You don't have to die or become disabled to benefit from an insurance policy! There are a number of ways you can use insurance to your advantage while you are alive and healthy: to further your personal or professional goals, to support your financial planning activities, or to boost your cash flow.
Here are just some of the ways insurance can be put to practical use. Consult your financial advisor for suggestions appropriate to your own situation, or contact us at 866-607-5338 or ada@gwl.com for personal assistance.
When you apply for a substantial loan, whether to purchase a home or a practice, your lender will usually require some form of security that the debt can be paid off. In fact, many lenders will require security for both death and disability, so they are able to recoup their investment whether you die, become disabled, or remain healthy. That security is called collateral, and it can come in the form of any property with a market value — in this case, either life or disability insurance. (Life insurance provides collateral if you should die before the loan is fully repaid; disability insurance secures the loan in the event a disability reduces your income and subsequent ability to make monthly payments.) The process of using your insurance as collateral is called collateral assignment.
How collateral assignment works: You temporarily assign your insurance proceeds to a bank or other lender as security for your loan, so that if you die or become disabled before the note is paid off, the proceeds from your insurance policy are paid directly to the lender, to cover the balance of your debt. (If there are funds left over once the debt is cleared, then either you or any other beneficiary you designated will receive your remaining insurance benefits.) When the loan is paid in full, either you or the lender then contact the insurance company to release the assignment so payment of any future insurance benefits is not delayed.
The collateral assignment process works best if you already have insurance in force, or active. To begin, you simply notify your insurance company that you wish to make a collateral assignment. (Depending on the size of your loan, the bank will require a portion (or all) of your insurance coverage as collateral.) The insurance company will send you a form to complete and sign, and provide the bank with a recorded copy of your signed assignment form. Your banker will then contact you with a loan guarantee, which means you're good to go. This process can typically be completed in about a week, or even faster if documents are emailed or faxed from one party to the next.
If you do not yet have insurance, and instead learn about the need for collateral through your lender, the process can take a little longer (about 12 weeks, on average) and may even delay loan approval. But don't worry — this is a common occurrence for both insurance companies and lenders, who routinely work together on matters like these. The first step is to identify the insurance company you want to buy coverage from, and/or a specific policy that will provide the type and amount of protection needed. Any coverage you request will then require underwriting, during which you must provide proof of medical and financial insurability. Most insurance companies will provide your lender with documentation to support the collateral requirement while your application is pending underwriting approval, but the legally binding collateral assignment cannot be recorded until you are actually approved and pay for the coverage.
If your practice is a partnership or a corporation with multiple shareholders (or if you are buying into an established practice as a part-owner), you need to have a succession plan in place in case any one of the ‘partners’ should die. A common way is to establish a buy/sell agreement, through which all partners agree to purchase a deceased partner's share of the business on a pre-arranged basis. Insurance can help guarantee that the funds are available to make such a purchase at a moment's notice.
How a buy/sell agreement works: This binding legal document, which is usually drafted by your attorney with input from your accountant, will outline the terms of your succession plan, establish the purchase price (or the method to be used to determine the purchase price) of each partner's share of the business, and name the individual(s) who will succeed each partner upon death, disability, or retirement, as the case may be. In most cases, the agreement will stipulate that the interest of any owner who dies must be sold to, and would be purchased by, the surviving co-owner or by the practice, but some buy/sell agreements may name a third-party purchaser, such as a dentist across town, to succeed the dentist who dies.
Once your buy/sell agreement is drafted, you then obtain life insurance coverage equal to the value of your share of the practice (or purchase price) as stated in the agreement, and name your partner(s) as legal beneficiary. By designating your business partner as the beneficiary of your insurance policy, you can guarantee that he would have the funds to buy your share of the practice. The purchase price could be paid in a lump sum from the insurance proceeds.
Having a buy/sell agreement in place can smooth the process of finding a successor on short notice or dealing with grieving family members (who may understandably have other priorities). It also allows the partner's heirs to receive the cash value of their inheritance with minimal disruption to business operations and patient care. In most states, it is prohibited for a non-dentist to be a co-owner of a dental practice, which means that a non-dentist heir would be forced to sell an inherited share of a practice anyway. But with another dentist already legally identified as your partner's successor (or with the pre-determined plan to divide the partner's share among the remaining partners, or assume sole ownership of the practice yourself), you would be able to transition to the new business arrangement almost immediately.
If you are a new dentist, you may be asked to enter into a buy/sell agreement when you join an established practice, or you may be the named successor in another dentist's buy/sell agreement. Either way, this tool can help set you up for future success as a business owner.
Note: Whenever a buy/sell agreement is involved, it is critical that the titling and beneficiary designations of the insurance policy accurately reflect the specific terms of the legal buy/sell document so that the intended results will be achieved.
