Joe and Lisa White are a married couple. Joe is 63 and Lisa is 61. Joe is thinki
ID: 2749853 • Letter: J
Question
Joe and Lisa White are a married couple. Joe is 63 and Lisa is 61. Joe is thinking about retiring in a few years, and the Whites have come to you for an insurance evaluation. Lisa plans to continue working even after Joe retires. The following provides a summary of the Whites’ insurance planning situation.
Life Insurance
Joe owns a $500,000 universal life insurance policy. Joe is the insured and their son David, age 37, is the beneficiary. The policy has a cash value of $50,000 and a living benefits provision; all account earnings are used to offset premium expenses. Lisa owns a 20 year $350,000 level term life policy that she purchased five years ago. She pays approximately $1,000 per year in premium costs. Lisa is the insured and Joe is the beneficiary.
Property and casualty insurance
Joe and Lisa own a home as JTWROS. The home has a market and replacement value of $675,000. The house is insured with the standard HO-3 policy for $550,000. The policy requires that the Whites pay a $500 deductible per claim occurrence. Other provisions include the following:
10% coverage on detached structures
Coverage up to $250 for cash
Coverage up to $1,500 for collectibles, artwork, and similar assets
Personal property contents coverage equal to 20% of the insured dwelling
Living expenses coverage for six months
Coverage up to $100,000 for personal liability
A replacement cost coverage endorsement is in place
The Whites’ two cars are insured under a personal automobile policy with split limit coverage of 250,000/500,000/50,000. They also have a $1 million excess liability policy.
Health insurance
The Whites are covered under Lisa’s group health insurance plan. The traditional plan has a lifetime maximum benefit equal to $5 million for the family, a $500 per person deductible, and an 80% coinsurance clause, with the family stop-loss limit of $2,500.
Using this information, please answer the following questions.
3. If Joe were to die today, how would the universal life insurance policy benefits be distributed? Would there by any taxes involved: income tax, estate tax, gift tax? Explain your response completely.
4. What will be the tax consequences if Lisa decides to cancel her term life insurance policy? Justify your answer.
Explanation / Answer
3. If Joe were to die today,The universal life insurance policy benefits of $550000 will be given to David only as the Policy amount is $500000 and it had gained a cash value of $50000 over the years.
Nothing would happen to the Policy of Lisa in which Joe was the beneficiary as nothing would come in the hands of Lisa as she is still alive and she would name her primary beneficiary again.
There would not be any Taxes involved by whatever name called as Life insurance policy claims (Principal Amount) are tax free in the hands of beneficiary. If there would have been any interest amount then that would have been taxable in the hands of David with applied tax rates.
4. If Lisa decides to cancel her term life insurance policy she will have to pay penalties or fees. Additionally, if the policy has an accrued cash value, any outstanding loans against the policy will be deducted before she receive the cash value. If she has paid premiums in advance, the account will deducted for the amount of time in the billing period that you have not canceled, and the remaining amount will be refunded to her.
And all the claim money that she will reeceive on the cancellation of the policy would be taxable as Income tax in her hands.
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