at 61.2%, changed little over the month but was up by 0.5 percentage point over the year. In January, average hourly earnings rose by $0.07 to $28.44. Over the past 12 months, average hourly earnings have increased by 3.1%. The average workweek was unchanged at 34.3 hours in January.
- January has gotten off to a slow start in the manufacturing sector, at least according to one purchasing managers' survey. The latest IHS Markit U.S. Manufacturing PMI™ fell in January on the heels of a drop in export orders. At the same time, the pace of growth for new orders was the softest in three months, prompting firms to exercise greater hesitancy in relation to hiring additional staff, with workforce numbers rising only slightly and at the slowest pace in four months.
- It is not uncommon for the leading manufacturing surveys to post conflicting results, as was the case in January. According to the Manufacturing ISM® Report On Business®, purchasing managers were more upbeat relative to the manufacturing sector in January, evidenced by a 3.1 percentage point increase in the purchasing managers' index. Survey respondents also reported an increase in new orders, production, hiring, new export orders, and prices — not entirely in line with the survey results from Markit's report.
- The services sector continued to expand in January, according to the latest Non-Manufacturing ISM® Report On Business®. Survey respondents reported growth in business activity and new orders. On the other hand, hirings and prices each fell in January compared to December.
- The goods and services deficit was $48.9 billion in December, up $5.2 billion (11.9%) from $43.7 billion in November, revised. Exports ($209.6 billion) were up 0.8%, and imports ($258.5 billion) increased 2.7%. For 2019, the goods and services deficit decreased $10.9 billion, or 1.7%, from 2018. Exports decreased $1.5 billion, or 0.1%. Imports decreased $12.5 billion, or 0.4%. Reflective of the trade war, the United States deficit with China in 2019 decreased $73.9 billion to $345.6 billion.
- For the week ended February 1, there were 202,000 claims for unemployment insurance, a decrease of 15,000 from the previous week's level, which was revised up by 1,000. According to the Department of Labor, the advance rate for insured unemployment claims remained at 1.2% for the week ended January 25. The advance number of those receiving unemployment insurance benefits during the week ended January 25 was 1,751,000, an increase of 48,000 from the prior week's level.
Eye on the Week Ahead
The latest inflationary indicators are available this week, including January's Consumer Price Index. The retail sales report will provide last month's figures on consumer spending at retail and food services stores. The Federal Reserve releases its report on the government's budget for January. The December government budget deficit was $13.3 billion.
Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. Market indices listed are unmanaged and are not available for direct investment.
This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.
The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.
The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.
A life insurance policy illustration is a text-and-graphics presentation of how a life insurance policy will perform at a selected interest rate, with an assumed number of predetermined premium payments and a "current" and "guaranteed" cost of insurance and expenses. A life insurance policy illustration is not a legal document--legal obligations are contained in the policy itself.
If you no longer need life insurance or want to cancel for some other reason, you might be thinking about surrendering your permanent life insurance policy and withdrawing the cash value that has accumulated. But before you do it, here are some things you should consider.
You've decided to buy some life insurance, but with so many insurance companies and so many products to choose from, shopping for coverage can be a bit of a challenge. Fortunately, with a little homework and the right help, you may be able to find a policy that suits you at a good price. Here are some guidelines to help get you started.
Cash value life insurance refers to a wide variety of insurance policies that provide both a death benefit and a cash value component that may build tax deferred over time. Many cash value policies let you borrow or withdraw from the cash value. This can sometimes be a good way to raise funds for expenses or emergencies. However, before you take a loan or withdrawal from your policy, make sure you explore all of your options and understand the issues involved.
You've shopped around, found the right insurance policy, and now you're ready to apply for it. What happens when you do?