Blog Archives - PFwise.com

Which Segment of Consumers Prefer What Annuity Products?

10/31/2018

Q. which market segment (age, affinity, affluence, life stage, etc.) is attracted to what annuity products?

A. Studies continue to show that the primary market segment for deferred annuities are those ages 55 to 65, with a quarter million to a million in liquid assets, and for immediate annuities the primary buyers are those in their mid 60's who just retire and have money to rollover from their lifetime savings to purchase immediate annuities for retirement spending purposes.

Comparison of 4 Major Types of Life Insurance Products

10/30/2018

Q. What are the different types of life insurance products?

A. There are 4 major different types of life insurance products -

Term Life
Term life is used to provide a large amount of death benefits for the lowest amount of premium. This is a great way of providing the needed amount of death benefit to cover temporary, short term needs for things like income replacement, mortgage protection, children's education expenses, etc.

Whole Life
Whole life products are typically used to provide a minimum amount of death benefit and build the most amount of cash for the purpose of withdrawing tax-free income at some point in the future. The majority of the cash value is reliant on non-guaranteed dividend payments. If all of the available premium is used for whole life, you run the risk of being under insured.

Guaranteed Universal Life
Guaranteed universal life is a great hybrid approach to providing permanent protection with a cost somewhere between term and whole life premiums. There are typically very little or no cash values associated with this type of products. The attraction is the guaranteed premium structures and permanency of the death benefits.

Indexed Universal Life
Indexed universal life plans offer a hybrid approach to pricing for death benefits and provide permanent protection. They are designed to build cash values and give a large degree of premium flexibility compared to whole life, which offers very limited premium flexibility. Similar to whole life plans, these policies can also be used to build cash value and provide tax free income. The values are usually based on either a fixed interest rate (that can be guaranteed) or on a non-guaranteed market index, such as the S&P 500.

If you want to know more details about how to pick the right product and how to have the best policy design, please contact us.

Key Difference Between Fixed Annuity and Fixed Indexed Annuity

10/29/2018

Q. What's the main difference between a fixed annuity and a fixed indexed annuity?

A. Fixed indexed annuity is far more popular than its counterpart - fixed annuity, what attracts consumers to it?

To understand why fixed indexed annuity is more popular, one needs to understand the trade-off from a fixed interest rate to an indexed interest rate.

Annuities are spread-based products
The insurance company accepts your premium and earns interest, subtracts a spread for its expenses, then credits you a fixed rate or buys an option in the case of an indexed annuity.

For example, the insurance company earns 3.5%, needs 1.5% to cover expenses, and that 2% is policyholder's earning. Now the customer can either take the 2% as fixed interest, or have the company buy an option that costs 2% and the ending interest credit could be something higher or lower.

Fixed Annuity
Based on the above example, over 10 years, total return is 10x2% = 20%

Fixed Indexed Annuity
Tied to S&P 500 index performance with a 4% cap and 0% floor. Over 10 years, assume 7 years hits the cap, total return is 7x4% = 28%

So fixed indexed annuity offers 40% higher upside, what's the price for this upside? It's the reward for consumers who are willing to take the risk of their earnings, with their principal always protected.

4 Areas to Pay Attention to During Open Enrollment Time

10/28/2018

1. Health insurance
Most employers offer a variety of plans, including:

EPO (Exclusive Provider Organization).
HMO (Health Maintenance Organization).
POS (Point of Service).
PPO (Preferred Provider Organization).

You might also have the opportunity to open a flexible spending account (FSA), health savings account (HSA) or health reimbursement account (HRA).

The FSA lets you and your spouse set aside up to $2,600 each to pay for medical expenses tax-free during the year. Typically, you must use the money by year-end or lose it (although some FSAs will cover expenses through March 15 of the following year). So, you must estimate how much you think you’ll spend on health care over the next 12 months.

