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The first two questions most people ask when they look into life insurance coverage are very often: “How will my premiums be?” and “How much do I need?”

Life insurance costs can be a challenge to calculate because there are several types of life insurance, including whole life, universal life and term life insurance. The cost of life insurance is unique to each individual and depends on the type of policy you choose, the amount of coverage you want, and factorssuch as your age and overall health.

Comparing online life insurance rates can be a good way to get an idea of what you might pay in premiums. But to get a customized plan that fully meets your needs and budget, it is a good idea to work directly with an agent. For detailed answers and a review of your situation, contact an independent agent in the Trusted Choice® network who specializes in life insurance. A local member agent in your area can help you evaluate your options and provide a customized quote.

Factors That Affect Your Life Insurance Policy Premiums:

Age: Overall, life insurance rates increase as you age.
Health profile: Do you have any chronic conditions? Do you smoke?
Gender: Women live longer, statistically, and typically pay lower life insurance costs.
Occupation: Receptionist? Machine operator? Sky diving instructor? Yes, it matters.
Exams: “No exam” life insurance quotes are available, but are typically more expensive.

To look at some average life insurance rates, we will review several scenarios. Why? Because the average cost of life insurance for a 30 year old male who smokes is very different from the average cost for a 30 year old female with a clean bill of health. To illustrate the range of costs associated with life insurance, the following section will give some hypothetical scenarios for you to think about before you buy a plan.

The Average Cost of Whole Life Insurance

The following average costs were calculated using the following assumptions:

The individuals are a healthy weight and do not live a hazardous lifestyle.
They want $500,000 worth of life insurance.
They want monthly “level pay” (same payments for the duration of the policy).
The average costs will differ when any of the variables change. For example, a 35 year old female nonsmoker would pay an average of $731.57 if she wanted 1,000,000 worth of whole life insurance or about $188.36 for $250,000 worth of whole life insurance.

The Average Cost of Term Life Insurance

The following average costs were calculated using these assumptions:

The individuals are a healthy weight and do not live a hazardous lifestyle.
They want $500,000 worth of life insurance.
They want to pay monthly for a 20-year term policy.
Life Insurance – 2
Again, the average costs will differ when any of these variables change. For example, a 35 year-old female nonsmoker would pay an average of $61 per month for $1,000,000 worth of life insurance with a 20-year term, and $23.90 per month for $250,000 worth of life insurance with a 20-year term.

Does Life Insurance Cost More in Certain Regions of the U.S.?

There can be some differences in your life insurance costs, depending upon your state and region. Life insurance companies use “mortality tables” to help predict the benefits they are likely to pay in a given year. Why? Because the amount they collect in premiums must be less than what they pay out in benefits, and these actuarial tables ensure that they will not end up in a deficit.

Some factors that may be taken into account to calculate your life insurance costs in your region include:
Whether there is a high rate of obesity in your state or region
If the area experiences a high rate of deadly natural disasters, such as earthquakes
If the region is prone to certain diseases, such as black lung disease typical in miners
If the state or region has a high mortality rate due to crime
How many policies have been written in that area
Even with these factors taken into consideration, rates do not typically vary significantly from region to region. For example, if you live in an area prone to earthquakes and high crime, your life insurance rates will be affected more by your age and personal health profile than where you choose to live.

How to Lower Your Life Insurance Policy Premiums

Because health and lifestyle play a key role in determining your life insurance rates, the key things you can do to lower your payments have to do with improving your health and reducing your risk of chronic conditions like diabetes or cancer. Being a non-smoker is perhaps the most critical choice you can make to reduce your life insurance rates, but there are many more things you can do as well.

For example:

Maintain a healthy weight to reduce the risk of obesity and related chronic conditions.
Get a body mass index (BMI) check done
If you have a high BMI, work with a health professional to lose excess weight
Maintain your heart health to reduce the risk of hypertension, heart attack and stroke.
Get an annual physical
Regularly check your blood pressure, cholesterol, and triglyceride levels
Work with a health professional to improve your numbers, if needed
Reduce stress, improve your diet and increase exercise
Manage your blood sugar to reduce the risk of diabetes.
Request a blood sugar test
Obtain a diet and exercise plan to help manage blood sugar levels
In addition to assessing your overall health, most life insurance companies will also review your risk of death from a high risk sport or work related accident. For this reason, your career choices and the activities you choose to do for fun can also impact your life insurance rates. If you work at a desk job, versus a career as a skydiving instructor, under-water welder or a rodeo clown, you will find that more insurance companies will be willing to insure you at a more affordable rate.


