Imagine it, you sit down with your clients to discuss their financial strategy for the coming year and instead of their IRA or stocks, they ask you about life insurance. At first you may think, “I got this.” But life insurance, like life, can get complicated quickly.
Read on for some of our favorite nuggets that are worth knowing.
Q. Can my client deduct life insurance premiums paid as part of alimony?
A. This is a simple question with a fairly complicated answer. The short answer is that if your client is trying to deduct life insurance premiums from an alimony payment, chances are it won’t work. That being said, if he or she is maintaining a life insurance policy on behalf of an ex-spouse it might be worth a discussion with an attorney or tax advisor. Be sure they present a divorce decree so the attorney can share the terms of the agreement.
Q. Are life insurance premiums paid as part of alimony considered taxable income?
A. Like most things in life this topic has many sides worth considering. If your client is the recipient of life insurance premiums as part of alimony and the former spouse is able to deduct premiums from taxes, there’s a good chance the premiums will be considered taxable income for your client.
Q. When does it make sense to split life insurance?
A. A private load regime/split dollar arrangement is worth digging into if you handle a fair number of high net worth clients. This option can make sense for clients who have already used their exemptions, want an option beside a trust, or own a business or real estate. Tax-wise this strategy is best used when interest rates are low due to how the agreements are structured and benefits are paid.
Q. How much life insurance is enough?
A. There’s a good chance the majority of your clients have life insurance, if not it may be time to have the conversation with them. While most Americans have life insurance, most don’t have adequate coverage. Life insurance isn’t set-it-and-forget-it. For many clients, their life insurance needs change throughout their lives. For example, a couple in their mid-20s and a couple in their mid-50s might have very different financial responsibilities including homes, families, cars, and even businesses. According to LIMRA, a not-for-profit research trade association, nearly half of the Americans with life insurance have inadequate coverage — an oversight that could leave your client’s loved ones in a very vulnerable position.
Q. Should you conduct an annual policy review with clients?
A. The short answer: yes. There’s a common perception that life insurance is a set-it-and-forget-it investment. It’s not. There are several variables that need to be reviewed, analyzed, and discussed with clients each year to help ensure the policy they have is the policy that best fits their current and future needs. Key considerations include: rate changes, policy charges, changes in policy funding, and the current stability of the carrier.
Your clients trust you to assist them with their financial preparation. Make sure you cover all the bases, including life insurance, each year as part of an overall plan that works to their benefit today and in the long term.
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Neither Transamerica nor its agents or representatives may provide medical, tax, investment, or legal advice. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely on their own independent tax and legal advisors and financial professional regarding their particular situation and the concepts presented herein.
Transamerica Resources, Inc. is an Aegon company and is affiliated with various companies which include, but are not limited to, insurance companies and broker dealers. Transamerica Resources, Inc. does not offer insurance products or securities. The information provided is for educational purposes only and should not be construed as, medical, insurance, securities, tax, legal or financial advice or guidance. Please consult your personal independent advisors for answers to your specific questions.