End of Life and Funeral Insurance

Everything You Need to Know About Funeral Insurance

The Average Cost of a Funeral is Approximately $10,000 (AARP.org)

 

End of Life Family Protection is:

√ Easy to Qualify and Very Inexpensive
√ A Selfless Gift to Show How Much You Care
√ Helps Make a Difficult Situation a Little Easier

 

10 Important Things to Know About
Funeral or Burial Insurance:

 

1.) NO medical exam required
2.) Premiums NEVER increase
3.) Accumulates CASH value
4.) Insurance NEVER decreases
5.) EASY to obtain up to age 80
6.) Protection is GUARANTEED
7.) Prepays ALL funeral costs
8.) Prepay any expenses or debts
9.) Your beneficiary can ALWAYS be changed
10.) QUICK coverage ranges from $2,500 to $50,000

 

Additional Helpful Resources:

 

3 Most Common Ways to Plan a Funeral

How to Prepay Funeral Expenses

Key Burial Insurance Details

Top 10 End of Life Plan Benefits

 

Funeral Estate Planning

Estate and Inheritance Tax Questions to Ask

After Grieving the Loss of a Loved One

When suffering from the grief and loss of a loved one, it can be the most painful and stressful time in our life. It’s important to surround our selves with close family or friends as a support system.

The experience is one that can seem like time is standing still because of the grief, but at same the time, it can be quite overwhelming and as if time were flying right past us. When someone we love passes away, there are so many details that need to be considered while grieving. That process in-and-of-itself can be painful. Funeral arrangements, memorial services, obtaining death certificates, and legal matters are all part of the details involved in losing a loved one.

Things like inheritance and estate tax issues don’t need to be addressed immediately. Focusing on our friends and family are obviously more important. But eventually the details will need our attention.

Helpful Considerations When Facing a Loss:

Is Life Insurance Taxable?

While life insurance proceeds are included in the estate, they are not taxable (as income) to beneficiaries. However, you should contact the life insurance company to understand the procedure to cashing in their policy. Typically insurance companies will require a claim form and death certificate. But generally, life insurance is not taxable to inheritors. (Click to learn more about burial insurance)

What is My Inheritance Tax Rate?

Inheritance tax will vary from state-to-state. Typically if the value of the estate that’s being inherited is high in value, your tax rate will be higher as well.

For example, tax preparers in Indianapolis, Indiana will tell you that Indiana’s inheritance tax system breaks the heirs or inheritors into three classes or groups. Systems in Pennsylvania are very different. For Indiana, each group has different rate schedules and exemptions. Here’s how this looks according to the Indiana Department of Revenue:

•  Class A – direct ancestor or descendant, stepchildren, direct descendant of a stepchild: $100,000 exemption.
•  Class B – siblings, descendants of sibling, spouse, widow or widower of your child: $500 exemption
•  Class C – anyone else excluding spouse: $100 exemption

Are Bank Accounts Taxable?

Revenue-producing assets like bank accounts and stacks are not taxable upon inheriting them. However, the income that these assets generate is taxable to the recipient.

What About Pensions and IRA’s

A person inheriting a pension or IRA is required to pay taxes on the amount received, as the decedent (person who is deceased) would have during their life. An IRA or similar fund can be rolled over tax-free into the beneficiary’s name and treat it as their own.

While things like estate and inheritance tax is, by no means, the most important item to address when we suffer the loss of a loved one, it is important to understand what is and is not taxable during these times. Estate and inheritance taxes can be burdensome and stressful, but in some cases, an inheritance is not taxable to you.

Estate lawyers are available to help guide us during times of funeral estate planning, but they can often be costly. Check with your tax preparer or attorney handling the estate as to what you need to know when sorting out inheritance and estate issues.

How to Prepay Your Funeral Expenses…
And Why?

According to AARP (www.aarp.org), the average cost of a funeral today is approximately $10,000.  So by preplanning a funeral and creating an end of life plan, your are certainly doing a wonderful thing by helping to alleviate many of the funeral planning challenges.