What are Term Life Insurance Premiums and Policies

The most affordable and simplest form of life insurance coverage is known as Term Life Insurance as the premium or payment amount is guaranteed for a set amount of years or a term. The term generally ranges between 10 to 30 years.

How does Term Life Insurance Work?

Here is an example:

Daisy Smith pays a $25 monthly premium for a policy with a 30 year term and as a result, secures a $500,000 policy.

Of course, insurance premiums vary depending on one’s health and age. As the rates and cost associated with term life insurance are lower than most policies,

policy holders are able to maximize their coverage benefit, making this type of insurance the most popular choice among families.

This type of policy can be allocated for a number of uses including:

Maintain your family’s standard of living with income replacement

Pay off debts such as a mortgage, credit cards, etc.

Pay for children’s college education

Key person or buy/sell agreements for a business

Divorce settlement

Pay for final expenses

What are Common Additional Benefits or Riders

A rider is an additional benefit that can be added to a policy. The purpose of rider provisions is to allow for additional benefits and meet the unique needs of policy holders. It also empowers the policy holder with control over ever-changing life situations. It is important to understand the terms of each rider as each insurer may have different definitions that may impact your qualifications. Also, keep in mind that in most cases, buying a rider may require paying an extra premium for this supplementary benefit. A few of the more common riders available are listed below:

Waiver of Premium

In the event that the insured becomes disabled, this rider will pay the premiums on your life insurance policy for the duration of its term. The definition

of “totally disabled” may vary from one insurer to another, making it important to be aware of the terms and conditions of this rider.

Accelerated Death Benefit

This rider is included in most policies at no additional cost. It provides that a portion of the death benefit becomes available to help with expenses, should the insured be diagnosed with a terminal disease and their lives be shorten considerably. Also, the definition for “terminal illness” may vary depending on the insurer, so make sure you are familiar with the terms and conditions.

Child Protection

No one wants to think about the death of a child. However, in addition to relieving the financial burden to the family, this rider also typically provides a guaranteed conversion option to a permanent policy, multiplying it up to five times the original face amount. This essentially guarantees parents the abilityto purchase lifetime coverage for that child without requiring a medical exam.

Conversion Option

Typically when you purchase term life insurance it is for a period of time between 10 and 30 years. With this rider, some life insurance policies will allow the policy to be converted into a permanent life insurance product without a medical exam. This can be beneficial especially to someone whose health has deteriorated over the years and may not be able to secure new coverage at the end of the guarantee period.

Return of Premium

Should a person outlive the initial guarantee period, the owner of the policy receives a refund in the amount of premiums paid during that time. In the event of the policy holder’s death, their beneficiaries will receive the paid premium amount.

Buying insurance can be complicated and confusing. Understanding the various types of insurance available is an important step to providing life security.

You can also use our online insurance calculator to help determine what the best options are for you.

Ah, tax season: that time of year when clients and advisors alike are faced with a string of uncertainties and unanswered questions. How are single premium life insurance policies taxed? How can the generation-skipping transfer tax exclusion be leveraged using an ILIT? Find answers to these and other ponderings in our timely tax primer.

Are premiums paid on personal life insurance deductible for personal tax purposes?

No. Premiums paid on personal life insurance are a personal expense and are not deductible. Internal Revenue Service (“IRS”) regulations specifically provide that “[p]remiums paid for life insurance by the insured are not deductible.” It is immaterial whether the premiums are paid by the insured or by some other person. For example, premiums paid by an individual for insurance on the life of his or her spouse are nondeductible personal expenses of the individual. Premiums are not deductible regardless of whether the insurance is government life insurance or regular commercial life insurance. Although life insurance premiums, as such, are not deductible, they may be deductible as the payment of alimony or as charitable contributions.

Is the interest increment earned on prepaid life insurance premiums taxable income?

A: Yes. Any increment in the value of prepaid life insurance or annuity premiums or premium deposit funds constitutes taxable income in the year it is applied to the payment of a premium or is made available for withdrawal, whichever occurs first. The interest treated as taxable income, however, will be included in the cost basis of the contract. Thus, for purposes of IRC Section 72, the cost of the contract would be the amount of premiums paid other than by discount, plus the amount of discounted funds and any increments on such funds that were subject to income taxation. The rule taxing interest increments has no applicability, however, to single premium policies. A later ruling explains in detail how the interest will be taxed.

