Living in a different city or state — miles from aging parents — can be very difficult. Keeping in touch by telephone and making long trips to help parents or aging relatives with their needs can be time consuming and not nearly as effective as being available full time in person.

Mark Sessions spent two years juggling his restaurant business with multiple daily phone calls to his elderly parents, checking on their needs and answering their questions. Family vacations were spent traveling the 500 miles to his parent’s home to personally take care of home maintenance and provide health care visits to their doctor. During his last visit, Mark noticed his father had difficulty walking and his mother was confused as to which medications she was to take and at what time. This alarming change in his parent’s condition concerned Mark that his parents’ care needs required more than frequent phone calls and vacation visits. Running his business and handling his parent’s long distance care was now becoming very challenging.

According to a report by the Alzheimer’s Association of Los Angeles & Riverside, California, there are approximately 3.3 million long distance caregivers in this country with an average distance of 480 miles from the people they care for. The report also states that 15 million days are missed from work each year because of long distance care giving. Seven million Americans provide 80% of the care to ailing family members and the number of long distance caregivers will DOUBLE over the next 15 years.
Long Distance Caregiver Project – Alzheimer’s Association LA & Riverside, Los Angeles, CA (May 15, 2002, National Web Seminar by Judith Delaney, MFT, Clinical Coordinator)

The long distance caregiver is a new role that is thrust upon children and younger family members. Families used to live closer together, with children residing and working near their parents. But nowadays family members are more distant from each other. Society, today, is recognizing this. Some caregiver services have tweaked their programs to work as liaisons between long distance caregivers, senior loved ones and local medical professionals.

Professional care managers — a lso known as Geriatric Care Managers, Elder Care Managers or Aging Care Managers — represent a growing trend to help full time, employed family caregivers provide care for loved ones. Care managers are expert in assisting caregivers, friends or family members find government-paid and private resources to help with long term care decisions.

They are professionals — trained to evaluate and recommend care for the aged. A care manager might be a nurse, social worker, psychologist, or gerontologist who specializes in assessing the abilities and needs of the elderly. Care manger professionals are also becoming extremely popular as the caretaker liaison between long distant family members and their aging elder loved ones.

Jacqueline Marcell — author of “Elder Rage, or Take My Father…Please! How to Survive Caring for Aging Parents” (Impressive, 2000) — says,

“The most important thing to do is to find a geriatric care manager in the area where your loved one lives. She will have knowledge of all the services in the area and can be your eyes.”

Below is a partial list of what a care manager or Professional Geriatric Care Manager might do:

• Assess the level and type of care needed and develop a care plan.
• Take steps to start the care plan and keep it functioning.
• Make sure care is in a safe and disability friendly environment.
• Resolve family conflicts and other issues with long term care.
• Become an advocate for the care recipient and the caregiver.
• Manage care for a loved one for out-of-town families .
• Conduct ongoing assessments to implement changes in care.
• Oversee and direct care provided at home.
• Coordinate the efforts of key support systems.
• Provide personal counseling.
• Help with Medicaid qualification and application.
• Arrange for services of legal and financial advisors.
• Provide placement in assisted living facilities or nursing homes.
• Monitor the care received in a nursing home or in assisted living.
• Assist with the monitoring of medications.
• Find appropriate solutions to avoid a crisis.
• Coordinate medical appointments and medical information.
• Provide transportation to medical appointments
• Assist families in positive decision making
• Develop care plans for older loved ones not now needing care
  “The 4 Steps of Long Term Care Planning,” National Care Planning Council

Services offered will depend on the educational and professional background of the care manager, but most are qualified to cover items in the list above or can recommend a professional who can. Fees may vary. There is often an initial consultation fee that is followed by hourly fees for services. Health insurance does not generally cover these fees but long-term care insurance might.

In 2002, the AARP published a survey from geriatric care mangers about their fees:

“Respondents were asked how much they charged for their services, which might include: an initial consultation; fees on an hourly or per visit basis; fees for development of a care plan; and fees on a fixed-price contract basis. Hourly fees averaged $74 an hour. GCMs charged an average $168 to develop a care plan. Initial consultations averaged $175. Seven of ten current GCMs responded in the affirmative when asked if they had a statement that listed their fees. ” Written by Robyn Stone, DrPH, Principal Investigator; Susan Reinhard, RN, PhD, Co-Principal Investigator; Jean Machemer, MSG, Research Associate; and Danylle Rudin, MSW, Research Associate of The Institute for the Future of Aging Services, Washington, D.C.Barbara Coleman, Project Manager, AARP Public Policy Institute November 2002

When you take into account the time absent from work and time to find the right care resources for your loved ones, along with the cost of travel expenses to monitor their care, you will probably concur that using a caregiver is money well spent. Add on to this the stress of handling your own life circumstances combined with being a caregiver and you will probably wonder how you could have ever done without the care manager.