In an era when everyone and everything is typically stretched as thin as possible, it’s natural to want to make your money go as far as possible too. One way to “boost” your financial portfolio is to choose universal life insurance for your life insurance needs. Universal life includes a savings component that enables you to build cash value at the same time you provide insurance protection for your loved ones. Universal life can simultaneously give you great financial flexibility, which also makes it an appealing alternative to traditional term life insurance.
How universal life insurance helps build your savings: After you make deposits into a cash value accumulation account, your insurance costs (plus administrative charges, if applicable) are automatically deducted from the account (usually on a monthly basis), and the balance earns interest on a tax-deferred basis. (As long as your account balance is sufficient to cover those monthly costs, your insurance stays in force.) Your cash value could grow quite dramatically over time, depending on the credited interest rate and the amount and frequency of your deposits. Some policies will even guarantee a minimum rate of return on each deposit you make, which can compare favorably to other savings alternatives, and render this an even more effective way to grow your assets.
Because of the tax-deferred savings component, universal life insurance is often used for long-range financial goals, like retirement or children’s education. By making periodic deposits into your cash account whenever it’s convenient, you can add to your savings for this specific purpose, and leverage the power of compounding to watch your money grow over the years.
How universal life insurance gives you financial flexibility: The funds in your cash value accumulation account are always at your disposal — to cover insurance costs and related administrative fees, to accumulate tax-deferred interest, or to provide liquidity in times of need. Subject to the terms of your policy and/or any federal regulations that apply, you can withdraw funds and even borrow against the balance of your account at any time. That flexibility can give you access to additional cash that you need only temporarily, or without much notice — while still providing ongoing life insurance protection. (Limitations and penalties may apply to any loans or withdrawals you may make. Any outstanding loan or withdrawal may also reduce the dollar value of your death benefit.) Whether it’s used to save, spend, borrow, or bequeath, many people feel that the greatest benefit of universal life, in fact, is its flexibility to facilitate a variety of financial objectives.
There are a variety of trusts you can use to accomplish your estate planning objectives, which many people choose to minimize tax liability, execute specific plans, or bequeath funds to charitable organizations. One trust in particular, an Irrevocable Life Insurance Trust (or ILIT), links your life insurance policy with your estate plan, and can result in huge tax savings for your heirs.
With an ILIT, the life insurance policy will be titled in the name of the person(s) you name to serve as trustee of the trust you establish, such as “Jane Doe, trustee of the John Doe Irrevocable Life Insurance Trust,” and the trustee will also be designated to receive the insurance proceeds payable at your death. It is most common to name your spouse as trustee, although some people will name a grown child over 21, especially if the spouse is already deceased. Because the insurance policy is owned by the trust and not by you, the benefits are not included in your taxable estate for estate tax purposes. Depending on the circumstances, that can be a savings of up to 47% of the value of your life insurance policy (based on the Internal Revenue Code of 1986, as amended and valued in 2005).
How to establish a life insurance trust: Your attorney, in either developing or updating your estate plan, creates an Irrevocable Life Insurance Trust, and you name a trustee. The terms of the ILIT will specify the discretion that the trustee will have over the use of the funds once you die. For instance, if you want to give your spouse access to half of the funds immediately and reserve the remaining half for your children to access when each one turns 21, your attorney can work those details into the trust document. Most commonly, the ILIT will mirror your estate plan in terms of distribution allocations, timelines, and percentages.
If your trust is already in place when you apply for insurance, and the trust is recorded as the original owner of the life insurance policy, then everything progresses according to design. However, if you obtain the insurance first, establish an ILIT later, and then change the beneficiary to the trust, then the benefits will automatically be pulled back into your estate if you die within 3 years of assigning benefits to the trust. This 3-year rule applies to residents of any U.S. state or territory. To name a trust as beneficiary of your policy, simply contact your insurance company to request a beneficiary change form. Once you complete, sign, and date the form, you send it back to the insurance company for recording. As with all other important documents, it’s wise to keep a copy for your records.
The unique attributes of universal life insurance give you great flexibility for saving money at the same time you maintain important insurance protection. You can take advantage of this policy’s flexibility by sufficiently growing the balance of your cash value accumulation account to fund future expenses, such as the cost of your insurance. (Because this instrument is designed primarily to purchase life insurance protection, it’s natural to earmark any accumulated cash value to help fund future insurance and administrative costs.)
With universal life, you contribute to a cash value account that grows with each deposit and earns tax-deferred interest along the way. A number of variables influence your actual account growth, and if all assumptions hold true, your account will grow as projected. And if you are able to grow your cash value beyond projections, you could accomplish not only your long-term savings goals, but other financial objectives as well.
How to pre-fund insurance costs: Making extra or larger deposits (within available limits) produces a higher accumulated cash value and, depending on actual results regarding all variables (including credited interest rate), can even be sufficient to cover all future insurance costs and administrative charges. Such a result is never guaranteed — it’s completely dependent on future experience — but illustrates the real power of compounding. In other words, your cash value can grow itself higher and faster, the more (and the more often) you add to it on your own... leading you to exceed your original goals, and freeing you up to skip future deposits in order to maintain insurance and savings.
