Life Insurance and Terminal Illness
What if you were faced with the heart-wrenching news that you were terminally ill? How would you provide for the continued financial support of your family and loved ones? How would you and your family pay for the expenses related to your medical care and comfort? Your life insurance policy may be a valuable resource for you and your family. Not only can you use life insurance to provide a source of income to your survivors for their short- and long-term needs, but you also may be able to receive proceeds from the policy while you're still alive to help meet the expenses related to your illness.
Obtain more life insurance
Even if your health takes a turn for the worse, you may be able to increase your life insurance death benefit without providing evidence of insurability. Increasing the death benefit may provide greater financial support to your survivors after you die. Here are some ways you may be able to increase your death benefit without regard to your health.
If you purchased a guaranteed insurability rider as part of your existing life insurance policy, you may have the option of buying a higher death benefit. However, these riders generally offer the ability to purchase more coverage only on specific dates. Often, the rider may no longer be available after a certain age. Also, optional riders are available for an additional fee and are subject to contractual terms, conditions, and limitations as outlined in the policy.
If your policy pays dividends, you may be able to use those dividends to buy fully paid-up additional life insurance. It's important to understand that no matter how they're used or applied, dividends may be taxable to you as ordinary income if the dividends received, plus all previous nontaxable distributions from the policy, exceed the total of all premiums paid for the policy.
Caution: Any guarantees are contingent on the claims-paying ability and financial strength of the issuing company.
Use life insurance for cash
If your life insurance has a cash-value component, you may be able to access that cash to help meet costs associated with your illness, including lost wages, uninsured medical expenses, and respite care. One way to access the cash value is by surrendering the policy. However, if you surrender your policy prematurely, there may be surrender charges and income tax implications, as well as the loss of the death benefit that could be helpful to your survivors.
Or you may be able to borrow against the policy's cash value. But the loan will reduce the policy's cash value and death benefit, could increase the chance that the policy will lapse, and might result in a tax liability if the policy terminates before your death.
Your life insurance policy may come with an accelerated benefit rider. As a result of your illness, you may be eligible to receive some, or all, of the face amount of the policy in advance of your death, either in a lump sum or in installments. You also may be able to take less money than the full amount available to you so that some of the death benefit will be payable to your survivors. Usually, you can use the proceeds however you wish. Rules differ for the tax treatment of accelerated death benefits paid to the terminally ill.
You may have added a critical illness life insurance (CILI) rider to your existing policy. CILI pays benefits to you when you are chronically or terminally ill. You can use the money you receive to pay for your daily living expenses, increased medical costs, or any other way you choose. However, the amount you receive (with terminal illness, often 100% of the policy's face value) will reduce or eliminate benefits payable to your survivors. In addition, there may be tax consequences arising out of payments received from CILI. For more information on the tax treatment of CILI benefits, consult your tax advisor.
Earn Too Much for a Roth IRA? Try the Back Door!
Roth IRAs, created in 1997 as part of the Taxpayer Relief Act, represented an entirely new savings opportunity--the ability to make after-tax contributions that could, if certain conditions were met, grow entirely free of federal income taxes. These new savings vehicles were essentially the inverse of traditional IRAs, where you could make deductible contributions but distributions would be fully taxable. The law also allowed taxpayers to "convert" traditional IRAs to Roth IRAs by paying income taxes on the amount converted in the year of conversion.
Unfortunately, the law contained two provisions that limited the ability of high-income taxpayers to participate in the Roth revolution. First, the annual contributions an individual could make to a Roth IRA were reduced or eliminated if his or her income exceeded certain levels. Second, individuals with incomes of $100,000 or more, or whose tax filing status was married filing separately, were prohibited from converting a traditional IRA to a Roth IRA.