A professional or geriatric care manager can be an important asset to all families in elder care situations. Here is an example of how a care manager can help.

Mary is taking care of her aging husband at home. He has diabetes and is overweight. Because of the diabetes, her husband has severe neuropathy in his legs and feet and it is difficult for him to walk. He also has diabetic retinopathy and, therefore, cannot see very well. She has to be careful that he does not injure his feet, since the last time that happened he was in the hospital for four weeks with a severe infection. She is having difficulty helping him out of bed and with dressing and using the bathroom. She relies heavily on her son, who lives nearby, to help her manage her husband’s care.

On the advice of a friend, Mary is told about a professional care manager, Sharon Brown. The cost of an initial assessment and care plan from the care manager is $175.00. Mary thinks she has the situation under control and $175.00 for someone from the outside to come in and tell her how to deal with her situation seems ridiculous.

One day Mary is trying to lift her husband and injures her back severely. She is bedridden and cannot care for her husband. Her son, who works fulltime, now has two parents to care for. On the advice of the same friend, he decides to bring in Sharon Brown and pay her fee himself.

Sharon does a thorough assessment of the family’s needs. She arranges for Mary’s doctor to order Medicare home care during Mary’s recovery. Therapists come in and help Mary with exercises and advice on lifting. Sharon advertises for and finds a private individual who is willing to live in the home for a period of time to help Mary with her recovery and watch over her husband. Sharon makes sure the new caregiver is reliable and honest and that taxes are paid for the employment. Sharon enlists the support of the local area agency on aging and makes sure all services available are provided for the family.

Sharon also calls a meeting with Mary’s family and explains to them the care needs and how they need to commit to help with those needs. Sharon makes arrangements to rent or purchase medical equipment for lifting, moving and easier use of the bathroom facilities. Medicare will pay much of this cost. Sharon also works closely with an elder law attorney and a financial planner who specializes in the elderly. The attorney prepares documents for the family including powers of attorney, a living will and advice on preserving Mary’s remaining assets. The financial planner recommends a reverse mortgage specialist to help Mary and her husband tap unused assets in their home’s equity. Some reverse mortgage proceeds are used to pay off debt. The remaining proceeds are converted into income with a single premium immediate income annuity in order to provide Mary adequate income when her husband is gone and she looses one of the Social Security payments.

With the help of the care manager, Mary’s life and future have been significantly improved. Her husband as well, if he adheres to the care plan, may end up having a better quality of life for his remaining years.
“The 4 Steps of Long Term Care Planning,” National Care Planning Council

The National Care Planning Council promotes and supports professional and geriatric care managers on its website www.longtermcarelink.net .

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Martin Higgins is a registered representative and investment adviser representative of Mutual of Omaha Investor Services, a securities broker/dealer and registered investment adviser. Home Office: Mutual of Omaha Plaza, Omaha, NE 68175-1020 Member FINRA/SIPC. There is no contractual relationship between Family Wealth Management and Mutual of Omaha Investor Services, Inc. Martin Higgins can only do business in states in which he is registered. The information presented in this newsletter is intended for educational purposes only, and is not intended to replace the advice of an attorney or qualified tax professional.

A family vacation home is a place of fun, memories and refuge for generations of friends and relatives. But when the matriarch or patriarch who bought the home dies, it’s not uncommon for the same family members to go to war over visitation rights and ownership of the property, which can be worth a significant sum.

This is why it’s important to include any vacation property as a part of the buyer’s estate planning. According to the National Association of Realtors’ 2009 analysis based on U.S. Census data, there are 7.9 million vacation homes and 41.1 million investment units in the United States, compared with 75 million owner-occupied homes.

