CornerStone Financial

IMPORTANT DISCLOSURES

The information presented here is not specific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Life Insurance Needs: Capital Liquidation Approach

Life Insurance Needs: Capital Liquidation Approach

What is the capital liquidation approach?

The capital liquidation approach is one of two methods of calculating your family's life insurance needs under the family needs approach. It is not an independent approach. Rather, it is one of two ways to determine the lump sum of insurance proceeds the surviving spouse needs to receive and invest to provide for ongoing family income needs. Under this approach, you estimate the necessary lump sum assuming that you will be liquidating all the proceeds over the surviving spouse's remaining life expectancy. The idea is that the proceeds, or capital, will be used up either at or slightly after the end of the surviving spouse's life expectancy. In other words, your family's life insurance proceeds should last just through the four ongoing income periods: readjustment, dependency, blackout, and retirement. This way, you reduce the amount of life insurance you need to purchase while covering for your family's needs under the most likely scenario: the surviving spouse not living significantly beyond his or her life expectancy.

Under the alternative capital retention approach, you purchase more life insurance to retain all of the principal for supporting the family indefinitely into the future.

As a result, you are better positioned for either of the following situations:

1) Your surviving spouse outliving predicted life expectancy

2) Your wanting the heirs to inherit some of the proceeds after the surviving spouse dies

You have to pay more up front in premiums, however. For example, you estimate an insurance need of $800,000 for the 30 years of your surviving spouse's life expectancy using the family needs approach. If you use the capital liquidation approach, you can settle for somewhat smaller insurance proceeds because you won't depend entirely on the investment returns for the $800,000 need. Some or all of the proceeds themselves--the capital--will supplement investment returns to provide the $800,000 needed by your family. If, on the other hand, you use the capital retention approach, you will want proceeds that, if invested, will yield $800,000 during this period entirely from the investment returns.

Why choose the capital liquidation approach?

You should focus on capital liquidation when using the family needs approach if you wish to spend less on life insurance to cover your family's ongoing income needs. At the same time, you should be comfortable with using up your family's available life insurance proceeds over the course of the surviving spouse's remaining life expectancy. Of the two approaches, capital liquidation arguably is the riskier approach. You are gambling that the surviving spouse won't substantially outlive his or her life expectancy. If the spouse does, the family won't have any insurance proceeds left to liquidate in order to provide for the spouse's continuing income needs.

Strengths

Less spent on life insurance

If you focus on capital liquidation when using the family needs approach, you can spend less on life insurance than if you were concerned with preserving some or all of the insurance proceeds into the indefinite future.

Tradeoffs

Risk that the surviving spouse will outlive the insurance proceeds

Under this approach, the insurance proceeds will be liquidated over the surviving spouse's remaining life expectancy or perhaps slightly longer. If the surviving spouse significantly outlives his or her life expectancy, your family may have no proceeds left to generate needed income. (Interestingly, in the past several years, actuarial experts (actuaries) have projected much higher life expectancies for most Americans, barring war, epidemic, or natural disaster. Most insurance companies have yet to update their actuarial tables to reflect the longer average life span. If these projections hold true, then the capital liquidation approach will be much more risky.)

May not be able to pass the capital to heirs

If the surviving spouse lives at least as long as his or her life expectancy, the heirs won't be able to inherit any of the capital represented by the insurance proceeds, because the proceeds will have been exhausted. If the surviving spouse dies before the end of his or her life expectancy, a portion of the proceeds may have been used up and may be no longer available to the heirs.

How to use the capital liquidation approach

Generally speaking, the family needs approach requires you to make the following calculations in order to estimate life insurance needs:

Immediate needs at death

Ongoing family income needs

Expected other income sources

The following equation yields an estimate of the insurance you need:

Immediate needs at death + Ongoing family income needs -Expected other income sources = Family needs

Your choice of the capital liquidation approach versus the capital retention approach affects your figures for the insurance amount necessary to cover the ongoing family income needs. If you choose capital liquidation as opposed to capital retention, you won't require as much insurance proceeds to invest in order to cover the ongoing family income needs.

CornerStone Financial

Whether your nest-egg is worth millions or thousands,

You and your family deserve it more than the government....

Contact:

Eric Tuttobene

President/CEO

CornerStone Financial

(615) 427-8780

IMPORTANT DISCLOSURES

The information presented here is not specific to any individual's personal circumstances.

Determining the Need for Life Insurance: How Much Is Enough?

