FORT KNOX, Ky. — Life insurance; it has become a powerful financial product, a tool taken from the “financial toolbox for estate planning.”
More than half of Americans have some type of life insurance, according to Life Insurance Marketing and Research Association. However, many are being enticed by financial gurus to purchase products they don’t understand but are told they need.
Therefore, it is important to be aware of how life insurance works, and how it can impact one’s benefits because not everyone needs it.
Many are confused by the wide variety of life insurance plans available. Before we can begin to understand how to protect ourselves, we need to be aware of what life insurance is and how it works.
Life insurance is defined as a “contract between you and an insurance company.” You make regular payments to the life insurance company while living and, in exchange, your premium payments will pay a death benefit to your beneficiaries after you die.
When we die, our income stops. If you have a spouse, children or dependents, one might ask how they will be supported in the event of your death. Life insurance is intended to cover one’s final expenses. It is a benefit that can help replace income and/or various costs, such as funeral and burial expenses, or to pay off debt, and other assets in the event of your death. Certainly, it is a tool used for financial protection.
There are many insurance products from which one can select, each with different benefits and prices.
The two main types of life insurance are “term” and “permanent.” A term life policy covers you for a specified time and pays benefits if the insured dies within the term the policy covers.
Term policies are very popular because they are much cheaper than permanent policies and simpler to understand. Simply put, if “you die, your beneficiary gets paid.” The insurance “offers significate payouts at lower costs.”
However, term policies have no cash value and the policy is for a fixed period of time.
Permanent insurance covers you until the end of your life. Permanent policies also build up cash value; there is an investment element built into the policy. Depending on the type of policy you purchase, a portion of the premium payments earn interest. There are “different flavors,” or types of permanent insurance, such as universal, variable and whole.
There are several reasons these policies are preferred over term policies — not only do they build up cash value, you can use the cash value of your policy while you are still alive. You can borrow from it, make withdrawals as needed, or you can use the interest payments to cover the premiums. You can also surrender the policy if you need to make trades as you build cash value over time.
When buying life insurance, it is important to pay attention to the policy’s general terms and conditions, the special features of a cash-value policy, and any settlement options.
Note, however, that a cash-value policy costs more in the long term because only a portion of the premium is used to provide the death benefit; the remainder is used to keep the premium level and to build the cash value.
Many financial gurus suggest “the best strategy is to buy term and invest the difference.” Statistics reveal one would have a better opportunity on their return if they invested in the stocks of their choosing; certainly, costs are less expensive and the gain more rewarding.
Where it gets interesting. When selecting a product, one needs to consider all the angles: in other words, the good, bad and ugly of one’s resources and how their income can be impacted down the road.
Recently, I counseled an individual who received a letter from Social Security inquiring about her “countable resources.” She was honest and answered the letter.
Supplemental Security Income, or SSI, provides a worksheet to determine if your “countable resources are worth more than $2,000.” A resource is not only money, but anything that you own and can be turned into cash. Supplemental Security Income’s “allowable limit is $2,000, and resources must not be more than the resource limit.”
Although your resources would prevent you from receiving SSI payments, you may still be eligible to receive SSI if:
- The value of cash, including savings and other things you have can easily be changed into cash less than $2,000
- You sign a written agreement that allows you to receive SSI while you are trying to sell property that causes your resources to be over the limit
- You agree to repay any SSI payments you receive while trying to sell products from the proceeds
In this case, the individual’s 93-year-old mother was her dependent. The individual purchased a cash-value life insurance to specifically cover her mother’s funeral and burial expenses. She was not aware of the “laws, regulations and policy statements” until asked to complete the checklist provided by SSI to “all who receive benefits.”
Although she was paying the benefit, her mother was considered the beneficiary, thus the life insurance was considered an asset to the mother. Her SSI benefits were stopped. What does this mean?
Social Security defines “life insurance” as a resource, meaning cash, bank accounts, stocks, savings bonds, land, life insurance, personal property, vehicles and anything of monetary value that you own.
The difference. “Term life is not an investment or money-making scheme.” However, any money that you receive from a permanent life insurance policy, whether it’s from dividends or from a loan that you have taken out against the cash value of your policy, can affect your SSI benefits.
In other words, you can have life insurance while on SSI, but your current assets and resources could impact your benefits. Since burial insurance and most kinds of term insurance have no cash surrender value, it is NOT considered a resource per Section 2159.
Generally, the life insurance proceeds you receive as a beneficiary due to the death of the insured person aren’t included in gross income, and you do not have to report them. However, any interest you receive is taxable and should be reported to the IRS HERE. Funds would need to be designated to be set aside for burial, according to Section 2169, which conveys what is included as “burial funds.”
Burial funds include revocable burial contracts, burial trusts, or other burial arrangements, cash, financial accounts or other financial instruments with a definite cash value that is clearly designated for burial expenses. Interest earned on your excluded burial funds and appreciation in the value of the funds do not count as income if resources are left as part of the burial fund.
If you use the excluded burial funds, including excluded interest or appreciation for a purpose other than burial, Supplemental Security Income may withhold your SSI check in the amount up to the amount of burial funds you spend.
Should your SSI benefits stop because of the amount of resources you own, you have the right to appeal the decision. Supplemental Security Income will review the entire case, consider any new facts, and make a decision. However, if you lose your appeal, you might have to pay back some or all of the money.
To appeal, call the Social Security office at 800-772-1213 or visit the website HERE. Then select “Request for Reconsideration” (SSA-561-U2).
Every financial plan has a purpose. Life insurance is designed to provide protection from financial losses that result from a death. Take a look at your situation and see what makes sense.
Regardless of the insurance plan you select, remember there can be risk attached. Be sure to consider how you can divert the risk. Consider the risk factors and how you could be impacted. Those interested can find a website with useful information HERE.
Those who have personal financial questions, need financial assistance, or would like to schedule an appointment can call Army Community Service’s Financial Readiness department at 502-624-5989. Financial specialists are available to assist with individual financial education and planning needs to the Fort Knox community.
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