By comparison, an HSA (which is also tax-deductible) lets you contribute up to $6,900 for a family in 2018, and another $1,000 if you’re over 55. Unlike with an FSA, you don’t have to use all the money in one year; instead, you can roll it forward. HSAs are generally used when you have a high-deductible insurance plan.

You generally can’t contribute to both an HSA and an FSA at the same time — except that some employers offer HSA eligible, limited-purpose FSAs that cover only certain expenses, such as dental and vision costs.

Finally, an HRA is funded by your employer to help you pay for deductibles, coinsurance and PPO copays. (You can’t use it to pay for monthly health insurance premiums.) You can pair an HRA with any health insurance plan.

2. Life insurance
If your employer offers life insurance, you should take it — but never assume that’s all the life insurance you need. Such policies usually provide a death benefit of only one or two times your annual salary, and that’s probably not enough to adequately protect a spouse and children. Also, this benefit goes away if you quit or lose your job — but your risk of death doesn’t.

Buying life insurance on young children generally isn’t cost-effective or necessary. We generally don’t recommend taking voluntary accidental death and disability insurance or critical illness insurance either, as they also tend not to be cost-effective.

3. Disability insurance
Do, however, take short-term and long-term disability insurance. But pay for it with after-tax money — not pre-tax, even if you are offered that option. That’s because paying for the insurance pre-tax turns any disability checks you receive into taxable income. Paying the premiums after-tax keeps the benefits tax-free.

4. Long-term care insurance
We often recommend long-term care insurance because of the exploding cost of care. If you buy a long-term care policy through your employer, remember that you lose the coverage if you quit or lose your job. So shop in the commercial marketplace for the best policy you can find, and then compare it with the policy offered by your employer — or perhaps use a private policy to supplement your workplace coverage.

A Trick For People Over 70 to Simplify Paying Taxes

10/27/2018

Q. As a retiree, it's a pain to pay estimated taxes four times a year. Is there an easy solution to it?

A. Yes, there is a trick for people over 70.5 to simplify paying tax each year.

Tax Paying Pain Points for Retirees
For most retirees, you need to pay estimated taxes 4 times a year - first quarterly payment due in April, then June, September, and the following January. You need to pay at least 90% of your current tax year's liability or 100% of what you owed the previous tax year (or 110% if your prior year's adjusted gross income was more than $150K), otherwise you will owe underpayment penalty.

Not only can making such estimates be a pain, writing these 4 checks can disrupt your cash flow.

A Trick to Simplify Paying Taxes
Starting from age 70.5, retirees must take required minimum distributions from their traditional lRAs, based on the balance in the accounts on the previous December 31 divided by a factor provided by the IRS. If you don't need the IRA money to live on, you can wait till December to take your RMD and ask the sponsor to withhold a big chunk for the IRS, enough to cover your estimated tax on the IRA payout and all of your other taxable income for the year.

Here is the reason why this trick works - amounts withheld from IRA distributions are considered paid evenly throughout the year, even if made in a lump sum payment at year end.

So if your RMD is large enough to cover your entire tax bill, you can keep your cash safely in the IRA most of the year, avoid withholding on other sources of retirement income, skip the painful quarterly estimated payments ... and still avoid underpayment penalty!

The Caveat
RMD withholding might not work when it comes to state estimated taxes because some IRA sponsors won't withhold state income taxes. Check with your IRA sponsor for details.

Is Making an Insurance Inquiry the Same as Filing a Claim?

10/26/2018

Q. Is making an insurance inquiry the same as filing a claim?

A. Shockingly, the answer is Yes!

Asking about a potential claim is the same as filing one. Because industry data shows that those who ask end up filing claims more often than those who don’t ask. Even asking your agent (if you have one) can count as filing.

Also, insurers often deny people because of what they are insuring. For example, if the prior owner of your house filed many claims, you could be denied even though you never filed any claims yourself! So you should ask the seller about their insurance claims history on the house before you buy it — to make sure you can buy insurance and won’t have to pay higher-than- normal costs.