Such significant property can mean significant discord when there’s a desire on the part of some family members to sell. Siblings may not have the cash to buy other family members out. That’s why it’s important for experts in financial planning, tax and estate issues to be brought into what might seem as a fairly minor investment issue. Some suggestions:

Do a market analysis: How valuable is the family vacation home, anyway? It might make sense before you talk to any of your heirs to appraise the property and launch a competitive marketing analysis to see what other homes in the immediate area are worth. Knowing whether the property is appreciating or depreciating is important, but knowing future maintenance costs is important too. If the home is in significant need of repairs or updating, it’s fair to get estimates and determine whether the owner wants to do those now or if heirs want to make that investment, at which time they’ll have full control over the choices that get made.

Discuss scenarios with your team of experts: Again, it’s important to bring in your entire financial team to talk through the sale or succession issues involved in deciding what to do with the vacation property. This will give you something to think about so you’ll have more to discuss when you finally bring it up with your heirs.

Discuss family feelings about the property before you solidify your plans: It might be a good idea for the property owners to casually sit down with family members over time to gauge their interest in keeping the property. Eventually that can result in a more formal meeting when it’s time to start making decisions. An owner might find that the children he or she were certain would want to keep the property want to sell, or vice-versa. This is one emotional investment issue, so it makes sense to take time to feel out all the family members, particularly if sets of children from previous marriages are involved.

Start developing the plan: Once you reach consensus with all relevant family members, act. If there are children who want out of the ownership plan, see if you want to compensate them and decide how that will be done. Parents might offer a buyout sum to children in the form of a gift over several years while they’re alive so surviving heirs don’t have to pony up after the owner dies. The key advantage of planning ahead is having the time to consider all the financial and emotional fallout before it happens. It’s good to get advice on what a sensible buyout price is ahead of time. Because it won’t include traditional selling costs, family members might be able to buy the property at a premium.

Consider different ownership structures: Homes that older family members want to  keep in the family might consider a limited liability company (LLC) as an ownership vehicle for the vacation home. LLCs can offer lawsuit protection from creditors and users, they’ll keep the property in the family and they will help the owner set up a structure for ownership, maintenance and governance issues that will stay in place long after he or she is gone. Again, financial, tax and estate experts should be consulted.

Have some fun: Don’t let the process of handing down the property or discussing future ownership detract from the property’s original purpose – to keep family together and to create good memories. Once decisions are made, it might be a good idea to have one last, big gathering there so everyone can either say goodbye or solidify their plans for the next generation of family gatherings.

August 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V. Higgins, CFP, CLU, AEP, a local member of FPA.

Why do people buy life insurance? More specifically, why do you buy life insurance?

Without life insurance, a financial plan is just an investment plan that will die when you do. People dream dreams. Without enough life insurance, your dreams will probably die when you do?

Most people have either an estate tax problem or an estate size problem. What does that mean? When you die, your estate will be subject to income taxes and estate taxes. Life insurance can provide the money to pay the taxes rather than liquidating other more valuable growth and income-producing assets. On the other hand, most people have an estate size problem. Life insurance helps creates wealth that they have not had enough time to accumulate themselves.

I’ve heard it said many times that if people truly understood life insurance, they would be lining up to buy it. Life insurance is a commonsense cash cushion to fall back on during your lifetime or for your family when you die. Think of it in this context. How would you feel about a bank savings account that pays higher interest than the bank over the long haul, and where the interest is either tax-free or tax-deferred, depending upon the degree of tax planning done? In addition to that, there is a tax-free death benefit. Over the long haul, it will quite probably substantially outperform the bank.

Buying life insurance is a reflection of common sense, caring, commitment, and character. It is about doing the right thing for yourself and your family. General Norman Schwarzkopf said, “The truth of the matter is that you always know the right thing to do.  The hard part is doing it.” This statement certainly applies to life insurance.

Life insurance only makes sense if you are going to die. Coming to grips with that fact is not so easy for everyone. No one has a lease on life. If you don’t die before age 65, you will die after age 65. It is bad enough to die. Don’t do it for free.

Most of us understand that we have a responsibility to our families. It is easy to say you love someone. Buying life insurance means putting your money where your mouth is. As General Schwarzkopf said, we know the right thing to do. As he also said, we need help doing it. That is why most people need a life insurance agent to help them do the right thing.

By Harvey Mackay

Disagreements happen. You can’t always get your way. Everyone has an opinion. There are two sides to every argument.

