Blog Archives - PFwise.com

What Does Life Insurance Urine and Blood Test Do?

3/31/2017

Q. What does life insurance's urine and blood tests check?

A. A life insurance urine test along with a blood test check two things.

a) Check for drugs, both illegal and prescription to test against medical records for abuse. Underwriting will test for nicotine and cotine, which stays in the system longer than just nicotine for tobacco use.

b) Check for diseases such as cancer, diabetes, heart disease, blood disorders, kidney disease, etc. These results are usually compared to the individuals medical records for their risk assessment.

What Happens If I Terminate My Term Life Insurance?

3/30/2017

Q. What happens if I cancel my term life insurance?

A. If you cancel your term life insurance policy, your policy simply ends. Since there is no cash value with a term life policy, you will not get any money back, and there is no monetary penalty for cancellation of term life insurance. If you want coverage in the future, you will have to reapply for a new policy, and premiums will increase as you are older.

What To Do If I Cannot File My Tax On Time?

3/29/2017

Q. What should I do if I can't file my tax on time?

A. Assume you are not procrastinating the tax filing, rather you have a more complex return to file, you can buy yourself more time by filing a Form 4868 by mail or electronically, in this way, you will get an automatic six-month extension. You can submit online for free via IRS' Free File program even if you earn more than the threshold for free tax help (income $64,000 or less).

Getting an extension is better than filing now than amend later. With an extension, you can avoid a costly failure-to-file penalty of 5% of your unpaid taxes per month, up to a max of 25%.

However, even with an extension, you must pay what you owe by April 18, 2017 to avoid interest (currently 4%) and a late-payment penalty of 0.5% of your unpaid taxes per month. If you don't have enough money, you can apply for an online payment agreement from the IRS as long as you owe $50,000 or less. If you can pay within 120 days, you automatically qualify for a no-fee and short-term plan.

Could J-visa Holder Apply For Life Insurance in the U.S.?

3/28/2017

Q. I am in the U.S. on a J-visa, if I apply for life insurance, will I be discriminated and not getting the best possible class?

A. If you are in the U.S. on a temporary visa, your life insurance application will be reviewed on a case by case basis by all of the insurers. Specifically, an insurance carrier would ask you the following questions -

foreign nationals are typically a case by case issue...questions we usually have for those to determine eligibility and/or carrier choice:

What country are you a citizen of?
How long have you been in the US?
- Date of entry (mo/yr) to the US?
What specific form of VISA are you here on?
Have you applied for permanent residency?
- If so how far along?
Are you married to a US citizen?
- Or have children, born here in the US?
Do you own any property or business here in the US?
Occupation/income?
Plan to stay here permanently?
Any foreign travel planned, back home?...or to anywhere else of possible concern?
Face amount and plan type you’re considering?

The truth is, your options will be limited. Please Contact Us if you face this situation and we have had experience helping clients like you in the past and we know which insurance carrier is more friendly for such situations.

Why Investment Alpha Still Exists Even We Know It Exists?

3/27/2017

Q. We know over the long term, small caps tend to outperform large caps, why people don't take advantage of this fact and eventually such alpha disappears?

A. We know certain investment alphas still exist, even researchers have documented them for a long time. Why investors are not taking advantage of these alphas? The reason could be explained by some behavior science findings:

Recency bias: we overweight what happened recently and extrapolate it into the future.
Availability bias: we are more willing to invest in stocks that we can readily recall.
Familiarity bias: we perceive less risk in something we are familiar with, this helps explain why so many are so comfortable in keeping concentrated positions in employer's securities.
Gambling tendency: we pursue gambles that have significant upside potential, despite their improbably outcome. This explains why we continue to buy lottery tickets with a highly negative expected value.
Loss aversion: we exhibit a significant aversion to losses and debt.
Herd effect: we have a strong bias to do what everyone else is doing and avoid the risk that comes with being singled out, especially if there is a bad outcome and someone needs to be blamed.

