Life insurance has many uses. Obviously, it is important in providing financial protection to a young family in the event of the breadwinner’s death. It is generally an important part of estate planning. Life insurance can fund a buy-sell agreement for a closely held business that protects the surviving spouse and the other owners. It can also be an important consideration when there is a divorce and second marriage. In the August 18th online edition of Registered Rep magazine, there was an article that discussed this topic. According to an Experian Research Services survey done in 2007, 65% of those preparing for a second marriage said they wanted life insurance as part of the “package”, for good reasons. Divorce agreements typically require one spouse to pay alimony, child support, health care, educational expenses and maybe even mortgage payments. For the protection of the beneficiary of these payments, life insurance is usually required to be in force on the policyholder for at least as long as the obligation exists. Further protection is needed to ensure that a beneficiary change cannot be made without the knowledge and consent of the recipient of the death proceeds. On the other side, the policyholder should have the right to make changes if the ex-spouse remarries. Can you see the possible conflicts of interest? One other important consideration comes into play when there are children in the first and second marriage. In this case, life insurance can be used to provide the children of the first marriage with their inheritance while the children in the new marriage receive other assets. The use of revocable trusts may be helpful in discouraging a possible change of beneficiary by the new wife who obtains a power of attorney for a sick husband. If any of these situations apply to you or a loved one, set up a meeting with your financial advisor and attorney to make sure that the proper protection is in place.
Many of you are aware of the opportunity to convert your traditional IRA to a Roth IRA. Prior to 2010, there were income limitations that are now removed. Also, for conversions made in 2010, the applicable income tax relating to the changeover can be paid in 2011 and 2012. If converting a traditional IRA to a Roth, you will owe ordinary income taxes on any previously deducted IRA contributions plus all earnings. This may place you in a higher tax bracket and therefore may not fit your situation. For some whose retirement portfolios have been reduced in value by recent market downturns, it may make sense to study the pros and cons of a conversion. Here is another idea which was presented in the online version of Registered Rep magazine dated August 19th. If your traditional IRA is of a size that makes you hiccup at the taxes that would be due on a changeover, but you are interested in the ability of using a Roth IRA to provide tax-free income to your heirs, consider the purchase of life insurance in lieu of moving to a Roth. This approach will work better if the traditional IRA is an asset to be passed on to heirs and is not needed for living expenses. Distributions are taken from the IRA to fund a life policy that is owned by an irrevocable life insurance trust. Note that IRA distributions made prior to age 59.5 may be subject to ordinary income tax plus an IRS penalty and again may not fit your situation. At death, the proceeds are excluded from the assets of the estate and pass to the heirs’ tax free. Is this approach necessarily better than use of a Roth IRA? That will depend on case by case evaluations, but it is an interesting alternative. As always, before any definitive action is taken, ask for guidance from your financial planning team.
One final note for this month. If you are planning on selling your house for a substantial gain in the next 24 months, you may want to put it on the market sooner than later. In 2012, the new healthcare law imposes a special 3.8% Medicare surtax on high profit sales, unless the law can be repealed. Check with your CPA, because this info is not meant to be a substitute for individual tax, legal or investment planning advice and everyone is different. For a positive ending to this article, consider these thoughts from Eugene Peterson: “Spirit is the scriptural word for God sharing His life in our lives. It means that God is not an anonymous somebody “out there” or an idea explained in a book, but a living presence whom I experience in the life I live day by day. God gives Himself to me. I receive God into myself. Spirit is God’s gift of Himself in my experience.”
Securities and Investment Advisory Services offered through FSC Securities Corporation, member FINRA/SIPC and a registered investment advisor.3416 North Blvd, Alexandria, LA 71301, (318) 448-3201. The views expressed are not necessarily the opinion of FSC Securities Corporation.