When you’re dealing with family or friends, you expect to have differences of opinion. Perhaps you are willing to fight for your views and what’s important to you. And often, because of the personal relationships you have, you find a way to work things out.

At work, the dynamic is very different. The professional relationships you develop are based more on achieving success and moving up. Of course, you’ve become friends too, but competition is still part of the system. You want to be seen as a team player, but you want your ideas respected. You don’t want to get a reputation for making trouble. You need to be picky about picking fights.

Disputes that are not worth pursuing fall into several categories:

• The other person will not change. Perhaps they are just as grounded in their principles as you are, and not willing to listen or consider another point of view. Compromise may not be an option in any case.
• The results won’t change the outcome substantially. Think hard about whether it is more important to get your way or to just let it go.
• All the facts aren’t available. Decisions need to be based on the best possible information. Guessing to fill in the blanks will not benefit anyone.
• Other issues are more important. Keep your priorities straight and concentrate on the most pressing issues. Not all issues carry the same weight.
• You’re just trying to prove yourself, not improve the situation. What you will prove is that your ego is more important than the problem you are trying to solve.
• You really have no chance of winning. You may be a voice in the wilderness, and 100 percent correct in your assessment, but save your breath until you can realistically bring others around.

But there are valid reasons for holding your ground, which need no explanation. Pursue a fight when: Your own ideas are being stolen. Your reputation is at stake. Your company’s reputation is being threatened. The action being taken is unethical or illegal. And cost is a major factor.

When an argument ensues, focus on the issue, not the person raising the objection. Make sure your facts are correct and complete. Have documentation available to back up your points. Stay calm — yelling and ranting make you look out of control rather than on top of the issue. Respect the other people and let them have their say. Compromise wherever possible. Bear in mind that you will be working with these co-workers and the success of future dealings hinges on how you treat them.

Letting a disagreement fester is counterproductive in many ways: It creates a hostile workplace, discourages teamwork, wastes time and resources, and in the end, accomplishes nothing. Everyone loses.

Fortunately, with some preparation, you can improve your chances of persuading others to consider your ideas. If I know I’m going into difficult negotiations, I don’t want the result to be an argument. I want everyone to feel like they contributed to the solution. It has to be a win-win situation. Here’s how I proceed:

• Anticipate the sticking points. I never walk into a presentation or meeting without considering what issues and objections might arise. I develop a game plan to deal with concerns and to convince them that the solution I am proposing will address their objection.
• Stay on topic. Stick to the issues, and redirect the conversation back to the original issue if conversation wanders.
• Don’t take objections personally. Pay close attention to the reasons others are challenging your ideas, and try to see the issues from their perspective. If my solution creates a new problem for them, I am willing to reconsider. The point is to solve problems.
• Ask for help. I look to advisers and employees for great ideas. This accomplishes two things: It helps me see the problems from several points of view, and it demonstrates that I am willing to be a team player. I want the best ideas out there, and I don’t always care where they come from.

Differences of opinion don’t have to be dead ends. Learn how to pick your battles, and put your energy into finding the best possible solutions.

Mackay’s Moral: You have a right to fight for what’s right.

[Ed Note: To learn more about handling disagreements in the workplace effectively, without wasting time or money, check out ETR's Epiphany Alliance personal success program. From your personal mentor Bob Cox, you'll learn dozens of techniques for organizing your life at home and at work so you can achieve all your most important goals. Find out more here.

Harvey Mackay has written five New York Times bestselling books, two of which were named among the top 15 inspirational business books of all time -- Swim With the Sharks Without Being Eaten Alive and Beware the Naked Man Who Offers You His Shirt. His latest book, Use Your Head to Get Your Foot in the Door: Job Search Secrets No One Else Will Tell You, was released on Feb. 18. Harvey is a nationally syndicated columnist and has been named one of the top five speakers in the world by Toastmasters International. He is chairman of the $100 million MackayMitchell Envelope Company, a company he started in 1960.]

The purpose of life insurance is to provide a sum of money (the death benefit) at the death of the insured. When you use life insurance as part of your college-funding plan, you can provide funding for your child’s college education in two ways. The first and perhaps obvious use is the death benefit, which can be used to pay for your child’s college education should you die prematurely. Statistically speaking, you probably will be alive to see your child through college, in which case you can still use life insurance as part of your education-funding plan. When you choose a cash value life insurance policy, you have a second way of reaching your college-funding goal. When you pay premiums on a cash value policy, some of your money is applied towards the policy cash value, making it sort of a savings account within the life insurance policy. Cash values accumulate and can be used during your lifetime via withdrawals and/or policy loans. This discussion assumes that you will live beyond the time your child enters college, and it will focus on the potential benefits of using cash value life insurance in your plan for funding your child’s college tuition.

