Consider these facts on aging from the 2010 Census¹:
The highest growth rate for a 10-year age group within the older population (age 65+) was for men 85 to 94 years old (+46.5 percent). Women in this age group grew by 22.9 percent.
Men 90 to 94 years old had the fastest growth rate (+50.3 percent) of all five-year age groups.
Living this long may have unexpected tax consequences. Here’s why.
Many older life insurance policies mature at a specific age, typically 95 or 100. If the insured individual attains that age, the policy’s cash value may be paid out to the policy owner in lieu of a death benefit payment.²
This payout may be taxed as ordinary income on the amount that exceeds the policy owner’s cost basis (i.e., the sum of after-tax premiums). The after-tax amount would then become part of the policy owner’s estate and may be subject to further taxation upon the policy owner’s death.³
If a policy is owned by an irrevocable trust, the trust is responsible for any tax owed, though the proceeds should not become part of the insured’s estate if the insured had no incidents of ownership.⁴
Avoiding the Taxable Risk
This taxable risk may be mitigated through a maturity extension rider, which allows the policy to continue until the death of the insured. Many newer life policies come with a higher maturity age (e.g., 120) or an indefinite period.
U.S. Census Bureau, 2016
Several factors will affect the cost and availability of life insurance, including age, health and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.
The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2016 FMG Suite.
This article was written for information purposes only and its content should not be construed by any consumer and/or prospective client as rebel Financial’s solicitation to affect, or attempt to affect transactions in securities, or the rendering of personalized investment advice for compensation. No client or prospective client should assume that any such discussion serves as the receipt of, or a substitute for, personalized advice from rebel Financial, or from any other investment professional. See our disclosures page for more information.
Phil Ratcliff, President of rebel Financial, is a senior financial advisor that holds an AIF®, CFP®, ChFC®, and CLU® certifications. He started his career at American Express Financial Advisors in 2003, then moved to AXA Advisors for 7 years before founding rebel Financial LLC in 2013.