Here are some basic features of the different types of annuities and life insurance plans to consider before investing:
Term Life Insurance
- Purchased to provide income for dependent in the event of death.
- Usually purchased from individuals 25-50 years old.
- It does not accumulate money tax deferred.
- Pays out when you die typically in one lump sum.
Whole Life Insurance
- Purchased to provide income for dependents in the event of death as well as to provide financial planning needs.
- Usually purchased from individuals 30-60 years old.
- Accumulates tax deferred.
- Pays out in three different ways depending on circumstances: death, borrow against the policy, or surrender the policy.
Deferred Annuities
- Purchased to invest and contribute tax deferred.
- Buyers typically 40-65 years old.
- Accumulates tax deferred.
- Death benefit pay out can be a single sum or monthly withdrawals to give a steady cash flow.
Immediate Annuities
- Purchased to give coverage against outliving retirement income.
- Buyers typically 55-80.
- Accumulates tax deferred but only if you have early payout.
- Pay out is for a period of time but it stops when the annuitant expires, however payments will continue at death if the annuity has an option of "guaranteed period" and it hasn't expired when the annuitant expires.
Pensions were originally set up to reward loyal employees
for the fruits of their labor and were once viewed as guarantees. However, since the most recent economic
downturn, many pensions that were once viewed as invincible are now being
questioned about their solvency. Due to
uncertainties pensions are proposing dramatic changes that will impact current
and retired employees.
In particular, the State Teachers Retirement System of Ohio has
proposed several changes to insure they remain solvent. The current system allows for educators to
retire after 30 years of service with unreduced benefits, which they are
looking to increase the eligibility to retire without unreduced benefits to 35
years of service. They are also looking
to increase the employee and employer contributions to the system by 2.5% of
employees’ annual income, which employees currently contribute 10% towards STRS
and employers contribute 14% of employees’ annual income. Another possible change is to increase the
final average salary from the three highest years to the five highest years of
service. In addition, they are looking
to reduce the incentive for employees to work more than 30 years by making the
annual increase a flat 2.5% instead of increasing 1% thereafter, which
decreases the percentage to 78.5% from 88.5% with 35 years of service.
Additionally, they
are not only looking to change existing employees but possibly retired
employees. For example they are looking
to decrease the cost of living adjustment, which is currently 3% simple
inflation and they are looking to reduce it to 2% over a phase in period. In addition, even though health care has not
been discussed to be reduced or eliminated for retired employees, it is a
concern that many current and retired employees worry about since it is an
elective benefit.
These proposed changes are a reflection of the financial
stress on current pension plans. In
order for these systems to remain viable and solvent the systems are going to
have to make fundamental changes that will have a direct impact on current and
retired employees. Also, these systems
could pass part of the burden onto employers which may indirectly be passed off
to consumers or tax payers.
The majority of educators have heard of the popular 403B retirement savings plan,
but many have not heard of a 457 retirement savings plan. The
457 has several features that make it more attractive than a 403B while still
having the advantage of tax deferral.
Before discussing the difference between the two vehicles it is
important to discuss the similarities of the vehicles.
Both retirement vehicles are pretax and have the same
current contribution limits of $16,500 per year with a $5,500 catch provision
for participants 50 or older. In
addition, they both require mandatory distributions at age 70 ½, and typically
they both allow loans for the account holders.
In addition, they both have the same portability to other vehicles,
unless the plan document restricts it.
Even though there are similarities between the two plans
they also have several differences. One
of the main differences is between the restrictions the employee has on taking
distributions. The 403B distributions
cannot begin until the employee is 59 ½ and if the employee takes a withdrawal
they will encounter a 10% penalty for early withdrawal from the government, and
the 457 allows the employee access once the employee separates from
service. This is a crucial difference
since many employees have the opportunity to retire before they are 59 ½. In addition, the 457 is more flexible than a
403B with gaining access to the account value when they are still working. The guidelines state that employees can take
distributions for any unforeseen reason.
In conclusion, 403B and 457 are both great vehicles that
have pretax savings for employees.
However, when comparing the two vehicles the 457 is often viewed more
attractive for employees due to its flexibility to take contributions. With 403Bs limitations 457 should continue to
gain recognition and may even surpass 403Bs popularity.
People often ask what Final Expense Insurance is and do they need it. Final Expense is simply another name for a
whole life insurance product generally marketed to people ages 50 -85. Final Expense Insurance generally has
death benefits between $5000 and $50,000. Because of the lower death benefits, companies are able to offer these products with limited or no underwriting at all. This means two things. Easier to get the insurance but, higher prices for the coverage.
