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.

You can thank the Pension Protection Act.

www.youtube.com/watch?v=TXF09-F84SE

More options. On January 1, 2010, owners of non-qualified annuities were allowed some new tax benefits. On that date, the Pension Protection Act (PPA) of 2006 was fully implemented and brought about dramatic and interesting changes for those who had started annuities with after-tax dollars. At the start of 2010:

• Non-qualified deferred annuities with added long term care insurance riders were now characterized as tax-qualified LTC insurance plans.¹
• As a result, all withdrawals from these “hybrid annuities” are income tax free so long as they are used for qualified long term care. So you can use the cash value of the annuity to cover the cost of LTC insurance premiums without triggering a taxable event.¹
• Annuity owners were now allowed to make tax-free 1035 exchanges into appropriate hybrid annuities with long term care riders.²
• Additionally, an annuity owner can do a 1035 exchange for the cash value from any annuity into a single-premium qualified LTC insurance policy without incurring any gains.²

Now these annuities are even more attractive. Hybrid annuities with LTC insurance riders already offer their owners tax-deferred growth – and sometimes, a return-of-premium option that gives back the investment to an owner’s estate if no LTC claim is made. These linked-benefit annuities (and linked-benefit life insurance policies) can provide something like a “money-back guarantee”, as well as the capability to multiply the benefit value of idle cash sitting on the sidelines. The new allowance of what could be sizable tax-free withdrawals makes them look even better.

In addition, the new freedom to make a tax-free exchange means that an annuity owner can now leave a current contract for a hybrid annuity that may provide a much greater pool of money someday to cover LTC costs.

Are they for you? These hybrid annuities are certainly worth a look. If you can’t qualify medically for LTC insurance but still need to be protected, a hybrid annuity may be an excellent option. Many people fund these annuities by redirecting cash from a bank CD or an annuity they already own. You might want to talk to your insurance or financial consultant about the possibility.

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.

Who should inherit your IRA or 401(k)? See that they do.

www.youtube.com/watch?v=M4SY07wSdSk

Here’s a simple financial question: who is the beneficiary of your IRA? How about your 401(k), life insurance policy, or annuity?

You may be able to answer such a question quickly and easily. Or you may be saying, “You know … I’m not totally sure.” Whatever your answer, it is smart to periodically review your beneficiary designations.

Your choices may need to change with the times. When did you open your first IRA? When did you buy your life insurance policy? Was it back in the Eighties? Are you still living in the same home and working at the same job as you did back then? Have your priorities changed a bit – perhaps more than a bit?

While your beneficiary choices may seem obvious and rock-solid when you initially make them, time has a way of altering things. In a stretch of five or ten years, some major changes can occur in your life – and they may warrant changes in your beneficiary decisions.

In fact, you might want to review them annually. Here’s why: companies frequently change custodians when it comes to retirement plans and insurance policies. When a new custodian comes on board, a beneficiary designation can get lost in the paper shuffle. (It has happened.) If you don’t have a designated beneficiary on your 401(k), the assets may go to the “default” beneficiary when you pass away, which might throw a wrench into your estate planning.

How your choices affect your loved ones. The beneficiary of your IRA, annuity, 401(k) or life insurance policy may be your spouse, your child, maybe another loved one or maybe even an institution. Naming a beneficiary helps to keep these assets out of probate when you pass away.

Many people do not realize that beneficiary designations take priority over bequests made in a will or living trust. For example, if you long ago named a son or daughter who is now estranged from you as the beneficiary of your life insurance policy, he or she will receive the death benefit when you die, regardless of what your will states.¹

You may have even chosen the “smartest financial mind” in your family as your beneficiary, thinking that he or she has the knowledge to carry out your financial wishes in the event of your death. But what if this person passes away before you do? What if you change your mind about the way you want your assets distributed, and are unable to communicate your intentions in time? And what if he or she inherits tax problems as a result of receiving your assets? (See below.)

How your choices affect your estate. Virtually any inheritance carries a tax consequence. (Of course, through careful estate planning, you can try to defer or even eliminate that consequence.)

If you are simply naming your spouse as your beneficiary, the tax consequences are less thorny. Assets you inherit from your spouse aren’t subject to estate tax, as long as you are a U.S. citizen.² For example, a spouse can roll assets inherited from a 401(k) plan into an IRA without incurring taxes on the wealth transfer.³

When the beneficiary isn’t your spouse, things get a little more complicated … for your estate, and for your beneficiary’s estate. If you name, for example, your son or your sister as the beneficiary of your retirement plan assets, the amount of those assets will be included in the value of your taxable estate. (This might mean a higher estate tax bill for your heirs.) And the problem will persist: when your non-spouse beneficiary inherits those retirement plan assets, those assets become part of his or her taxable estate, and his or her heirs might face higher estate taxes. Your non-spouse heir might also have to take required income distributions from that retirement plan someday, and pay the required taxes on that income.⁴

If you designate a charity or other 501(c)(3) non-profit organization as a beneficiary, the assets involved can pass to the charity without being taxed, and your estate can qualify for a charitable deduction.⁴

Are your beneficiary designations up to date? Don’t assume. Don’t guess. Make sure your assets are set to transfer to the people or institutions you prefer. Let’s check up and make sure your beneficiary choices make sense for the future. Just give me a call or send me an e-mail – I’m happy to help you.

Citations.

¹ seattlepi.nwsource.com/lifestyle/356213_consumer25.html          [4/24/08]

² smartmoney.com/taxmatters/index.cfm?Story=20020830              [9/29/00]

³ online.wsj.com/public/article/SB119948578270968559.html?mod=yahoo_free         [1/5/08]

⁴ news.morningstar.com/articlenet/article.aspx?id=212411           [11/6/07]

⁵ investmentnews.com/apps/pbcs.dll/article?AID=/20080331/REG/872112904/1037 [3/31/08]

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice.