Below is a case study from Sagicor that shows how its single premium universal life product helps one retiree.
People in or near retirement need solutions that can evolve with their changing needs — for 20 or more years. While people in retirement ages may have CDs, annuities, and bonds in their retirement portfolios, it may be time to consider an insurance asset that can help address a lot of different needs.
Below is a case study from Sagicor that shows how its single premium universal life product helps one retiree.
With the sustained low interest rate environment that makes traditional GUL insurance less attractive and more expensive, it may be time to look at other alternative solutions like a guaranteed-focused IUL.
Imagine: you can pay the same premium as a traditional GUL policy, but get the added benefits of strong cash value and chronic illness protection! Yes, you heard it right.
Strong guaranteed death benefit, upside market potential and chronic illness protection. Now THAT'S the power of QoL Value+ Protector!
Life Happens conducted a survey that found that the COVID-19 pandemic has led to an enormous increase in consumers’ interest in life insurance.
Life Happens collaborated with LIMRA on the 2020 Insurance Barometer report.
In one section, the survey team made survey participants rank their level of concern about living expenses, health insurance, life insurance and saving goals, rather than letting them simply express concern or lack of concern about each of those components of spending.
From 2011 through the beginning of 2020, life insurance flopped around at the bottom of the hierarchy chart.
Earlier this year, life insurance suddenly climbed above living expenses as a concern — even though the survey was conducted before the government had acknowledged that much COVID-19 had spread to the United States.
Lincoln Financial Survey
Lincoln surveyed 1,004 U.S. adults ages 18 and older, in July.
About 7% of the participants said owning life insurance is now less important than it was before COVID-19 came along.
In last blogpost, we discussed Self-employed 401(k). Now we will discuss SIMPLE IRA.
Like a 401(k), this account offers tax-deferral and pretax contributions, plus an employee contribution and an employer match.
Who can open one?
Anyone who is self-employed or a small-business owner can open a SIMPLE IRA. Small businesses with 100 employees or fewer can also open a SIMPLE IRA plan.
How it works
Like the self-employed 401(k), you get 2 chances to contribute.
But be aware that a SIMPLE IRA can require the employer to make contributions to the plan even if the business has no profits.
Who it may help
The SIMPLE IRA is an inexpensive plan for businesses with fewer than 100 employees. It also allows for salary deferrals by employees and there are no tax forms to file.
The SIMPLE IRA also allows those age 50 and over to save an additional $3,000 a year.
Things to keep in mind
The deadline to set up the plan is October 1. You can make matching and nonelective contributions until the company's tax filing deadline—including extensions.
In last blogpost, we discussed SEP IRA, now we will discuss self-employed 401(k).
A self-employed 401(k), also known as a solo 401(k), can be an option for maximizing retirement savings even if you're not making a ton of money.
Who can open one?
If you are self-employed or own a business or partnership with no employees you can open a self-employed 401(k). A spouse who works in the business can participate as well.
How it works
You get 2 opportunities for contributing to a self-employed 401(k)—first as the employee, and again as the employer.
As the employee, you can choose to make a tax-deductible or Roth contribution of up to 100% of your compensation, with a maximum of $19,500 in 2020 ($19,000 in 2019). Once you're over age 50, you can also make catch-up contributions—for 2020 you can save an extra $6,500, for a total of $26,000 ($25,000 in 2019).
As the employer, you can contribute up to 25% of your eligible earnings. The employer contribution is always made before tax. (Again, consult a tax expert or the IRS website for details on computing eligible earnings.)
Who it may help
These accounts give small business owners the opportunity to save a significant amount of money each year. The total that can be contributed for employee and employer is $57,000 in 2020 ($56,000 in 2019), plus an additional $6,500 ($6,000 in 2019) for people age 50 and over.
Things to keep in mind
After the plan assets hit $250,000, you have to file Form 5500 with the IRS.
The deadline for setting up the plan is the end of the fiscal year, generally the last business day of the year. You can make employer contributions to the account until your tax-filing deadline for the year, including extensions.
In next blogpost, we will discuss Simple IRA.
In last blogpost, we discussed IRA for self-employed people. Now we will discuss SEP IRA.
If you are self-employed or have income from freelancing, you can open a Simplified Employee Pension plan—more commonly known as a SEP IRA.
Who can open one?
The SEP IRA is available to sole proprietors, partnerships, C-corporations, and S-corporations.
How it works
Contributions to a SEP IRA may potentially be tax-deductible. The amount you can put in varies based on your income. The most an employer can contribute to an employee's SEP IRA is either 25% of eligible compensation or $57,000 for 2020 ($56,000 for 2019), whichever is lower. (Note that the rules on determining eligible compensation, which are different for self-employed and employee SEP participants, can be complex. Consult a tax expert or the IRS website for details.)
If you have employees, you have to set up accounts for those who are eligible, and you have to contribute the same percentage to their accounts that you contribute for yourself. Employees cannot contribute to the account; the employer makes all the contributions.
Who it may help
This account works well for freelancers and sole entrepreneurs, and for businesses with employees (as long as the owners don't mind making the same percentage contribution for the employees that they make for themselves). The SEP IRA is generally easy and inexpensive to set up and maintain. Plus, there are typically no tax forms to file.
Things to keep in mind
The deadline to set up the account is the federal income tax filing deadline.
In next blogpost, we will discuss Self Employed 401(k).
If you are one of the millions of freelancers, entrepreneurs, workers with a side gig—or an employee with no workplace retirement plan—you can still save for retirement. As long as you have some earnings, you have some tax-advantaged saving options.
In this mini blog series, we will discuss 4 options - the IRA, SEP IRA, SIMPLE IRA, and self-employed 401(k).
You've probably heard of IRAs, short for individual retirement accounts. Anyone with earned income (including those who do not work themselves but have a working spouse) can open an IRA. There are a few different options, Roth and traditional. Each offers a tax benefit.
Fidelity.com has a good article discussing how to choose between Roth and Traditional IRA, you can view it here.
In next blogpost, we will discuss SEP IRA.
Q. Is it possible to avoid 10% early withdrawal penalty from retirement accounts?
A. Yes, early withdrawals from retirement accounts may be unavoidable in a tough environment, below are exceptions you can avoid the 10% early distribution penalty:
Retirement Plans (e.g. 401(k)) and IRAs (including SEP and SIMPLE IRAs)
IRAs only (including SEP and SIMPLE IRAs)
Retirement Plans only
In last blogpost, we compared Deductions and Tax Credits. Now we will focus on Education and Estate and Gift Taxes.
Current law: There's no tax credit for contributions to state-identified not-for-profit scholarship-granting organizations, though some amount might be deductible as a charitable contribution.
Forgiven student loan debt generally is included in taxable income.
Donald Trump: Enact the Education Freedom Scholarship tax credit, which would provide up to $5 billion worth of income tax credits annually for individual and corporate donations to state-identified not-for-profit scholarship-granting organizations.
Joe Biden: Exclude forgiven student loan debt from taxable income.
Estate and gift tax
Current law: For 2020, the estate and gift tax exemption is $11,580,000. This amount is scheduled to revert to the pre-TCJA indexed amount of approximately $5.8 million after 2025.
Transfers of appreciated property at death get a stepped-up basis.
Donald Trump: Extend the higher estate and gift tax exemption enacted by the TCJA that is scheduled to expire after 2025.
Joe Biden: Eliminate stepped-up basis on transfers of appreciated property at death.
In last blogpost, we discussed individual tax rates and Capital gains. Now we will focus on deductions and tax credits.
Current law: The basic standard deduction for married couples filing jointly is $24,800 ($12,400 for single taxpayers or for married taxpayers filing separately, and $18,650 for heads of household). After 2025, the basic standard deduction is scheduled to revert to pre-TCJA amounts.
The TCJA suspended the personal exemption and most individual deductions through 2025.
Donald Trump: Extend the higher basic standard deduction and other deductions enacted by the TCJA that are scheduled to expire after 2025.
Joe Biden: Limit total itemized deductions so the reduction in tax liability per dollar of deduction does not exceed 28%, which means taxpayers in tax brackets higher than 28% will face limited itemized deductions.