Lincoln Financial Helps Foreign Nationals Protect and Create Wealth

10/25/2018

Lincoln Financial Helps Foreign Nationals Protect and Create Wealth - see its videos for 5 reasons!

Buy or Rent Online Calculator From Fidelity

10/24/2018

Fidelity has a free online calculator that helps you evaluate whether buy or rent. It considers most of the important factors in the rent vs buy decision process.

If you are in the process of evaluating whether to buy or rent, give this Fidelity online buy vs rent tool a try!

How to Determine Which Life Insurance Policy Is Needed - Part B

10/23/2018

In last blogpost, we outlined 4 potential needs a life insurance policy could address and discussed the first one. Now we will show how life insurance could address the other 3 needs.

Avoiding liquidating assets at death
Imagine someone who owns and operates a midsize soybean farm and has two adult children. One child wants to run the farm and the other wants no part of it. In the event the client dies, there’s not enough cash in the business to buy out the disinterested child. Life insurance could provide liquidity at precisely the right time.

This is one example, but there are many situations where liquidity at death is extremely important to allow estate equalization without liquidating assets. In this situation the need is specific at death, so carrying significant cash value through the life of the policy doesn’t add value.

Increased certainty of an inheritance (for a well-funded, but conservative client)
Imagine someone who is generally conservative, whose portfolio might lean as far as 80% bonds, and who is highly motivated to leave money to her children. She may be well-suited to use life insurance to provide at least part of the inheritance.

Long-term care riders in these situations can be highly valuable because the leverage (risk-pooling) aspects of long-term care riders would protect a far greater portion of the estate than the conservative portfolio alone. Depending on how well-funded the person is, over-funding life insurance and carrying a significant cash value as a complimentary asset class with potential tax advantage can also be highly valuable.

Supplemental retirement income
This has historically been one of the most commonly suggested reasons to purchase permanent life insurance. First, it’s important to determine whether there is an at-death need. If there is, consider life insurance. If there is not, then there is a high likelihood this need can be met in a variety of other ways, such as a Roth IRA (subject to income limitations) or Roth conversions (not subject to income limitations). In some circumstances, there is no better way to meet the need than life insurance.

Other Business Needs Life Insurance Could Meet
There are also a variety of business uses for life insurance, particularly surrounding key people, deferred compensation plans and other executive benefits.

How to Determine Which Life Insurance Policy Is Needed - Part A

10/22/2018

Q. How to determine what type of life insurance policies I need?

A. There are two basic rules to life insurance:

Don’t risk what you can’t afford to lose
Don’t buy more than you need

The key is identify what's your risk mitigation needs or desired economic advantage, and then determine what type of life insurance policies meet the needs.

4 Major Needs
Typically, there are major needs life insurance policies could meet:

Income replacement
Liquidity at death
Increased certainty of inheritance
Supplemental retirement income.

How does a life insurance policy meet one of the above 4 needs?

Income replacement
Here’s an example of how life insurance can help a retiree who needs income replacement.

Consider someone who has pensions from several past employers and elected the “single life” option on all of them, with the expectation that he would outlive his wife. Although their relative health and family history would suggest that’s not a bad expectation, it’s not certain.

When shown what his wife’s living standard would be in the event of his death, he quickly recognized that some element of protection made sense. Determining how much is simply a matter of projecting the shortfall she would face in the absence of his pensions, after accounting for the fact that the cost to run the household will be less with only one mouth to feed.

Life Insurance Solution
Consider a minimum premium universal life policy with a no-lapse guarantee. That structure will keep the premium costs as low as possible while maintaining the ability to meet the need at death. Term riders can also be effective.

We will show how life insurance addresses the other 3 needs in next blogpost.

7 Differences Between Traditional IRA and Roth IRA Investors

10/21/2018

Traditional IRAs held $6.9 trillion in assets as of the end of 2016, while Roths held $690 billion at the same time. Traditional IRA investors at the end of 2016 numbered close to 12 million, while Roth investors numbered 5.9 million. Numbers aside, there are other contrasts between the investor groups themselves.

