Why might the wealthy be directing more money into this middle-class bedrock?

For generations, Americans have thought of life insurance as a midlife purchase of the middle class. Today, that perception is less accurate.

Wealthier Americans seem to be buying more life insurance. Affluent individuals are recognizing what it may help to accomplish for their families and their companies. They see the twofold tax break offered by whole life and universal life policies – the death benefit goes untaxed, and the policy has a chance to accumulate cash value through a tax-deferred savings or investment account.

As tax rates may rise before the end of the decade, cash value life insurance may seem increasingly attractive to those in the top tax brackets.

Here is some recent history to mull over:

• In 2007, a striking 55% of tax-free investment gains inside universal life and whole life policies belonged to the wealthiest 10% of U.S. families. In fact, 22% of these assets belonged to the richest 1% of American families. (That data comes from the Federal Reserve.)
• In that same year, the life insurance industry research group LIMRA conducted a survey for the Wall Street Journal. It found that policies for $2 million and more comprised almost 40% of the face value of whole life and universal life policies sold that year. In 1997, large policies made up just 10% of the life insurance market; in 1987, they made up 1% of it.
• Prudential Financial Inc. says 31% of its life insurance policy sales in 2009 were made to households with investable assets of more than $250,000. In 1999, that demographic accounted for just 19% of its life insurance polices in force.¹

When you consider that households with adjusted gross incomes above $250,000 face a 0.9% income tax increase and a new 3.8% investment income tax in 2013, you have yet another factor that may contribute to the trend.²

An option to consider. Whether you see life insurance as an alternative investment or merely a resource to pay estate taxes or facilitate a buy-sell agreement, it may have merit as a complement to your retirement strategy – especially given the volatility of the stock market and the possibility of higher income taxes in the next few years.

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www.youtube.com/watch?v=k50Q8b6fLoE

One of my favorite questions:  What exactly is an annuity? Let me break it down to its basic function. An annuity is an investment contract with an insurance company, much like a CD is an investment contract with a bank.

Now, there are major differences. Your bank CD is probably going to be what is called FDIC insured, and your annuity is probably not going to be FDIC insured. Those are completely different things there. Having the FDIC and not having the FDIC. It’s an investment contract.

Now there are four main types of annuities. The first is a fixed annuity. The second is a variable annuity. The third is a fixed indexed annuity. And the fourth, which many people wouldn’t actually consider a different type of annuity but I do, is called an immediate annuity.

The fixed annuity is really simple. It’s where you’ve given your money to the insurance company and the insurance company guarantees you a certain interest rate on that money for a certain period of years. Could be one year, could be five years, could be ten years, something like that.

So you take them $100,000, they say, for this $100,000 we’ll guarantee you a 5% interest rate for the next five years. You say, “great”, shake hands, boom, you do the deal. Now you’ve got that. Now one of the key differences between let’s say a CD and an annuity is the growth you get inside of your annuity gets to grow tax deferred. Now if that annuity is also inside of a Roth IRA, it’s going to grow tax deferred and because the IRS looks at the Roth IRA first, it’s going to come out tax-free.

Now a variable annuity is a little bit different. You take that insurance company $100,000 and you go, here, but I’d like you to take that $100,000 and I’d like you to put part of it in Fidelity, part of it in Janus, part of it in Alger, part of it in Vanguard. And they go, no problem. And now the returns you get are based on those, what we call subaccounts. And you go, “well Pete, I’ve never heard this term subaccount before. I mean, this looks like the Fidelity account. It looks like a mutual fund.” Well, it does look like a mutual fund. It smells like a mutual fund. It might even have the same fund manager as the mutual fund. But when it’s in insurance, it’s no longer called mutual fund. It’s called a subaccount. So what’s the difference? I don’t know, a few letters in the name? Basically, that’s the main difference.