5 Common Estate Planning Mistakes - Part E

3/26/2017

In our last blog post, we discussed the 4th common estate planning mistake. Now the mistake #5.

Mistake #5. Improper Titling of Life Insurance Policies
Most people know that the death benefit of a life insurance is income tax free, but many people don't know that if the life insurance policy is not owned by an irrevocable life insurance trust (ILIT), the death benefit of the policy owned by the deceased insured is included in the deceased's estate, which could potentially drive up total estate value above federal and/or state state guidelines and trigger an estate tax.

Potential negative consequences:
The following negative consequence might be only applicable to certain high net worth individuals, but it's good to know this could happen and therefore plan your future -

If someone with high net worth purchased a life insurance policy with the purpose to pay estate tax when he passes away, but if himself, rather than an irrevocable life insurance trust, as the owner of the life insurance policy, 40% of the life insurance policy's payout will go to Uncle Sam, rather than as planned to pay out his estate tax.

5 Common Estate Planning Mistakes - Part D

3/25/2017

In our last blog post, we discussed the third common estate planning mistake. Now mistake #4.

Mistake #4. Not Getting the Professional Help
While it is true that most estate plans are simple, it is best to let a specialist who has the time and knowledge of the ongoing changes of tax laws to maintain and update your will.

Potential negative consequences:
If a will was made without a professional help and left some important aspects out, for example, only grant medical power of attorney but not financial power of attorney to a child, when the person suffers a major stroke and put into a medically induced coma and unable to make medical and financial decisions, that child could step in and make the medical decision, but without a financial power of attorney, the child would be powerless to pay any bills - utility, mortgage, medical bills, etc.

We will discuss the last common estate planning mistake next time.

5 Common Estate Planning Mistakes - Part C

3/24/2017

Having discussed the second common estate planning mistake, now we will turn to the third common mistake -

Mistake #3. Choosing the Wrong Executor/Power of Attorney
Most people choose the executor to be someone they "trust the most" or "love the most", but there are other important factors to consider when selecting the estate executor/power of attorney - age, knowledge, professional and communication skills, the ability to be impartial, etc.

It is important to talk to the person you want to name as the executor to make sure that person is prepared and willing to do the job if you pass away.

Potential negative consequences:
1) The main responsibility of the executor/power of attorney is to make sure that what the deceased wanted to happen, happens. If the executor/power of attorney is ill-prepared for this job, unnecessary delays, errors in judgement, and needless suffering by the parties involved could happen.

2) Greed or grief could cause a person of weaker character to take unfair advantage of the powers granted to them.

In our next blog post, we will discuss common estate planning mistake #4.

5 Common Estate Planning Mistakes - Part B

3/23/2017

We discussed the most common estate planning mistake last time. Now the second common estate planning mistake.

Mistake #2. Having an Outdated Will
Congratulations, you have a will in place! However, that was made years ago. A will should be updated frequently to reflect your latest assets, make sure your previous wishes still apply, and ensure any tax code changes are accounted for!

Potential negative consequences:
1) If your will was prepared years ago and not planned for what your estate might be at your life expectancy age, the appreciation of assets, inflation, and any anticipated inheritances could have all threw away your old estate plan!

2) If you have had a major life event after your will, for example, a divorce and a new marriage, and you pass away without updating the will, your previous spouse whose name still on your outdated will might get everything, while your new spouse is left out without nothing!

In our next blog post, we will discuss estate planning mistake #3.

5 Common Estate Planning Mistakes - Part A

3/22/2017

Estate planning is important for anyone, not just those with high net worth. We will discuss 5 common estate planning mistakes and the potential negative results they might cause.

Mistake 1. Not Having a Will
This is the most common mistake.

While the federal estate tax won't kick in until an individual is worth more than $5.45 million (or $10.9 million for a couple), many states have much lower state estate tax thresholds.

For people with high net worth, obviously the stakes are higher, but for anyone with an income and asset, a will should be in place to properly plan for what he/she wants to happen with the estate when he/she passes away.