This article reveals 7 differences between traditional IRA and Roth IRA investors.

List of 102 Schools For Financial Planning Learning

10/20/2018

Financial Planning magazine publishes an annual schools listing, in alphabetical order from a Financial Planning survey of colleges and universities that ofer CFP Board-registered degree program.

Check out the list here.

Best Of Fixed Annuity Rates in October 2018

10/19/2018

The tables below show the best rates for fixed annuity products:

How Is MEC Status Determined?

10/18/2018

In last blogpost, we discussed what happens if your policy is a MEC. Now we will answer -

How is MEC status determined?

The IRC defines a seven-year testing period as the seven years that begin at issue of the policy or upon any Material Change. To determine if an insurance policy is a MEC, a premium limit, known as a seven-pay limit, is set.

This limit is defined at the beginning of the testing period based on IRC rules. The policy is tested for MEC status against the premium limit during the testing period. This is known as a seven-pay test.

For a policy covering a single insured, if benefits are reduced during a testing period, it usually is necessary to reapply the seven-pay test based on those reduced benefits.

The seven-pay test compares the cumulative premiums actually paid during the testing period against the cumulative seven-pay limit for that same period. The cumulative amount paid at all times in the testing period must not exceed the cumulative seven-pay limit or the policy will become a MEC.

What Happens If My Policy Is A MEC?

10/17/2018

In last blogpost, we discussed what is a MEC. Now we will answer the following question -

What happens if my policy is a MEC?

When your life insurance policy is classified as a MEC, you may be required to pay taxes if you withdraw funds from it, take a policy loan, or assign or pledge the policy.

This treatment also applies to such transactions in the two year period prior to a policy becoming a MEC. In addition, if a distribution is made before the policyowner reaches age 59.5, an Early Withdrawal Penalty may apply equal to 10% of the taxable portion of your distribution.

The tax and related penalty are only applicable to any gain attained within the policy. The amount of premium put into the policy (cost basis) is NOT subject to tax or penalty.

Upon the death of the insured, the policy's status as a MEC is no longer relevant, as the death benefit paid to the beneficiary will receive the same income tax treatment as the death benefit that is paid from a life insurance that is not a MEC.

In next blogpost, we will discuss how is MEC status determined.

What Is A Modified Endowment Contract (MEC)?

10/16/2018

Q. What is a MEC?

A. A Modified Endowment Contract, commonly referred as a MEC, is a life insurance policy where premiums paid exceed certain amounts specified under the Internal Revenue Code (IRC).

Taxation under a MEC is similar to taxation under an annuity for any distributions (including loans) made while the policy is in effect. However, as with all life insurance, the death benefit payable to the beneficiary is NOT generally subject to income tax.

Once classified as a MEC, a policy remains a MEC for its lifetime, even if it is later changed or reconfigured.

Next blogpost, we will answer "what happens if my policy is a MEC".

What Does Turning Age 18 Mean ... Legally?

10/15/2018

If you ever wonder what does it mean legally that your child turns to age 18, the article below could help you have a better understanding ...

7 Common Mistakes of Buying Life Insurance - Part B

10/14/2018

In our last blogpost, we discussed the first 3 common mistakes people make when considering life insurance. Now another 4 common mistakes people tend to make.

4. Considering illustrations as fact
When selling permanent insurance policies, agents like to give people a form called an “illustration” that demonstrates the cost of insurance and the future cash value of the policy. But be aware that the numbers you see on life-insurance illustrations are merely projections. They are not guarantees (unless you see that word printed there!) and the reality could be very different from what is illustrated. The actual interest rate earned by the policy might be lower than projected, the premiums might be higher, and other costs could rise if the policy is a non-guaranteed contract. Don’t give too much credence to policy illustrations.

