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Universal Life Insurance: A Rebuttal

/// Posted by Wayne Slattery

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‘Universal Life Insurance, a 1980s Sensation, Has Backfired’

“A long decline in interest rates caused premiums to soar when they were supposed to stay level.” – Wall Street Journal

As soon as I read this headline in the Wall Street Journal I was surprised by how misleading it was, and decided to write a response.  A little bit about me, I started my career in financial services with MetLife in 2004 at the age of 24.  I spent 13 years with them until they sold their whole financial division in July of 2017.  MetLife was a giant in the life insurance industry and a main player in providing the Universal life insurance product, specifically the type mentioned in the attached article.  Many evenings I would make phone calls, receive calls from policy holders, or meet with policy owners to give them the bad news:  Your policy is “blowing up”. This was a term we used when someone had a policy where there was no more cash and the premium was skyrocketing.  Many, as you can imagine, were not thrilled to see or hear from me in this instance.    We will discuss later how I was able to help most people continue their coverage, but first I’d like to discuss some basics of the policy itself.

Typically, we expect that we purchase a specific death benefit that is supposed to remain level.  The cost of the 1980s era UL insurance increased each year that you aged.  So if you purchased a policy pre-retirement, the insurance cost may have started relatively low, but increased slowly each year you kept it.  The premiums on these products were flexible, and though they were typically portrayed as remaining relatively level, many buyers opted to start off paying the minimum amount required, which was problem number #1. 

As the article explains, those products utilized a “cash account” that was based on interest rates.  By design, a cash account was created by overpaying in the early years of a policy while the insurance company invested the excess dollars in a separate account with high interest rates.  This cash account system was meant to offset the future increase in cost of insurance in your later years/age.  It was not meant to be borrowed/loaned against indefinitely, as that only increased the odds of your policy lapsing or costing a significant amount more to continue later on, which was problem #2. 

In the 1980s, interest rates were as high as 10%-13%, so UL’s illustrated very well.  Many companies offered minimum guaranteed rates as high as 4%-5%, in an attempt to mitigate potential losses and keep interest rates “level.” Prospective clients should have been shown both current and guaranteed interest rate projections to keep them informed of the standing of their policy.  Nowhere does it state that these high interest rates in the mid 1980s were guaranteed, problem #3. 

I believe the main reason that some of these policies were imploding, was a combination of some suspect sales tactics, clients ignoring the facts of their policy as one couple admitted to in the article, along with not paying high enough premiums in the early years, and/or borrowing against the cash value.

Now that you have a broader understanding of 1 type of older universal life insurance, lets discuss what I did to help people who fell into problem 1,2 and/or 3.  First, running an in-force illustration for these older polices based on current and guaranteed interest rates shows roughly when the policy will lapse, unless you increase your premium payment.  If a client is in a situation where in 5 years they may need to pay triple the amount they are paying now, we discuss what other options they have.  Many still had some amount of cash value in their policy.

Depending on 2 main factors: age and health, the cash could be used to help fund a new UL with a guaranteed premium payment that would not increase.  Unfortunately, there were many people who didn’t open up their annual statements that showed their policy was in danger or didn’t meet with an advisor every year to make sure they were on track or able to take out loans.  The majority of people in this article fit into 1 of those 3 categories, and when there is no cash value left, and they are too old to qualify for a new policy, it seems like the policy failed them.  This is why it is important to work with a trusted advisor and meet, at least, annually to discuss any changes in your situation or health, and to make sure your current plan is still in line with future goals.

Today there are many variations of Universal Life, which are much more robust with stronger guarantees and the ability to grow cash value in numerous ways.  A Guaranteed* UL is designed for someone who wants inexpensive permanent life insurance with a level premium.  Pick an age you want it to last to and pay the level annual premium, simple as that.  However, there is another type of UL that I’ll mention briefly as it is one that I use a lot for people that want a potentially higher cash value and tax advantages.  An indexed universal life** policy is used for people between 25-55 who want life insurance but also the ability to grow significant cash value to be used in the future to supplement retirement income with tax advantages when used correctly.  The premiums are generally higher to generate more money in the cash account.  But here is the neat part—the cash account invests in an index like the S&P 500.  You have a floor, typically 0%, and a cap of 10%-12%, depending on the company. 

For example: if you started in 2008 when the S&P 500*** dropped around 37%, you would have lost 0% as that is your floor.  When it went up in 2009 almost 27% you would have netted 10%-12% as that is your cap.  These policies can generate significant amounts of tax efficient cash flow to be used later in life to supplement your retirement or even pay for your child’s college education, as my father did with mine.

There have been many changes in the financial service industry over the years.  The main take away is to work with a trusted advisor and meet annually to update your plan as needed.  There is no one size fits all solution as each individual has different needs and goals.  Here at Sapers & Wallack, our approach is to design plans unique to each clients’ objectives and goals and to service them regularly.