When can it be used?

You have a need for insurance

Life insurance can be an important tool in your savings plan for your child’s college education. However, it is not appropriate that you buy life insurance solely for funding college tuition. You should only consider life insurance for this purpose when you also have a need for life insurance protection. Need is determined by several factors. If you work and produce an income that your family depends on, there is likely an insurance need. Even if you don’t work outside the home but are responsible for the care of your children, there may be an insurance need. The worksheet How Much Insurance Do You Need? will give you a guideline to help you and your financial planner determine appropriate levels of life insurance coverage.

Tip: If you already have insurance, review your existing coverage every few years. Changes in your life (such as salary increases, marriage or divorce, the birth or adoption of a child, or purchase of a residence) may indicate a need for a change in coverage.

You have a long time before tuition funds are needed

Insurance companies often charge the policy expenses such as fees and commissions in the earlier years of the policy. Because of this expense front-loading, several years could pass before your policy cash values begin to accumulate to sizable amounts. It is generally recommended that cash value insurance be considered for purchase when you intend to hold it for a long period of time, usually at least 10 or 15 years.

Tip: Check your existing policies. If you already have life insurance with cash values (remember that policy you bought 10 years ago?), you may have a head start on your funding plan for your child’s college education.

Strengths

Your family is provided with life insurance protection

Unlike other investments or a savings account, life insurance provides your family with a death benefit (i.e., a sum of cash paid after your death). Generally, the amount of the death benefit is significantly larger than the total premiums paid for the policy. If you should die before your child enters college, tuition can be paid from the policy death benefit. Should you live (which is much more likely), you can use policy cash values to pay for some or all of your child’s tuition. Your family still receives the benefit of life insurance as long as the policy remains in force.

Policy cash values grow tax deferred

The portion of your premium payment that is applied to cash value is invested either by the insurance company or at your direction, depending on the type of policy. Positive investment returns increase the cash value. You are not subject to taxes on the growth in cash value until you withdraw the cash values or cancel (surrender) the policy. It is possible that you may be able to withdraw cash values and not be subject to income tax on the withdrawal. For more information, see the section on tax implications.

Diverse investment choices are available for cash values

The cash values in your life insurance policy are invested in investment vehicles that traditionally have the potential to earn higher returns than an ordinary savings account at a bank. The investment options (normally called subaccounts) usually include bonds or stocks. You can buy a life insurance policy that lets you select the specific investments, or you can leave the investment choices up to the professional investment managers with the insurance company. In either case, you have the potential for higher returns (but also greater potential for loss) than if you made deposits to a traditional passbook savings account.

Tip: Read the fine print concerning the underlying investments for the insurance policy you are interested in. Shop around until you find a policy with cash value investments you are comfortable with.

Caution: Variable life and variable universal life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and consider this information carefully before purchasing a variable life or variable universal life insurance policy.

Cash values can be withdrawn

When the time to pay college tuition arrives (or you need the money for any other purpose), you might withdraw some or all of the cash value from your policy, much like a withdrawal from a bank account. The amount you can withdraw is generally limited to a percentage of the cash value and varies by policy and company. You may be able to withdraw from your cash values and still keep your insurance in effect to provide a death benefit at your death.

Tip: It’s a good idea to leave enough cash value in the policy to maintain the policy and cover the policy fees.

Caution: Cash value withdrawals may reduce the death benefit.

Cash values can be borrowed against

Cash values can be borrowed against using a policy loan. Policy loans are allowed under the terms of your insurance contract and are not affected by your current financial position. In other words, you don’t have to undergo a credit check or a bank loan approval process for a policy loan. When you take a policy loan, the check you receive comes out of the general funds of the insurance company, not your cash value. Your policy cash value serves as the loan collateral. The interest rate for a policy loan is known in advance and may be lower than that on a bank loan.

Tip: Some policies allow borrowings at an interest rate only slightly higher than the rate being credited to cash values. With some policies, the loan interest rate charged equals the rate credited to cash values, for a zero net cost loan.