5. Viewing the purchase as a one-time activity
As with the rest of financial planning, evaluating life insurance needs is an ongoing process, not a one-time product purchase. If you bought a policy 20 years ago, your death benefit may be much less than what you need today, because your income and expenses are likely higher than they were. It’s best to review your insurance needs every few years, or whenever you’ve experienced a major change in income/expenses, marital status or the birth or death of a family member.

6. Are you a tobacco user?
You’ll get far better rates if not. Tobacco users usually pay more than twice as much for insurance as nonusers. Some companies treat tobacco use more favorably than others, so it’s important to comparison shop.

7. Cancelling a policy before you obtain the new one
Term life insurance rates have dropped dramatically in recent years, making it worthwhile in many cases to switch insurance companies. But if you’re going to replace a policy for a new, lower-cost one, don’t do it until the new one is in force.

7 Common Mistakes of Buying Life Insurance - Part A

10/13/2018

Q. What are the common mistakes people make when buying life insurance?

A. The types and selections of life insurance products could be confusing. Below are 7 common mistakes people tend to make when purchasing life insurance -

1. Looking only at price
Whether buying temporary (term) or permanent insurance, consider the company’s financial strength and the policy’s guaranteed features. If you’re buying a term policy, compare the death benefit, the cost of the policy and the insurer’s rating to competitors. Such “apples to apples” evaluation can help you get the most insurance for the longest term at the best rate from a strong company. If you need permanent insurance instead of (or in addition to) term, also compare the assumed interest rate that each policy is offering. Decide which of all these variables is most important to you, make sure the others are equal, and then solve for the variable you’re emphasizing.

2. Automatically buying term life only
With longer life expectancies, today’s 30-year term policies are cheaper and more cost-effective than ever, and usually best if you don’t need life-long coverage. But some people have more than one need for insurance: for example, to ensure that a surviving spouse won’t lose the home while protecting the children from estate taxes. For such reasons, you may need a permanent policy, or even two policies — term and permanent.

3. Not buying enough coverage
Consumers often underestimate the amount of insurance that’s needed to properly protect their families. How much money your survivors will need and how long they’ll need it are key factors in determining the amount of coverage that’s right for your family.

We will discuss the other 4 common mistakes in next blogpost.

Should I Freeze My Credits?

10/12/2018

Q. Should I freeze my credits since it's free now?

A. A new law now requires all three major credit bureaus to offer credit freeze free, the new law requires that a thaw must also be free.

If you are still looking for reasons why you should freeze your credits, check out this NY Times article.

In the meantime, consumers should also look to freeze their file at the National Consumer Telecom and Utilities Exchange as well, as identity thieves can sometimes still open fake cellular accounts even if the other bureaus are frozen).

Read our past blogpost about how to freeze credits at 4 credit bureaus.

How to Estimate Retirement Spending

10/11/2018

Q. How to estimate retirement spending?

A. This Walls Street Journal article has an interesting way to estimate how much you will need during retirement time - by breaking up spending into 7 core categories:

Basic Needs (housing / utilities / healthcare)
Dining (eating in and eating out)
Recharge (salons, country clubs, golf memberships, gyms, etc.)
Travel (both local and far)
Digital Services (cable, internet, smartphones, etc.)
Entertainment (events, books, museums, parks, etc.)
Shopping (clothing, electronics, home goods, gifts, etc.)

This approach could lead to estimated spending in retirement much higher than estimates made based on pre-retirement lifestyle spending.

Marijuana or Cannabis Use and Life Insurance - Part C

10/10/2018

In our last blogpost, we discussed how underwriters will consider the use of marijuana and cannabis. Now we will share what questions underwriters will ask an applicant -

The primary questions to be asked of a proposed insured that presents with marijuana use history are:

Is the use for recreational or medicinal purpose?
If for medical concerns, what is the underlying health condition?... and what is the severity?
What is the frequency of use?
How is it used?...smoked/inhaled or ingested? (some carriers treat this type of use differently)
Have there been any problems with law enforcement?...or Dr’s concern over use?
Any other drug use or alcohol concerns?