So you get to go up when the market goes up and down when the market goes down. However, on a variable annuity, if you put $100,000 in it and let’s say the market fell to $80,000 and you died, your heirs would get the full $100,000 because it’s inside of this annuity, and an annuity is an insurance contract so the insurance company has to give you something for that, and basically what they’re giving you is a death benefit, that no matter what happens you’re at least going to get how much money you put in, minus however much money you’ve personally taken out. So if the market falls, hey, it falls. But you died, great, your heirs get all of it. If you say, hey, I put in $100,000, it grew to $110,000 but I took out $30,000, well then your heirs are going to get $80,000. Because it went up to $110,000, you pulled out $30,000. Does that make sense?

Now, the third is the fixed indexed annuity. These have been really, really popular and there are some great indexed annuities out there and there are some really, really bad indexed annuities out there that I wouldn’t touch with a ten-foot pole. Now, the same can be said with almost any investment, so you can’t just look at it and say, well, this investment’s good or this investment’s bad. There’s a time and a place for everything. But let me give you the basics of how an indexed annuity works. I’m going to make it really simple because I’m only going to talk about one of the options in an indexed annuity.

We’re going to say that this indexed annuity, your growth that you get is based on the S&P 500. So what this means is this. They’re going to give you a cap as to how much growth you can get, and you’re going to have a floor as to how little growth you can get. So let’s say our cap is 10%, and the S&P goes up 7%. Well, you put $100,000 in, a year later they look at it and they go, okay, the S&P 500’s up 7%, your cap is at 10%, we’re going to give you 7% on that money. The next year after that it goes up another 15%. Well, your cap is at 10%, so you only get 10%. Let’s say it’s three great boom years in a row, the next year it goes up 35%. All you’re going to get is 10%. That’s the cap. That’s the best you can do. Now let’s say the following year after that we have the great crash of 2008 all over again, right? And the market goes down 40%. You get zero. You see, your money’s not actually in the S&P 500, it’s linked to it. So if the market goes down, you don’t lose anything because it’s not actually in it. It just means that year you didn’t make any interest.

Now when you start to understand that concept, these start to look really, really nice because you get to go up. Granted, you don’t get to go up all the way with the market, but you’re guaranteed that you’re never going to lose. Now, as long as you can deal with just getting moderate gains, this may not be a bad option for a lot of people.

It’s not really meant to compete with the securities markets, it’s meant to compete with the fixed markets, like the fixed annuities, the CDs, things like that. That’s what it’s really meant to be. So it’s somewhere in between the fixed markets and the stock market as far as what you can potentially get as far as gain is concerned.

Now, the fourth option is the immediate annuity. And the immediate annuity is very much like a pension. You give the insurance company let’s say $100,000 and they guarantee you that you’re going to get an income for the rest of your life. It’s going to come to you if you want it every month or every quarter or every year, it doesn’t really matter to most immediate annuity companies. And so that’s why I kind of look at it a little bit differently because the other three are all meant for growing your money, and the immediate annuity is meant for income, and that’s exactly what it’s going to provide to you is income.

Now having said all this, there are a lot of variations on annuities, and like I said before, some of them are great, some of them are really bad. Before you go putting yourself into an annuity, you need to talk to a qualified professional who understands this stuff and isn’t just limited to these types of products. If you go talk to a car salesman, he’s going to sell you a car. But what if what you really needed was a truck or a motorcycle? Well, if he doesn’t have those, he’s not going to offer that to you. So you want to make sure that you’re talking with someone who’s not just pigeonholed, which are usually just—and I don’t mean to offend anybody—basic insurance agents. Of course they’re going to tell you, hey, you need this.

They’re great options, but you just need to make sure that you’re getting a look at all of your options.

I’m Pete Mitchell, and I look forward to sharing more on the markets and investing with you later.

What do they do? And should you have one?

www.youtube.com/watch?v=-LqDlixUWSA

What does a financial planner do? Well, that depends. Many individuals refer to themselves as “financial planners”, but not all perform true multidisciplinary financial planning. Investment, insurance and tax professionals sometimes specialize in certain areas of financial planning (such as retirement planning, estate planning, tax planning, or investment management).

In general, individuals who call themselves “financial planners” aim to help you plan for your goals and needs and improve your unique financial situation.