With many people losing their jobs and consequently their life insurance benefits, there is certainly a big market for Final Expense Coverage. The best advice: If your health is good look into a fully underwritten whole life policy first. You may have to answer a few more questions and maybe even take a physical, but you could save big dollars on your yearly costs. If your health is questionable or you just need a small policy for burial, than Final Expense Coverage may suit your needs.
Bottom line is when buying a life insurance policy compare pricing for similar products, evaluate what you are buying it for and take your time to make the right decision.
For many of us, one of our greatest fears is that we'll need long term care and be unable to afford it. When our assets run out, Medicaid (but not Medicare) can be a source of funds, but at the expense of almost everything we've worked so hard to build. Long Term Care insurance can help provide those funds, and a measure of financial independence.
If, of course, the company through which it was purchased is still around.
For a number of years, Penn Treaty (and its subsidiaries)marketed long term care insurance plans around the country, writing thousands of policies for folks who trusted that the company would be there to pay their claims. Unfortunately, Penn Treaty became over extended, and has been taken over ("put in rehabilitation"in insure-speak) by various state departments of insurance.
And it gets a bit more complicated still: Penn Treaty policies were actually underwritten and issued by both Penn Treaty Network America Insurance Company (PTNA) and the American Network Insurance Company(ANIC). Both of these carriers are now undergoing rehabilitation.
As an Ohio-based blogger, I've been asked by Insurance and Annuities' John Power to report on the efforts undertaken by the Buckeye State's commissioner of insurance, Mary Jo Hudson. Ohio, like all states, has a Life and Health Guaranty Fund which functions much like the FDIC; that is, when a carrier becomes insolvent (or looks to be heading that way), the fund steps in to make whatever arrangements are necessary to protect the policy holders. In this case, since PTNA and ANIC are Pennsylvania-domiciled carriers, that state's insurance department has taken the lead role.
According to the Ohio Insurance Department, there are just shy of 4,000 Ohio PTNA policy holders, and about 3 dozen who own ANIC policies.The Pennsylvania Department has asked that the companies be liquidated, and their assets sold off, and they'll need to find a "home" for the companies' policy holders. This will involve selling the books of business to another carrier (or carriers). The Ohio Guaranty Fund can assess other carriers to cover policy holder claims, up to certain limits. In Ohio, this means that claims of up to $100,000 (which could be several years' worth of long term care) are covered by the Fund. According to the Ohio Department of Insurance,"Claims not covered by a Guaranty Association, including any portion exceeding the Guaranty Association’s statutory limit, become claims against the estate of the company and will be paid to the extent funds are available. Policy holder claims have priority over most other claimants."
While this may not be the best news, it represents something very important: life insurance policyholders can count on the states' guaranty funds to protect them in the rare instances that a carrier becomes insolvent. In this case, it appears that the funds, and the insurance departments are doing everything they can to protect the interests of the folks who bought these policies, and counted on them to help pay for this crucial and expensive type of claim.
For more information, I strongly suggest clicking here for a bird's-eye view.
[Henry Stern, LUTCF, CBC is an independent insurance agenti n Dayton, OH. A licensed Continuing Education instructor for Ohio, Kentucky and Indiana, he has over 25 years of experience in “the biz.” He blogs everyday (or so it seems) at InsureBlog.]
If it sounds too good to be true it generally is, but not in the case of
Return of Premium Life Insurance.
Life Insurance is a risk. If the insured dies someone is paid the death benefit. But what happens if the insured lives? In the case of term insurance policies, the policy ends and nothing is paid out at the end of a specified term (generally 10, 15, 20, 25 or 30 year periods). However there is a product that takes the financial risk out of buying a term life policy, called Return of Premium
Term Life.
What is Return of Premium (ROP) Term Life? Simply stated it is a policy that guarantees to pay the owner back all of the premiums paid into the policy at the end of the specified term. An example would be owning a 20 year ROP term policy and paying a premium of $500.00/year. At the end of the 20 year term the owner will receive a check for $10,000 (20 x $500.00) and the policy expires. Under a traditional term policy the same owner may pay less premiums per year but will not receive anything at the expiration of the term.
It is easy to see that this kind of product makes sense if you apply the above example to leaving that same $500.00 in a low interest checking account vs. paying into a ROP term policy. Many people look at ROP policies as a forced savings where the protection (death benefit) is more valuable than the small amount they would have earned at low interest rates.
The only risk to an ROP term policy is that the owner discontinues payments prior to the expiration of the term. In that case they would forfeit all, or the majority of, the premium payments they have made. So if you buy a ROP term policy plan on keeping it for the entire term and at the end you will be very happy.
