Most Americans are not prepared to deal with the possibility of becoming disabled due to sickness or injury and leaving the workforce for an extended period of time. In fact, more than half of U.S. adults said they would be unable to pay their bills or meet expenses if they became disabled and could not work for a year or longer, according to a recent National Association of Insurance Commissioners (NAIC) study.
And the possibility of becoming disabled and unable to return to work is quite high for many Americans. One-fifth of this nation's population will actually become disabled for a year or more before reaching age 65, according to the Social Security Administration (SSA). The most common causes of long-term disability are heart disease, back injuries and cancer, followed by stress, anxiety and depression according to the U.S. Department of Education and the National Institute on Disability and Rehabilitation. By contrast, slightly more than one in 10 Americans surveyed by NAIC say that it is somewhat or very likely they would become disabled and unable to work.
These findings, according to the NAIC and financial planners, underscore the need for long-term disability insurance. Nearly half of Americans do have long-term disability insurance, but much of it is employer provided rather than individually purchased. And that means, according to the NAIC, that a significant number of people could lose their coverage in the event of a change in employment status.
So what then is disability insurance? Disability insurance is insurance designed to protect people financially by replacing some of their lost income. The two main types of disability insurance are short-term and long-term. Short-term disability insurance, which some states require employers to carry for their employees, replaces a portion of the policyholder's salary for a short-period - typically from three to six months following a disability, according to NAIC.
Long-term disability insurance coverage typically begins after the policyholder is disabled and unable to work for at least six months, according to NAIC. The coverage period can extend for a specific number of years or until the policyholder retires or turns 65, depending on the policy selected and the type of disability.
For insurance purposes, disability is typically defined as the inability to work due to an illness or injury, according to the NAIC. Of note, the insurer’s definition of disability is a key factor in how one should shop for a policy.
So what should Americans consider when evaluating disability insurance? Below are tips from the NAIC and financial planners:
First, determine how much money you'll need to cover all of your critical expenses (such as housing, food, utilities and transportation) should you become disabled. Generally, you should consider buying long-term disability insurance that covers about 60 percent of your annual income.
Those who have a pre-existing health condition, such as a back problem or heart ailment, may have to purchase a policy with an “exclusion” rider. If the disabled person can provide documentation that the pre-existing condition has improved, the insurer may remove the rider after a specified time period.
Your occupation is crucial in obtaining coverage. If possible, depending on your occupation, you want to get an “own occupation” definition.
Typically, younger, healthier individuals pay lower disability premiums. If you purchase disability insurance at a young age and can get a "non-cancelable" policy, your coverage can't be cancelled and the premiums can't be raised once your medical exam has been approved and your policy issued, assuming your premiums are paid on time. Also, consider buying an option to increase your coverage without additional medical underwriting if you’re young or if you expect your earning power to increase.
While a "guaranteed renewable" policy can't be cancelled, its premiums may be increased on the anniversary of the policy or when stated in the policy.
Most long-term disability insurance stipulates a waiting period, such as 90 days (the most comment), 180 days or one year before benefits are paid. Disability insurance also stipulates a benefit period; for example, one year, two years, five years or until age 65.
Most companies offer policies that are offset by any benefits paid from Social Security. While receiving a benefit from Social Security is not likely, this is a way to reduce the cost of the disability policy.
The federal government does offer long-term disability benefits through the Social Security Administration under the following specific circumstances: "…if you cannot do work that you did before and we decide that you cannot adjust to other work because of your medical condition(s). Your disability must also last or be expected to last for at least one year or to result in death." And you must be disabled for at least 5 months. SSA disability is an “any” occupation definition of disability.
Before purchasing any disability policy, consumers should check with their state insurance department to make sure the company offering the coverage is legitimate, solvent and authorized to do business in their state. They should also evaluate the financial strength of the company and whether there are any complaints filed about their claims-handling experience.
March 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA
Friday, March 30, 2007
Tuesday, March 27, 2007
Now Is the Time to Pick Up Low-Cost Life Insurance
If you need life insurance, now may be the time to buy it. Insurance premiums are expected to drop 4 percent this year, following a 5 percent decline last year, according to the Insurance Information Institute, New York. In fact, premiums are less than half of what they were a decade ago.
There are two basic types of life insurance policies that have lowered their premiums: terms and permanent.
