Eric D. Brotman, CFP®, AEP®, MSFS
Eric D. Brotman, CFP®, AEP®, MSFS is President of Brotman Financial Group, Inc., an independent financial services firm assisting clients with wealth creation, preservation, and distribution. Mr. Brotman began his financial planning practice in Baltimore in 1994, and founded Brotman Financial Group in 2003. He provides investment, retirement, estate, insurance, and business planning for professionals, executives, and business owners. Mr. Brotman’s clients benefit from his technical experience, extraordinary client service, and a knowledgeable team of insurance and investment specialists. Mr. Brotman is the author of "Debt-Free for Life: The Tools You Need to Free Yourself from Debt," published in 2009 by One Hour or Less Publishing, LLC. He is a 2006 alumnus of Leadership-Baltimore County and a 2009 alumnus of Leadership-Maryland, where he is presently a member of the Board of Directors. Mr. Brotman is a Past-President and Chairman of the Board of the Financial Planning Association of Maryland. He was a co-founder of the Mastermind executive dialogue, and is a professional facilitator of study groups for financial advisors around the county. He is a member of the Baltimore Estate Planning Council, and the Towson, Baltimore County, and Maryland Chambers of Commerce, and is serving on the Presidents Advisory Council at Stevenson University. He is a champion for financial literacy programs in Maryland high schools and colleges, and an avid supportor of the St. Vincent’s Center for abused children in Timonium, MD. Mr. Brotman has also served on the boards of Leadership-Baltimore County, St. Paul’s School Alumni Association, Baltimore Junior Association of Commerce, Mays Chapel Garden Condominium Association, and Executive Women’s Network of Baltimore. In addition, he served as an adjunct faculty member at Villa Julie College (now Stevenson University), where he taught financial planning and investment planning courses to CFP® students. Eric lives in Lutherville, Maryland with his wife, Meredith, and they are currently learning about the “terrible twos” from their first daughter. Securities and Advisory Services offered through NFP Securities, Inc., a Broker/Dealer. Member FINRA/SIPC and a Federally Registered Investment Advisor. NFP Securities, Inc. is not affiliated with Brotman Financial Group.
By Eric D. Brotman, CFP®, AEP®, MSFS
Many families buy life insurance to make certain their spouses and/or children will be taken care of financially in the unfortunate event of a parent’s untimely death. It is an unpleasant topic to consider, for sure, but it’s always best to plan ahead and be prepared.
However, what many parents don’t realize is that owning life insurance policies may have more financial advantages than just the death benefit. For families with significant portfolios who are looking to do tax and estate planning, whole life insurance can be a fantastic tool to help build net worth. Beyond simply providing a lump sum payout on death, there are a variety of ways your family might benefit from holding life insurance, even if you and your spouse both live to the age of 105.
When saving for a college education, many times it is the grandparents who are able to “save the day” to make an education possible. In addition to contributing to 529 College Savings Plans1 or making tuition payments directly to a college or university, having the parents own permanent life insurance on one or more grandparents may be an effective strategy. If the insured grandparent passes away before your child starts college, the proceeds are received income tax-free and are available for school. If your child doesn’t go to college, or if the grandparents are fortunate enough to enjoy a very long life, the funds will still be available for other uses. Both of these options allow flexibility with the money saved – it can be used for college or for other family needs. In our family, we used this strategy personally, in addition to funding a 529 College Savings Plan at a level designed to pay for in-state tuition.
If you are purchasing whole life insurance, I would say to plan not to touch it for the first 10 years as you pay the premiums and allow its cash value to grow. After that point, if you find yourself in a situation where you need access to additional cash, you can access your policy in one of two ways. You can make withdrawals from the cash value of your policy, or you can take out a policy loan2. These sorts of loans never have to be paid back, as long as the policy still has enough value in it to cover the cost of the loan interest each year.
Whole life insurance grows tax deferred, meaning there are no capital gains or income taxes as the policy builds cash value. And when cash values in whole life insurances are withdrawn during the lifetime of the policyholder, they are not taxable income as long as the policy is not surrendered. This means you have ways to access your cash, later in life, tax-free and can leave behind a death benefit that is also income tax-free to your beneficiaries, net of any loans or withdrawals.
Today, some companies are offering whole life insurance in a 10-payment format that will require you to pay annual premiums for just 10 years, and then never to contribute another nickel assuming that no loans or withdrawals are taken against the policy. At that point, you can decide to keep the policy and allow the cash value and death benefit to continue to grow for the rest of your life, or to begin making withdrawals from the policy at some future time for use of the cash values. This is a great option that could allow you and/or your spouse to pay for your life insurance in full before you retire. Of course, the younger you are when you get started, the better off you’ll be in terms of cost and time to accrue your return.
Investing in whole life insurance is not right for everyone, however. If your family is not fully funding retirement or has any debt issues, deal with those first. As always, you need to be careful in how you allocate your assets, so be sure to work closely with a financial and tax advisor to determine what strategies and policies are best for you. But if you already own a sizable portfolio and have fully-funded retirement (or are on track to do so), participating whole life insurance purchased from a mutual insurer – Guardian and Mass Mutual are my personal favorites – may make sense.
1 – There is no guarantee that the plan will grow to cover college expenses. In addition, depending upon the laws of your home state or designated beneficiary, favorable state tax treatment or other benefits offered by such home state for investing in 529 college savings plans may be available only if you invest in the home state’s 529 college savings plan. Any state-based benefit offered with respect to a particular 529 college savings plan should be one of many appropriately weighted factors to be considered in making an investment decision. You should consult with your financial, tax, or other adviser to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances and also may wish to contact your home state or any other 529 college savings plan to learn more about the features, benefits, and limitations of that state’s 529 college savings plan. You may also go to http://collegesavings.org for more information.
2 – Loans and withdrawals from an insurance policy may generate an income tax liability, reduce available cash value, and reduce the death benefit or cause the policy to lapse.
All guarantees are based on the financial strength and claims-paying ability of the issuing insurance company.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by NFP Securities, Inc. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward-looking and should not be viewed as an indication of future results.
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