Life insurance
over age 50 and even life insurance over age 60 is available for those who have
passed their prime and still desire coverage. It is good to invest in life insurance coverage so that
loved ones, as well as the insured, are taken care of in the event that
something happens. Being past one's prime does not have to eliminate the
chances of finding coverage. Plan and be responsible when it comes to getting
affairs in order and caring for the family. Life insurance companies can help
establish these guidelines regardless of the age of the insured or the
particular situation. For example, marriage in the later years and suddenly
having to plan for new loved ones. If not sure what those benefits are or could
be, arrange to talk with a representative who can share the differences of
coverage for the different stages of aging and what it all entails.
Senior citizens and those owning their own businesses, will probably want to
get affairs in order especially as years advance. When it comes to writing out
a will, it is a good thing to have everything sorted out. The same is true for
life insurance. Make sure there is proper coverage for life insurance over age
50, and even life insurance over age 60. Getting these affairs in order will
help the family be better prepared financially whenever passing occurs. Become
educated about the policies available for any situation. Having coverage is
essential to all as Social Security, if available, does not pay a lot to cover
even just a burial, let alone debts and financial obligations that might be
left behind.
An adult, whose parents are reaching their golden years, can look into what is
available for them. Get information on the types of plans parents can receive
at their age. What sort of benefits do they get from life insurance over age
50? What about benefits from life insurance over age 60? Is there a cost
difference each month, depending on which policy chosen? Think about it and get
together with parents to discuss which type of coverage would be ideal. Set up an
appointment to talk with companies who specialize in providing life insurance
and assorted plans. Ask them any questions there may be. The more insight had
ahead of time will probably save time and heartache later.
Learn more about annuities
To put it simply, life
insurance protects those who depend on your paycheck.
If you die prematurely, sooner then you’re suppose to, that life insurance
provides your dependents with ongoing income to replace yours, until (or
unless) they can live comfortably without it. It can also provide a timely
emergency fund for medical, legal, and funeral costs, should family savings not
be enough to cover them.
Life insurance
is not a good way to strike it
rich for "pennies on the dollar." It's not the surest way to leave a life of luxury for future
generations of your clan. In fact, even though some life insurance policies are
combined with a savings plan, the savings plan is essentially independent. The
life insurance component of these cash value policies retains its fundamental
purpose: income protection for your dependents after you die.
Given
this simple definition of life insurance, it should be easy to decide whether
you need it. Start by imagining yourself gone tomorrow. (We know, it's morbid,
but bear with us.) What would the impact be?
Could
your family afford the funeral expenses? Have you left a complicated will or
perhaps no will at all? More importantly, what about your spouse, children, and
other dependents? Are they counting on your paycheck in the years ahead to
cover basic needs and/or future savings goals? If you are the primary caregiver
to dependents, what will it cost to replace you with a paid provider, and for
how long?
If you
are single, or one-half of a two-income, no-dependents household, you probably
won't need much life insurance, if any. With a little planning, you can
establish a low-risk savings fund to cover funeral costs, and invest the money
you would have paid for insurance premiums. You may also want to obtain
coverage that will pay the estate taxes on a huge estate so heirs don't have to
liquidate assets at unfavorable prices to pay them. If you are right now a
successful investor, then you may be a prime candidate for such life insurance.
These issues can get complicated, and may be best left to a discussion with an
estate planning attorney.
On the
other end of the spectrum, if you are the sole provider for a large family with
little savings, you are likely to need substantial life insurance. After basic
food and housing is covered, life insurance premiums are likely to be next in
line in terms of priority, perhaps even ahead of auto loan and credit card
payments, and certainly ahead of retirement savings.
Learn more about annuities
For seniors with
declining health and limited finances, a cash payout can be a godsend. Life settlements may be the answer, but
there are a number of factors to consider before you sell your life insurance policy.
A life settlement
or "senior settlement" is where you sell your unwanted or unneeded
life insurance policy to a third party, which in most cases is an investment
company.
A life settlement
allows you to receive a cash payout in exchange for your insurance policy while
you are still alive, it eliminates premium payments, and it accommodates the
changing financial needs of your dependents that may no longer rely on you for
financial support. The settlement buyer ultimately receives the death benefit
when you die.
Life settlements
have raised many questions in the insurance industry, including concerns about
possible insurance and investment fraud. Several insurance companies and trade
groups warn policyholders about the consequences of selling their policies to
third parties.
Unlike viatical settlements, which are sales of
policies by those who are terminally ill, life settlements are sales of
policies by folks who have impaired health.
Before you enter
into a life settlement, it's important to determine whether selling your life
insurance policy is your best option.
A life settlement
investment company buys life insurance policies by paying a percentage of the
face value to the sellers.
From the
investment company's perspective, the shorter your life expectancy, the greater
the potential profit— and the higher the percentage of your death benefit you
should receive as a life settlement. You generally must be 65 or older to
receive a life settlement and your life expectancy must be two to 18 years;
some life settlement buyers will purchase policies only from sellers age 70 and
over.