Potential negative consequences:
1) If you pass away without a will, future marriages and divorces of the surviving spouse could lead to a scenario where your assets end up with non-family members, while your beloved family members could get left out completely!

2) Without a will, the assets you want to go one place might end up being at a completely different place.

3) Bitter legal battles could be waged over your assets, opening rifts in the family that might never heal.

Please keep reading the estate planning mistake #2.

Could a Stay At Home Mom Buy Life Insurance?

3/21/2017

Q. I am a stay-at-home mom with no income. Can I also purchase a term life policy so if anything happens to me, I could leave some funds to my kids?

A. As a stay-at-home mom with no or low income, you can still purchase a life insurance policy, however, your justification should not be "to leave some funds to my kids", instead, you have a strong financial justification - taking care of kids and family at home is an unpaid full time job!

If anything happens to you, your spouse would obviously need to hire someone else to perform the job you have been doing, and that costs money. So, a stay at home mom with no or low income has a right justification to purchase a life insurance policy. As to the specific coverage amount, different insurance companies have different standards, but it's safe to say any reasonable amount would be acceptable from underwriting perspective.

Can I Change My Term Life Policy's Beneficiary Without Current Beneficiary's Signature?

3/20/2017

Q. My term life policy currently has my spouse as the primary beneficiary. Can I change it to my kids without my spouse's signature?

A. If you are the owner of your term life policy, you can change your policy's beneficiary at anytime, and you do not need current beneficiary's signature in order to make the change.

Preferred Stocks 101 - Part E - Preferred Stocks vs. Common Stocks

3/19/2017

In our last blog post, we discussed the similarities and differences between preferred stocks and bonds. Now we will discuss the similarities between preferred stocks and common stocks.

Preferred Stocks and Common Stocks: Similarities

Payments
Both are equity instruments that pay dividends from the company's after-tax profits.

Preferred Stocks and Common Stocks: Differences

Payments
Preferreds have fixed dividends and, although they are never guaranteed, the issuer has a greater obligation to pay them. Common stock dividends, if they exist at all, are paid after the company's obligations to all preferred stockholders have been satisfied.

Appreciation
This is where preferreds lose their luster for many investors. If, for example, a pharmaceutical research company discovers an effective cure for the flu, its common stock will soar, while the preferreds in the same company might only increase by a few points. The lower volatility of preferred stocks may look attractive, but preferreds will not share in a company's success to the same degree as common stock.

Preferred Stocks 101 - Part D - Preferred Stocks and Bonds Differences

3/18/2017

In our last blog post, we discussed the similarities between preferred stocks and bonds. Now we will turn our attention to the differences between preferred stocks and bonds.

Preferred Stocks and Bonds: Differences

Type of Security
Preferred stocks are equity; bonds are debt. Most debt instruments, along with most creditors, are senior to any equity.

Payments
Preferreds pay dividends. These are fixed dividends, normally for the life of the stock, but they must be declared by the company's board of directors. As such, there is not the same array of guarantees that are afforded to bondholders. This is because bonds are issued with the protection of an indenture. With preferreds, if a company has a cash problem, the board of directors can decide to withhold preferred dividends; the trust indenture prevents companies from taking the same action on bonds. Another difference is that preferred dividends are paid from the company's after-tax profits, while bond interest is paid before taxes. This factor makes it more expensive for the issuing company to issue and pay dividends on preferred stocks.

Yields
Computing current yields on preferreds is similar to performing the same calculation on bonds: the annual dividend is divided by the price. For example, if a preferred stock is paying an annualized dividend of $1.75 and is currently trading in the market at $25, the current yield is: $1.75/$25 = 7%. In the market, however, yields on preferreds are typically higher than those of bonds from the same issuer, reflecting the higher risk the preferreds present for investors.

Volatility
While preferreds are interest rate sensitive, they are not as price sensitive to interest rate fluctuations as bonds. However, their prices do reflect the general market factors that affect their issuers to a greater degree than the same issuer's bonds.

