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INSURANCE SMARTS How to reduce your taxes, build wealth for retirement, and safeguard the people you care about most.
Determining whether you need insurance is the easy part. If someone else depends on you financially, you probably need life insurance. If prolonged medical care would deplete your savings, or that of your family, you may need long-term care insurance. If you’re saving for or about to enter retirement, you should consider annuities. Figuring out how much insurance you need is more challenging. One recent survey showed that 53% of people who are shopping for insurance have trouble
and long-term care insurance and annuities, and look at special considerations for business owners and those who plan to leave assets for their heirs. When you finish, you’ll have the information you need to sit down with an insurance agent and safeguard the people you care about most.
determining how much to buy, and that 45% have never analyzed their protection needs. That can, and does, lead to significant underinsurance. The average amount of life insurance owned in America is $126,000, according to industry research. The average amount of coverage needed is $459,000. Then there’s the matter of choosing specific types of insurance. Is term life insurance best, or should you choose permanent life insurance? What’s the difference between fixed and variable annuities? Consider this special section an insurance primer. We’ll examine life, disability
companies call it a death benefit — is delivered free of federal taxes and can be used for a variety of financial needs. It can replace the income of the deceased, pay off a mortgage or other debt, fund a child’s education, pay funeral and lawyer fees, and more. There are two primary types of life insurance: term and permanent. Term is strictly insurance coverage; it doesn’t accumulate cash value or pay dividends. It also tends to require lower payments, called premiums, than permanent insurance. As the name suggests, term insurance policies last for a specific period of
THE FACTS OF LIFE Life insurance provides cash to your family after your death. This cash — insurance
time — say, five, 10 or 20 years. At the end of the guarantee period term policies must be renewed. Rates aren’t locked in; each renewal tends to bring higher premiums. There’s also no guarantee that the insured will remain eligible for renewal. Permanent insurance policies can’t be canceled, so long as you continue to make premium payments. They may pay dividends, and generally begin to build cash value after the first or second year of coverage. This cash value can be accessed via loans or withdrawals, and used for things like buying a house. It can also be left in the policy, where it will continue to grow tax-deferred. Which type of insurance is best? That depends on a variety of factors, including the length of time you need coverage for and the level of premiums you can afford. Term insurance is generally best for people who have short-term protection needs, or who can’t afford permanent insurance. Term policies generally start with smaller premiums than do permanent policies. That doesn’t necessarily make them cheaper over the long run, though. People in their 20s and 30s often buy term insurance to save on premiums. As they grow older, the premiums increase. Premiums on permanent life insurance policies start and stay level. By the time people reach their 50s, the rising cost of term insurance may have exceeded that of permanent. Those who can no longer afford their term premiums and who cancel their policies do so without having accumulated equity. Some insurance companies offer options that carry the benefits of permanent insurance with lower monthly payments. Modified premium policies may offer lower payments for a specified period of time — say, five years. These policies can be ideal for people who have limited free funds today, but who expect to earn
Conceived and produced by New Futures Media Inc., this special section provides information and ideas to benefit our readers and their families. In addition to retirement, insurance, and financial planning New Futures Media also creates special advertising features on healthcare, corporate citizenship, diversity, and other public-service themes. The information and opinions expressed in this advertising section do not constitute an endorsement of advertisers or their products by New Futures Media. For information about our company and our work see www.NewFuturesMedia.com or contact us at info@NewFuturesMedia.com.
Client: Inc magazine Project title: Insurance smarts Issue: May 2005 Size: Bleed:8.25 x 10.125 Trim: 8 x 10.875 Safety:7.5 x 10.375
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INSURANCE SMARTS more money in the future. Another option is a term rider. A rider is a piece of supplemental insurance that gets added onto a policy. Someone who needs $500,000 of coverage, but who can’t afford the premiums for a permanent policy, might choose to buy $100,000
worth of permanent coverage, and supplement the remaining $400,000 with a term policy. One other option is a convertible policy. This allows the insured to enjoy the lower premiums associated term policies for several years, while maintaining the option to convert to a permanent policy without needing an additional medical exam. How much coverage do you need? Experts say it’s best to err on the side of caution. “We tend as human beings to make decisions based on our experience, and most of us have never experienced a catastrophic loss,” says John Hebden, assistant vice president at State Farm. “It’s better to pay a little more premium now to avoid a mistake that can cost you much more in the future.” Determining an appropriate coverage level is a matter of calculating how much money your survivors will need to maintain their current lifestyle, and adjusting for assets you already own. Add up the amount owed on mortgages, credit cards, personal loans, student loans and so on. If you rent, estimate the amount your family will need to continue doing so. Next, look at income replacement. How much of your annual income will your family need when you’re gone? At this point it’s also important to look at the non-monetary contributions made by
non-working spouses. For example, stay-at-home mothers may not earn income, but they provide services like child care that are expensive to replace. It’s also important to consider final expenses. These include funeral fees and probate costs. Also, consider the amount that would be needed to pay for your children’s education. From this total subtract the value of assets such as stocks, bonds, CDs and retirement plans. The resulting figure will give you a rough estimate of the amount of coverage you need. To determine the exact amount, it’s important to sit down with an insurance agent and more thoroughly evaluate your needs. DISABILITY AND LONG-TERM CARE While you’re reviewing your life insurance needs, be sure that you have adequate disability insurance. Experts say the most valuable asset many people have is their income. Life insurance provides protection for your family in the event of your death, but not necessarily in the event that you become injured and are unable to continue working. An insurance agent can help you determine an appropriate level of disability coverage. Think, too, about long-term care insurance. Studies show that 40% of people turning 65 years old will spend time in a nursing home at some point in their lives. The average annual cost of long-term care is $55,000. Medicare pays very little