Term insurance is basic coverage. You pay a premium and just get life insurance for a specific period, typically from 1 to 20 years. Upon the renewal of a term insurance policy, though, you’ll pay a higher premium because you’re older.
Permanent insurance, on the other hand, provides both insurance coverage and a savings account, known as the “cash value.” Cash value policies include whole life, universal life, variable whole life, and variable universal life. Cash value insurance is permanent protection. You lock into a premium when you purchase the contract. Universal policies let you make flexible premium payments.
Why are life insurance rates dropping? People are living longer. The longer you live, the lower your insurance premiums. Life insurance rates are dropping because death rates for the 25 to 44 age group—the primary purchasers of life insurance—have decreased significantly over the past 10 years, according to Weisbart. In 1996, the death rate per 100,000 for the 25-to-44 year-old age group was 177.8. By 2004, it had dropped to 161.8, based on National Vital Statistics Reports preliminary data. That represents nearly a 10 percent drop in the death rate in less than a decade for the prime insurance-buying ages.
The drop in insurance rates can represent a substantial savings. The annual premium for a 40-year-old male nonsmoker buying a $500,000, 20-year level term life insurance policy in 2007 would run $615 if he qualifies as a “standard” risk and $340 if he meets the more stringent requirements of a “preferred” risk. Rates for women, younger people and for larger amounts of insurance would be lower.
Premium rates for traditional whole life, universal life, and variable universal life insurance also are lower. Today, someone age 35 would pay about $8 per $1,000 of coverage for permanent protection. Ten years ago it was more like $12 per $1,000 of coverage.
With rates lower than they ever have been, parents might reassess the amount of life insurance they carry, and consider purchasing more. For example, it takes, calculated in the most simplistic of ways, a $500,000 death benefit to pay a widow $2,500 a month for 17 years. Yet, in 2004, according to LIMRA International, Hartford, Conn., the average 25 year-old to 34 year-old adult with life insurance had only $145,000; the average 35 to 44 year-old adult had only $323,000 of life insurance.
So what should you do if you’re sitting on a higher rate term insurance or cash value policy? Have an experienced life insurance agent conduct an insurance needs analysis to determine how much coverage you need. On average, you need about five to eight times your wages to be adequately protected.
Most life insurance companies charge lower rates for larger amounts of insurance. So buying one larger policy rather than keeping a smaller one and starting a second policy should further lower your premium. Rates often drop at the $250,000, $500,000, and $1 million levels. Do note on the application that you plan to replace an existing policy. And, don’t drop the existing policy until the new one is in place.
The drawbacks: If your age, occupation or health has changed, you may not be able to get lower premiums from another insurer. You can check term insurance rates at Web sites such as www.accuqote.com or www.selectquote.com.
There are more factors to consider when switching a whole life, universal or universal variable insurance policy. In addition, consider:
- Although you can do a 1035 tax-free exchange to move the cash value from your old policy to a new policy, you’ll pay commissions and other insurance costs on the new policy. This can mean more than 50 percent of your premium in the first year and other commissions on the cash value that is moved to the new company.
- If the total of all prior premiums is less than the cash value in the policy you are replacing, you will owe income taxes on the difference. A 1035 tax-free exchange should be considered in this situation.
- Usually, if a cash value policy has been in force for 7 to 10 years, with a quality carrier and you are not changing the type of underlying investment from a fixed portfolio to a variable portfolio, it is unwise to make a change.
- Life insurance policies are incontestable after they have been in force for two years regardless of any errors or misstatements on the initial application. Replacing an existing policy with a new policy will start the incontestability period over again.
Any policy loans on your old policy will have to be repaid.
Tip: Always check the financial strength of the insurance company you are considering. The strongest companies are rated A++ and A+ by A.M. Best and AAA by Standard & Poor’s.
March 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA
Friday, March 23, 2007
How Bunching Can Preserve Your Right to Itemize
Tax laws are at times nothing if not infuriating. Indeed, with phaseouts and sunsets coming and going, taxpayers may find it difficult planning from one year to the next.
Case in point: In 2006 and 2007, the overall limitation on itemized deductions that reduces the value of certain itemized deductions claimed by upper-income individuals is scheduled to be phased out.
In effect, higher income individuals will have a small tax rate reduction, according to PricewaterhouseCoopers 2007 Guide to Tax and Financial Planning.