Caution: If either your dividends or the increases in cash value are reduced, this is also part of your cost to borrow.

Caution: If you die with an outstanding policy loan against your account, your death benefit is reduced by the amount of the outstanding loan balance.

Caution: Interest accrues on the unpaid loan balance. If you choose not to repay the loan, the accruing interest could erode your cash values and result in a policy lapse with some types of policy.

You can combine withdrawals with policy loans

Cash value withdrawals and policy loans are not exclusive events. You can use a combination of withdrawals and loans to maximize the tax-free cash withdrawal benefits. You might choose to make cash value withdrawals up to the amount of your policy basis and then take a policy loan. In insurance terms, this is referred to as “surrender to basis and switch to loan.”

Example(s): Let’s say you have a son you are putting through college. You own a cash value policy that you bought just after he was born, and you are considering accessing your cash values to pay this year’s tuition. The first thing you might do is to make a tax-free withdrawal of cash value from the policy equivalent to the amount of premiums you have paid into the policy. After you withdraw to your basis, you take a policy loan.

Insurance policy can be gifted to your child

As the owner of a life insurance policy, you may be able to transfer ownership to someone else by gift. As part of your overall financial and estate planning, you may choose to gift the policy to your child. To attain the maximum allowable tax benefit from your policy, you may want to withdraw cash value equivalent to your basis in the policy before you make the gift.

Example(s): Let’s say you have a daughter you are putting through college. You own a cash value policy that you bought when she was very young. She doesn’t have an income because her “job” at present is that of an unpaid archaeologist working on a project in France. You are considering making a gift of your cash value insurance policy to your daughter. Before you make the gift, you may be able to make a tax-free withdrawal of cash value from the policy equivalent to the amount of premiums you have paid into the policy. In insurance terms, this is referred to as a withdrawal to basis. After you complete the withdrawal to basis, you gift the policy to your daughter. As the new owner, she can now withdraw from the cash value. Her withdrawals will be taxed at her income tax rate, which presently is considerably lower than your rate. Another option is for her to take a policy loan against the remaining cash value.

Caution: Depending on the amount of the cash value gifted, part of it may be considered a taxable gift. Also, you may need to continue the gift with additional gifts of the premiums in order to keep the policy in force. Otherwise, your low-income college student may not be able to make the premium payments, and the policy could lapse.

Life insurance values are not included in federal methodology for financial aid

Under the federal financial aid formula, assets are grouped into two categories: assessable and nonassessable. Life insurance policies fall into the nonassessable category. In other words, the value of your cash value life insurance is not counted as income or assets in the financial need calculation. The amount of federal financial aid your child is eligible for is not reduced because you have life insurance containing cash value.

Although life insurance values are not included in the federal methodology, many colleges and universities do look at these values when assessing financial need and assistance at the school level.

Tradeoffs

You must be insurable

In order to get life insurance, you must be considered insurable by an insurance company. Insurability can be affected by such factors as medical history, age, or participation in dangerous hobbies such as auto racing. Life insurance is not available to people in extremely poor health, although few people are actually refused insurance.

Tip: Even if you have a history of health problems, you may still be able to buy a rated policy. The premiums are higher than for a preferred policy (whose favorable premiums reflect the fact that the applicant is less likely to die than a standard applicant), but your need for insurance protection may make it worth the expense.

Premiums represent financial obligation

Once you buy a life insurance policy, there is often an ongoing expense: the premiums. In the early years of the policy, the premiums represent a contractual obligation. Obviously, when you pay premiums, you have less cash available for other purposes.

Tip: In the later years of the policy, you may be able to reduce the amount of premiums you pay. This depends on the type of policy, so check out the details of your policy. With some policies, you can reduce your death benefit when your need for insurance is reduced (e.g., when your child has completed college). The death benefit reduction would be accompanied by a reduction in your premiums. Check the policy for details.

Amount of insurance must be justifiable

When you buy life insurance, you purchase a policy with a stated death benefit, also called the face amount. An appropriate death benefit is calculated beginning with your current income and your economic life (i.e., what you can be expected to earn during your working lifetime). There are several ways to calculate a life insurance need, but in the end, the death benefit must be justifiable in order to satisfy the insurance company’s financial underwriting process.  As a result of this death benefit limitation, your cash value potential is also limited. For instance, a 30-year-old person with an income of $30,000 would not be eligible to buy the same amount of insurance as a 50-year-old person with an income of $1 million.

