A vital part of wealth management and family protection is to ensure that assets are properly and prudently diversified. Diversification implies both the right asset mix as well as the right mix within the assets.
Clients may need their advisor to bring up the topic of family wealth management so that they have a fully informed retirement plan. Some advisors may find clients who could be using more of their retirement income or those close to retirement who are pushing their planned retirement launch dates off without a good explanation. The story may be a simple as concern for how their spouse might fare without their income. Here are some of the basics clients may need to discuss with their advisors but may need help initiating a discussion.
Many end of life costs, like funeral expenses, debt and some taxes often must be paid before an estate is settled. That means before a house can be sold and transferred or before bank accounts can transfer, a family may incur significant debt. Life insurance provides cash immediately, unlike other wealth transfer aspects of death.
Life insurance is an essential, not an extra. The best time to start a life insurance policy is now. Most folks put the topic of life insurance off until the midnight anxiety session that arises near the homecoming of their first child. And given that fear doesn’t always lead to the best decisions, many may be asking, did I get it right?
Suboptimal insurance coverage and overpayment for insurance are main pain points for near retirees and those who have just retired. For younger generations, financial analysts all agree on one point: if you have children, you need life insurance. Many couples plan for retirement based on a dual income in retirement. For those with investments or pensions, losing a spouse may be less harsh financially than for those dependent on social security income which could terminate on death. Life insurance amounts should be set to keep income protection for the surviving spouse in mind. So too amounts should be set for children and college education.
For many people, life insurance payments can become a way of transferring wealth during their lifetime to their beneficiaries at their death in a manner that incurs less taxes. Just like any other insurance policy, a life insurance policy is a contract with an insurance company that in exchange for a premium payment they agree to provide a payment to the beneficiaries on death. That payment is usually all at once, or sometimes called a lump sum payment. Usually, beneficiaries are not taxed on the payout.
There are two main types of life insurance: term and permanent. Term life insurance provides insurance for a set period of time, say 25 years, whereas permanent insurance covers a client’s entire life. Term life insurance has a set premium that is usually lower than permanent life insurance. This is often chosen as it helps ensure that financial goals, like sending kids to college or paying off a mortgage, could be met if a client’s income were to be taken away. Unlike term life insurance, universal life insurance covers a client’s entire life. Because a client’s risk of death changes as the client get older, the premiums increase with age. Premiums are set by a variety of factors, but usually focus on health, family medical history and lifestyle. Whole life insurance coverage is another kind of permanent life insurance. It also has higher premium payments. This kind of insurance has a cash value and can accumulate over time, which could have a savings component to it. It too is often used as an estate planning tool to help transfer wealth to a client’s beneficiaries. Which life insurance policy is a crucial question that requires tax and estate planning advice. Where a client obtains life insurance may be driven by the kind and amount of life insurance needed.
A client’s life insurance plan may also need to consider succession planning if a client owns or operate a small business. While research suggests that only 18% of small businesses have 401k plans, almost 60% of small businesses lack a succession plan. Combining those two data points results in a fair number of small businesses with potential succession problems.
Family protection strategies should also incorporation tax issues for transferring assets such as stock or real estate. Transferring stock to a child or relative brings up issues of basis and capital gains taxes. And the key may be that in some cases capital gains taxes may transfer to the recipient of the stock.
A vital part of wealth management and family protection is to ensure that assets are properly and prudently diversified. Diversification implies both the right asset mix as well as the right mix within the assets.
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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