By way of history, the tax law limits the amount of certain itemized deductions that individuals can use to reduce their taxable income. For instance, miscellaneous deductions are limited to those in excess of 2 percent of Adjusted Gross Income or AGI.
But Congress has also placed what’s called an “overall” limitation on the deductibility of itemized deductions, according to The Ernst & Young Tax Guide 2006. For 2007, the total of this group of deductions must be reduced by 2 percent (down from 3 percent) of the amount of your AGI in excess of $156,400 for married couples filing jointly and $78,200 for married filing separately. Itemized deductions will, however, never be reduced by more than 80 percent of the amount by which they exceed a specified group of deductions, including, but not limited to, medical expenses, investment interest, and theft losses.
This reduction in itemized deductions is applied after the taxpayer has used any other limitations that exist such as the AGI limitation for charitable contributions and miscellaneous itemized deductions. The reduction falls to 1 percent in 2008 and 2009 and is phased out in 2010. Medical expenses, casualty and theft losses, investment interest expense, and gambling losses are not subject to this rule, insofar as calculating the 80 percent limitation is concerned, according to the Ernst & Young Tax Guide.
So what happens to taxpayers who for whatever reason (a bonus, a salary increase, or new job) will find themselves losing their ability to use itemized deductions fully in 2008? What kind of planning can they do in 2007?
Among other things, taxpayers may want to consider a technique called “bunching,” otherwise accelerating or deferring itemized deductions where possible. Bunching may work if the taxpayer is able to accumulate deductions so that they are high in one year and low in the next.
According to Deloitte Tax’s Essential Tax and Wealth Planning Guide, taxpayers should explore opportunities to time deductions for charitable contributions, state and local taxes, and other payments within the taxpayer’s control. In some cases, it may be better to take deductions in the current tax year; the caveat emptor of this strategy is Alternative Minimum Tax or AMT.
For instance, if the taxpayer isn’t subject to AMT in 2007, they should consider paying 2008 real estate and property taxes before yearend. Also, the taxpayer might consider paying any remaining state and local estimated income tax payments before the end of the year. State and local taxes are not deductible for AMT purposes, so taxpayers should consider the consequences of AMT before bunching these or other “non-deductible for AMT” itemized deductions in one year.
In another example, taxpayers might also accelerate mortgage payments. According to Deloitte, cash-basis taxpayers can, in most cases, deduct expenses in the year paid. Thus prepayment of mortgages due in 2008 may provide a deduction for interest to 2007.
According to Ernst & Young’s Tax Guide, in certain situations, it’s possible for the 2 percent limitation to reduce allowable itemized deductions below the standard deduction. Thus, it’s worth considering this possibility when choosing whether to itemize or not.
Taxpayers contemplating bunching should read the Instructions for Schedules A & B for Form 1040, which is available on the IRS’ Web site at www.irs.gov. In order to make sure that the strategy of bunching deductions makes sense in your particular situation, it is generally a good idea to consult with a tax professional before proceeding. At the very least it is important that you are comfortable using tax planning software and are capable of identifying all of the ramifications of any tax planning technique.
March 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA
Case in point: In 2006 and 2007, the overall limitation on itemized deductions that reduces the value of certain itemized deductions claimed by upper-income individuals is scheduled to be phased out.
In effect, higher income individuals will have a small tax rate reduction, according to PricewaterhouseCoopers 2007 Guide to Tax and Financial Planning.
By way of history, the tax law limits the amount of certain itemized deductions that individuals can use to reduce their taxable income. For instance, miscellaneous deductions are limited to those in excess of 2 percent of Adjusted Gross Income or AGI.
But Congress has also placed what’s called an “overall” limitation on the deductibility of itemized deductions, according to The Ernst & Young Tax Guide 2006. For 2007, the total of this group of deductions must be reduced by 2 percent (down from 3 percent) of the amount of your AGI in excess of $156,400 for married couples filing jointly and $78,200 for married filing separately. Itemized deductions will, however, never be reduced by more than 80 percent of the amount by which they exceed a specified group of deductions, including, but not limited to, medical expenses, investment interest, and theft losses.