November is Long-Term Care Awareness Month

/// Posted by Aviva Sapers

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Long-term illnesses are very challenging emotionally, physically, and especially financially.  I should know, as I have lived through 3 grandparents, 2 in-laws, and one mother who all needed or still need care.  It is difficult to watch those you love lose the ability to do for themselves, and to experience the toll it takes on family and friends who are thrust into the role of caregiver. 

Some of these situations seem to come out of nowhere after a stroke, a fall, or a surgery gone awry, while others are slow and progressive, like Parkinson’s, Alzheimer’s, or cancer.  Regardless, if you are thrust into the situation over night or if it happens gradually, it will affect your spouses and children in many different ways:  Families will differ on the course of care that should be given: whether or not to keep a person at home or move them to a facility, who is available to provide the care or should they hire a professional to provide the needed assistance?  If a spouse is still able and willing to provide care, what toll might that take on them both physically and emotionally?  Is there someone at home who can help administer needed medications?  So many questions and details to manage!

Care coordinators (or geriatric care managers) are available to consult with a family concerning various options.  There is no need to go through this alone!  There are home care services that provide temporary care or longer duration care as needed.  Assisted living or nursing homes also exist if taking care of a family member at home is not an option.  Today, we also have progressive living communities that offer housing from independent living, assisted living residences, and full nursing home residence all on the same campus.

When one is put in the situation of caregiving for a friend or family member, it is worthwhile to utilize whatever resources are available.  If the person who needs care has purchased long-term care insurance, or has an LTC rider on a life insurance policy, care coordinators are usually provided under that policy and should be consulted.  If there is no insurance, then speak with friends or Google ‘Care Coordinators’ in the area.  If you have a family member who has cognitive or neurological issues and are concerned with their ability to drive, there is a program at the Beth Israel Hospital, in Boston, called Drivewise, where both a neurological and a physical driving test can determine if one is still safe to drive.  It is a good resource to consider if you don’t wish to be viewed as the bad guy or judge of whether or not to take a person’s keys away.

If you are still healthy, and are concerned about how a long-term illness will affect you and your family emotionally and financially, the best thing to do is to have a discussion about your wishes with family members now.  Perhaps someone in your family would want you to come live and assist them?  Maybe a family member would want to come live with you?  Many people have heard that long-term care insurance is very expensive, which it certainly can be if you are trying to cover the entire cost of care, but LTC insurance can also be used to offset just some of the costs of care, which can often prove to be more affordable.  Investigate different living options for later life if you haven’t already considered progressive living environments in your area.  Familiarize yourself with local service providers and do your best to make your wishes know before someone is thrown into the position of making them for you. 

If you are in the midst of dealing with long-term care issues or foresee them happening in your future, call us today and set up an appointment. 

Is There a Better Option for College Savings than Using a 529?

/// Posted by Aviva Sapers

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Many people feel that the most cost effective way to fund college for their kids is by contributing to a 529 plan.  The benefits are:

  • All earnings grow tax free and are distributed tax free if used for qualified education expenses
  • 30 states offer full or partial deduction – Not MA
  • Owner can change beneficiaries and maintain control past college
  • Funding can vary as needs dictate
  • No age or income limits or annual contribution limits (up to $500,000 per beneficiary)

     

However, there are some definite drawbacks to college funding via 529 savings plans:

 

  • Lack of liquidity while you save – cashing it in results in a 10% penalty + income taxes
  • Single purpose vehicle for life
  • Market risk – Expected duration of 22-26 years (18 years of accumulation and 4-8 years utilization). Could see many down years with likelihood of 4 of those down years being greater than 10% – where you could lose money

In addition to the drawbacks mentioned above, there are other factors to keep in mind.  Off Campus room and board may not be fully covered by a 529 plan.  Not all tuition is considered qualified tuition and things like insurance, sporting events, parking, transportation and some administrative expenses are not covered.  Payments must occur in the same calendar year as withdrawals.  You must track expenses covered by 529 plans as you will get a 1099-Q and a 1098-T for each 529 that you will need to reconcile annually and file with your taxes.  Finally, during the withdrawal phase, you can’t move your money into cash so you expose the account to market corrections during the 4+ years in which you are paying tuition.

So what is the alternative?  The Ultimate 529 – An indexed universal life policy (IUL) used to fund the same needed payments.  An IUL provides tax free growth and distributions.  You decide when you use your money.  No restrictions on where you use your money or what it covers, with complete downside protection on investment risk.  You can fund as much or as little as you want and can change beneficiaries as needed.

A few other benefits of the Ultimate 529:  It is not reported to the IRS nor is it required on the FASFA application for financial aid.  It is one asset that can be utilized for all your kids’ purposes, such as college, first home, wedding, car, business start-up capital, or even retirement funding.