What doesn’t a financial planner do? A financial planner cannot make you a thriftier shopper, a better saver, or help you earn more money. Ideally, he or she will look at your financial “big picture” and help you work to enhance it via money management. Depending on their credentials, they may recommend specific investments, long-run investing strategies, insurance options, retirement planning, risk management methods and more.

Who needs a financial planner? If you have some significant assets built up (a home, a retirement fund, savings, etc.) and are wondering about how to protect and/or grow those assets, you’re probably ready for a financial planner. If you currently live paycheck to paycheck or have less than $10,000 combined in your savings and/or any retirement accounts, then you’re probably not yet in need of a financial planner. What you should do is research savings strategies and take a good look at your spending habits so you can begin to build your wealth at a faster pace.

How much does it cost? That is a tricky question to answer. The cost of hiring a financial planner can vary depending on who you hire, where they are located and what type of “fee structure” they use. A fee-only financial planner earns a flat fee, hourly or otherwise, for their services. A fee-based planner generally prefers to charge advisory fees (often .50% to 2.00% annually of the assets under management) for his or her services, rather than commissions linked to investments or product sales.

In occasional instances, charging commissions may actually be more cost-effective for you, but may not be as beneficial. A commission-based planner typically receives the total percentage of his or her income in upfront commissions and therefore some may feel they have little incentive to service you on an ongoing basis.

In most cases, your initial meeting with one of these professionals will be free of charge (be sure to ask in advance about this), and you can discuss fee schedules and compensation arrangements at that time.

How do I choose a planner? In two words … ask questions. Ask trusted friends or colleagues for referrals. Sit down with any planner you’re considering and find out how long they’ve been in business, what their credentials are, how they operate, etc. Most importantly, make sure if and when you hire a planner that your personalities will mesh. This is someone you may well be working with for the rest of your life, so you should choose someone you feel comfortable with.

If you can’t afford a long term care policy, this may be a good alternative.

www.youtube.com/watch?v=pt6wDdc7qsU

Are you familiar with critical illness insurance? Some people aren’t. It doesn’t get as much attention as disability insurance or long term care coverage. But if you face a serious health threat, a critical illness policy can help to ease a financial burden.

A tax-free lump sum at a crucial time. That is what critical illness insurance provides. If you have a life-threatening illness severe enough to prevent you from working, the money from a critical illness policy can be used to pay medical bills and even some costs not covered by medical insurance. While the insurance premiums are not tax-deductible, the insurance proceeds come to you tax-free.¹

A few years ago, a Harvard University study determined that about half of all personal bankruptcies in the U.S. happened as a result of the debts incurred by a critical illness.² Imagine having $50,000, $100,000, even $500,000 in tax-free cash to help you out in the event of a heart attack, a stroke or cancer. That is the kind of coverage we’re talking about. In 2007, the average payout was $100,000 with the average recipient being just under 50 years old.³

What illnesses does a policy cover? Critical illness insurance can cover two dozen or more health circumstances. Nearly all policies cover most forms of cancer, heart attacks and strokes, renal failure, multiple sclerosis, and operations such as heart bypass surgery and major organ transplants. The tax-free lump sum comes to you within 30 days of a diagnosis of a life-threatening disease.⁴

Critical illness insurance doesn’t cover everything. For example, early-stage prostate cancer and less lethal forms of skin cancer aren’t usually covered. Some policies don’t provide coverage if you have lymphoma, or Kaposi’s sarcoma related to HIV. If you have already beat back a serious health threat or if cancer or heart disease runs in your family, then you are undoubtedly going to have to pay more for this coverage – and a disease you fought into remission may be excluded from the policy.

Who buys this coverage? Well, it is often sold in tandem with life insurance – but not always. There are a few different scenarios in which critical illness insurance can be a great help:

• You have a major medical problem and you don’t have health insurance.
• You have health insurance, but it won’t pick up the cost of the treatments you need.
• You face a major health scare, and you are unable to pay your bills and your mortgage because you can’t work.
• You worry about winding up in a nursing home or an assisted-living facility someday, but you can’t afford to pay high premiums for long term care insurance.

Sometimes you can guarantee the premiums on a critical illness policy so they won’t rise with time.