This reduction in itemized deductions is applied after the taxpayer has used any other limitations that exist such as the AGI limitation for charitable contributions and miscellaneous itemized deductions. The reduction falls to 1 percent in 2008 and 2009 and is phased out in 2010. Medical expenses, casualty and theft losses, investment interest expense, and gambling losses are not subject to this rule, insofar as calculating the 80 percent limitation is concerned, according to the Ernst & Young Tax Guide.
So what happens to taxpayers who for whatever reason (a bonus, a salary increase, or new job) will find themselves losing their ability to use itemized deductions fully in 2008? What kind of planning can they do in 2007?
Among other things, taxpayers may want to consider a technique called “bunching,” otherwise accelerating or deferring itemized deductions where possible. Bunching may work if the taxpayer is able to accumulate deductions so that they are high in one year and low in the next.
According to Deloitte Tax’s Essential Tax and Wealth Planning Guide, taxpayers should explore opportunities to time deductions for charitable contributions, state and local taxes, and other payments within the taxpayer’s control. In some cases, it may be better to take deductions in the current tax year; the caveat emptor of this strategy is Alternative Minimum Tax or AMT.
For instance, if the taxpayer isn’t subject to AMT in 2007, they should consider paying 2008 real estate and property taxes before yearend. Also, the taxpayer might consider paying any remaining state and local estimated income tax payments before the end of the year. State and local taxes are not deductible for AMT purposes, so taxpayers should consider the consequences of AMT before bunching these or other “non-deductible for AMT” itemized deductions in one year.
In another example, taxpayers might also accelerate mortgage payments. According to Deloitte, cash-basis taxpayers can, in most cases, deduct expenses in the year paid. Thus prepayment of mortgages due in 2008 may provide a deduction for interest to 2007.
According to Ernst & Young’s Tax Guide, in certain situations, it’s possible for the 2 percent limitation to reduce allowable itemized deductions below the standard deduction. Thus, it’s worth considering this possibility when choosing whether to itemize or not.
Taxpayers contemplating bunching should read the Instructions for Schedules A & B for Form 1040, which is available on the IRS’ Web site at www.irs.gov. In order to make sure that the strategy of bunching deductions makes sense in your particular situation, it is generally a good idea to consult with a tax professional before proceeding. At the very least it is important that you are comfortable using tax planning software and are capable of identifying all of the ramifications of any tax planning technique.
March 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA
Thursday, March 22, 2007
Welcome to the World of Wealth Management
This blog was created to bring the world of Wealth Management to life! Many people are unaware of the vast possibilities within the financial world, and it is those possibilities that this blog is designed to bring to the forefront of your mind.
This blog will explore many different areas of the Wealth Management universe. Let's begin by defining "WEalth Management" as a term. The editors amongst you will think that I made a typo in the previous sentence, but I didn't. It's my opinion that it's more than just a coincidence that the word wealth starts with "WE". Wealth Management is a more than just the latest catch phrase in an industry full of catch phrases. It's a process; a process of developing an overall plan of action for a person's financial life, which in most cases ties directly into their non financial life as well. The "we" in Wealth Management is there because the process is a hands on one. A financial planner along with the client will forge a path along which the client can travel towards the inevitable destination of reaching their goals.
Financial strategies are as unique as your individual goals. Therefore, it is important to look at your needs holistically. By bringing together a myriad of financial services under one roof, your Wealth Manager can improve your chances of staying on course and achieving your financial goals. The Wealth Manager you partner with should be able to offer their clients integrated and coordinated services in the following areas:
- Wealth Management (investment portfolio management)
- Financial Planning
- Accounting and Taxes
- Risk Management
Wechter Financial Services, Inc. can make a difference for you. We view our association with you as a partnership. We consider your lifestyle, attitudes and levels of acceptable risk. We look at the needs of your loved ones - home and health, education and retirement, and more - to customize a plan that works for your family.
Wechter Financial Services, Inc. offers a broad range of financial services for individuals and businesses. With objective-based planning, we listen to your specific needs and individual goals, then in turn, offer a range of options to insure that your destination, as well as the journey, are as comfortable and secure as possible. You can reach me at Wechter Financial Services, Inc. by either going to our web site, www.wechterfinancial.com or calling me at (973) 605-1448 and just ask for Mike.
This BLOG will be used to convey very important information about financial planning and the state of the markets. I will publish 3 articles a month on various topics of interest. Please check back here often for updates to these articles and other postings.
Subscribe to:
Posts (Atom)