In 2005, however, Congress passed the Tax Increase Prevention and Reconciliation Act (TIPRA), which repealed the second barrier, allowing anyone to convert a traditional IRA to a Roth IRA--starting in 2010--regardless of income level or marital status. But TIPRA did not repeal the provision that limited the ability to make annual Roth contributions based on income. The current limits are set forth in the chart below:
|Phaseout ranges for determining ability to fund a Roth IRA in 2016*|
|Single/head of household||$117,000-$132,000|
|Married filing jointly||$184,000-$194,000|
|Married filing separately||$0-$10,000|
|*Applies to modified adjusted gross income (MAGI)|
If you have taxable compensation, you can contribute up to $5,500 to an IRA in 2016, or $6,500 if you'll be 50 or older by the end of the year. You can't contribute to a traditional IRA for the year you turn 70½, or thereafter.
Through the back door...
Repeal of the provisions limiting conversions created an obvious opportunity for high-income taxpayers who wanted to make annual Roth contributions but couldn't because of the income limits. Those taxpayers (who would also run afoul of similar income limits that prohibited them from making deductible contributions to traditional IRAs) could simply make nondeductible contributions to a traditional IRA and then immediately convert that traditional IRA to a Roth IRA--a "back door" Roth IRA.
The IRS is always at the front door...
For taxpayers who have no other traditional IRAs, establishment of the back-door Roth IRA is essentially tax free. Income tax is payable on the earnings, if any, that the traditional IRA generates until the Roth conversion is complete. However, assuming the contribution and conversion are done in tandem, the tax impact should be nominal. (The 10% penalty tax for distributions prior to age 59½ generally doesn't apply to taxable conversions.)
But if a taxpayer owns other traditional IRAs at the time of conversion, the tax calculation is a bit more complicated because of the so-called "IRA aggregation rule." When calculating the tax impact of a distribution (including a conversion) from any traditional IRA, all traditional and SEP/SIMPLE IRAs a taxpayer owns (other than inherited IRAs) must be aggregated and treated as a single IRA.
For example, assume Jillian creates a back-door Roth IRA in 2016 by making a $5,500 contribution to a traditional IRA and then converting that IRA to a Roth IRA. She also has another traditional IRA that contains deductible contributions and earnings worth $20,000. Her total traditional IRA balance prior to the conversion is therefore $25,500 ($20,000 taxable and $5,500 nontaxable).
She has a distribution (conversion) of $5,500: 78.4% of that distribution ($20,000/$25,500) is considered taxable ($4,313.73), and 21.6% of that distribution ($5,500/$25,500) is considered nontaxable ($1,186.27).
Note: These tax calculations can be complicated. Fortunately, the IRS has provided a worksheet (Form 8606) for calculating the taxable portion of a conversion.
To be eligible for tax-free qualified distributions from a Roth IRA, you must satisfy a five-year holding period and, in addition, one of the following must apply: you have reached age 59½ by the time of the withdrawal, the withdrawal is made because of disability, or the withdrawal is made to pay first-time homebuyer expenses ($10,000 lifetime limit from all IRAs).
There's also a side door...
Let's assume Jillian in the example above isn't thrilled about having to pay any income tax on the Roth conversion. Is there anything she can do about it?
One strategy to reduce or eliminate the conversion tax is to transfer the taxable amount in the traditional IRAs ($20,000 in our example) to an employer qualified plan like a 401(k) prior to establishing the back-door Roth IRA, leaving the traditional IRAs holding only after-tax dollars. Many 401(k) plans accept incoming rollovers. Check with your plan administrator.
It's not clear how long the back door is going to remain open. There have been suggestions that this is a loophole that should be legislatively closed.
Pros and Cons of Working from Home
Imagine that your employer gives you the choice between either working from home or commuting to the office throughout your work week. You might think the obvious choice is to work from the comfort of your own home; after all, staying in your pajamas all day and avoiding stressful commutes sound appealing. But there are some considerations to think about before you decide that telecommuting is right for you.
Working from home could end up saving you a considerable amount of money. It eliminates the cost of commuting by cutting down what you spend on gas, public transportation and parking fees, and car maintenance. And depending on your company's dress code, you could save what you might spend on expensive work-related clothes.
Besides reducing some of your daily expenses, working from home could provide you with more opportunities and increased productivity. Telecommuting might mean you are no longer tied to a single location, which could allow you to explore more flexible work opportunities within the company. Working from home may also motivate you to use your time more effectively and accomplish more for your company because you'll save time commuting.
