Insurance

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Insurance plays an important role in estate planning. Life insurance can help create a nest egg to provide for your family if you meet with an untimely death. Health insurance can protect you and your family from financially crippling medical bills. Long-term care insurance can protect your family from the heavy financial burden of long-term care. Life insurance Whole life insurance Term life insurance Taxation Use in estate planning Beneficiaries Long-term care insurance Health insurance (Including Medicare)

Life insurance

Life insurance policies allow one to insure his or her life, or the life of another for an annual premium. The amount of annual premiums depend on a variety of factors, including the age and health of the "insured" (the one whose life is insured), the amount of the insurance proceeds to be payable upon the insured's death, and the type of insurance policy purchased. Often, the insured must "qualify" in order to obtain the insurance policy. Some insurance policies have certain exclusionary periods, or may not cover certain conditions or types of death. The following is a brief explanation of different types of insurance policies, the estate tax consequences of insurance, and other information.

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Whole life insurance

"Whole Life Insurance" is the traditional form of life insurance. The purchaser of the policy pays annual premiums, a portion of which build up in cash value over time. Whole life insurance is a form of investment, and insurance companies can illustrate the cash value build up depending on the rate of return the policy brings. A common rate of return for whole life insurance policies is 6%. A portion of each premium goes towards paying administrative expenses and other fees. Generally, whole life insurance premiums do not increase over time, as long as the policy is based on a low rate of return which the insurance company guarantees. Insurance companies offer different types of whole life insurance, such as "variable" policies, which may generate higher rates of return. However, these policies also contain higher risk because the higher rates of return are not guaranteed.

"Whole life policy owners may also obtain a loan against the cash value built up in the policy, or even cash out the policy entirely.

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Term life insurance

"Term Life Insurance" is a more affordable type of insurance policy. Term premiums are generally far cheaper than whole life premiums. However, term insurance policies do not build up any cash value. Additionally, term insurance policies are usually for a stated amount of time, for example, five years, after which a new policy must be purchased. When the new policy is purchased, the insured is "re-evaluated" for insurability, and the premiums will increase reflecting the insured's advanced age and health. Term insurance premiums, therefore, are not guaranteed after the end of the stated term period. Term insurance is an excellent choice for young families, who may not be able to afford whole life insurance, but need the protection life insurance can provide. Term insurance is often used to cover a mortgage for a surviving spouse, or college education expenses.

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Taxation

Many people believe that life insurance proceeds are not subject to federal or state estate tax. This belief is not true. Life insurance proceeds are included in the insured's taxable estate at his or her death. However, the proceeds are not considered income for income tax purposes when paid to the beneficiary. While life insurance can provide a large sum of money for pennies on the dollar, those proceeds can also inflate the insured's taxable estate which may be subject to very large tax rates.

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Use in estate planning

As discussed above, life insurance proceeds are part of the insured's taxable estate at his or her death. However, life insurance can still play a very vital role in estate planning. For example, if the insured's taxable estate is far below his or her applicable credit amount, ($650,000.00 in 1999), the insured can purchase a large policy, with relatively low premiums, and pass more property to his heirs. Additionally, for those who already have taxable estates, life insurance is very easily removed from the taxable estate. An estate planning attorney can create an "irrevocable life insurance trust" which can own the insurance policy instead of the insured, which will then remove the proceeds from the insured's estate. Certain rules apply if the policy is already in existence, versus the trust purchasing the policy after its creation. Therefore, while one must be aware that life insurance is part of the taxable estate, it is easily removed from the taxable estate.

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Beneficiaries

The term "beneficiaries" simply means those persons designated on the insurance policy to receive the policy proceeds when the insured dies. Often, a policy owner will make his or her spouse the beneficiary of the life insurance proceeds. If one does not indicate a beneficiary at all, however, the proceeds will be payable directly to the policy owner's estate and will be distributed pursuant to the policy owner's Will. If the policy owner designates a beneficiary to his or her insurance policy, the proceeds will pass outside of probate and will not be subject to any probate fees. Additionally, the proceeds will be payable to the beneficiary much quicker than if the proceeds had to first pass through the policy owner's estate and then to the policy owner's heirs. Therefore, it is strongly recommended that whether or not an insurance policy is in a trust, the policy owner should always indicate one or more beneficiaries to the policy to ease administration and reduce probate fees.

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Long-term care insurance

Long-term care insurance provides protection to individuals for potentially astronomical long-term care costs. Long-term care includes nursing homes, assisted living facilities, and other types of care. It can often include in-home care, hospice care, or most other forms of care associated with debilitating diseases or illnesses. Unfortunately, long-term care insurance is extremely expensive, and many cannot afford to pay the premiums. However, if one can afford the premiums, long-term care insurance provides maximum protection against long-term care costs. Further, if one can qualify for long-term care insurance at a younger age, one may be able to reduce the costs over the long term through guaranteed, or at least annualized growth premiums.

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Health insurance (including Medicare)

Health insurance provides insurance against common medical expenses or medical care that is not considered long-term care. Many people have health insurance through their employers, and the insurance may usually be extended to cover the insured's family and dependents. One can also purchase health care insurance individually, through health insurance providers. Often, one can "lock in" to a certain type of policy at a younger age which may not change over time.

Medicare is a health insurance program administered by the federal government. Most persons become automatically eligible for Medicare at age 65, but those under age 65 may also qualify if they are disabled. Medicare consists of three parts: Part A (Hospital Insurance), Part B (Supplemental Medical Insurance), and Part C (Medicare Plus Choice). In general, Part A covers hospital costs, Part B covers physicians' services and prescription drugs, and Part C is a new part that covers the services in both Parts A and B. Medicare is administered by the Health Care Financing Administration, a part of the Health and Human Services and by the Social Security Administration.

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Prepared by Charles N. Griffin, III, an attorney with Kirschbaum, Nanney, Brown & Keenan, P. A., Raleigh, NC.

This publication is provided as a public service and is designed to acquaint you with certain legal issues and concerns. It is not designed as a substitute for legal advice, nor does it tell you everything you may need to know about this subject. Future changes in the law cannot be predicted, and statements in this publication are based solely on the laws of North Carolina in force on the date of publication.

Date: December 2, 1999