You don’t have to be employed to collect the benefits from a critical illness policy. You don’t have to be disabled to collect the benefits either. You don’t even have to spend the lump sum on medical expenses – you can spend it as you wish.⁵

Critical illness insurance has been around since 1983 – it was first offered in South Africa, became popular in Canada and Europe, and has become an option more people are exploring in the U.S. A 2010 study from the nonprofit American Association for Critical Illness Insurance found that 89% of those opting for the coverage were under age 45.⁶

If you’re self-employed, in a high-risk line of work, or just want to have little more protection in case a serious illness strikes, take a look at critical illness insurance. Ask your insurance agent to show you some options. You might be very thankful for it someday.

Four tips for recovering from unemployment.

www.youtube.com/watch?v=kp5S6YhxpjY

Any period of unemployment is fraught with stress – both personal and financial. While landing that formerly-elusive new job can be a relief, it is only the first step on the road to recovery from unemployment. This transition time is akin to breaking the surface after being underwater for several minutes. It’s a relief to be breathing again and feel the sun on your face, but it’s no time to relax. You must start swimming right away to get back to a healthy financial shore.

Here are four steps you can take to help make sure your recent unemployment doesn’t cast a long shadow across your future financial health.

Continue to live lean. More likely than not, you weren’t buying $4 coffees while unemployed. Five star restaurants were out too. Hamburger may have replaced steak. You may want to continue to follow that pattern. We tend to grow into our incomes, our budgets bloating along with our salaries. Fighting that urge will help with the rest of the steps to unemployment recovery.

Protect yourself ASAP. The longer your unemployment lasts the more important basic survival becomes. Someone who is unemployed may let life insurance, disability insurance or health insurance policies lapse as they try to keep current on the mortgage, pay utilities and put groceries in the pantry. Sometime during the first few days of your employment you should enroll in whatever benefits you need that your company offers. If the new firm does not offer the coverage you need, make an appointment with an insurance professional and use part of your first paycheck to protect you and your family. Remember, the income from your new job won’t benefit anyone if a catastrophic illness, disability or death suddenly takes it away.

Develop a plan to pay down your debts. When you have a job, debts are a nuisance. When you don’t have a job, they may become a threat to your future financial well-being. While it’s normal to hope that you never have to go through unemployment again, you must start preparing for the possibility.

If you are behind on your mortgage, call your lender to let them know of your new job and to work with them on a plan to catch up on your payments. If they are unwilling to work with you, consider using a Federal resource such as those offered by the U.S. Housing and Urban Development Administration.

While there are fewer similar programs for car loans, calling your lender and trying to develop a plan for a loan you’re behind on should be your first step.

All too often during unemployment, credit cards may be used to get by when cash is low. While your interest rates may have been low when you initially signed up for the card, new legislation has caused a spike in credit card rates.¹ Rates of 20% – 30% are not uncommon as banks react to new rules. Paying down these balances should also be a primary goal.

Remember to start paying yourself. Whether you call it a rainy day fund, a nest egg or emergency cash, slowly, paycheck by paycheck, begin paying yourself a fraction of your salary. Some experts will argue that a family should keep six months to one year’s worth of expenses in the bank for unexpected events such as a blown car engine, the roof caving in, or another round of unemployment.¹ For many families, that may feel like an insurmountable sum. But as the old joke goes “How do you eat an elephant?” The answer: “One bite at a time”. Paying yourself has to be done paycheck-to-paycheck, little by little.

1. http://www.marketwatch.com/story/credit-cards-gouge-consumers-ahead-of-new-law-2009-11-06 [11/10/09]

If you’re just starting to look into life insurance,
the myriad of choices can be confusing.

www.youtube.com/watch?v=kEcc76QhCyo

Man is Mortal. That makes life insurance a little unique and interesting, doesn’t it? We purchase things like health insurance, car insurance and home insurance, then hope we never have a need to use them. Life insurance is different, because it’s a widely accepted fact that sooner or later, each one of us will die.

So many choices. When it comes to life insurance, there are many options. You may have heard terms like “whole life insurance”, “term insurance” or “variable insurance” … but what does it all mean? And what are the differences? Well, first let me point out what they have in common: all life insurance policies provide payment to a beneficiary in the event of your death. Except for that basic tenet, the differences between policies can be major.

