"Start Thinking Long-Term"
Printed, April 27th, 1998
When Steve Kaufmann went to serve in Vietnam, he left behind happy, prosperous and healthy parents. Upon his return, he discovered the once sturdy couple, who had been looking forward to a comfortable retirement, had been devastated by Illness, economic adversity and a bleak future. While Steve was away, his father had been stricken with Alzheimer’s disease, and the family’s home and summer cottage were lost to foreclosure. His mother was left with a life of heartache and financial ruin. His parents had never purchased health or life insurance, and they didn’t have a will. *
Years later, Steve recalls the painful memory of watching helplessly as his family fell apart. Those same memories have shaped his resolve to help people prepare for the unexpected. As a successful attorney in Luray, VA., and member of the American Society of Chartered Life Underwriters (CLU) &Chartered Life Financial Consultant (ChFC), Steve travels the nation with his wife and legal partner, Bonnie. Their mission: To help families protect their, assets from the devastation of illness, disability and sudden death.
Steve Kaufmann’s family experience, though tragic, is not unusual. Far too many American families work hard to accumulate assets and plan for a comfortable retirement, only to see their efforts unravel in years later. While most people see the need to buy insurance coverage for their home, car and health, they don’t view coverage that protects their income and livelihood as a necessity. This special section takes a look at these important issues and provides helpful information about protecting your financial security in years ahead.
“Think of life insurance as a plan for your life, not your death,”says David Woods, CLU, ChFC, president of the Life and Health Insurance Foundation for Education (LIFE) in Washington, DC Along with disability income coverage, life insurance is the cornerstone of a sound financial plan. So, be sure you have enough coverage t protect your family and/or business from financial ruin- before you begin to save an invest for the future.
More than half of Americans are under insured, and 24 percent of all households have no life insurance, according to the American Council of Life Insurance.
Who are America’s under insured? Predominantly, they’re women-married working women, single working mothers and women who stay at home to care for children. In 1997, men accounted for 63 percent of the new life insurance policies compared to just 37 percent for women. Moreover, the average size policy for a man was$306,900 versus $165,00 for a women for a woman, reports LIMRA International, an insurance marketing and research association in Windsor, Conn.
Demystifying Life Insurance
The wide variety of life insurance products
available today can be confusing and may even prevent some people from
buying the protection they need. The two most frequently asked life insurance
questions are: How much coverage do I need? And, what type of policy best
meets this need?
How much coverage you need depends on why you’re buying insurance—or continuing to pay premiums for a policy you already own. For most people, life insurance’s primary purpose is to make sure there’s enough income for the family in the event of a wage earner’s premature death. Other practical uses for life insurance include paying debts and estate taxes, funding a child’s college education or supplementing other retirement income sources.
• Non-guaranteed or current interest.
A policy’s performance also is based on the following non-guaranteed risk elements: mortality experience, which is based on statistical tables; investment performance earned by the insurance company; policy lapse rates, or the number of policyholders who drop their insurance; and company expenses, which include the cost of keeping the policy in effect. Insurance illustrations should not be used to compare two or more life insurance policies.
If you are willing to assume more risk in return for earning higher
interest, says Joseph Ramenda, JD, CPA CLU, ChFC, of Tampa, Fla., you may
be in the market for variable life or variable universal life insurance.
Both these policy types build cash value over the years. Here’s how they
work. Variable life insurance not only provides all the benefits
of its traditional counterpart, whole life insurance, but also offers an
investment component. As with whole life, variable life gives you the tax-deferred
build-up of the policy’s cash value, as well as an income tax-free death
benefit for your family. As an added benefit, a variable policy allows
you to select where your premium dollars are invested. The insurance company
has separate investment accounts with varying rates of return,* Some variable
policies guarantee that death benefits cannot fall below a certain minimum,
but investment performance will raise and lower the policy’s cash value
In addition, you may add a policy provision or rider that gives the option to purchase more insurance without a medical exam or evidence of insurability. Variable universal life (VUL) policies combine the best features of several different policy types, according to Ben Baldwin, CLU, ChFC, CFP, of North-brook,111. With a VUL policy you get:
(1)the death-benefit value of term insurance; (2) flexible premium payments that fluctuate according to market conditions and are subject to certain minimums and maximums; and (3) investment-account flexibility of variable life. Be sure to keep putting enough money into the policy so it doesn’t lapse.
Policy replacement may sound attractive as a way to save money on the life insurance coverage you already have or to get more coverage for what you’re already paying, And while sometimes it may be to your advantage, most of the time it isn’t.
Term insurance and long-term care insurance are two types of insurance policies issued by life insurance companies that can sometimes be improved. However, when replacing a policy, watch out for important “incontestability” provisions that you may lose for as long as two years with a new policy.
If your agent suggests replacement coverage, ask the agent to complete
the American Society of CLU & ChFC’s Replacement Questionnaire (RQ).
