Category Archives: Insurance

Variable-annuity, with Guaranteed Lifetime Withdrawal Benefit

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Guaranteed Lifetime Withdrawal Benefit (GLWB) is not a stand-alone product but is a rider attached to a variable annuity insurance product.

How does it work?

The GLWB allows the annuitant to withdraw a fixed percentage of the total annuity premiums each year regardless of market performance. The income payments are guaranteed for life.

Example.

Bob, the annuitant, buys a variable annuity for $200,000 with a GLWB rider that pays 3% annually. The stock market had declined sharply during the past 10 years and the annuity is now worth $150,000. Bob will receive $6,000 per year for the remainder of his life ($200k x 3%). The guarantee is computed on the initial investment ($200,000) and not on the declined portfolio value ($150,000).

This product sounds like a winner. The annuitant receives downside protection through lifetime income and upside potential based on market performance. Not so fast. While the guarantees is favorable in a bear market by shifting the risk from the annuitant to the underwriter, this product comes with a cost.

The problems.

  • The income received will not protect the annuitant against inflation.
  • The fee structures is frequently complicated and expensive.

When does this product make sense?

  • It permits the retirees to have a peace of mind without worrying about stock market conditions.
  • It is helpful if the retirees have limited access to other guaranteed income sources (e.g. corporate defined-benefit plan).

When to avoid this product?

  • If the retirees have other guaranteed income sources (e.g. corporate defined-benefit plan).
  • If one expects inflation is to rise in the near future.

Should You Create Your Own Fixed Income Annuities?

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“The wise man bridges the gap by laying out the path by means of which he can get from where he is to where he wants to go.” — j.p. morgan

Today fewer employers are offering defined benefit plans to their employees.  As an alternative retirees are purchasing annuities that would provide them with a steady stream of income into their retirement years.  Insurance companies have responded to the retiree’s needs with various annuity products.  In recent years annuities continue to grow in popularity.  According to LIMRA, the Windsor, CT-based financial services research firm, the sale of all annuity products reached $122.4 billion for the six months through 6/30/2011, an increase of 13% (a).

What are types of annuity?

Annuities can be segregated into variable annuities and fixed annuities.  With fixed annuities the investors are offered a lower return as the insurance companies assume the investment risk.  With variable annuities the investors assume the risk an can invest in a variety of investments with the expectation of achieving superior returns.

Fixed annuities provide guaranteed regular payments to the policyholder over the term of the contract.  These contracts can either start immediately or deferred to a future date.  Retirees are using annuity payouts to supplement Social Security and cover basic expenses.

Advantages and disadvantages?

With a deferred annuity the investor lose control of his assets once he hands over the money to the insurance company.  Should the investor change his mind there could be substantial surrender charges.

With an immediate annuity the investor give up control of his money.  Most immediate annuity provide the investor with income for life.  Once the investor dies, nothing is left to the heirs.

There are immediate annuities that can provide income to heirs.  Such policies are more expensive resulting in a smaller income to the investor during his lifetime.

Create your own Fixed Annuities.

To save on high commission fees, you can create your own fixed annuities.

In the charts below are example computations using an initial investment of $100,000.  I used the 10 year Treasurys for investment in the fixed income portion.  This instrument currently pays an annual yield of 2.5% (b).  I use the SPY ETF to mimic investment in the S&P 500.

In exhibit A, I allocated $79,250 to 10 year Treasurys with the balance going to the SPY ETF.  Should the market declines 13% per year (twice the gain of 6.7%), the investor have protected his initial investment after 5 years.  Should the market stay flat the investor’s $100k investment grows by 10.4% to $110,414.  Should the market increase by 6.7% per year (c) the investor’s $100k investment grows by 18.4% to $118,361.  In the three scenarios, the Treasurys provide a guaranteed return.  And you, the investor, maintains the assets, not the insurance company,

In exhibit B, I show a 100% allocation to 10 year Treasurys.  If the investor can achieve a rate of 2.63% for the 20 year investment period, he should be able to withdrawal $6,414 per year over twenty years.