Phase out the 20% pass-through deduction for income over $400,000.
Current law: A child with an individual taxpayer identification number cannot be claimed for the Child Tax Credit but can be claimed for the $500 other dependent credit. A taxpayer with an individual taxpayer identification number is eligible to claim the Child Tax Credit and the $500 other dependent credit.
The maximum CTC is $2,000. This amount is scheduled to revert to the pre-TCJA amount of $1,000 after 2025.
The maximum child- and dependent-care credit is $1,200.
Workers older than 65 who do not have a qualifying child are not eligible for the Earned Income Tax Credit.
There is no tax credit for first-time homebuyers. There's also no tax credit for renters.
Donald Trump: Require a dependent to have a Social Security number to be eligible to be claimed for the $500 other dependent credit. Require a taxpayer to have a Social Security number to claim both the CTC and the $500 other child dependent credit.
Extend the $2,000 CTC enacted by the TCJA that is scheduled to expire after 2025.
Joe Biden: Raise the CTC to $8,000 for one child and $16,000 for two or more children for taxpayers with income up to $125,000 per year. The credit phases out for income between $125,000 and $400,000 per year.
Expand the EITC to workers older than 65 who do not have a qualifying child.
Enact a $5,000 tax credit for family caregivers of people who have certain physical and cognitive needs.
Enact a refundable, advanceable tax credit of up to $15,000 for first-time homebuyers.
Enact a renter’s tax credit, designed to reduce rent and utilities to 30% of income for low-income individuals and families who make too much money to qualify for a Section 8 voucher.
In next blogpost, we will compare their plans on Education Estate and Gift Taxes.
Individual tax rate
Current law: The top marginal tax rate is 37% for income over $518,400 for individuals and $622,050 for married couples filing jointly.
Rates are scheduled to increase to pre-Tax Cuts and Jobs Act of 2017 (TCJA) amounts after 2025.
Donald Trump: Enact a 10% middle-class tax cut, which reportedly could include lowering the 22% marginal tax rate to 15%. For 2020, the 22% marginal tax rate applies to income over $40,125 for individuals and $80,250 for married couples filing jointly.
Extend the individual rates enacted by the TCJA that are scheduled to expire after 2025.
Joe Biden: Raise the top marginal tax rate to the pre-TCJA rate of 39.6% for income over $400,000.
Current law: The top tax rate for capital gains and qualified dividends is 20% for income over $441,450 for individuals and $496,600 for married couples filing jointly. In addition, there is a 3.8% net investment income tax.
Donald Trump: Index capital gains for inflation.
Reduce the capital gains tax rate.
Enact a capital gains tax holiday that eliminates capital gains taxes for a yet-to-be-identified period.
Joe Biden: Remove the preference for capital gains and qualified dividends for income over $1 million by taxing them at ordinary rates.
The net investment income tax remains.
In next blogpost, we will compare their plans on Deductions and Tax Credits.
Q. What are the two conflicting objectives of an index universal life product?
A. An indexed universal life product provides premium flexibility as well as death benefit flexibility, it has two broad categories of objectives, which as illustrated below, have natural conflicts.
The first objective is to pay as little in premium as possible in order to get desired death benefit. Some IUL policies have a death benefit that is guaranteed for a certain number of years as long as the consumer pays the "minimum no-lapse" premiums. There could be lower cost insurance options than IUL, for example, term life or guaranteed universal life (Perm Term" as I call it. However, with IUL, consumers may choose to pay higher premiums because it provides the death benefit protection AND the ability to accumulate cash value that can be accessed for various reasons such as emergencies, education expenses, retirement funds, etc.
The second objective is what most people purchase IUL for. Consumers with this objective have a strong focus on cash value growth and want to minimize the cost of insurance charges which will eat out cash values. This objective is to generate enough cash value in the policy so that the policy holders can take out policy loans against the policy later - usually tax free.
Q. Which takes precedence: will or life insurance beneficiary designation?
A. Most people think an updated Will is all they need. However, your will or trust will NOT override what is named in the beneficiary designation on a life insurance policy, annuity, or retirement account (IRA or 401k).