For a free copy, call toll-free1-888-243-2258. Have the agent review the
RQ responses with you, and ask for clarification if something doesn’t make
“President Clinton’s proposed 1999 budget includes a tax provision affecting
variable life insurance and variable annuities. For more information, consult
your insurance and tax professionals
Income Objective Chart
How much would your family need? The following are typical income objectives that may permit a family to retain their current lifestyle after a wage earner’s death. * Assumptions: The home mortgage is paid or a rent fund has been established, and educational expenses are provided for separately.
Annul Gross Income Percentage of Gross Income
For a free insurance needs worksheet, visit the American Society of CLU & ChFC’s Web site: http://www.asclu.org Or write to: Life insurance Needs Worksheet, American Society of CLU & ChFC, 270 S. Bryn Mawr Ave., Bryn Mawr, PA 19010 - 2195
A Plan for Life cont’d
• If you decide to surrender or reduce the value of the policy you now own and replace it with other insurance, be sure that (a) the agent making the proposal puts it in writing; (b) you pass any required medical examination; and (c) your new policy is in force before you cancel the old one.
Gary Smith, CLU, ChFC, of Syracuse, NY, has seen the same scenario played out many times. As a financial adviser, he’s heard clients tell him that buying disability income (Dl) insurance is a waste of money. Clients often rationalize: “I’m healthy, I feel fine, I don’t need to spend the money.” One of Smith’s clients, Tony, a successful realtor, applied this same logic, but reluctantly purchased an individual Dl policy anyway. A few winters ago, Tony began power walking to lose some weight. He slipped and fell on a patch of ice, shattering his knee cap. His ability to work was severely limited and his recovery was slow and painful. When Tony called Gary Smith from the hospital the day after his emergency knee surgery, both men were relieved, knowing they had done the right thing. Tony’s Dl coverage provided $3,000 per month tax free, replacing his lost income. The coverage helped him focus on getting well, not on his finances.
The chances of suffering a disability— an illness or injury lasting
more than three months—are three times greater than dying before age 65,
according to Edward H. Miller, Ill, CLU, ChFC, the American Society’s president.
Consider this: If you earn an income, you need Dl coverage. This type of
insurance is paycheck protection in case you suffer an injury or illness
that prevents you from working.
Many employers provide some group disability coverage, but it’s
typically not enough to cover current living expenses. While Social Security
might pay something, it’s prudent to buy an individual Dl policy that pays
70 percent of your current income.
Disability income insurance is paycheck protection in case you suffer
an injury or illness that prevents you from working.
Q: What’s the difference between whole life, term, and convertible term insurance?
A: Whole life insurance, the most traditional form of insurance, can
be kept in force for as long as you live. The face amount (the death benefit)
and the premium (the amount you pay for protection each year) are fixed
at the time you buy your policy and stay the same even as you age. The
policy’s “cash value” grows at a fixed rate of return specified ’in the
policy and can be used as collateral to borrow against your policy. While
permanent insurance is usually recommended as the core of an insurance
program, term insurance is good for people who need coverage for short
periods of time—younger families, say, who need large amounts of protection
for one year, five years or more. Lower premiums at younger ages increase
as policyholders age and renew their policies. Benefits are paid only if
death occurs during the period covered. If you stop paying premiums, the
insurance stops. Term policies generally have no cash value and no residual
rights if the policy is canceled. “Convertible” term policies can be exchanged
for permanent insurance without a medical examination, but with a higher
Q: By using medical tests are insurers trying to
A: Because some health conditions are easily managed through proper
medication, therapy or lifestyle changes, medical information sometimes
makes it possible for insurers to cover applicants who might not otherwise
be insurable. Overall, only 4 percent of individual life insurance applications
Q:As a single person, do I need insurance?
A: As a single wage person, you need to consider these options:(1) Disability income insurance—Especially Important for self-supporting singles without sizable assets, this can replace a good part of the income you would lose if you were unable to work because of accident or illness. If you don’t have long-term disability coverage at work, ask your life insurance agent about an individual policy designed to replace atleast 70 percent of your income. (2) Health insurance—If you don’t have on-the-job coverage, an individual policy is your first line of defense against ever-escalating medical and hospital costs. You can keep premium costs down by electing a large deductible, thereby “self-insuring” as much as you can afford. (3) Life insurance—Even if you have no dependents now, you may later. If you buy now when you are younger and healthier, you can “lock in” lowest-cost coverage, including guaranteed insurability.
Q. How do variable and fixed annuities work?*
A: Annuities are long-term investments that provide • retirement income to individuals without pensions, that supplement a pensioner’s income or build assets over a more limited period. With variable annuities, the value varies according to the worth of the insurer’s investments, such as bonds and common stock. Payments can be fixed or build assets over a more limited period. Under a fixed annuity (also called a fixed-dollar annuity), money is invested in assets with fixed rates of return and the owner is guaranteed a fixed payment every month. Because annuities are designed to be held for many years, the interest in an annuity builds up on a tax-deferred basis, and purchasers are not taxed until regular payments begin after retirement. Early withdrawals, however, result in substantial penalties in addition to federal taxes.