Insurance offers nearly all of the benefits of a traditional 529 Plan without all the headaches and limitations and with none of the investment risk.  It is a terrific asset for those looking to fund education goals but want to maintain flexibility and long term planning options.

 Feel free to call us  for a consultation.

Retirement in the Age of Rising Health Care Costs

/// Posted by Scott Tuxbury

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Most people make a concerted effort to plan and save for retirement, but many fail to account for the projected toll that health care costs will take on their mandatory expenses throughout their retirement. There is a common misconception that savings will be enough to cover living expenses while Medicare can cover health care related costs, but reality doesn’t always match the numbers, and Medicare only covers approximately 60%.  

Earlier this year, the Fidelity Retirement Health Care Cost Estimate found that an average retired couple, age 65 in 2018, would need around $280,000 saved (after taxes) just to cover health care expenses. That is a big ask for most couples, and both health care inflation and expected lifespan are continuing to increase at expedited rates to compound the problem.

Many economists question the long-term solvency of Social Security from which the eligibility into Medicare is derived, and rules and penalties around late enrollment are changing. Even with Medicare coverage in effect, it has been estimated that the average 65+ year-old retiree would pay around $5,000 a year in health care premiums and other uncovered expenses. Careful planning around the timing of retirement and method of payment to maintain expected quality of life is crucial.

As retirement approaches, questions around when to stop working, when to take Social Security, how to pay for health care, and how to generate cash flow from retirement assets come into play. The longer you can put off retirement, the more in deferred Social Security benefits you can claim later. If you remain working, carefully consider the cost and benefit comparison of work related coverage to Medicare options once eligible. Medicare can be very complicated as well, with the enrollment period lasting seven months, including the three months prior to your 65th birthday, but with later windows of enrollment after that.

How much coverage you’ll get, and the amount you will need to pay for health care costs outside of coverage varies greatly. Also important, will be which type of accounts you use to pay for health care, whether it be from a 401(k), IRA, HSA, or taxable accounts, as well as time and place of retirement and even gross income.

All of this is not to confuse or worry you, simply to paint a general overview of some of the factors that will help to determine the projected health care requirements of your retirement years. When starting to think about a plan for retirement, a financial advisor can help to navigate some of the intricacies and pitfalls ahead.

Consider asking your financial advisor some pointed questions about:

  • Social Security – projected solvency, what to expect, and best time to take benefits?
  • Health Care – how to prepare for rising costs?
  • Retirement Income – ways to make sure that money lasts for life?
  • Best Ways to Pay – recommendations for funds, accounts, vehicles that will support way of life and easy access to health care spending?
  • New Tax Bill – what is the impact of recent tax legislation on retirement accounts and health care payment methodology?

And as always, feel free to reach out to our dedicated wealth counselors for help in constructing a workable plan to manage distributions and control health care costs.

 

Have you Protected your Property, Employees, and Reputation?

/// Posted by Aviva Sapers

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Whether you’re the owner of a small business or involved in risk management for a national organization, the right Property and Casualty coverage can have a huge impact on protecting your business against unforeseen events. P&C Insurance exists to safeguard the buildings, vehicles, and people that make up your business structure, but P&C coverage can be as varied as the types of businesses out there. 

Once a year, we like to remind our current and prospective clients to work with their insurance broker to review the specifics of their P&C coverage. Property liability and bodily injury in the workplace can deal a devastating financial blow to  a business of any size. Staying on top of the unique components that make up your coverage will not only provide peace-of-mind for you and your employees, but also mitigate chances of reputational damage or other catastrophic setbacks to your business goals caused by injury, mishap, property damage, or negligence.

For smaller businesses, a Business Owner’s Policy (BOP) combines property coverage and general liability insurance into one blanket policy. BOPs have limited eligibility requirements based on number of employees, amount of revenue, low risk industry status, and smaller office/workspace.   

For larger commercial enterprises, a Commercial Package offers property and general liability insurance along with broader coverage options and higher policy limits. Commercial Packages can provide comprehensive coverage for businesses with more complex structures, a larger workforce, or larger business premises.. 

Additional protections can be added to fit to business needs around:

  • Commercial Auto
  • Marine Use
  • Freight Shipping
  • Umbrella Coverage
  • Workers Compensation
  • Customized Requirements

Regardless of your business size and structure, having a well-constructed P&C insurance policy is necessary to meet your unique needs and keep your business running smoothly. Contact us to review your existing policies and ensure that you are covered where you need to be, and are not spending money on elements where you don’t.

We look forward to hearing from you and tailoring your coverage to ensure proper risk management at the most competitive price.