Therefore, over 60% of people who are willing to selflessly take the time to create an End of Life Plan will also choose to prepay their funeral expenses.  By taking care of your funeral costs and expenses in advance, this is yet another added value.  Prepaying your funeral costs is another way of leaving behind a memory of how much you cared for your family and loved ones, rather than leaving them to deal with these financial challenges.

While you need to learn and understand the three most common ways to preplan a funeral, you should also be familiar with the various ways of prepaying your funeral expenses, since this is  one of the fastest growing and widely-accepted aspects of the funeral planning process.

Similar to preplanning your funeral, most financial professionals agree that prepaying your funeral expenses should be a standard topic of discussion when creating a financial plan and estate plan.

The most common and widely used strategies to prepay your funeral expenses are savings, life insurance, and funeral insurance (also referred to as burial insurance), mainly because they tend to be deemed the most reliable and readily available. However, there are several other finance advice strategies to consider when prepaying your funeral costs or expenses:

Savings

Although many people choose to set aside savings to pay for their end of life plan and funeral expenses, there are several reasons this does not always end up working out as originally planned. First, the savings can be depleted based on unexpected financial circumstances, such as health or financial issues. Second, these funds are not always readily available and liquid upon death due to the challenges and restrictions often found in estate planning. Third, the funds set aside can often be insufficient due to inflation and the rising cost of funeral expenses. Finally, it should be noted that savings are included in a part of one’s estate, and, thus, the taxable consequences can often come into play.

Life Insurance

Term Life Insurance is widely considered to be a flexible, simple, and affordable way to pay for your final funeral expenses. Although Term Life Insurance has a set term, or set number of years, it also has multiple uses in prepaying for your funeral. Because upon your death it becomes a liquid asset that is usually not part of your estate, it can be used for many things such as your funeral or memorial services, burial expenses, cremation, liquidity, and many other things, including debts or obligations.

In addition, there are some types of life insurance that allow the funds contributed to these policies (either in lump sum, monthly, quarterly, semi-annually, or annually) to grow and accumulate as a cash value that can be accessed if necessary. Therefore, these policies can not only be used for funeral expenses, but also for other financial planning options that may arise such as financial emergencies, and college.

Funeral Insurance

Funeral insurance is an insurance policy which is specifically designed to cover any costs or expenses which are directly related to your funeral. If you purchase one of these policies, one of the options you have is to determine exactly which funeral costs or expenses are to be covered, such as funeral flowers, burial plot, grave marker, and much more. Another option you have is for the policy to be paid out in a single lump-sum, which can be used to cover your pre-determined costs or expenses, or simply help your loved ones financially as they plan for you. There are many insurance companies that offer funeral planning packages, and certain funeral homes or funeral companies also offer funeral insurance policies.

PreNeed Trust Agreements

Another alternative to prepaying your funeral is to consider a PreNeed Trust Agreement to pay for your costs or expenses. Generally speaking, these Trust accounts are typically funded with monthly payments that are invested in a fund which is designed to grow over time. Although a Trust account is designed to provide the potential for protection against inflation, it is not guaranteed to do so.

Get Help

Although the large majority of the funeral industry will tell you that most funeral costs can range anywhere from $5,000 – $10,000, it is very common for funerals to cost much more or maybe even less.

Also, as with any important financial decision or investment, there are many advantages and disadvantages to each of the options mentioned above. Before choosing a policy, it is important to consider many things, including but not limited to your age, health, financial status, objectives, liquid assets, tax issues, estate tax issues, family needs, etc.

In summary, although nobody likes to think or talk about dying, it is one of the facts of life we all must eventually face. If you are trying to build a successful financial plan, the only way you can be sure your plan works smoothly and efficiently is to be proactive about your planning process. This is particularly true and necessary when creating a proper plan of succession, and everyone should consider including an end-of-life plan.