Determining the Need for Life Insurance:

How Much Is Enough?

What determines your

life insurance need?

Life stages and circumstances

When determining your life insurance need, you should first consider your life stage and circumstances. Marital status, number of dependents, size and nature of financial obligations, your career stage, and your intentions to pass on your property are all factors to consider. Your need for life insurance changes as the circumstances of your life change.

Starting out

In the "starting out" stage of life, you may be just beginning your career or family. You may not have children or other dependents at this stage, but that doesn't mean you have no obligations. For instance, if you paid for your college education with student loans, you likely had a cosigner for your loan--maybe your parents or a grandparent. The same may be true of your car loan. If you were to die before the loan is paid, your cosigner would be obligated to pay the debt. Under law, a cosigner is responsible for full payment of a debt in the event of default. Death doesn't erase the debt obligation.

Single adult

A growing percentage of the population now falls into the single adult demographic group. This group covers a broad spectrum of ages, lifestyles, and obligations.

Family obligations--Parents

Although you may not have a spouse, your death could have a serious financial impact on other family members. If, like many adults, you are supporting your parents (either financially or with care), your death could have a major impact, both emotionally and financially. They would not only lose the support you have been providing to them, but they would also need to come up with the money for your final expenses.

Family obligations--Children

If you are a single parent, the primary financial support for your children would die with you. If you are lucky, you may have family members who would step in and help your children if you died. If you are even luckier, they will be able to provide your children with the education and lifestyle you had hoped for them to have. Your need for life insurance as a single parent is even greater than that of a dual-parent, dual-income household, which would still have one income if one parent died. Life insurance is a cost-effective way to make sure that your children are protected financially should anything happen to you.

Debt obligations

In this stage of life, you may still be paying for or even still accumulating education loans. You may have purchased a house or condo with a cosigner. If you died, your cosigner would be legally liable for the payments on the debt.

Protect your insurability

Another reason to buy life insurance at this stage of your life is to protect your future insurability. Once you buy a permanent, cash value life insurance policy, it remains in effect for your entire life (assuming the premiums are paid), even if your health changes. If you were to experience a serious change in health, you might not be able to buy additional insurance coverage, but you would still have the permanent coverage you already own.

Dual-income couple or family

If you and your spouse both earn an income, it is possible that if one of you died, the other may be able to cope financially on the remaining income. If there are mortgages, joint credit cards or other debt, or children in the picture, the loss of one income could be much more difficult to overcome. The more people who depend on your income while you are alive, the more life insurance you should own. If you died today with insufficient or no insurance, your mate could be forced to give up the residence or lifestyle for which you have both worked. When there are children involved, the loss of one breadwinner could mean a setback in the daily way of life, not to mention any plans for private school or college.

Parent of grown children

Just because your children have grown up and left the nest doesn't mean you have no need for life insurance. You may have spent your entire adult life building an estate that you intend to pass on to your children, grandchildren, or favorite charity. You can use life insurance to ensure that the bulk of your estate passes to your heirs or designated charitable organization subject to certain tax advantages.

Part of overall financial planning

Determining your life insurance needs should not be done in isolation. Instead, it should be looked at as part of your overall financial plan, with consideration given to your goals for savings and retirement, as well as tax and estate planning. As your life changes, your financial goals may change, as well as your need for life insurance, making it important to also periodically review your coverage.

Methods of calculating life insurance need

Several methods are used to calculate the appropriate level of insurance for you and your situation. While they all share common features, some methods strive to be more simplistic, while others involve more sophisticated calculations. Some of these differences are illustrated in the Table of Alternatives. You may want to determine an amount on your own, using one of the simpler methods. This can provide a basis for your discussions with your financial planner.

Insurable interest

Before you begin calculating your insurance needs, it is important to determine insurable interest. Basically, having an insurable interest in a person's life means that you would suffer emotional or financial harm or loss if that person were to die. It is always assumed that you have an insurable interest in your own life. However, to prove an insurable interest in someone else's life, you must have a relationship to that person based on blood, marriage, or monetary interest. You must have an insurable interest before you can purchase an insurance policy.

Family needs approach

The family needs approach is one of the more comprehensive methods of calculating your life insurance needs. It assumes that the purpose of life insurance is to cover the needs of the surviving family members. This method takes into account the immediate and ongoing needs of the surviving family members, as well as income from other sources and the value of assets that could be used to help defray the family's expenses (such as bank accounts and real estate).