Q: How do accelerated death benefits work?
A: More than 200 insurers now offer this “living benefits” option to ease the financial burdens of the seriously ill or incapacitated. It allows policyholders to receive all Or part of the policy’s proceeds prior to death under certain circumstances, including the need for long-term care and confinement to a nursing home. Because payments may affect tax status and Medicare eligibility, and will be deducted from the overall benefits paid later to beneficiaries, policyholders should thoroughly investigate these options prior to needing them.
Source: National Association of Life Underwriters, Washington, DC
*President Clinton’s proposed 1999 budget includes a tax pro vision ~ affecting variable life insurance and variable annuities. For more in formation, consult your insurance and tax professional.
Start Thinking LONG-TERM
Nearly 43 percent of American who are currently age 65 and older will enter a nursing home, according to the US Department of Health and Human Services. If you are a woman, your chance of entering a nursing home after age 65 is 50 percent greater than a man’s.
Consider this fact: About one out of every four Americans will stay in a nursing home for more than a year, and one in 10 will stay five years or longer. And, long-term-care costs continue to rise at about 6 percent a year. A year in a nursing home is estimated to cost $46,000, according to the American Society of CLU& ChFC. In large metropolitan areas, the cost can easily be double this amount.
Caring for a parent or other relative at home is also costly, averaging more than $1 000 per month. A prolonged illness or the daily effects of Alzheimer’s disease, stroke and even arthritis could cause a lifetime of savings to disappear. Long-term care (LTC) insurance protects your assets during your retirement years, just as disability insurance protects your income during your working years. Don’t fall prey to this common misconception: You don’t have to worry about long term care costs because Medicare will pick up the tab. Wrong. Generally, neither Medicare, private Medicare supplement insurance, nor the major medical insurance you have on your own or though your employer will pay for long-term care.
Medicaid, for those who qualify, will pay for long-term care expenses,
but only in Medicaid-approved facilities. Medicaid, which is administered
by your state, requires its recipients to be impoverished; it’s a safety
net for the poor. Families that used to manipulate finances or “spend
down” assets in order to qualify their aged parents for Medicaid benefits
are now barred from doing so. Criminal sanctions may even be imposed on
those who attempt to transfer property to qualify, according to the Journal
of the American Society of CLU & ChFC. It’s less expensive to buy
a long-term care policy when you are younger, say before age 50 or 60.
With more people living well into their 80s and 90s these days, it’s
no surprise that a common financial goal is not outliving savings and investments
during retirement. Another major concern is the exorbitant long-term care
expenses associated with aging. Many baby boomer families already find
themselves uncomfortably “sandwiched” between the demanding health care,
emotional and financial needs of their children and their aging parents.
Are You Covered?
? Ask your agent if the policy is “qualified” under the Health and Portability and Accountability Act of 1996. In order for LTC premiums and benefits to be tax deductible, the policy must be “qualified” under the law.
? Is the policy guaranteed renewable for life, and does the policy cover all levels of care, including skilled, intermediate, custodial and home health care?
? What are the set of conditions, called “benefit triggers,” under which the insured will be eligible f or benefits? Most policies do not require hospitalization prior to entering a nursing home.
? Does the policy explicitly cover Alzheimer’s disease and other senile dementia?
? What protection does the policy offer against the effects of inflation?
? What is the duration of policy benefits—from two to six years or a lifetime benefit for nursing home care?
? What is the policy’s elimination or waiting period before benefits begin?
? Selecting a longer waiting period will lower your premiums.
? Does the policy adequately cover the cost of long-term care where you live? LTC costs vary depending on geographic location.
? What is the term of the policy’s preexisting clause? There should
be no more than a six-month exclusion for a preexisting condition.
Recognizing the unique retirement planning needs of an aging population, the insurance industry developed a product, called an annuity, which can have either a fixed or variable rate. Annuities offer investors both a death benefit and the ability to accumulate money for retirement, with taxes deferred until the money is withdrawn. Unlike insurance, which is a hedge against dying too soon, annuities are designed to provide investors with a lifetime income stream. Unlike fixed annuities, which pay regular amounts, the value of variable annuities fluctuates. A variable annuity allows you to put money in a variety of investment vehicles (sub-accounts), including stocks and bonds or a combination thereof. Variable annuities give you the option to move among the sub-accounts in the contract you buy,*
With both fixed and variable annuities, withdrawals prior to age 59 ½ may incur a 10 percent IRS penalty.
While it’s true that some expenses will decrease during retirement, perhaps even your tax rate, higher medical costs could offset these estimated savings. Expect to tap money from employer-sponsored retirement plans and personal savings for as much as 85 percent of your total retirement income. Social Security, most experts predict, may provide on
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