Accessibility for the Average Investor
Information about a company's preferred shares is easier to access than information about the company's bonds, making preferreds, in a general sense, easier to trade (and perhaps more liquid). The low par values of the preferred shares also make investing easier, because bonds, with par values around $1,000, often have minimum purchase amounts (i.e. five bonds).

In our next blog post, we will discuss the similarities and differences between Preferred Stocks and Stocks.

Preferred Stocks 101 - Part C - Preferred Stocks and Bonds Similarities

3/17/2017

In our last blog post, we discussed the pros and cons of investing in preferred stocks. Now we will compare preferred stocks and bonds and see what are their similarities.

Bonds and Preferred Stocks: Similarities

Interest Rate Sensitivity
Preferreds are issued with a fixed par value and pay dividends based on a percentage of that par at a fixed rate. Just like bonds, which also make fixed payments, the market value of preferred shares is sensitive to changes in interest rates. If interest rates rise, the value of the preferred shares would need to fall to offer investors a better rate. If rates fall, the opposite would hold true. However, the relative move of preferred yields is usually less dramatic than that of bonds.

Callability
Preferreds technically have an unlimited life because they have no fixed maturity date, but they may be called by the issuer after a certain date. The motivation for the redemption is generally the same as for bonds; a company calls securities that pay higher rates than what the market is currently offering. Also, as is the case with bonds, the redemption price may be at a premium to par to enhance the preferred's initial marketability.

Senior Securities
Like bonds, preferreds are senior to common stock. However, bonds have more seniority than preferreds. The seniority of preferreds applies to both the distribution of corporate earnings (as dividends) and the liquidation of proceeds in case of bankruptcy. With preferreds, the investor is standing closer to the front of the line for payment than common shareholders, although not by much.

Convertibility
As with convertible bonds, preferreds can often be converted into the common stock of the issuing company. This feature gives investors flexibility, allowing them to lock in the fixed return from the preferred dividends and, potentially, to participate in the capital appreciation of the common stock.

Ratings
Like bonds, preferred stocks are rated by the major credit rating companies, such as Standard & Poor's and Moody's. The rating for preferreds is generally one or two tiers below that of the same company's bonds because preferred dividends do not carry the same guarantees as interest payments from bonds and they are junior to all creditors.

In our next blog post, we will discuss the differences between preferred stocks and bonds.

Preferred Stocks 101 - Part B - Pros and Cons of Preferred Stock

3/16/2017

In our last blog post, we discussed the different types of preferred stocks. Now we will discuss the pros and cons of investing in preferred stocks.

Pros of investing in preferred stocks:

Higher fixed-income payments than bonds or common stock
Lower investment per share compared to bonds
Priority over common stocks for dividend payments and liquidation proceeds
Greater price stability than common stocks
Greater liquidity than corporate bonds of similar quality

Cons of investing in preferred stocks:

Callability
Lack of specific maturity date makes recovery of invested principal uncertain
Limited appreciation potential
Interest rate sensitivity
Lack of voting rights

In our next blog post, we will discuss the relationships between preferred stocks and bonds.

Preferred Stocks 101 - Part A - What Is A Preferred Stock?

3/15/2017

Q. I heard preferred stocks are safer than stocks and earn more than bonds. Is it correct?

A. To answer this question, let's first answer this question - what is a preferred stock?

A preferred stock is a like a hybrid investment product, it is technically an equity security, but has many features of the debt instruments.