Capital retention approach

The capital retention approach is one of two calculation methods under the family needs approach. This approach assumes that life insurance principal will support the family indefinitely into the future. Because you will purchase more life insurance under this method, you will be in a better position if the surviving spouse lives longer than expected.

Capital liquidation approach

The capital liquidation approach is the second of two calculation methods under the family needs approach. This method does not provide as much continuing capital for the surviving spouse or for heirs after the death of the surviving spouse. However, it does allow you to spend less money by purchasing a lesser amount of life insurance coverage.

Estate preservation and liquidity needs

The estate preservation and liquidity needs approach attempts to determine the amount of insurance needed at death for items such as taxes, expenses, fees, and debts while preserving the value of the estate. This method considers all the variables of family lifestyle and the total cash needed to maintain the current value of the estate while providing adequate cash needed to cover estate expenses and taxes.

Income replacement approach

The income replacement calculation is based on the theory that the purpose of insurance is to replace the loss of your paycheck when you die. This analysis determines an economic or human life value and factors in salary increases and the effects of inflation in determining the appropriate level of coverage. While more comprehensive than the rules of thumb, this method still fails to consider special circumstances or financial needs and operates on the premise that the current level of income provides a satisfactory standard of living that will remain level throughout the future.

Rules of thumb

The rules of thumb are extremely basic calculations. They provide a starting point but fail to recognize special family circumstances or needs and focus only on the most basic components. One rule of thumb dictates that multiplying your salary by a certain number will provide an adequate level of insurance, while another calculates need based on normal living expenses.

Insurance mistakes

No insurance

The worst mistake you could make concerning life insurance is having a need and not having any insurance at all. Very often, people can find all sorts of excuses for not buying life insurance. It's no fun to plan for your death, for one thing. For another, there's the tendency to think that dying won't happen to you, only to some person you read about in the obituaries. But how many times have you heard about a young, apparently healthy person dying suddenly in a car accident, leaving behind a spouse, a young child, and no insurance? Sadly, it happens, and when it does, the family faces not only emotional trauma but possibly an extremely difficult financial situation, as well.

Not enough insurance

The majority of people with insurance are underinsured. Insufficient coverage can occur as a result of buying what is affordable instead of what is needed. Failure to review your coverage periodically could also result in insufficient insurance, even if you started out with adequate levels. Inflation rates, your career, and your lifestyle may have changed. Your family could be faced with a large financial gap and left unable to maintain the current lifestyle if you died today. Consequences could include loss of the family home, scaling back of college plans, and possibly years of financial difficulty.

Too much insurance

If you purchased a large policy during one point in your life and then didn't adjust your coverage when your insurance need was reduced, it is possible that you have too much life insurance. This is another good reason to periodically review your coverage with your financial planning professional. Periodic reviews of your insurance coverage can reveal opportunities to change your levels of coverage to match your current and projected needs.

CornerStone Financial

Whether your nest-egg is worth millions or thousands,

You and your family deserve it more than the government....

Contact:

Eric Tuttobene

President/CEO

CornerStone Financial

(615) 427-8780

IMPORTANT DISCLOSURES

The information presented here is not specific to any individual's personal circumstances.

Why Women Need Life Insurance

Why Women Need Life Insurance

Today, women have more financial responsibilities than ever before. How will your family or loved ones manage financially if you die? Whether you are single, married, employed, or a stay-at-home mom, you probably need life insurance. At the very least, life insurance can help pay for the costs of funeral and burial services, estate administration, outstanding debts, estate taxes, and the uninsured expenses of a final illness.

Who needs life insurance?

Working women

Increasingly, families depend on the income of two working parents. If you're a working mother, your income can have a significant impact on the quality of your family's lifestyle. Your income helps cover the cost of ordinary living expenses such as food, clothing, and utilities, and it provides savings for your children's college education, and for your retirement. Life insurance protects your family by providing proceeds that can be used to replace your lost income if you die prematurely.

Single women

Often, women, like men, think that it's not necessary to buy life insurance because they have no dependents. What's often overlooked is that life insurance can provide necessary funds to pay off car loans, education loans, debts, a mortgage, taxes, and funeral expenses that might otherwise be the responsibility of family members. Also, the cash value of permanent life insurance may be used to supplement retirement income.

Single moms

Whether you're divorced, widowed, or simply a single mom, you're most likely primarily responsible for your child's support. If you die prematurely, life insurance can provide ongoing income to cover child-care costs, medical expenses, debts, and future college costs.

