Structured Settlements 4Real™ Blog: Structured Settlements | Settlement Planning News and Commentary

Settlement Planning: Post Mortem Liquidity Needs and Estate Planning| NY|CT|NJ|

Level premium term life insurance which can go out to age 95 is now available at very attractive long term premiums so that older plaintiffs, plaintiff attorneys and others who can't afford, or choose not to pay, higher premiums for whole life or other permanent coverage.

For example a male age 70 might be able to get $500,000 coverage for $8,050 annually, that stays level for 20 years.

Life insurance proceeds are generally income tax free and if the application and ownership is properly structured proceeds when paid may be outside of the insured's estate.

Some possible uses of life insurance at age 65 plus

• Older plaintiffs can solve for post-mortem liquidity needs or bequests without breaking the bank or forgoing coverage due to the burden of whole life cost.
• Older healthy grandparents or parents can provide for a special needs child.
  
• The healthy spouse of a disabled plaintiff can purchase insurance to enhance settlement recovery if he or she were to pass before the disabled spouse.
  
• Equalize inheritances if giving business to one child and have other children who you love, but are not interested in the business.
• Can fund buy sell agreements for law firms. There are options for senior partners who are active as partners and want to continue practicing into their 70s and even 80s
• Enhanced structured attorney fees
• A chance to make up for not buying insurance when you were younger and it was cheaper.

More information on the use of life insurance in the settlement planning process. or watch my podcast

 

Life Insurance Rate Relief for Smokers

If you smoke anything other than cigarettes you may now be able to qualify for "Standard Plus" non smoker rates on term life insurance, universal life, whole life or other form of permanent insurance.

 OK   Probably not OK!

So if you chew tobacco, wear a nicotine patch, chew nicorette gum, smoke pipes (see above) smoke cigars with the boys on the golf course AND you need life insurance or wish to explore the benefits of life insurance in a structured attorney fee product arbitrage...  

Contact John D. Darer, CLU ChFC CSSC RSP for details.   888-325-8640

 

 

At What Point Does Nontaxable Income From A Structured Settlement Become Taxable To An Estate?

The above question was recently asked by someone searching on the Bing Search Engine.

Structured settlements, referring to the classic personal injury version retains its income tax status when paid to the beneficiary. Payments under the classic structured settlement is for payment of damages which are of the form excluded under IRC 104(a)(2)  or IRC 104(a0(1) in the case of workers compensation payments.

Payments from such structured settlements are generally included in the taxable estate of the decedent. If the present value of the unreceived payments (that will now be going to the beneficiary) together with other assets that form the decedent estate, exceed an exempt amount an estate tax is due.

A complete discussion of the estate tax cannot be done justice in a short blog post, but generally the estate tax is due within 9 months of death. Furthermore there are estate or inheritance taxes on both the Federal and State levels. Through careful advance planning there are a number of technioques to mitigate the estate tax problem if it exists. For example, some people can effectively "prepay" the estate tax at a discount using life insurance and gift tax exemptions.

If we are talking structured settlements in the non classic sense, such as employment cases, structured attorney fees and other non qualified structured settlements used in taxable damage cases the same estate tax scenario applies. One must however be cognizant of the income in respect of decedent issue (IRD).

IRD is not some new form ofgastrric reflux. It's a form of "income reflux". Income In Respect of a Decedent is the name given t o all types of taxable income earned, but not received by the decedent by the time of his or her death. IRD is NOT taxed on the final return of the decedent, instead, it goes on the return of the person or entity receiving the income. Sometimes this is the surviving spouse, sometimes the estate, sometimes some other beneficiary. IRD retains the same tax nature after death as it would have had if the decedent had received the item of income while alive. There is no step-up in basis for IRD items.

No Lapse Guarantee Universal Life: A New Paradigm Shift?

The pull out of Sun Life from the No Lapse guarantee UL market represents the second major life insurer to jettison the popular product in the past couple of years. In early 2009 AXA Equitable stopped offering the product.

 No Lapse guarantee UL came onto the market as a solution to those who had a long term or permanent insurance need but were turned off by the premiums of whole life. The early version of Universal Life was a popular alternative to whole life in the 1980s when interest rates were high as policy "buckets" were credited with "New Money" rates. It was thought that the new moneycrediting rate would facilitate a more flexible response to assumed increasing rates. The portfolio rate offered by many mutual insurers at the time was posited by UL purveyors as being more slow to respond.  The policies also offered the undisciplined flexibility to pay premiums or not, provided that there was enough cash in the policy "bucket" to pay non guaranteed expense and mortality charges.