 

Five Ideal Summer Action Items

/// Posted by Karen Van Voorhis

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Have you ever come home from a trip with a renewed perspective?  Sometimes the very activities designed to help us relax can also work to free the mind so we can more easily prioritize what needs to get done.  Here are five goals that can be great to achieve during the rest of the summer.  Click on each to learn more.

#1 Summer offers an ideal window during which to hire a tax preparer. If this is a task that has been gnawing at you, bite the bullet and do it! You’ll be thankful come next tax season that this necessary chore has been taken care of.  

#2 Summer is a time for re-evaluating whether you need long term care insurance, or at least learning more about it. Check out our long term care insurance page with a long term care shopper’s guide, tools, calculators and a webinar that walks you through all aspects of long term care insurance.  

#3 Summer is a time to take stock of whether you are fully engaged with your financial picture – or whether you have been letting your spouse or partner take the lead too often, for too long. Over the years, many women fall farther and farther behind in knowledge and familiarity with all things financial. 

#4 Summer is a good time to make sure your high school graduate has the right estate planning documents before heading off to college. To ensure students and their families are as prepared as possible for college life, it is necessary to set up an incapacity plan that includes a health care proxy, durable power of attorney and a HIPAA release.  

#5 Summer is a good time to evaluate your life insurance coverage. If you happen to have a lot of coverage through your group plan at work, take a look at how much you’re being taxed on that coverage.

Have a great summer and of course feel free to reach out if you need help with any of these initiatives.

For additional information or help:

 

Unclaimed Retirement Benefits

/// Posted by Scott Tuxbury

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Unclaimed Retirement Benefits: Do you have money lost in old 401(k)s and pensions? 

There has been a wave of reporting over the last few years around the vast sums of money in unclaimed accounts in the US. Millions of Americans have forgotten or are completely unaware of money in their name from government payouts, bank accounts, and stock sales. But, by far, the largest numbers are held in unclaimed 401(k) and pension plans from previous employers.

 

The nonprofit National Association of Unclaimed Property Administrators estimates that state and government treasuries are sitting on an excess of $33 billion in unclaimed assets. It seems like a good time for a reminder on how and where you might track down long-lost funded pensions or 401(k)s in your name.

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Termination Death Benefit for Large Corporations

/// Posted by Bill Sapers

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Termination Death Benefit for Large Corporations: How Not to Lose Benefits to Taxes, While Insuring Recovery of Accrued Liabilities

It is a hard, somewhat morbid, topic to face, but the death of business executives at large companies is a financially fraught time for both the company and family of the executive alike. The financial payout of termination benefits  at the death of an executive is taxed heavily, usually leaving between 30-35% of benefits after estate and income taxes to their heirs.

Having spent a lifetime analyzing such situations and dealing with them first hand, I can definitively say that I’ve found a better way for all parties to plan for such difficult moments. To first test my theory, I spent a number of months searching through the proxy statements of large corporations who have had executives die while employed. I calculated how much the company paid out in “death benefits” (salary, incentive bonuses, stock options, etc.) that were promised to the employee and now passed on to their estate. In most every case, the company paid large amounts, which were then taxed through the roof leaving only a small portion of what was promised. 

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Why Staying the Course is Helpful

/// Posted by Karen Van Voorhis

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I am not normally a fan of Jim Cramer, the loud, stock-picking host of CNBC’s “Mad Money.” That said, this week on the TODAY show he had a sensible reflection about the recent days’ market decline: “No one ever made a dime panicking.”

True!

Most advisors, including me, preach staying the course, having a long-term goal, and an asset allocation model. We caution against selling out, especially now. We talk about risk/reward tradeoff, and pride ourselves on educating investors that the stock markets reward us in the long run for taking on additional risk.

All of this is easier said than done, of course. Especially in volatile markets like we’re experiencing now, especially with the 2008-2009 stock market crash still looming large in our memories.

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Will Debt Spoil Too Many Retirements?

/// Posted by S&W

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What pre-retirees owe could compromise their future quality of life.

The key points of retirement planning are easily stated. Start saving and investing early in life. Save and invest consistently. Avoid drawing down your savings along the way. Another possible point for that list: pay off as much debt as you can before your “second act” begins.

Some baby boomers risk paying themselves last. Thanks to lingering mortgage, credit card, and student loan debt, they are challenged to make financial progress in the years before and after retiring.

More than 40% of households headed by people 65-74 shoulder home loan debt. That figure comes from the Federal Reserve’s Survey of Consumer Finances; the 2013 edition is the latest available. In 1992, less than 20% of Americans in this age group owed money on a mortgage. Some seniors see no real disadvantage in assuming and retiring with a mortgage; tax breaks are available, interest rates are low, and rather than pay cash for a home, they can arrange a loan and use their savings on other things. Money owed is still money owed, though, and owning a home free and clear in retirement is a great feeling.1 

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