Stay-at-home moms

Maintaining a household is a full-time job, and you have many important roles and duties. The cost of the services performed by a stay-at-home mom could be quite significant if someone had to be hired to do them. If you die, your surviving spouse may have to pay for services such as child care, transportation for your children, and housekeeping. Taking over these added responsibilities could cause your spouse to shorten work hours, resulting in a reduction in income. Proceeds from your life insurance can help your spouse pay for services that keep the household running and allow your spouse to keep working.

Family caregiver

Many women find themselves providing care for both children and elderly family members. Caring for an aging parent or family member can include paying for the costs of adult day care, uninsured medical expenses, and extra transportation. Adding these expenses to the costs of maintaining a household, child care, and college tuition can be financially overwhelming. Unfortunately, these added financial responsibilities often continue after your death. Life insurance provides a source of funds that can be used to help pay for these expenses.

Business owner

You may be one of the increasing number of women business owners. If you die while owning your business, life insurance can be used to provide cash for company expenses such as payroll or operating costs while your estate is being settled. Also, life insurance can be a useful tool for business owners structuring buy-sell arrangements or providing benefits to key employees.

Life insurance types and options

Life insurance comes in many different sizes and shapes, and determining the policy that meets your needs may depend on a number of factors. Understanding the basic types of life insurance can help you find the policy that's best for you.

Term life insurance

Term life insurance provides a simple death benefit for a specified period of time. If you die during the coverage period, the beneficiary you name in the policy receives the death benefit. If you live past the term period, your coverage ends, and you get nothing back. The cost, or premium, for the coverage can be fixed for the duration of the policy term (usually 1 to 30 years) or it can be "annually renewable" meaning that the premium can increase each year as you get older. However, the premium for term insurance usually costs less than the premium for permanent insurance when all factors are the same, including the death benefit.

Whole life insurance

Whole life is permanent or cash value insurance that provides insurance coverage for your entire life. With most whole life policies, part of your premium is added to the cash value account, which earns interest. Some whole life policies also pay a dividend, which represents a portion of the company's profits made during the prior year.

The cash value grows tax deferred and can either be used as collateral to borrow from the insurance company or be directly accessed through a partial or complete surrender of the policy. It is important to note, however, that a policy loan or partial surrender will reduce the policy's death benefit, and a complete surrender will terminate coverage altogether.

Note: Guarantees are subject to the claims-paying ability of the issuing insurance company.

Universal life insurance

Universal life is another type of permanent life insurance with a death benefit and a cash value account. A universal life insurance policy will generally provide very broad premium guidelines (i.e., minimum and maximum premium payments), but within these guidelines you can choose how much and when you pay premiums. You are also free to change the policy's death benefit directly (again, within the limits set out by the policy) as your financial circumstances change. But if you want to raise the amount of coverage, you'll need to go through the insurability process again, probably including a new medical exam, and your premiums will increase.

Variable life insurance

Variable life insurance is a type of cash value coverage that allows you to choose how your cash value account is invested. A variable life policy generally contains several investment options, or subaccounts, that are professionally managed to pursue a stated investment objective. Choices can range from a fixed interest subaccount to an international growth subaccount. Variable life insurance policies require a fixed annual premium for the life of the policy and may provide a minimum guaranteed death benefit. If the cash value exceeds a certain amount, the death benefit will increase.

Variable universal life insurance

Variable universal life combines all of the options and flexibility of universal life with the investment choices of a variable policy. You decide how often and how much your premium payments are to be, within policy guidelines. With most variable universal life policies, you get no guaranteed minimum cash value or death benefit, but you can direct how your premium payments are invested among policy subaccounts.

Note: 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.

Joint and survivor life insurance

You and your spouse may choose to buy a single policy of permanent insurance that covers both of your lives. With first-to-die, the death benefit is paid at the death of the spouse who dies first. With second-to-die, no death benefit is paid until both spouses are deceased. Second-to-die policies are commonly used in estate planning to pay estate taxes and other expenses due at the death of the second spouse. Other than the fact that two people are insured by one policy, the policy characteristics remain the same.

Bottom line

Life insurance protection for women is equally as important as it is for men. However, women's life insurance coverage is often inadequate. It may be time to consult an insurance professional who can help you assess your life insurance needs, and offer information about the various types of policies available.

CornerStone Financial

Whether your nest-egg is worth millions or thousands,

You and your family deserve it more than the government....

Contact:

Eric Tuttobene

President/CEO

CornerStone Financial

(615) 427-8780