Please consult with your attorney or financial advisor before applying or purchasing any of these policies, pay close attention to your specific state requirements, and also the financial strength and claims paying abilities of each company, funeral home, etc.

Estate Planning Often Fails to Protect Your Family

Creating a Will or Trust Does Not Solve Many Key Problems

What is Estate Planning?

Insurance companies, banks, financial advisors, and many attorneys all advertise that they will help you with your estate plan. However, when financial advisors talk about estate planning, unless you are using the proper disclosures, many people can be confused as whether you are providing financial and/or legal advice.

The Answer

An effective estate plan is one that protects and provides, for you and your loved ones, now and in the future.  Then, this plan distributes your property the way you want, when you want, and how you want, while paying the minimum of taxes and expenses and causing the smallest possibility of a family feud. The reality is the only way this effective plan can happen is when two things occur:

1.  You take advantage of utilizing the skills of lawyers, accountants, financial planners, insurance professionals and/or trust officers.
2.  Each of these financial professionals involved work together to coordinate and integrate this estate plan so that it works in harmony with the rest of this client’s comprehensive financial plan.

Example: Sam and Sally

Sam and Sally meet with a seasoned estate planning attorney to develop an estate plan. During the interview the estate planning attorney discovers that Sam has several old life insurance policies which would provide $300,000 to Sally if Sam died, and the total cash value of the policies are $280,000.  The cash value is what the insurance company would pay Sam today if Sam turned in (surrendered) the insurance policies while Sam is still alive.

Like many seniors and baby boomers, Sam draws income from a pension plan which has a 50% Survivor Benefit.  Therefore, after Sam dies, Sally will receive only half of his pension income, which creates a significant decrease in not only Sally’s income and standard of living, but also her ability to maintain the payments and upkeep of their house.

Like most seniors and baby boomers (and homeowners for the most part), Sally’s home is her pride and joy.  She has spent thousands of hours on activities and improvements such as landscaping, building beautiful flower beds, decorating her kitchen, adding a wonderful deck and patio, and so on.  Sally enjoyed making her home a very pleasing and comfortable place, and this special home is filled with many wonderful memories of family gatherings.

What is the Central Problem?

As mentioned earlier, the lawyers can create the Wills, Trusts, Powers of Attorney and property transfers to make their estate plan perform as they believe to be effective.  But, the reality in most cases is that these documents do not save Sally’s house. The central problem in Sam and Sally’s estate is not the legal documents.

Their original intention was to prepare the proper legal documents and estate plan that would ensure their property goes to whom they want, when they want, and how they want, with the minimum of taxes and expenses.  However, in this case, this does not accomplish some of key goals which have been overlooked or ignored.

The problem here is that Sally, who statistically is likely to survive Sam, will not receive enough life insurance proceeds to replace the income she needs in order to stay in her beloved home after Sam dies.  As with most cases, the children of Sam and Sally have their own families, are well established and don’t need (or are not depending on) Sam and Sally’s money to live on.  And now at Sally age and place in life, the so-called “golden years”, she does not have the stamina, skills, or desire to go back into the workplace.

Providing For the Surviving Spouse

In this case, the proper solution to this central problem would have been for Sam, or a qualified financial advisor, to identify this potential problem, and exchange his insurance policies for a new insurance policy that will provide enough money for Sally to live on after Sam dies.

Not only is this something financial advisors are trained to protect retirees agains, but they are also likely to know that the tax code under Section 1035 allows Sam to exchange his old policies for a new policy with a higher death benefit and lower cash value.  The best part is this life insurance policy can exchange without paying any taxes at the time of the exchange, even though Sam is using his untaxed earnings (capital gains, dividends, interest, etc.) in his insurance policy to buy something of greater value to him.

The Main Purpose of Life Insurance

There are many reasons people or families choose to buy permanent life insurance, since it can serve many purposes.  For example, some purchase these policies as an investment due to the upside growth potential of the cash value.  Others purchase these permanent policies as a tax-saving or tax-deferral vehicle, since the cash value grows without being tax, and if managed properly, can be withdrawn without paying taxes or penalties.  One other common use of permanent insurance is to replace the income or estate taxes which could be due at the death of the surviving spouse.

