Is a Recession Coming?

Uh-Oh…

On July 27, 2022, the fed raised interest rates again, bringing rates to between 2.25% to 2.5%.

Does this mean a recession is coming or are we already in one? Who knows? Every financial pundit has a different opinion. Either way, both inflation and recession create nail-biting fortuity.

What Does a Recession Mean for Me?

If you hold a student loan or home loan, the recession news is less positive than it is for those with enough money in a savings account to keep afloat or who are living off a high-yield savings account.

But whether higher interest rates work for or against you; whether we’re in a recession or not, there are some things you can do to ride out a recession with your financial boat intact.

Financial Advice for Riding Out an Economic Downturn

Take stock of your current financial situation.  Winnie Sun, Managing Partner, Sun Group Wealth Partners  advises to take a look at your retirement assets, savings, and checking accounts to see where your assets lie.

Audit your budget to see where you’re spending and where you’re earning. This will help you determine if you need a budget or not.

Start with the bare bones to get a baseline. First the priorities. What are you spending on housing, food, utilities and medical expenses? After that,  look at what you’re spending on car payments and nice-to-have’s like streaming services.

Consider whatever is left is discretionary income.

Be a Budget Planner. Make budgeting a family affair so everyone agrees on your financial management plan. It’s good for your marriage and provides instructive money role modeling for your kids.

 

Tip: Use a membership card that offers a percentage-off gas deal. Some rewards programs offer cash-back incentives.

Diversify your investments. Stocks tend to fall during a recession, which can be a good thing or a bad thing.

If you prefer to stay in the stock market, buy from companies you know will come out strong as the recession wanes.

If the stock market’s fluctuations make you nervous, consider buying bonds like government-guaranteed savings bonds or investing in foreign securities and precious metals.

If you have a recession-proof job, take this time to pour as much into your savings as possible.

You can also invest in your family’s financial future with a level term life insurance policy. Term rates are locked in without the fluctuations interest-earning policies suffer. It’s much less expensive and payouts are completely tax-free.

Pay down or pay off credit card debt. And throw away new credit card offers—unless you can transfer current credit card debt to a card with a lower interest rate if you can find one.

Avoid new loans and consider refinancing any variable rate loans to fixed-rate loans. Look into doing the same for your student loans, too.

Invest in yourself. Consider ways you can generate outside income with a part-time job or an online business.

Reach out for help if you need to. Call companies and utilities to whom you owe money and explain your situation. A lot of times, they’ll give you a break.

Look for ways to have fun. Even in a recession, there are still simple ways to have fun and grow stronger bonds with your family. Play the games or do the puzzles you never had time for, go on a day trip to a free museum, or have a picnic. Ask your kids for other ideas.

No doubt economic downturns are white-knuckle events. But as you ride out the storm, take time to breathe and appreciate the little moments that make you smile. And stop doomsday scrolling. It’s going to be fine. This isn’t our first rodeo.

Is Life Insurance Taxable?

Do I Have to Pay Taxes on My Life insurance Death Benefit?

Life insurance is a lifesaver for loved ones you leave behind. But there can be some scary surprises if you aren’t familiar with the tax codes attached to your policy.

If your life insurance policy is simple, your payout is simple and tax-free. A death benefit is not considered income.

However, if your policy is set up to gain interest, any interest you earn on your policy is considered income and therefore is taxable.

Simple Term Policies: No Tax

term life insurance policy,  is non-taxable. You buy the policy for say $50,000 and your loved ones will receive $50,000 tax-free.

Keep in mind that you must appoint a beneficiary. Not having one may delay your benefit from getting to your loved ones as it makes its way through probate court.

Also, consider leaving your benefit to more than one beneficiary to ensure that if one dies, the surviving one will receive the payout, not the IRS.

If you want your child to be your beneficiary, set up a trust. This ensures that inheritance is used in a responsible way.

Permanent Policies: Probably Taxed

The federal government and some state governments handle permanent life insurance differently since this type of policy can accrue interest. Beneficiaries may have to pay taxes on that gained interest.

However, the interest is taxable only if it exceeds the amount you paid in premiums. And it’s not retroactive. Your loved ones only pay on the interest earned after your death.

Now if you borrowed against your policy for more than you’ve paid in premiums and the interest it earned, you must pay what you owe before you die or your loved ones will pay taxes on the benefit. They’re also considered taxable income.

Useful Tax Strategies

Strategy #1: Transfer Your Life Insurance Policy

Transferring your policy gets you off the hook for taxes as well as premium payments. And while the person to whom you transfer is responsible for the payments and taxes, you can set aside a part of the benefit as a gift to help them pay those expenses. A gift is tax-free.

Transfers are irrevocable, so choose your transferee carefully. You can transfer your policy to a trust, which is especially helpful if your child is your beneficiary.

Now, the IRS does have some caveats regarding transfers.

And if you sell your policy, while this also frees you from paying your monthly premiums, you are on the hook for any cash or profits you received above the amount you paid in premiums.

Strategy #2: Tie Your Policy to an Estate

This is a great strategy if you make less than $12 million as an individual or $24 million as a couple. That’s the current federal threshold. If you make more than that, the estate is taxable. If you earn less than the threshold, the estate is tax-free. But no matter what side of the threshold you’re on, you do have to report the payout to the IRS.

Is your brain spinning yet? This is a lot of information—much of it beyond the scope of one humble post. Taxes, like people, can be complicated.

Make sure you talk to an attorney, tax professional, or accountant before making any tax-related decisions and putting them in writing. Your loved ones will thank you