With this kind of long-term goal, it’s important to monitor closely for changes in all the factors affecting the level of cash value in your account. For example, if you obtain more insurance coverage, skip or reduce deposits, or earn less interest than projected, you may not achieve the desired result. Consult your financial planner or insurance expert for an estimate that is likely to support all of your objectives.
Whether you’re a few years or a few decades away from retiring, it’s never too late (or too early) to save for your retirement years. Insurance can help feather your retirement nest egg, especially if you choose universal life insurance as a tool to build your cash value.
Because of the unique way a universal life policy is structured, you can save for retirement at the same time you provide your family with valuable life insurance protection. With your long-term savings goals in mind, a recommended deposit amount is determined at the time you first purchase the policy. Then, as long as you make deposits as recommended and achieve other experience assumptions as illustrated, your insurance stays active and the funds in your account (minus the periodic cost of insurance, plus whatever administrative fees may apply) grow over time into the retirement fund you envisioned. Best of all, you can make extra deposits any time you like — which often makes a universal life plan an attractive tax-deferred retirement savings supplement. (Although you can typically make substantial deposits even after you maximize annual contributions to your IRA or 401(k) account, there may be limitations on the total amount you can deposit in any one year, so consult your financial or tax advisor regarding your personal situation.)
The balance in your cash account earns interest on a tax-deferred basis, which means you are taxed only upon withdrawal of funds that exceed the sum of your deposits. That leaves more money in your account each year to earn interest, and more time for that balance to compound. You can make withdrawals or loans at any time too, subject to policy limitations and/or federal guidelines. Then upon your death, your beneficiary will receive the full death benefit (either the face value of your life insurance, or the face value plus the full value of your cash account, depending on the plan). So whether you deplete the cash account during your retirement years or you leave some of the cash to your heirs, you always benefit by keeping your money available and liquid.
As a retirement planning tool, disability insurance can also be used to help preserve the retirement savings you so earnestly build over the years. If, for example, you became disabled and did not have sufficient disability insurance, you could be forced to deplete your IRAs and other sources of retirement income in order to maintain your standard of living, pay unforeseen medical bills, or be able to afford whatever rehabilitation or renovations may be required by the disability. For that reason, many dentists choose to maintain their disability protection as long as they possibly can — since disability could realistically happen at any time.
With the cost of health care continually on the rise, it can be quite challenging to find quality medical coverage that’s also affordable. One way to achieve greater overall value is to look for a way to put some of your hard-earned cash back in your pocket — through a vehicle known as supplemental medical insurance.
As its name implies, supplemental medical insurance supplements your major medical coverage by providing cash benefits independent of whatever other health insurance benefits (including Medicare) you may have or be eligible for. Some supplemental policies provide additional coverage (for specific illnesses like cancer, or for hospitalization charges), and others provide cash benefits to help you recoup out-of-pocket medical expenses.
How supplemental medical insurance works: A qualifying event — usually a specific medical diagnosis or hospitalization — triggers the payment of a supplemental benefit. Depending on your policy provisions and other circumstances, the insurance company will then send a check either directly to you, or to your medical provider (physician, hospital, etc.), whichever you prefer. Some supplemental policies offer indemnity coverage only, meaning they strictly reimburse actual expenses, while other policies pay a lump-sum amount and let you use the cash however you please. Regardless of the approach, you simply provide documentation of the qualifying event at the time you file a claim, and benefits are typically paid promptly. (If you have the kind of coverage that pays you cash directly, you can generally use that cash to offset any medical or related expenses you incur, such as insurance copays or deductibles, travel expenses, child care, and the cost for experimental medications, second opinions, rehabilitation programs, and more.) If you have young (or active) children who may periodically require emergency room treatment, or if you are advancing in age and more prone to medical maladies, this kind of coverage can be particularly handy.
Although supplemental policies can vary greatly, your need for this kind of coverage is universal: The more you are required to self-support the cost of your family’s health care, the more you need to consider supplemental medical insurance to manage your total health care bill. And considering some policies provide generous benefits (like a lump-sum payment of $50,000 upon first diagnosis of a critical illness), require minimal proof of insurability, and allow you to arbitrarily choose the amount of coverage you obtain, this is insurance that can be easily attained and customized to your individual needs.
When it comes to putting insurance to practical use, these examples only skim the surface. But because there is a cost to obtain your insurance protection, you owe it to yourself to take advantage of every possible opportunity to leverage that coverage for whatever additional purposes may exist. Don’t wait to die or become disabled to get any benefit out of your insurance coverage; consult the professional guidance of your attorney, financial planner, accountant, and/or other trusted advisor for assistance, including issues specific to your state. You can also contact a Plan Specialist at 866-607-5338 or ada@gwl.com for help using any of your ADA-sponsored insurance.