How are single premium life insurance policies, including single premium variable life insurance policies, taxed?

A: A single premium life insurance policy generally is treated in the same manner as a multiple-premium life insurance policy for income tax purposes. For all life insurance policies that meet the definition of life insurance, cash surrender value increases generally are not taxed until received and death proceeds generally are received income tax free.

The tax treatment of policy loans depends on whether the policy is treated as a modified endowment contract (“MEC”). Most single premium policies are considered MECs; policies entered into on or after June 21, 1988, that do not meet the seven pay test of IRC Section 7702A(b) are classified as MECs. Loans from MECs are taxable as income at the time received to the extent that the cash value of the contract immediately before the payment exceeds the investment in the contract.These distributions also may be subject to a penalty tax of 10 percent.

Life insurance policies, including single premium policies, issued prior to June 21, 1988, generally are grandfathered and are not subject to the seven pay test. Loans from these policies will not be treated as taxable income. Loans from policies that are not grandfathered but that meet the requirements of the seven pay test also are not treated as taxable income. Any outstanding loan becomes taxable income at the time of policy surrender or lapse, however, to the extent that the loan exceeds the owner’s basis in the contract. If policy death proceeds are tax free, the amount of the loan is not taxed but is treated as part of the tax free death proceeds. Note that a grandfathered policy may lose its grandfathered status if it undergoes a material change in its terms or benefits or is exchanged for another life insurance policy under IRC Section 1035.

How is the value of a life insurance policy determined for income tax purposes?

A: Transfers of property after June 30, 1969, in connection with the performance of services are governed by IRC Section 83. For transfers before February 13, 2004, Treasury Regulation Section 1.83-3(e) provided that, “In the case of a transfer of a life insurance contract, retirement income contract, endowment contract, or other contract providing life insurance protection, only the cash surrender value of the contract is considered to be property.”

For transfers after February 12, 2004, however, new regulations recently have been issued under IRC Section 83. These regulations change the definition of what constitutes property with respect to a life insurance contract. The new definition generally treats the policy’s fair market value (specifically the policy cash value and all other rights under the contract, including any supplemental agreements to the contract, whether or not they are guaranteed, other than current life insurance protection) as property. For transfers of life insurance contracts that are part of split dollar arrangements that are not subject to the split dollar regulations, however, only the cash surrender value of the contract is considered property.

The IRS has provided a safe harbor on how to determine the fair market value of a life insurance contract. The fair market value of a life insurance contract may be the greater of either: (1) the interpolated terminal reserve and any unearned premiums, plus a pro rata portion of a reasonable estimate of dividends expected to be paid for that policy year, or (2) the product of the “PERC amount” (PERC stands for premiums, earnings, and reasonable charges) and the applicable “Average Surrender Factor.”

The PERC amount for a life insurance contract that is not a variable contract is the aggregate of:

(1) the premiums paid on the policy without a reduction for dividends that offset the premiums, plus

(2) dividends that are applied to purchase paid-up insurance, plus

(3) any other amounts credited or otherwise made available to the policyholder, including interest and similar income items but not including dividends used to offset premiums and dividends used to purchase paid up insurance, minus

(4) reasonable mortality charges and other reasonable charges, but only if those charges are actually charged and those charges are not expected to be refunded, rebated, or otherwise reversed, minus

(5) any distributions (including dividends and dividends held on account), withdrawals, or partial surrenders taken prior to the valuation date.

The PERC amount for a variable life contract is the aggregate of:

(1) the premiums paid on the policy without a reduction for dividends that offset the premiums, plus

(2) dividends that are applied to increase the value of the contract, including dividends used to purchase paid-up insurance, plus or minus

(3) all adjustments that reflect the investment return and the market value of the contract’s segregated asset accounts, minus

(4) reasonable mortality charges and other reasonable charges, but only if those charges are actually charged on or before the valuation date and those

charges are not expected to be refunded, rebated, or otherwise reversed, minus

(5) any distributions (including dividends and dividends held on account), withdrawals, or partial surrenders taken prior to the valuation date.

The Average Surrender Factor is 1.0 when valuing life insurance contracts for purposes of the rules regarding group term life (Section 79), property

transferred in connection with the performance of services (Section 83), and certain transfers involving deferred compensation arrangements (Section 402(b)).