Basic Types of Preferred Stocks
Below are some basic types of preferred stocks:

Cumulative preferred stocks: if a company withholds part, or all, of the expected dividends of its issued preferred stocks, these unpaid dividends are considered dividends in arrears and must be paid before any other dividends. Preferred stock that doesn't carry the cumulative feature is called straight, or noncumulative, preferred. Most preferred stocks are cumulative.
Callable preferred stocks: the preferred stock issuer has the right to redeem the stock at a date and price specified in the prospectus. The majority of preferred shares are redeemable.
Convertible preferred stocks: the preferred stocks could be converted to regular stocks, with the timing for conversion and the conversion price specific to the individual issue laid out in the preferred stock's prospectus.
Participating preferred stocks: a preferred stock has a fixed dividend rate. However, for participating preferred stocks, these stocks gain the potential to earn more than their stated rate. The exact formula for participation can be found in the prospectus. Most preferred stocks are non-participating.
Adjustable-Rate preferred stocks (ARPS): these preferred stocks pay dividends based on several factors stipulated by the company. Dividends for ARPSs are keyed to yields on U.S. government issues, providing the investor limited protection against adverse interest rate markets.

In our next blog post, we will discuss the pros and cons of investing in preferred stocks.

What Business Retirement Plan Options If I Have a Small Business?

3/14/2017

Q. I have a small business, what are the business retirement plans I could choose from?

A. If you have a small business, depending on how large is your business and how many people do you employ, there are three major retirement saving plans you could consider, the table below highlights some of the key points:

Use Software to Maximize Social Security Benefits

3/13/2017

Q. Is there an easy way to help me figure out the best way to maximize my social security benefits?

A. It's estimated that there are more than 8,000 strategies and 2,700 separate rules on social security benefits, no wonder it is extremely difficult for an ordinary consumer to figure out the best way maximize social security benefits.

Just as a simple example - with couples, who should file first and when? As many people know, anyone gets an 8% annual bonus for waiting to file for benefits between 66 and 70. But total benefits are still gauged to lifetime earnings. Individuals can still claim up to half of their spouse’s -- or ex-spouse’s, with certain restrictions -- benefits. The best strategy isn’t always clear, and there are many ways to approach it.

Thankfully, there are some specialized software customized to the task.

Here is a short list of some such software packages, there are many more you can google to find out -

http://www.savvysocialsecurity.com/
https://www.ssanalyzer.com/
https://maximizemysocialsecurity.com/
https://www.socialsecuritytiming.com/

Cash Value Insurance Policy Loan Solutions - Solution 5. Surrender Policy

3/12/2017

In our last blog post, we discussed the 1035 exchange solution. Now the final solution - surrender the policy.

Surrender the Policy
There are two ways to surrender a policy:

a. Simply call the insurance company to surrender the policy. You will receive whatever cash value left, which possibly not enough to pay the resulting tax bill, but it's better than nothing.

b. Life settlement transaction is another possible way, which could work for senior policy holders, it involves the sale of the life insurance to a third party buyer or investor - the current owner will be off the hook, but still has to pay tax for whatever the value received from the sale, and the settlement value could be higher than the net cash value of the policy.

The new buyer of the policy will take over your policy and deal with all the consequences. Obviously the new owner will receive the death benefit payment when the insured dies, that's the reason he or she made the investment.

Cash Value Insurance Policy Loan Solutions - Solution 4. 1035 Exchange

3/11/2017

In our last blog post, we discussed cash injection to a policy that is going to lapse. Now we will discuss the 1035 exchange option to rescue the policy.

1035 Tax-free Exchange
1035 tax-free exchange of a policy means the current policy is exchanged to another new and better policy, this could be possible because various reasons, for example:

The insured's health condition improves therefore could get a better underwriting class
The current policy wasn't shopped around aggressively therefore is not the best one
The new life insurance policy has much better loan provisions, for example, a lot better interest rates
Etc.

There is an important caveat of doing a 1035 tax-free exchange to rescue the old policy - the exchange should still be for the gross cash value of the life insurance policy with a loan attached. If a policy with a loan is exchanged for a policy without a loan, the policy holder is treated as having received a partial liquidation of the policy, which triggers income tax.

For example, a $750,000 universal life policy with a $200,000 cash value and a $150,000 outstanding loan balance, if it's exchanged to a new policy, the new one must have $200,000 cash value with a $150,000 outstanding loan balance, precisely matching the original one.