Beneficiary designations takes precedence.
Regardless of your current relationship status with the beneficiary on record, and regardless of how your current will reads, the proceeds from life insurance policy will be paid to the latest person named in the beneficiary designation!
Life insurance illustrations can be a useful tool to show how a product works. However, when it is used as a comparison tool to show which product from different insurance carriers is the best, there is a common mistake consumers usually make.
People usually look at the current assumptions in the illustration and pick the product with the highest rate. Here is why this could be a mistake.
Whole life is a permanent life product that is meant to be owned for decades. Current assumption of dividend interest rate just shows you the current rate, and the illustration assumes the current rate would last in the next several decades.
Unfortunately, dividend interest rates do change over time. A company with the best current rate might have a low rate in the past and/or future. What a better way to compare is to look back a few decades, and apply the average dividend interest rate and determine which company has the best rate on average over a long period of time.
In last blogpost, we discussed Elevated Liver Function Tests. Now we will turn to questions will be asked during underwriting.
The primary questions to be asked of a proposed insured that presents with this history are:
The goal in underwriting abnormal liver tests is to determine the underlying cause and rate the case for that issue. Many of the conditions listed above can be quite serious. The level of the amount above normal will have a definite role in the final offer or quote. The underwriter will consider the degree of elevation, the clinical history, and the current physical findings.
We do have several carriers that are more aggressive than others and will allow slight increases, even in the Preferred Best type categories. If you are interested in an application, please contact us.
What is Elevated Liver Function Tests?
One of the most common abnormalities in an insurance exam lab is an elevated liver function test. Although they may be generated by other tissues in the body, an unexplained elevation of one or more liver function tests is a concern for impaired liver function.
Elevations in SGOT (or AST) and SGPT (or ALT) are usually caused by liver damage, which allows these enzymes to be released out of the cells. The GGT (or GGTP) test is a very sensitive enzyme for the detection of early liver disease or damage. It also is an inducible enzyme, meaning that it will rise when the liver is busy metabolizing some types of drugs or toxins (like alcohol).
Many impairments may cause elevations in one or more of the liver enzymes, including hepatitis, cirrhosis, fatty liver, excess alcohol use, liver cancer or metastases, as well as certain medications such as Dilantin, phenobarbital, allopurinol, and many others.
In next blogpost, we will discuss what questions the insurance applicant needs be prepared to answer during underwriting.
So many of the most battered industries don’t matter much because of the way stock indexes are structured.
August 4, 2020, 6:00 AM EDT
By Barry Ritholz
The stock market has been on a tear, yet the economy is in the dumps. So why do so many people believe -- undoubtedly incorrectly -- that the stock market has decoupled from reality?
The economy many people experience, while bleak, is local, personal and, for the most part, either not publicly traded or plays only a small part in the stock market’s moves. To explain why these personal experiences have so little effect on equity markets, we must look more closely at the market role of the weakest industry sectors.
The surprising conclusion: The most visible and economically vulnerable industries are also among the smallest, based on their market-capitalization weight in major indexes such as the S&P 500. Markets, it turns out, are not especially vulnerable to highly visible but relatively tiny industries. The 30 most economically damaged industry categories could be de-listed before tomorrow’s market open, and it would hardly shave more than a few percentage points off the S&P 500.
This is so despite the worst U.S. economic collapse since the Great Depression. All of the economic data is so bad that figures on gross domestic product, unemployment and initial jobless claims must be re-scaled to even fit on charts.
But the U.S. economy is not the stock market and vice versa. As we discussed before, ignoring overseas strength is a major oversight. The so-called FAANGs (along with Microsoft) derive about half -- and in some cases even more -- of their revenue from abroad. Beyond that, the pandemic lockdown in the U.S. has benefited the giant tech companies’ sales and profits. No wonder the Nasdaq Composite 100 Index, which is dominated by big tech companies, is up about 26% this year.