Here are some main
reasons policyholders consider selling:
- The policy is simply
no longer needed.
- Beneficiaries don't
need the death benefit.
- The insurance premiums have
become unaffordable.
Make sure to check
out a potential buyer as much as possible. A good place to start would be your
state's department of insurance.
How it works
A potential buyer
must calculate the possible life expectancy of the seller in order to make an
appropriate offer. You'll be asked to sign an authorization to release your
medical and other personal information; this is good time to understand the
life settlement company's privacy practices and how it shares information with
others.
Among the factors
that are used to calculate the buying price are: the death benefit amount
(generally no less than $100,000 and usually higher than $300,000); the age and
health of the insured person; the type of policy (whole, universal or term);
the rating of the insurer that issued the policy; and the premiums needed to
keep the policy in force.
When the investor
buys the policy, it becomes the new policy owner, pays all future premiums and
collects the entire death benefit when the seller dies. The settlement company
will likely set aside the estimated future premium payments in an escrow
account.
The buyer takes on
a certain financial risk: They don't know exactly when you are going to die and
they are paying the premiums until you do. Life settlement transactions are
typically handled by investment firms and sometimes bundled into securities.
Reputable life
settlement brokers will keep your personal information as a confidential
portfolio asset.
Life settlement
companies use various methods to determine when an insured dies so that they
can submit the claim. Some firms periodically send a postcard asking you to
send it back. If the postcard is not returned, the company investigates
further. Others designate a third party (a lawyer, for example) to stay in
touch with you.
Look before you
sign
While life
settlements are a good option for some, the insurance industry warns policyholders
to be careful. The American Council of Life Insurers (ACLI), a Washington
D.C.-based trade group, points out beneficiaries will lose valuable insurance
benefits if the policies are sold to an investor. Also, if someone sells his
life insurance policy and his health is less than optimal, future insurance
coverage might not be attainable.
Life
insurance companies generally want
customers to examine all options available with their current policies before they
decide to sell. In addition, anyone considering selling a policy should consult
a financial planner or attorney before signing a contract, plus their state
insurance department to find out applicable laws.
Beware of schemes
The life
settlement business is commonly regulated by the state's insurance department
or the securities commissioner, but it is still good practice to ask the
company if it's licensed. If you're not using a broker to shop around your
policy, negotiate with several provider firms to determine the market value of
your policy.
Avoid these
well-known schemes if you are considering selling your life policy:
"Clean sheeting."
This is when someone partners with an investment firm to "doctor"
their medical report to improve their health on paper and then buys a life
insurance policy they otherwise would not have been able to get, for the
purpose of selling it to an investor.
The
"stranger-owned life insurance" (STOLI) scheme. In this arrangement,
a speculator convinces a senior citizen to buy a life insurance policy for the
sole purpose of transferring the policy to the speculator shortly after the
sale. Seniors may get a sales pitch about "free life insurance" or
other financial incentives. In response we developed model legislation that
calls for a five-year moratorium on the sale of a life policy after it has been
purchased. Many states such as Arizona
prohibit the sale of STOLI policies.
There is an
important distinction between legitimate life settlements and STOLI: "We
understand that people who purchased life insurance to protect their families
may want to investigate the possibility of a life settlement after their
coverage needs cease. The real problem is with manufactured sales, where elders
in particular are induced to secure coverage so that third parties can greatly
profit from their demise."
"Flipping."
Although not a scamper se, the flipping of life insurance policies has been
receiving attention."Flipping" is when a person — often someone with
substantial financial resources — buys a large face value policy for the
purpose of quickly selling it for profit. TV host Larry King sued an insurance
brokerage over his life settlements after experiencing major flipper's remorse.
What to do before
you sell
Consider these
tips when selling your life insurance policy:
- Comparison shop by
getting quotes from several companies.
- Find out how much
tax you'll pay on the proceeds from selling your policy.
- Find out if any of
your creditors could claim your policy benefit.
- Read the privacy
notice outlining who will receive your personal information when the buyer
wants to periodically check on your health.
- Make sure all life
settlement application forms are completed accurately, especially your
medical history.
- Make certain you
have the right to change your mind after you receive the proceeds. Ask how
many days you're allowed to reconsider.
Life insurance medical exams are really quite routine. But
if you want to avoid a medical
exam at all costs, you could buy a simplified issue
policy, which requires only that you answer a few medical questions, or a
guaranteed issue policy, which requires neither an exam nor questions.
Keep in
mind, though, that if you're in general good health, or even with a history of
some health issues, you'll likely get a much better rate, amount of money your
beneficiaries will receive at your death, by buying the underwritten policy
that requires a medical exam. That's because simplified issue and guaranteed
issue policy rates assume you are a riskier applicant.