Balancing work and family life could be easier when you work from home, as well. Time that you might spend traveling to work, appointments, and family obligations will be saved when you no longer have to schedule around a daily drive to and from the office. Depending on your company's flexibility and the demands of your job, working from home may even eliminate or reduce child-care needs for your children, giving you more time to spend with your loved ones in addition to saving you money.
It's possible that you could be healthier by working from home. Your exposure to co-workers who come to work with a cold or the flu is reduced, which prevents you from having to take a sick day to visit your doctor. You may also wind up feeling less stressed when you don't have to worry about commuting or potential work-life issues.
Before you get too excited about the appeals of working from home, consider the drawbacks. For instance, telecommuting could affect your work performance. Isolation from the office may result in your professional achievements being overlooked, which could potentially delay a promotion or raise. Less opportunity to interact regularly with co-workers might mean missing out on important information, as well as feeling lonely. Plus, distractions around your home can interfere with your daily responsibilities and could result in a negative response from your employer.
Another financial downside of working from home is the prospect of providing your own office materials. Does your company provide you with supplies such as a computer, printer, and fax machine? Will you need to pay for office setup, postage services, or scanners, among other items?
You might think that a home office tax deduction could alleviate the cost of home office expenses, but you'll need to be careful with your home office use in order to qualify. The space you claim a deduction for must be used for business-only purposes. Any use of this space not related to your work may prevent you from taking this tax break. For more information, review IRS Publication 587, Business Use of Your Home.
You'll also need to think about how your increased presence at home may result in an increase in your home utility usage. Specifically, you'll probably spend much of your time using energy-consuming technology to perform your job. In turn, this could cause your electric bill to spike. Practicing energy efficiency may help reduce the bill, but you still might have to pay more than you'd like each month as the cost of working from home.
What works for you?
If your employer allows you to work from home, think about a few other things besides how it would affect your wallet:
- Consider whether your home has appropriate space to accommodate a home office.
- Understand that you may need to seek remote tech support on occasion to perform your job.
- Think about whether you're self-directed and able to work well independently in a home setting.
- Set expectations for yourself.
- Be familiar with any company policies that may apply to remote employees.
It's possible that you can strike a balance and choose to work from home one or two days a week, thereby reaping more of the telecommuting positives than negatives. You could also ask to undergo a trial period to make sure that working from home is truly what works best for both you and your employer.
Can you separate college financial aid myths from facts?
For all you parents out there, how knowledgeable are you about college financial aid? See if you know whether these financial aid statements are myth or fact.
1. Family income is the main factor that determines eligibility for aid. Answer: Fact. But while it's true that family income is the main factor that determines how much financial aid your child might receive, it's not the only factor. The number of children you'll have in college at the same time is also a significant factor. Other factors include your overall family size, your assets, and the age of the older parent.
2. If my child gets accepted at a more expensive college, we'll automatically get more aid. Answer: Myth. The government calculates your expected family contribution (EFC) based on the income and asset information you provide in its aid application, the FAFSA. Your EFC stays the same, no matter what college your child is accepted to. The cost of a particular college minus your EFC equals your child's financial need, which will vary by college. A greater financial need doesn't automatically translate into more financial aid, though the more competitive colleges will try to meet all or most of it.
3. I plan to stop contributing to my 401(k) plan while my child is in college because colleges will expect me to borrow from it. Answer: Myth. The government and colleges do not count the value of retirement accounts when determining how much aid your child might be eligible for, and they don't factor in any borrowing against these accounts.
4. I wish I could estimate the financial aid my child might receive at a particular college ahead of time, but I'll have to wait until she actually applies. Answer: Myth. Every college has a college-specific net price calculator on its website that you can use to enter your family's financial information before your child applies. It will provide an estimate of how much aid your child is likely to receive at that college.
5. Ivy League schools don't offer merit scholarships. Answer: Fact. But don't fall into the trap of limiting your search to just these schools. Many schools offer merit scholarships and can provide your child with an excellent education.
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