But a reasonable person might argue that GDP fell by about a third in the second quarter and the S&P 500 should be in synch with that. What’s more, of the 500 companies in the S&P 500, about 450 of them are doing terribly. Industries such as retail, travel, energy, entertainment, dining have seen sales evaporate. Bankruptcies are piling up -- legendary retailer Lord & Taylor is just the latest -- and more are surely coming. Yet, the S&P 500, after a huge plunge in March, is up 2% this year.
Market capitalization explains why.
Start with some of 2020’s worst-performing industries: Year-to-date (as of the end of July), these include department stores, down 62.6%; airlines, off 55%; travel services, down 51.4%; oil and gas equipment and services, down 50.5%; resorts and casinos, down 45.4%; and hotel and motel real estate investment trusts, off 41.9%. The next 15 industry sectors in the index are down between 30.5% and 41.7%. And that’s four months after the market rebounded from the lows of late March.
These are highly visible industries, with companies that are well-covered by the news media with household names known to many consumers. Retailers are everywhere we go. Gas stations, chain restaurants and hotels are ubiquitous in cities and suburbs across the country.
So although high visibility industries may be of considerable significance to the economy, they are not very significant to the capitalization-weighted stock market indexes.
Consider how little these beaten-up sectors mentioned above affect the indexes. Department stores may have fallen 62.3%, but on a market-cap basis they are a mere 0.01% of the S&P 500. Airlines are larger, but not much: They weigh in at 0.18% of the index. The story is the same for travel services, hotel and motel REITs, and resorts and casinos.
The market is telling us that these industries just don’t matter very much to stock market performance. And the sectors that do matter? Consider just four industry group -- internet content, software infrastructure, consumer electronics and internet retailers -- account for more than $8 trillion in market value, or almost a quarter of total U.S. stock market value of about $35 trillion. Take the 10 biggest technology companies in the S&P 500 and weight them equally, and they would be up more than 37% for the year. Do the same for the next 490 names in the index, and they are down about 7.7%. That shows just how much a few giants matter to the index.
On some level, it’s completely understandable why many people believe that markets are no longer tethered to reality because the performance doesn’t correspond to their personal experience, which is one of job loss, economic hardship and personal despair. But what’s important to understand is that indexes based on market-cap weighting can be -- as they are
now -- driven by the gains of just a handful of companies.
We can argue about whether the way the market reacts is good or bad and never reach a satisfying conclusion. But one thing the market isn’t is irrational or disconnected from is the reality of market capitalization, and its impact on stock indexes.
In our last blogpost, we discussed how to determine the right coverage for the key person solutions for small business owners. Below we will show you a case study from John Hancock.
In last blogpost, we showed you how the key person solution works for small business owners. Now we will help you determine how much coverage you will need.
How much coverage do I need?
The amount of death benefit to purchase will depend on your unique needs and goals for your family. As a starting place, consider:
Putting it all together
The personal key-person solution can help address some of the financial-planning challenges you and your business may face. Focusing on what makes your business unique, the plan can be designed with your specific needs in mind and can offer protection in many ways. Please contact us if you are interested in creating such a plan.
In next blogpost, we will show you a case study how this solution worked for someone.
In last blogpost, we introduced the key person solution for small business owners. Now we will show you how it works, in 3 phases.
Phase 1: Working years
During the years when you are actively working in your business, the personal key-person life insurance policy provides income tax-free death benefit protection to your family from day one to:
Additionally, depending on state law, life insurance proceeds receive favorable protection from creditors, including bankruptcy protection. Particularly if your business is in a higher-liability field, this solution can help provide a level of asset protection during working years.
Phase 2: Retirement years
Once you decide it is time to step away from the business, the potential cash value build-up within your personal key-person policy can be used to help supplement your income via tax-free withdrawals or loans. This access to cash value provides additional flexibility and protection to help address common issues, such as:
Unlike qualified plans which require distributions starting at age 72 and are subject to income tax, withdrawals from the life insurance policy are purely discretionary and received income tax-free. You have ultimate control to take withdrawals or loans if you need them or retain the cash value in the policy — and increase the death benefit to heirs — if you do not.