who are wealthy enough to pay for longterm care with a minimal impact to their assets can probably afford to do without coverage. Those in between, with enough assets to worry about depleting them should the need for long-term medical care arise, should speak to an insurance agent to see if long-term care insurance is right for them. A RETIREMENT YOU CAN DEPEND ON The key to saving for retirement is to contribute as much money as possible to tax-deferred investments, as early as possible. These investments include employer-sponsored 401(k)s, IRA accounts and annuities. Defined-benefit plans, also known as pensions, are less common than they used to be. Most employers prefer to offer self-directed plans for their employees, rather than guarantee a set level of future benefits. Annuities can help people create their own de-facto pension plans. “Annuities appeal to a wide range of people,” says John Meyer, senior vice president of New York Life’s annuity division. “People in their 40s and 50s use them to accumulate tax-deferred savings, while people in their 60s and 70s use them to guarantee a stream of income for the rest of their lives, or to secure a death benefit for their survivors.” For those who are saving for retirement, annuities make a great supplement to 401(k) and IRA accounts, since there’s
“The best time to talk to a financial professional is yesterday,” says State Farm’s Hebden. of this cost. Medicaid pays more, but to qualify you must spend down most of your assets. Long-term care insurance is designed to protect your assets, and the assets of your loved ones, in the event you need prolonged medical care. Good policies provide not just nursing home benefits, but also benefits that can pay for home care provided by a trained professional, or even a friend or family member. Long-term care insurance isn’t for everyone. Those with limited assets and lower incomes may find the premiums too expensive. And, of course, those
no annual limit to contributions. Annuities used to save up money for future retirement are called deferred, or accumulation, annuities. There are two types: fixed annuities provide a set rate of return, while variable annuities provide a return that’s based on the performance of an underlying basket of mutual funds. Which is better depends on how long you have until retirement. Fixed returns are best for those who are just a few years away. Over longer periods — say, 20 or 30 years — variable annuities invested in stock mutual funds may do a better job of outpacing inflation.
Client: Inc magazine Project title: Insurance Smarts Issue: May 2005 Size: Bleed:8.25 x 10.125 Trim: 8 x 10.875 Safety:7.5 x 10.375
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INSURANCE SMARTS Immediate annuities are for those who’ve already accumulated retirement assets, either in 401(k)s and IRAs or in regular taxable accounts, and now wish to lock in a guaranteed stream of payments. Immediate annuities today offer conven-
ownership of a business, it’s critical to develop a sound estate plan. Experts say estate planning isn’t for do-it-yourselfers. The right kind of life insurance policy can provide a tax-free benefit that heirs can use to pay for estate
“Annuities appeal to a wide range of people,” says John Meyer, senior vice president of New York Life’s annuity division. ience and flexibility. Since payments are based on the life expectancy of the recipient, annuities can satisfy the minimum distribution requirements that, for most IRA holders, kick in at age 70 1/2. Many annuities have early withdrawal options. And most allow their owners to lock in death benefits for their loved ones. It’s never too early for retirement investors to start thinking about an annuity. “Because of the time value of money, the best time to talk to a financial professional is yesterday,” says State Farm’s Hebden. You can’t wait until your financial house is in order. For most of us, that never happens. The advantages of starting early are profound.” PROTECTING YOUR HEIRS People often think of estate taxes as being somewhat similar to income taxes. That can be a mistake. Estate taxes can reach much higher rates than income taxes — up to 48% in some states. They ’re assessed on the value of all assets, whether liquid or not. And heirs have just nine months from the date of death to pay them. That combination of characteristics can have a disastrous effect on large estates, particularly illiquid ones. Heirs may be forced to sell property for far less than it’s worth just to raise money for taxes. Insurance can protect against such an event. Not everyone needs to worry about estate taxes. The government provides an exemption that, in 2005, protects up to $1.5 million in assets from taxes. This exemption is scheduled to increase to $3.5 million by 2009. For those with larger estates, particularly those made up of illiquid assets like land or part
taxes, but only if it’s set up properly. An experienced insurance agent can show you how to use trusts and other financial tools maximize your heirs’ protection.
the leasing company,” says Hebden. “It’s better than state bare-bones requirements, but it may not be good enough. Those standards, remember, are designed to protect the leasers, not the drivers.” Among other things to think about when insuring a small business is the value of electronics, computers and software. Specifically, owners should plan for the cost of a business interruption that can be caused by things like power outages and viruses.
TAKING CARE OF BUSINESS Small business owners — those with fewer than 100 employees or less and $1 million in annual revenues — can protect against business property damage and general liability using an all-in-one business owners policy, or BOP. Such coverage is often mandatory; a supplier, for example, may require a certificate of insurance before entering into an agreement with a small business.
THE NEXT STEP If you don’t already have an insurance agent, your next step should be finding one. An experienced agent can help you determine the level and type of coverage that’s best for you, and can periodically meet with you to see if your needs have changed. When choosing an insurance company, pay careful attention to financial strength. Independent organizations like Standard and Poor’s and A.M. Best publish financial ratings for insurance companies on their Web sites. Many of the larger and most familiar insurance companies have educational resources available on their Web sites.
State Farm’s Hebden says too many business owners view insurance as a basic commodity, which can leave them under-covered. He compares some BOPs to barely adequate autoinsurance policies. “It’s like a driver who leases a car and takes the minimum coverage required by
These include calculators and brochures to help you determine which types of coverage you may need before speaking with one of their agents. Remember: insurance is the foundation of financial security for you and your family. The best time to secure adequate protection is long before the need for it arises.
Client: Inc magazine Project title: Insurance smarts Issue: May 2005 Size: Bleed:8.25 x 10.125 Trim: 8 x 10.875 Safety:7.5 x 10.375