As interest rates began to fall in the late 1980s-early 1990s, policyholders began to experience cash calls when their policy "bucket" from which expenses and mortality charges are withdrawn shrunk. Some older insureds faced huge cash calls as the perfect storm of lower interest rates combined with increasing age related mortality charges accelerated the drain. A number of policyholders sued their agents alleging that the risk was not adequately disclosed. Enter no lapse guarantee UL

No lapse guarantee UL permitted an insured to know the minimum premium they had to pay to keep the policy in force even if the cash value dwindled to zero. The contract was contractually guaranteed not to lapse provided the minimum premium was paid. The initial product offerings provided such guarantees for  a limited period of time. In recent years the no lapse guarantees were available until as long as age 120.

Our sources tell us that insurers made hopefull actuarial assumptions that interest rates would increase and have been squeezed when they have actually drifted lower.  AXA's moment of clarity  was embodied in a withdrawal from the market was swift and abrupt, even ditching cases that were in undewritring. I should know. I had one of those cases!

The  low interest rate scenario is also meddling with insurers' assumptions used to set long guarantee period term insurance pricing.

All of this will impact consumers in a negative way as prices eventually adjust for new issues. For the moment No Lapse guarantee universal is still available, just from fewer life insurers and at higher prices.

Life insurance policy "contestable period"

Someone has made a comment on another industry blog concerning life insurance that I though would best be addressed in this forum. The writer appears confused over the significance of the contestable period on a life insurance policy. Here's what she writes:

"I have noticed lately that there are a lot of concerns about life insurance policies and the fact that you have to keep them for at least a year or whatever the term says before you can actually bank on the policy. So if you get a life insurance policy and you die in 2 weeks, then you do not get the life insurance payoff because you died too fast (no matter what the reason is). It is important to check out the life insurance company you are going to be dealing with on this aspect".

The contestable period defines a measure of time during which a life or health insurance company can protect itself from material misstatements made in an insurance application. Consider that a nominal down payment could turn into a $1 million claim in a matter of days or hours and perhaps you will understand the need for the life insurance company to have all of the information at its disposal to properly evaluate the risk.

Let us assume. for example, that you applied for a life insurance policy and lied on the application that you never smoked. If during the contestable period the insurance company discovers that you in fact smoke like a chimney, they can rescind the policy, and refund your money. If, however, they discovered this after the contestable period had expired, they could not take the policy away from you. Contestable periods are defined in the policy and are typically 1-2 years. Some policies have extended periods for fraud.

With respect to "banking on the policy", there is plenty of evidence that insurance companies pay claims during the contestable period. If you prepay your life insurance application or disability insurance application you will receive a conditional receipt. The receipt spells out the conditions for which a claim will be paid during the underwriting period. Assume someone dies in a motor vehicle accident one month after a life insurance application and insurance physical have been submitted to the insurer. Should there be a claim during this time, the insurance company will typically continue underwriting the application as if the decedent were alive, collect all the underwriting requirements to determine if the decedent would have been insurable. If so. it pays the claim.

A contestable period is an important consideration in the event you are replacing one insurance contract with another. If you have had a policy with company A for 5 years, the contestable period is over. If you go to policy B to save a few bucks but in aspiring to be the next "Leland Van Lew" you neglect to disclose your "crocodile wrestling" and "volcano luging" avocations on the app, you may have some problems.

The classic scene from Universal Pictures' Along Came Polly features a passionate promotion of risk taking "Leland Van Lew" (portrayed by Bryan Brown) for insurance by "Sanford Lyle" (portrayed by Philip Seymour Hoffman) to a panel of "insurance underwriters". What is notable is that "the insurance" was approved after FULL DISCLOSURE.

Life Insurance Policy Contestable Period

There seems to be some confusion over what the contestable period of a life insurance policy means judging by the following question which appears on another industry website. A visitor to The Settlement Channel writes:

"I have noticed lately that there are a lot of concerns about life insurance policies and the fact that you have to keep them for at least a year or whatever the term says before you can actually bank on the policy. So if you get a life insurance policy and you die in 2 weeks, then you do not get the life insurance payoff because you died too fast (no matter what the reason is). It is important to check out the life insurance company you are going to be dealing with on this aspect.

May 31, 2009 | life insurance girl"

Comments

The contestable period on a life insurance policy is designed to protect the insurance company and policyholders (in the case of a mutual company) or stockholders (in the event of a stock company) from material misrepresentation and frauds. The actuaries of the insurance company sets it prices in good faith relying on the truthful recording of answers by applicants and agents.

In "The MIsrepresentation Defense in Life and Disability Insurance Cases" by C. Edgar Sentell states

"These rules have typically been formulated in terms of whether the misrepresentation was “material.”  In some states, the insurance company’s right to defend or rescind is further limited by an additional requirement that the matter misrepresented actually contributed to the loss, contingency, event or hazard for which the claim is made.  In other words, in a limited number of states, the insurance company may not deny a claim or seek rescission unless a “causal relation” exists between the misrepresentation and the actual loss.  Under such statutes or case law, when there is an applicant who falsely claims to be a nonsmoker, the insurance company can escape liability if the then insured dies of lung cancer due to smoking, but not if the insured later dies of AIDS.  Finally, in some cases, the insurance company cannot avoid liability even when the policy has been procured through outright fraud".