This is because under these rules no adjustment for potential surrender charges is allowed.

The IRS pointed out that the formulas in its safe harbor rules must be interpreted in a reasonable manner, consistent with the purpose of determining the contract’s fair market value. Specifically the rules are not allowed to be interpreted in such a way to understate a contract’s fair market value.

For transfers of property before July 1, 1969, the IRS ruled that the value of an unmatured policy is determined for income tax purposes in the same manner as for gift tax purposes. In one case, the court accepted the value stipulated by the parties in an arm’s length agreement.

May a life insurance beneficiary be required to pay estate tax attributable to death proceeds?

A: Yes, under either of two circumstances: (1) Where the decedent/insured has directed in his or her will that the life insurance beneficiary pay the share of death taxes attributable to the proceeds; and (2) where the state of the decedent’s domicile has a statute that apportions the burden of death taxes among probate and nonprobate beneficiaries in absence of any direction from the decedent regarding where the burden of death taxes should fall.

Most states have statutes that apportion death taxes (federal, state, or both) among the beneficiaries of an estate, probate and nonprobate, under circumstances where the decedent has not directed otherwise. A few states place the death tax burden on the probate estate (technically, the residuary estate).

A federal apportionment statute provides in pertinent part as follows: “Unless the decedent directs otherwise in his will, if any part of the gross estate on which tax has been paid consists of proceeds of policies of insurance on the life of the decedent receivable by a beneficiary other than the executor, the executor shall be entitled to recover from such beneficiary such portion of the total tax paid as the proceeds of such policies bear to the taxable estate.”

In McAleer v. Jernigan, the decedent’s former wife was the beneficiary of insurance on the decedent’s life. The decedent, who died domiciled in Alabama, did not direct in his will where the burden of death taxes should fall. The Alabama statute said that unless the decedent directed otherwise, the executor was to pay death taxes out of estate property (i.e., from the residuary estate). The statute also said that the executor was under no duty to recover any pro rata portion of such taxes from the beneficiary of any nonprobate property. In a suit by the executor to recover from the life insurance beneficiary a pro rata share of the estate tax due (the insurance proceeds having been found includable in the gross estate for federal estate tax purposes), the Eleventh Circuit held that the federal statute, IRC Section 2206, prevailed over the state statute and allowed the executor to recover.

Can arrangements for payment of the proceeds of life insurance and annuity contracts attract the generation-skipping transfer tax?

A: Yes. Regardless of what form an arrangement may take (whether, for example, the arrangement is a life insurance trust, an agreement with the insurer for payment of proceeds under settlement options, or an outright payment to a beneficiary), if an insured (or annuitant) transfers benefits to a “skip person,” generally, the insured has made a generation-skipping transfer.

For purposes of the generation-skipping transfer tax, the term “trust” includes any arrangement (such as life estates, estates for years, and insurance and annuity contracts) other than an estate that, although not a trust, has substantially the same effect as a trust. In the case of an arrangement that is not a trust but that is treated as a trust, the term “trustee” means the person in actual or constructive possession of the property subject to such arrangement.

The IRS has been given authority to issue regulations that may modify the generation-skipping rules when applied to trust equivalents, such as life estates and remainders, estates for years, and insurance and annuity contracts. The committee report states that such authority, for example, might be used to provide that the beneficiary of an annuity or insurance contract be required to pay any generation-skipping tax.

Regulations provide that the executor is responsible for filing and paying the GST tax if (1) a direct skip occurs at death, (2) the property is held in a trust arrangement, which includes arrangements having the same effect as an explicit trust, and (3) the total value of property subject to the direct skip is less than $250,000. The executor is entitled to recover the GST tax attributable to the transfer from the trustee (if the property continues to be held in trust) or from the recipient of the trust property (if transferred from the trust arrangement).

Regulations provide a number of examples that treat insurance proceeds as a trust arrangement. Where insurance proceeds held by an insurance company are to be paid to skip persons in a direct skip at death (a direct skip can occur whether proceeds are paid in a lump sum or over a period of time) and the aggregate value of such proceeds held by the insurer is less than $250,000, the executor is responsible for filing and paying the GST tax. Consequently, the insurance company can pay out the proceeds without regard to the GST tax (apparently, the insurance company could not do so if the executor attempts to recover the GST tax while the company still holds proceeds). Where the value of the proceeds in the aggregate equals or exceeds $250,000, however, the insurance company is responsible for filing and paying the GST tax.


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