Should you buy a fixed income annuity or should you create your own fixed annuity?  Call us at 415.967.EDGE or e-mail us at paulsid@financialedge.net today and let us crunch out the answer for you.

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References:
(a) http://www.financial-planning.com/news/variable-annuity-sales-surge-second-quarter-2674713-1.html?portal=annuities&id=2674713&sponsor_info=1238
(b) http://www.bankrate.com/rates/interest-rates/10-year-treasury-bill.aspx
(c) http://seekingalpha.com/article/270171-jeremy-siegel-finds-stocks-currently-fair-to-undervalued-is-he-right

Types of insurance

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Life
Health
- Health
- Dental/ Vision
- Long-Term Care
Homeowner’s
Property/ Casualty
Unemployment, Disability
Annuity *

* Annuities are not generally classify as an insurance.
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Definition.

Insurance is a form of risk management primarily used to hedge 
against the risk of a contingentor peril. Insurance is defined as 
the equitable transfer of the risk of a loss by a specified 
contingency or peril, from one party to another, in exchange 
for payment (premium).

Peril is the cause of a loss.  Example of perils include: 
earthquake, fire, theft, windstorm, and hail.

Shopping for health care insurance has never been so easy (HealthCare.gov)

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Shopping for health care insurance has never been so easy,

On July 1, 2010, the U.S. Department of Health and Human Services launched HealthCare.gov, a new on-line tool that will help consumers take control of their health care by providing them with information and resources that will help them access quality, affordable health care coverage. The Web site was a requirement of the Patient Protection and Affordable Care Act that President Obama signed into law in March 2010

If you’re in the market for health insurance, HealthCare.gov is the site for you. The site provides comprehensive, easy-to-understand information on health insurance options. HealthCare.gov pulls together insurance options for individuals and small businesses and incorporate public programs and benefits with private insurance. Using the website the consumers will be able to compare information such as monthly premium estimates, annual deductibles, out-of-pocket limits and services covered.

In the “Find Insurance Options” section on the site, the consumers can complete the form with basic medical and demographic information, such as the state of residence, age range, employment status, health status, the number of people who need coverage and any relevant health issues. The site immediately lists all of the private and public insurance plans in your area. Available plans include the new Pre-Existing Condition Insurance Plan (the high-risk pool created by the health-care-reform law).

The site provides explanation for:
- Covering young adults under age 26;
- Laws governing job-based health coverage (and protections if you lose your job or exhaust your COBRA coverage);
- Links to hospitals and health-care facilities that offer free or below-cost health care to low-income people.

Pricing.

HealthCare.gov provides the consumers with some ideas on pricing. The prices provided are only estimates. The insurance provider will not provide base premiums for individual and small-group coverage on people’s medical conditions until 2014.

Ready to buy the health policy?

Next the consumers enter his ZIP code and the website pulls up specific companies offering insurance in your area. One can view each plan that a company offers, the benefit, and the doctors covered by the plan. To buy, go to eHealthInsurance.com, contact a local health-insurance broker or contact the insurer directly.

Future Updates.

In a section called “What’s Changing and When,” users can click through a timeline to find out what the law requires to happen in 2011, or 2014, or later this year. A section on “Strengthening Medicare” breaks out recent developments, such as a $350 million anti-fraud effort.

Rules change for flexible spending accounts (FSA)

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Under the March health reform law that go into effect Jan. 1, 2011 you can no longer spend flexible spending account (FSA) dollars for over-the-counter medications unless you have a prescription or letter of medical necessity from a doctor. The exception is insulin, which you can still buy with FSA dollars even in places where you get it without a prescription.  You will have to pay out-of-pocket and submit a reimbursement claim.

