Understanding life insurance
Many people have questions about life insurance.
There is no one answer to determine how much life insurance to have, but understanding your reasons for holding it can help guide you.
Types of insurance
In general, there are two types of life insurance: term insurance and permanent insurance. Term insurance insures you for a term, in some cases even just for one year. The premium, or cost of insurance, generally increases each year, since you’re another year older and statistically more likely to die during that year of coverage. There are also products that allow you to lock in a premium for a number of years. These cost more in the initial years than a one-year term policy, but the premium is guaranteed not to increase for a specified number of years. If the person whose life is insured outlives the term of years, the policy expires unless it is able to be converted into permanent insurance.
Unlike term insurance, permanent insurance remains in place for the insured’s lifetime. Permanent insurance includes both a term component and a savings or investment component. Premiums are higher for permanent insurance than they are for term insurance, but the savings component can earn a return that may add to the “cash value” of the policy. For certain policies, this return can be used to pay the cost of insurance, reducing or even eliminating the premiums that you have to pay over the years.
There are two primary reasons for individuals to purchase life insurance:
A primary purpose of life insurance is to try to help ensure that your surviving loved ones, most frequently a spouse and children, have their needs met when you are no longer earning income or taking care of the day-to-day tasks around the house. In either case, your role will have to be replicated, and the question of how much life insurance you need depends on how much money will be required to replicate your role as a provider. Will your family have to generate a certain amount of money in interest and dividends to replace your salary? Will they need to have enough money to hire babysitters, drivers, and other people to replace the roles that you filled?
For income replacement, especially if you’re worried about dying prematurely, a term policy with a level premium can be a good option. Do you have a particular expense that you want to make sure is paid? College for your children? Paying off your mortgage? Ensuring that your spouse has a certain amount of annual income? Making some assumptions about rates of return, you can come up with a number that will achieve your goals.
Providing liquidity and replacing estate taxes paid
Life insurance can also be helpful for replacing estate taxes paid or for providing liquidity for families with an illiquid but taxable estate. An illiquid estate means an estate with assets that cannot quickly be sold and turned into cash at a reasonable price. Keep in mind, if you live in a state that has its own independent estate tax, you may have a taxable estate for state purposes even if you are under the federal threshold. If this is the case, insurance won’t reduce the amount of tax that might be owed, but it can provide immediate cash to pay the tax. This tax must be paid within nine months of death to avoid interest and penalties.
There are a number of other reasons that people purchase life insurance (e.g., to fund a buy/sell agreement, to insure a key employee, to fund ongoing financial obligations after death, etc.), but these are beyond the scope of this article.
Can I use my Will to change the beneficiary of my life insurance policy?
No. The beneficiary designation for your life insurance policy controls who receives the insurance proceeds. You cannot change your beneficiary by naming someone different in your Will or in a trust. Instead, you must change the designation form in order to change your beneficiary. This is especially important when life changes occur, such as if the named beneficiary passes away or you divorce from the named beneficiary.
Who should own a life insurance policy?
Insurance proceeds are not taxable as income. However, if you own a policy on your own life, your estate may have to pay estate taxes on the proceeds. Even if you leave the proceeds to your spouse (in which case there would be no estate tax because your estate would be entitled to the marital deduction), if your spouse has a taxable estate when he or she dies, the excess over the exemption (federal or state) will be subject to estate tax.
Creating an irrevocable life insurance trust, sometimes called an ILIT, to own the policy and to be named as the beneficiary can significantly increase the likelihood that all of the insurance proceeds will be available for your family when you die and that none of it will be subject to estate tax. If the ILIT is the initial owner of the policy, proceeds should be excluded from estate tax at both your death and your spouse’s death. If you transfer an existing policy to an ILIT, you have to live for three years after the transfer in order for the policy proceeds to be excluded from your taxable estate. It’s important to remember that if an ILIT owns a life insurance policy on your life, your spouse and children can, and often should, be beneficiaries of the ILIT so they can have access to the insurance proceeds.
Talk to a J.P. Morgan advisor to help you think through some of these issues, and to review your beneficiary designations.