Possible Underwriting Classes
With many carriers, the underwriting of an applicant with marijuana use will often end up with Standard Smoker offers at best...but we do have some who look at this more aggressively.

Depending on frequency and/or whether it’s for medicinal use, we still have a few that can rate at Standard Non-smoker or, occasionally, even at Preferred classes. Each individual case will be looked at based on its own characteristics. Please contact us so we could help evaluate your case.

Marijuana or Cannabis Use and Life Insurance - Part B

10/9/2018

In our last blogpost, we discussed what is cannabis, now we will discuss how life insurance underwriters consider its use.

Recreational or Medical Use?
For underwriting consideration, the first thing we must determine is whether the use is recreational, or if the proposed insured has been issued a prescription for medical use. If for medicinal purposes, underwriting is going to be looking at the specific issue the marijuana is being used to treat.

Medical legalization is intended to provide beneficial treatment for those suffering debilitating symptoms. However, severity is subjective and open to interpretation. These uses may include severe pain, muscle spasms, severe arthritis, cancer or HIV-related symptoms, weight loss, nausea, glaucoma, and seizures from epilepsy. This highlights the need for full information considering not only potentially serious and uninsurable conditions, but also the high potential risk for misuse.

For recreational use, the underwriter is going to want to know the frequency of use. Classification of marijuana use can be any of the following:

Experimental or intermittent use, for those who have tried but no longer use or are using up to a couple of times a month or less
Moderate use, for those whose use is as frequent as 8-16 times monthly
Heavy use, for those whose use frequency is more than 4 times weekly, or daily use.

There is evidence that many cannabis users do not abuse other drugs. However, multiple drug and alcohol use can be encountered with cannabis use; when combined, it is more toxic than each drug alone.

In our next blogpost, we will share what questions an underwriter will ask.

Marijuana or Cannabis Use and Life Insurance - Part A

10/8/2018

Q. If I have used marijuana or cannabis, will my life insurance application be impacted negatively?

A. Regardless of your personal views on the subject, use of the drug is more prevalent than ever and we must address the issue when it arises during the life insurance application and underwriting process.

What Is Cannabis?Cannabis is a natural psychoactive drug that comes from the flowers and leaves of the hemp/marijuana plant. Tetrahydrocannabinol (THC) is the primary ingredient in cannabis that causes euphoria and intoxication. Cannabis is most commonly smoked as a cigarette or in a pipe. It can also be taken orally, either by eating it directly or mixing it with food products.
Short-term memory, attention, motor skills reaction time, and skilled activities are impaired while the individual is intoxicated. Cannabis contains carcinogens, and evidence suggests that heavy use may be associated with oral cavity, pharynx, esophageal, and lung cancers. Because of those concerns, many carriers will assign smoker/tobacco use rates for any use.

In our next blogpost, we will discuss underwriting considerations when it comes to marijuana or cannabis use.

529 Plan or Prepaid Tuition Plan: Which Is Better?

10/7/2018

Q. I am considering opening either a 529 plan or a prepaid tuition plan, which is better?

A. 529 plan is better of the two, for the following reasons:

1. Prepaid Plan Only Covers Tuition
Room and board expenses, which could be half of the cost of college, are covered by 529 plan but not Prepaid tuition plan!

2. Prepaid Plan Requires to attend In-state Public School
If your child wants to go to a private or out of state college, it will not be covered by the prepaid plan. Even if you move out of the state and your child decides to go back to the state and attends the public school, he or she will have to pay out of state tuition which there will be a gap to fill.

3. Prepaid Plan Could Stops
At this time, only 16 states still offer prepaid tuition plan, the rest have cancelled their prepaid plans after finding that they couldn't invest the money to keep up with the pace of rising cost of tuition. In most cases, they return the money back with only a small amount of interest.