Phase 3: Later retirement years, beyond life expectancy
Lastly, your life insurance policy’s potential cash value also can be used to provide additional supplemental income in the event you outlive or have insufficient other primary assets to draw from. If the cash value is not needed, the death benefit is preserved and can provide a source of funds for a surviving spouse and/or enhance the legacy you leave to your loved ones.
In our next blogpost, we will show you the way to estimate how much coverage you need.
In last blogpost, we discussed retirement challenges faced by small business owners. Now we will show you the key person solution for small business owners.
The “personal key-person” solution
A personal key-person solution insures against the loss of your business’s most essential person — you. Through the purchase of an individually owned permanent life insurance policy, you can secure:
How it works
Permanent life insurance, at its core, is a protection vehicle. No matter what stage you are at in life, your policy provides an income-tax free death benefit, making it an excellent way to ensure your family’s financial security. And, when that life insurance policy is designed as part of a personal key-person solution, you also have the ability to access the policy’s cash value to help offset a number of the risks often faced by small business owners.
In next blogpost, we will discuss how the protection works.
In last blogpost, we discussed some major risks faced by small business owners. Now we will focus on retirement challenges faced by small business owners.
Retirement planning challenges
While many business owners expect the business to provide some, or all, of their retirement income via a sale of the business, there are a multitude of factors that influence whether or not the business will sell for what you feel is its full fair market value.
As you plan for your retirement, consider the following:
Timing is important when it comes to selling a business, and it is often difficult to predict what type of market you will face when (or if) you decide to sell your business. Ideally, you will be able to time your sale with a booming economy so that you receive top dollar. Unfortunately, there is no way to predict what the market for your business will look like when you retire or whether you will receive enough to secure your retirement future.
With all of this uncertainty, it is important that you put a plan in place today that lets you decide how long you want to stay active in the business, while at the same time protecting you, your business and your family from life’s many unknowns.
We will discuss the key person solution for small business owners in next blogpost.
As a small business owner, the value of your business is linked to the skills and know-how you provide. Not only are you a “key person” to your company, you are also key to your family’s current and future financial security. For small business owners like yourself, conversations about business succession planning are about ensuring the prosperity of your family and business when you are no longer involved in the business or in the event of your disability or death.
2 Major Risks
What are the risks? Consider how your business, and by extension, your family, might be impacted if:
You passed away:
You suffer a serious illness or become disabled:
For small business owners, there are also retirement challenges, we will discuss in next blogpost.
In last blogpost, we discussed the importance of keeping tax loss harvesting in mind when develop your investment strategies. Now we will discuss the cost basis for tax loss calculation.
Select the most advantageous cost basis method
Finally, take a look at how the cost basis on your investments is calculated. Cost basis is simply the price you paid for a security, plus any brokerage costs or commissions.
If you have acquired multiple lots of the same security over time, either through new purchases or dividend reinvestments, your cost basis can be calculated either as a per-share average of all the purchases (the average-cost method) or by keeping track of the actual-cost of each lot of shares (the actual cost method).
For tax-loss harvesting, the actual-cost method has the advantage of enabling you to designate specific, higher-cost shares to sell, thus increasing the amount of the realized loss.
In last blogpost, we discussed wash sales and tax loss harvesting. Now we will discuss how to make tax loss harvesting part of your year round tax and investing strategies.
Make tax-loss harvesting part of your year-round tax and investing strategies
The best way to maximize the value of tax-loss harvesting is to incorporate it into your year-round tax planning and investing strategy.
In managing the asset allocation for your taxable portfolio, don't use big pieces like a large cap fund of funds. Instead, use more individual investments pieces that can help you create tax efficiency. For example, invest in individual large cap value, core and growth funds. This allows you the opportunity to tax loss harvest as individual securities and styles go in and out of favor.
Tax-loss harvesting and portfolio rebalancing are also a natural fit. In addition to keeping your portfolio aligned with your goals, a periodic rebalancing provides an opportunity to reexamine lagging investments that could be candidates for tax-loss harvesting.
In next blogpost, we will discuss which cost basis to choose.
PFwise's goal is to help ordinary people make wise personal finance decisions.