Your cash value contributions may be limited

Because life insurance contracts receive favorable income tax treatment, the government has restricted the amount of money that can be paid into policies that are treated as life insurance contracts for tax purposes. There are specific rules that define a life insurance contract for tax purposes. These rules limit the amount of cash you can put into a policy that is treated as a life insurance contract.

There may be a death benefit restriction

If the cash value in a policy is too high relative to the policy death benefit, cash value increases will be taxed instead of being allowed to grow tax deferred. The excess cash value must be distributed to you. The cash value might become too high relative to the death benefit if the underlying investment experiences high returns or if the death benefit is reduced. In addition, the size of the policy you are eligible to buy is limited by your age and income under the financial underwriting requirement that the amount of insurance be justifiable.

You may be subject to modified endowment contract (MEC) rules

The modified endowment contract (MEC) rules were established to prevent people from using life insurance policies as tax-free investments for large sums of money. The MEC rules limit the amounts you can pay into a policy during the first seven years of the policy’s life. If you exceed the limits, the policy is permanently classified as a MEC and is subject to special tax rules. Under these rules, policy loans are generally taxable, and withdrawals are not only taxable but may also be subject to a 10 percent penalty tax.

Underlying investments subject to fees, potential losses

The underlying investments in a cash value policy may be subject to losses, depending on the performance of the investment and the markets. Just as investment gains are added to your cash value, losses may be deducted, depending on the specific policy. Investments are also subject to management and administrative fees.

Tip: Read your contract and prospectus concerning the underlying investments and any associated fees before you choose a policy.

What factors should you consider when choosing a policy?

When planning for college expenses, parents are often concerned with four areas: tax benefits, financial aid, control issues, and investment costs. Generally, all types of cash value life insurance will provide you with the same benefits in the areas of tax benefits and financial aid. The major difference between various policy types occurs in the areas of control and costs. The following types of life insurance all contain cash value and may be used for funding your child’s college education.

• Whole life
• Variable life
• Universal life
• Variable universal life

Tax benefits

The following tax characteristics are common to all types of cash value life insurance.

• Cash value grows tax deferred
• Cash value withdrawals to basis are not taxable
• Policy loan proceeds are not subject to income tax
• Death benefit is generally received by beneficiary free from income tax

Financial aid

Some assets, like cash value life insurance, may be treated differently depending on who is doing the financial analysis, the government or a college.

• Federal financial aid methodology doesn’t include policy cash values in parents’ total assets when determining a child’s financial need
• Individual colleges may consider policy cash values when determining a child’s financial need

Control issues

In all cases, when you own a cash value life insurance policy, you control the policy. You can decide if withdrawals are to be taken when allowed under your policy or if you want to take a policy loan. You choose the policy beneficiary who will receive the death benefit when you die. However, between the various types of cash value policies, there are differing levels of control over the cash value investments and premium payments. These may be key factors in choosing the appropriate life insurance type for saving for your child’s college education while also protecting your family’s income at your death.

Control over cash values

You have two options concerning your policy cash values. You can choose from investments offered by the policy, assume the investment risk, and monitor the performance of your cash values, or you can leave that to the insurance company’s fund manager.

Control over premium payments

All life insurance policies require some payment of premium. However, depending on the policy you choose, you may be able to control the timing and amount of your premium payments. You might want to pay a fixed amount that is due on a specified date that you can budget for indefinitely. On the other hand, you may want the flexibility to decide if you will occasionally pay a larger or smaller premium or skip a payment altogether. You may want to pay your premium in an up-front lump sum, thereby eliminating future payments.

Investment costs: Premiums

When you buy life insurance, you incur a direct cost–the premiums you pay for the policy. Premiums generally include the cost of the insurance protection as well as certain administrative expenses, risk charges, and processing costs. With universal life and variable universal life policies, the expenses are itemized in the policy prospectus. With whole life and variable life, the expenses and charges may be bundled (i.e., you can’t easily determine and compare charges for individual items).

Tip: Often the expenses are front-loaded; that is, the expenses and charges are deducted directly from each premium payment, with the balance of the premium payment being credited to the cash value account.

The significance of premium differences

It may be tempting to compare different policies based solely on the premium amount. This method may not be reliable, however. Many policies receive dividends from the insurance company that are based on the company’s investment returns or expense experience. Even if a policy seems to have a high premium, if the policy also receives high dividends, its cash values accumulate rapidly. Moreover, if it receives high interest credits, it may actually be less costly than a policy with a lower stated premium.