However, the basic definition of insurance is the transfer of risk. Therefore, the most common reason people own life insurance is to replace the income lost in the event a spouse were to unexpected die, transferring the risk of a premature death to the insurance company. In this case, with $280,000 of cash value and a death benefit of $300,000, Sam has nearly all of the risk of his death on his shoulders and his insurance is providing him virtually no leverage.

This is the type of information that should be discovered by a financial advisor or insurance agent in the initial stages of the planning process, or discovered and brought to Sam and Sally’s attention during a review of their estate plan.  By simply asking questions regarding the amount of income Sally will have to live on should Sam die, how much life insurance Sam has, what kind of life insurance Sam owns, and what  the cash value amount is, this potential problem could have been easily avoided.

Solving the Central Problem.

The best possible solution is for Sam and Sally to have a qualified estate planning attorney and trustworthy financial and/or insurance professional working together. The insurance professional’s role would be to “shop around” and locate an insurance company that would be willing to offer Sam the best and most appropriate policy, with the goal being the largest death benefit and the longest duration.  Sam and Sally would then pay for this life insurance policy by using the cash value from Sam’s existing insurance policies.

The Features and Benefits

This aforementioned life insurance policy exchange, known as a 1035 exchange, does not require Sam and Sally to write a check, there are no tax consequences when they “trade the cash value” for this new policy, and they will not be required to pay any future insurance payments because they used the entire cash value to pay for this new policy in a lump-sum.

So if Sam owns a permanent policy, this is better in every way.  If Sam owns a policy where the life insurance protection only lasts for a certain number of years (commonly referred to as either Term Insurance or Universal Life Insurance), Sally will likely receive a much high amount of life insurance proceeds, and when combine with some of their other assets and income sources, this will likely be enough for Sally to stay in her beloved home.

Of course, Sam had the alternative of taking the $280,000 out of the policy and investing it in hopes that he could grow this $280,000 to a much higher amount, there are two major problems with this strategy.  First, there is risk.  For example, in 1966, the DJIA reached 1000 for the first time.  However, approximately 8 years later the DJIA plummeted to 570 at the Watergate Bottom, losing nearly 50% of its value during this 8-year period.  Another example is back in 1999 when the Nasdaq surged to approximately 5000.  However, 10 years later, the Nasdaq was below 1000, losing 80% of its value over this 10-year period.  The second problem is, even in a rising stock market trend such as 1990 to 1999, there are no guarantees Sam will live to a certain age.  Remember, the main goal of using this strategy is to transfer Sally’s risks to an insurance company.

How Can this Fail?

This happens very frequently because Sam’s prior insurance agent failed to discuss the possibility of this future problem with Sam and Sally. However, if Sam had consulted with a qualified insurance agent or financial advisor, he or she would have likely recognized this problem and either suggested a solution or recommended that Sam and Sally perform annual reviews to monitor this problem in the years ahead.  This happens far too often in the financial professional industry, and the most common reasons are:

1.  Some financial professionals tend to focus solely on products or strategies where they are compensated
2.  Others fail to recognize the importance and necessity to coordinate with the other key financial professionals who are directly or indirectly involved
3.  Some financial professionals simply fail to lack the training and expertise to understand these issues and options.

Key to Creating an Effective Estate Plan

Arguably the key ingredient in creating an effective estate plan is working together with a team of financial professionals who are looking out for the clients best interest from a “big picture standpoint”.  By working with a team that includes key financial professionals like a CPA, estate planning attorney, insurance professional, financial advisor, or personal banker, each of them can make an important contribution in helping to protect and preserve an sound estate plan.

Questions or Concerns?

Please contact our Estate Planning Expert Roger McClure at (571)-633-0330 or www.wealthcounsellors.com