Whole life insurance. This type of insurance covers your entire life (not just a portion or a “term” of it). Insurance companies tend to be cautious when selecting their investments, so the benefits could be lower than if you invested on your own. Whole life policies also tend to cost more than “term” policies. This is both because they grow what is known as “cash value”, and because after a time you will be able to borrow against or withdraw from your whole life benefits.

Term insurance. Rather than covering your whole life, “term” insurance covers a pre-determined portion of your life. If you die within that term, your beneficiaries receive a death benefit. If not, generally you get nothing. To put it simply, term insurance allows you to purchase more coverage for less money. Basically, you are betting on the probability of your death occurring within that specified “term”.

Variable life insurance. Variable life insurance is a permanent insurance. However, unlike whole life insurance, variable insurance allows you to invest the cash value of your policy in “subaccounts” (which can include money market funds, bonds or stocks). Variable insurance offers a bit of control, as the value and benefit depend upon the performance of the subaccounts you select. However, that means there could be significant risk involved, since the performance of your subaccounts cannot be guaranteed.

Universal life insurance. With universal insurance, it all comes down to flexibility. It is permanent life insurance that provides access to cash values that build up tax-deferred. You can choose the amount of coverage you feel is appropriate, and you retain the ability to increase or decrease that amount as needs change (subject to minimums and requirements). You also have some flexibility in determining how much of your premium is goes towards insurance, and how much is used within the policy’s investment element.

So, which is right for you? Many factors come into play when deciding what type of life insurance will best suit your needs. The best thing to do is speak with a trusted and qualified financial professional who can assist you in looking at all the factors and help you to choose the policy that will work best for you.

An estate planning option more families ought to know about.

www.youtube.com/watch?v=28Zf4B0uROA

You may think of life insurance in very simple terms: you buy a policy so that your loved ones will have some financial assistance when you die. But if you have assets of $1 million or more, you should view life insurance as a tool – kind of a Swiss army knife, in fact. Life insurance has many potential uses in estate planning, and a life insurance trust can certainly help a family.

What does a life insurance trust do? It enables you and your family to do three things in particular. One, it provides you, your spouse and your heirs with life insurance coverage after it is implemented. Two, it allows a trustee to distribute death benefits from a life insurance policy as that trustee sees fit. Three, it gives you the chance to reduce your estate taxes.

When you create a life insurance trust, you are creating an entity (the trust) to buy life insurance policies for you and your loved ones. You don’t own the policies, the trust does. So the insurance proceeds go into the trust when someone passes away. Because the trust owns the insurance policies instead of a person, the insurance proceeds aren’t subject to probate, income taxes or estate taxes. The trustee can distribute those proceeds to one or more parties as stipulated in the language of the trust. Also, if your estate ends up really large, the trust can buy additional life insurance to provide additional cash to pay additional estate taxes.

Sometimes these trusts establish investment policies for life insurance proceeds, and even timelines for who receives what when (families may want to delay an heir from legally receiving an inheritance until age 18 or 21, for example).

Why not just have someone else own my insurance policy? That scenario can lead to major financial and familial headaches. If that person dies before you die, the cash value of the policy will be included in their taxable estate. So the heirs (and relatives) of that person will have higher estate taxes to pay as a result. Also, if you do this, you surrender control of your policy; the loved one you trust could end up naming another beneficiary or even cashing your policy out.

A decision for life. Almost all life insurance trusts are irrevocable trusts. That is, they are legally “set in stone” once created, unlike a revocable trust which can be amended or revoked after creation. You can make these trusts revocable, but if you do, you lose the tax benefit: the insurance proceeds will be included in your taxable estate when you die, which could increase the estate tax bill for your heirs. However, some irrevocable life insurance trusts purchase survivorship life insurance in a profit sharing plan to permit the ability to change beneficiaries.

If you’d like to know more about life insurance trusts or the potentially significant changes in estate taxes over the next few years, talk me by calling 800-990-2734 or by sending me an email at Pete@PeteMitchellinc.com.