In our next blog post, we will discuss the final solution - surrender the policy.

Cash Value Insurance Policy Loan Solutions - Solution 3. Cash Injection

3/10/2017

In our last blog post, we discussed the second solution by reducing death benefit. Now we will discuss another solution -

Inject More Cash
This solution works well for a policy owner if the policy owner is keeping a large sum of money in a savings account or bond portfolio earning little, while the cash value insurance could earn 6% a year.

By injecting more cash into the policy, for example, if the entire loan balance is paid off, obvious the problem is solved. But as long as the policy loan balance is reduced, it will help mitigate the problem because the rate of loan compounding will slow. If not enough to pay off any loan balance, by just paying the annual interest could mean the loan balance is not compounding further.

Most of the times, it's the failure to pay insurance premium that triggers the problematic loan situation in the first place, either because it's a whole life policy that forces premiums to be paid via the automatic premium loan provision, or because it's a universal life policy that has insufficient cash value to keep up with all of the costs while the loan accrues.

In our next blog post, we will discussion another solution - 1035 exchange.

Cash Value Insurance Policy Loan Solutions - Solution 2. DB Reduction

3/9/2017

In our last blog post, we discussed the solution by changing dividend options to rescue the policy facing a loan problem. Now we will discuss another solution -

Reduce Death Benefits
If the policy is a universal life insurance policy, the death benefit can be reduced. However, for a whole life policy, death benefit could be reduced through a partial surrender (either of the base policy, or the PUAs), unfortunately this may trigger taxation.

The good news is that less death benefit means lower cost of insurance which may make the policy sustainable.

The bad news is that less death benefit means less payment to the beneficiaries if a death occurs, but it is better than nothing is the policy lapses.

In our next blog post, we will discuss another solution for a cash value policy faces policy loan problems.

Cash Value Insurance Policy Loan Solutions - Solution 1. Dividend Option Change

3/8/2017

In our last blog post, we presented a potential problem for a cash value insurance policy that is not managed well. Now we will present the first solution -

Change the Dividend Option
For any permanent life insurance policies that pay a dividend, there are several options for how dividends will be used. The most popular one is to purchase a paid-up addition, which means small amounts of additional coverage that are fully paid up when purchased.

The good news for PUAs is that they are quite favorably priced by insurers for the additional insurance because there is no acquisition cost to it. Because of this, most life insurance policies set this as the default option.

The bad news for PUAs is that if there is a compounding loan, buying more insurance while the main policy is in trouble is not a good strategy.

Now the good news again - the dividend option can be changed and redirected to pay the loan interest or principal or both, all it needs is a call to the insurance company's customer service to request the change. If the dividends are large enough, they may eventually payoff the loan, allowing the policy to sustain. After that, the dividend option can be changed to purchase PUA again.

In our next blog post, we will discuss another solution.

Cash Value Insurance Policy Loan Solutions - The Problem

3/7/2017

A life insurance policy loan is a personal loan from the life insurance company with the life insurance policy's cash value as a collateral. Cash value life insurance policy loans are known for having favorable interest rates, which is one of the great features of cash value life insurance policies. However, if not managed properly, the loan could compound out of control. Below we will describe the potential problem.

A Hypothetical Example and Problem
A person has paid total $125,000 of premiums into a universal life policy. The policy's current cash value is $200,000.

Many years ago, the policy owner borrowed $100,000 against the policy, and after more than a decade of compounding, the loan balance has reached $200,000 cash value.

As a consequence, the policy lapses, and the insurer uses the $200,000 collateral cash value to pay off the loan.

However, because the policy was worth $200,000 at liquidation, and the cost basis was only $125,000, the policy owner will receive a Form 1099-R for $75,000, and has to pay taxes on the gain, even though no cash was received upon liquidation of the policy.

Fortunately, there are many potential solutions to rescue this life insurance policy, either to avoid the adverse tax consequence or retain the value of the death benefit itself. We will discuss in next several blog posts for the various solutions.