This material is for information purposes only, and may inform you of certain products and services offered by J.P. Morgan’s wealth management businesses, part of JPMorgan Chase & Co. (“JPM”). This material is intended to help you understand the financial consequences of the concepts and strategies discussed here in very general terms. The strategies discussed often involve complex tax and legal issues. Your own attorney and other tax advisors can help you consider whether the ideas illustrated here are appropriate for your individual circumstances. JPMorgan Chase & Co. does not practice law, and does not give tax, accounting or legal advice. We are available to consult with you and your legal and tax advisors as you move forward with your planning. There may be different or additional factors that are not reflected in this material, but which may impact on a client’s portfolio or strategy. Please read all Important Information.
General Risks & Considerations
Any views, strategies or products discussed in this material may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. Asset allocation/diversification does not guarantee a profit or protect against loss. Nothing in this material should be relied upon in isolation for the purpose of making an investment decision. You are urged to consider carefully whether the services, products, asset classes (e.g. equities, fixed income, alternative investments, commodities, etc.) or strategies discussed are suitable to your needs. You must also consider the objectives, risks, charges, and expenses associated with an investment service, product or strategy prior to making an investment decision. For this and more complete information, including discussion of your goals/situation, contact your J.P. Morgan representative.
Depending upon the laws of the home state of the client or designated beneficiary, favorable state tax treatment or other benefits offered by such home state for investing in 529 Plans may be available only if invested in the home state‘s 529 Plan. Any state-based benefit offered with respect to a particular 529 Plan should be one of many appropriately weighted factors to be considered in making an investment decision; and clients are advised to consult with their financial, tax or other adviser to learn more about how state-based benefits (including any limitations) would apply to their specific circumstances.
Certain information contained in this material is believed to be reliable; however, JPM does not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. No representation or warranty should be made with regard to any computations, graphs, tables, diagrams or commentary in this material, which are provided for illustration/reference purposes only. The views, opinions, estimates and strategies expressed in this material constitute our judgment based on current market conditions and are subject to change without notice. JPM assumes no duty to update any information in this material in the event that such information changes. Views, opinions, estimates and strategies expressed herein may differ from those expressed by other areas of JPM, views expressed for other purposes or in other contexts, and this material should not be regarded as a research report. Any projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. Forward-looking statements should not be considered as guarantees or predictions of future events.
Nothing in this document shall be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing in this document shall be regarded as an offer, solicitation, recommendation or advice (whether financial, accounting, legal, tax or other) given by J.P. Morgan and/or its officers or employees, irrespective of whether or not such communication was given at your request. J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.
Legal Entity and Regulatory Information
Investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC (“JPMS”), a member of FINRA and SIPC.
JPMorgan Chase Bank, N.A. and its affiliates (collectively “JPMCB”) offer investment products, which may include bank-managed accounts and custody, as part of its trust and fiduciary services. Annuities are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. JPMCB, JPMS and CIA are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states.
Bank deposit accounts and related services, such as checking, savings and bank lending, are offered by JPMorgan Chase Bank, N.A. Member FDIC
This document may provide information about the brokerage and investment advisory services provided by J.P. Morgan Securities LLC (“JPMS”). The agreements entered into with JPMS, and corresponding disclosures provided with respect to the different products and services provided by JPMS (including our Form ADV disclosure brochure, if and when applicable), contain important information about the capacity in which we will be acting. You should read them all carefully. We encourage clients to speak to their JPMS representative regarding the nature of the products and services and to ask any questions they may have about the difference between brokerage and investment advisory services, including the obligation to disclose conflicts of interests and to act in the best interests of our clients.
J.P. Morgan may hold a position for itself or our other clients which may not be consistent with the information, opinions, estimates, investment strategies or views expressed in this document. JPMorgan Chase & Co. or its affiliates may hold a position or act as market maker in the financial instruments of any issuer discussed herein or act as an underwriter, placement agent, advisor or lender to such issuer.
References in this report to “J.P. Morgan” are to JPMorgan Chase & Co., its subsidiaries and affiliates worldwide. “J.P. Morgan Securities” is a brand name for a wealth management business conducted by JPMorgan Chase & Co. and certain subsidiaries. If you have any questions or no longer wish to receive these communications, please contact your usual J.P. Morgan representative.
“J.P. Morgan Securities” is a brand name for a wealth management business conducted by JPMorgan Chase & Co. and certain subsidiaries. J.P. Morgan Securities offers investment products and services through J.P. Morgan Securities LLC, member FINRA and SIPC. Bank products and services are offered by JPMorgan Chase Bank, N.A. and its bank affiliates.
© 2021 JPMorgan Chase & Co. All rights reserved.