In addressing the Professional Planner forum, attorney George Berger of the New York law firm Phillips Nizer stated:

"All that the N.Y. Insurance Law requires is that there be a material misrepresentation in the application. Even an innocent misrepresentation will do and the common position taken by the insured that I told the broker or agent the truth but he failed to write it down will not excuse the misrepresentation.

The test for what is material is stated in section 3105 the N.Y. Insurance Law and it says:

"No misrepresentation shall be deemed material unless knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract."

More Comments
IF you are part of the majority that is truthful on your application you should be able to  "bank on your policy", even if the indeterminable loss occurs within the contestable period.

When you apply for life insurance, you should carefully review the application BEFORE you sign the application. The application becomes part of the contract and is usually attached thereto, at the back. When you receive your annuity contract from your agent or the company, you should look over the application AGAIN and make sure that your application (that is now part of the contract) is completely truthful and accurately recorded.

Just remember if you screw up on your life insurance application you may never know the ramifications, but your family will!

Re-Finance Your Term Insurance!

Good news for families! The insurance Information Institute reports that term insurance rates have dropped 4% a year since 2000 with the trend expected to continue.

One reason for the drop:

Mandatory switch of mortality tables to the 2001 Commissioners Standard Ordinary (CSO) as of January 2009. 1980s stables were used previouly and there have been improvements in mortality along the way.

If you have a term insurance policy John Darer can help you review it in light of your current situation and update it if appropriate.

Call toll-free 888-325-8640

Life Insurance for Impaired Risks

There are a variety of reasons that life insurance maybe a good purchase by or for the benefit of tort victims and their attorneys. Some of these include:

• Life insurance on parents (or grand parents) who provide care giving services and/or support can provide an immediate income tax free** lump sum timed to an event which is certain but the timing is not. The policy can be applied for and owned by a trust to keep the insurance out of the parents' estate and assure spendthrift protection after their death.
• Life insurance can equalize inheritances in families where there is a disabled child and much of the parents' resources has been used to care for the disabled child.
• Life insurance can equalize inheritances where one child is going into the family business and the other is not.
• Life insurance can be used for estate tax purposes, particularly when there is a foreign spouse and no unlimited marital deduction available.
• Properly arranged life insurance can be used to prepay estate taxes or the purchase of a business at a substantial discount.
• Life insurance can be used to fund a buy-sell agreement on partners in a law firm or business.
• Life insurance can be used to leverage contributions and fund a charitable foundation that is of special interest to a tort victim, or members of his or her family.

Impaired risk doesn't mean you can't be insured for life insurance. Programs are available with highly rated life insurers for clients with heart disease, Diabetes, Alcohol abuse, Cancer, Stroke, Sleep Apnea, Overweight, Heart Attack, Coronary Bypass, Foreign Travel to most countries, including Israel, Iran, India, Pakistan, Nigeria, Brunei, Uganda, Indonesia, Malaysia and more. Insurance is also available to older and older ages.

Please call John Darer at 888-325-8640 to discuss your particular situation.

**see IRC § 101 for conditions

A Federal Charter For Life Insurance Regulation Inevitable?

Investment News' Darla Mercado reports on 6/9/2008 (at page 57) that the move toward federal regulation of the insurance market is working its way through Congress. There are many in the life insurance industry that applaud its movement. The state insurance commissioners have created the Interstate Insurance Product Regulation Commission to allow insurers to file products under uniform standards, allowing products to be sold in all member states. Another piece of the federal regulation puzzle is the establishment of a federal insurance oversight office within the federal government under U.S. Rep. Paul Kanjorski's (D-PA) proposed legislation.

The process of introducing new products in different states under the present system is both time consuming and costly. It is hoped that the passing of such measure will reduce the time it takes to bring innovative new products to market.

Life Insurance When You've Got Medical Problems

Life insurance may be an important element of a settlement plan for personal injury recovery management when recovery involves a minor child or incapacitated adult, particularly if the parents are the primary caregivers.

Life insurance can be used to finance the cost of a replacement caregiver, or someone who will replace certain services that are now being provided by the deceased caregiver. This value of this use of life insurance cannot be overemphasized.

Life insurance can be a means to finance estate taxes at a discount, or to even out an inheritance if one child has the aptitude and wants to enter the family business while another does not.

Life insurance can be used as a means to fund a buy sell agreement for law partners and other businesses where for example the surviving partners have no interest in being in business with a deceased partner's spouse.

But what if you or your client have medical problems? Surprisingly Standard and Standard Plus is available on whole life with "AAA" rated life  insurers for conditions such as diabetics, people with heart problems, Cancer History, Foregn Travel and those who are overweight or have high blood pressure.

For further information call John Darer 888-325-8640

Life insurance in settlement planning, further information please click here