Tip: Check with your financial planner. There are several different formulas for comparing policy costs. The policy with the lowest premium may not actually be the least expensive.

Fees, penalties, and charges

In addition to premiums, there may be other fees, penalties, and charges related to your policy. If you withdraw cash value or take a policy loan, the insurance company may charge a processing fee. If you take a cash withdrawal or a policy loan, there are costs you incur in the form of foregone interest on the amount of the withdrawal or loan, not to mention the interest that accrues on the loan amount. If you choose to cancel the policy, there may be surrender charges involved, which will vary depending on how early or late in the life of the policy the cancellation occurs. Some policies carry a 15- to 20-year surrender schedule.

Tip: If you already own life insurance, check your policy and consult your agent about fees and interest charges if you are considering a cash withdrawal or policy loan.

Tip: If you are in the process of buying a policy, compare several policies before you make your choice. Fees and processing charges can vary by company and policy type.

What are the tax implications?

Income Tax

Premium payments not deductible

Life insurance premium payments are not tax-deductible expenses.

Cash withdrawals may not be taxable

Life insurance policy cash value withdrawals are considered a nontaxable recovery of your policy basis until the entire policy basis has been withdrawn. There are special rules for policies that are classified as a modified endowment contract (MEC), which are not discussed here.

Example(s): Say you own a life insurance policy (non-MEC) with a cash value of $15,000. Your basis in the policy equals $12,500. You plan to take a withdrawal of $7,000 now to pay for part of your son’s tuition. You won’t have to pay tax on this withdrawal amount because it will be considered a return of your basis.

Caution: Withdrawals in excess of your basis are treated as taxable distributions of interest or gain.

Caution: Cash value withdrawals that occur in the first 15 years of the policy and are accompanied by a reduction in the face amount may be treated as ordinary income to the extent that the cash value of the policy exceeds the policy basis.

Policy loans generally not taxable

When you take out a loan against your life insurance policy (except a modified endowment contract (MEC), the amount you receive is not considered taxable income. This rule applies even when the loan is larger than the amount of premiums you have paid in (except in the case of a MEC).

Example(s): Say you own a life insurance policy (non-MEC) with cash value of $20,000. Your basis in the policy is $17,000. You decide to take a policy loan to pay your daughter’s tuition. Under the terms of your policy, you are allowed to take a loan for an amount up to 90 percent of the policy cash value–in this case, $18,000 ($20,000 x.90). You are not subject to tax on the amount of the loan, even though the loan is larger than your basis.

Policy loan interest not deductible

Interest you pay on a policy loan is generally not a deductible expense (under certain circumstances, interest on loans used for business or investment purposes may be deductible).

Policy cancellation may be taxable

If you cancel (surrender) your policy for cash, the gain on the policy is subject to federal income tax. The gain on a canceled policy is the difference between (1) the net cash value and any loan forgiveness amounts, and (2) your policy basis.

Caution: If you surrender your policy while there is an outstanding policy loan, there could be additional tax consequences.

Death benefits generally not subject to federal income tax

Policy death benefits are generally not subject to federal income tax.
Gift Tax

Policy proceeds not considered gift to beneficiary

When the proceeds of your life insurance policy are paid to a beneficiary other than yourself (as the owner-insured) or your estate, they are not treated as a gift for gift tax purposes.

Policy premium payments generally not subject to gift tax

When you are the owner of a policy on your own life, with another party as the beneficiary, premium payments made by you are not considered a gift to the beneficiary for gift tax purposes. If, however, someone else pays the premiums on a policy you own, the premium payments are considered a gift to you and may be subject to federal gift tax if the annual premiums exceed the annual gift tax exclusion.
Estate Tax

Policy proceeds included in estate value in some cases

The proceeds of a life insurance policy are included in the value of your estate if you held any incidents of ownership at any time during the three years before your death or if the proceeds are payable to you or your estate. Some examples of incidents of ownership include the right to change the beneficiary, to take out policy loans, or to surrender the policy for cash.

Policy proceeds often exempt from state inheritance tax

In many states, life insurance proceeds are exempt from state inheritance taxes.

April 2009 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V Higgins,CFP , a local member of FPA.