Cost of Long-Term Care Insurance (LTC)

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The fact is long-term care (LTC) — whether it’s in a nursing home, assisted living facility, or in your our own home—can be expensive. Without careful planning, you may exhaust your assets trying to pay the bills.  According to the Metlife Mature Market Institute, the average cost for one year’s stay in a nursing home is $66,153 ($181 per day).  With inflation these figures are expected to rise in the future.

Your decision should be based on your age, health, financial resources, goals, and whether or not you have family members who are able and willing to provide the necessary help.  Following are options you should consider:

  1. To self-fund;
  2. To self-fund and purchase life insurance to replace assets used for long-term care;
  3. Purchase long-term care insurance to cover expected costs.

The self-funders have sufficient assets to pay for their long-term care expenses.

The second group self-fund their long-term care expenses.  They also purchase life insurance to replenish their net egg and pass on an inheritance to the surviving spouse or children.

The third group buy long-term care insurance with an elimination period.  Most insurers offer elimination periods are from 0 to 180 days.

Insurance premium.  Your long-term care policy premium will depend on:

  1. Your age when the policy is issued;
  2. The maximum daily benefit that you choose;
  3. The maximum lifetime benefit period that you select;
  4. The length of the elimination period in the policy; and
  5. Any optional benefits you choose to add to your policy.

To give you with a guideline as to long-term care insurance premium, below are two charts prepared by the Maine Bureau of Insurance comparing 1st year premium for $150 per day and $250 per day benefits.

Planning for your long-term care needs is important.  Contact us at taxsolutions@gmail.com and let’ explore your options and the related cost.

Paul Sid, CPA CFA
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Permanent life insurance has become a tax shelter for the rich

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10/3/2010. As reported in the Wall Street Journal permanent life insurance has the dual tax advantages since the death benefit is not subject to federal income tax and earnings in the investment-account part accrue tax-free. As a result permanent life insurance has “become a tax shelter for the rich” said Charlie Smith, a former head of an international association of insurance managers.

Some tax-policy specialists contend the provision artificially favors income in insurance policies over things like interest on bank certificates of deposit. Some also say that because the break enables people who can afford large life policies to accumulate earnings free of taxes, it gives the affluent tax advantages far beyond those available to middle-income people through a 401(k) or IRA.  [read more, subscription may be required]

Have a question regarding life insurance?  Ask me at allexperts.com

Paul Sid, CPA CFA

Taxes. Radical Change Coming to 1099 Reporting

Beginning in 2012, you could be facing a whole new world of 1099 paperwork.

Section 9006 of the health care bill mandates that beginning in 2012 all companies will have to issue 1099 tax forms not just to contract workers but to any individual or corporation from which they buy more than $600 in goods or services in a tax year. This provision is expected to generate an estimated $17 billion in revenue for the IRS over 10 years.

Currently, Form 1099 is used to document income for individual workers other than wages and salaries. For example independent contractors and consultants receive them each year from their clients annually.

The bill makes two key changes to how 1099s are used. First, it expands their scope by using them to track payments not only for services but also for tangible goods. Plus, it requires that 1099s be issued not just to individuals, but also to corporations.

What does this mean to you?

  • If you sell goods or services, you’ll be getting 1099s from your customers. Previously, 1099-MISC forms were used to report payments for services. Starting in 2012, 1099s will be issued for tangible goods as well. Whether you sell plumbing supplies, office supplies, fast food, or beauty supplies, your business customers will have to report their payments to you if they spend $600 or more with you within a calendar year. This means that you need to provide your customers a completed Form W-9.
  • Whether you operate as an LLC, corporation, or sole proprietorship, you’ll be getting 1099s. Previously, 1099 were not sent to corporations.
  • If you purchase goods or services for your business, you will have to issue 1099′s to corporations and non-corporations. This means that you need to request completed Form W-9 from your vendors before payments are made. In my experience it is difficult to obtain completed W-9′s once payments have been made.