I was just sitting outside on my deck this Labor Day having a nice glass of Pinot Noir after grilling on the barbecue for Terri and Brian when I reflected on Scotty and Laura who are both away today. I was reading that September is Life Insurance Awareness Month. It reminded me of Scotty, six years old at the time. He came in from the yard one day yelling at the top of his lungs for his mother. Naturally, this distracted me from my work in my office (I spent too much time there anyway). Scotty upped his yell several decibels and just then Terri came down from the second floor where she had been running the clothes dryer. She said, “What do you want, Scott?” He replied, “Nothing; just wanted to know where you were.”

I’ve told that story hundreds of times because it shows why I pay the premiums on the life insurance policies that I have. I may have never left my three children an empire, a block of real estate or a huge stock portfolio at the time, but I was going to leave them a priceless gift: a fulltime mother. Because of my life insurance, all three could come yelling for their mother knowing she was somewhere around the house, even though she didn’t answer.

Another time I was sitting in the recliner reading the paper when eight year old Laura slipped her little brown haired head under my arm and wiggled onto my lap. I kept reading and then she said those few words that have helped me sell millions of dollars of life insurance. Looking at me with big, sad eyes, she said, “Daddy, if you won’t ever leave me, I won’t ever leave you.”

I couldn’t understand what prompted those words, but I immediately thought: “Well, dearest, I would never leave you, but if the Lord should rule otherwise at least I’ll never leave you without.”

Years ago I learned there were two kinds of dads, the see-kind and the have-kind. The see-kind says, “I want my family to have everything I can give them as long as I’m here to see it.” The have-kind says, “I want them to have it whether I’m here to see it or not.”

I mentioned earlier that September is Life Insurance Awareness Month. Consider giving your family the gift of long-term financial security. I’d like to review your life insurance program to make sure your coverage is up to date from their perspective. Just click here and we’ll contact you to arrange an appointment.

When it comes to showing our love, we sometimes go over the top with a crazy, silly or extravagant gesture. Other times we express our love in a quiet, tender act. But why all this talk about love on a life insurance website? Is there anything “loving” about life insurance? Actually, life insurance is all about love. The main reason we buy life insurance is because we love people and want to make sure they’ll always be protected financially, even after we’re gone.

Click here to learn more about life insurance and how it can protect the ones you love.

Warmest Regards,

Marty Higgins
Founder, Family Wealth Management Advisory, LLC

Why do people buy life insurance? More specifically, why do you buy life insurance?

Without life insurance, a financial plan is just an investment plan that will die when you do. People dream dreams. Without enough life insurance, your dreams will probably die when you do?

Most people have either an estate tax problem or an estate size problem. What does that mean? When you die, your estate will be subject to income taxes and estate taxes. Life insurance can provide the money to pay the taxes rather than liquidating other more valuable growth and income-producing assets. On the other hand, most people have an estate size problem. Life insurance helps creates wealth that they have not had enough time to accumulate themselves.

I’ve heard it said many times that if people truly understood life insurance, they would be lining up to buy it. Life insurance is a commonsense cash cushion to fall back on during your lifetime or for your family when you die. Think of it in this context. How would you feel about a bank savings account that pays higher interest than the bank over the long haul, and where the interest is either tax-free or tax-deferred, depending upon the degree of tax planning done? In addition to that, there is a tax-free death benefit. Over the long haul, it will quite probably substantially outperform the bank.

Buying life insurance is a reflection of common sense, caring, commitment, and character. It is about doing the right thing for yourself and your family. General Norman Schwarzkopf said, “The truth of the matter is that you always know the right thing to do.  The hard part is doing it.” This statement certainly applies to life insurance.

Life insurance only makes sense if you are going to die. Coming to grips with that fact is not so easy for everyone. No one has a lease on life. If you don’t die before age 65, you will die after age 65. It is bad enough to die. Don’t do it for free.

Most of us understand that we have a responsibility to our families. It is easy to say you love someone. Buying life insurance means putting your money where your mouth is. As General Schwarzkopf said, we know the right thing to do. As he also said, we need help doing it. That is why most people need a life insurance agent to help them do the right thing.

The commercial featuring that loud, quacking duck has gone a long way to making people think about individual disability coverage as a way to keep bills paid if the family breadwinner gets sick or injured over an extended period of time.

It’s true — individual disability insurance is more important than ever, and every working individual should have it.

The key is shopping smart for that coverage. A financial planning professional is a good first stop for advice on that coverage, which should be considered as part of an overall financial plan.

Why is it a good idea to have personal disability coverage, particularly when most employees can buy such coverage at work for a nominal fee? That’s because most employers offer disability coverage that lasts 12 weeks or less and covers less than 60 percent of a worker’s pretax income. That might be workable for a surgery or injury with a relatively quick recovery time on the couch, but a diagnosis for even the most curable cancers can put workers with even the best financial coverage into a devastating financial bind.

And if you are self-employed, the need for the best, most flexible long-term disability insurance is even more important because other than your own resources, that coverage will be your own safety net.

Here are some essential things to know about long-term disability coverage. Remember that policy language is critical, and a financial planner can give you a second, helpful set of eyes to review what your insurance agent recommends:

If you’re considering becoming self-employed or might lose your job due to layoff: The time to buy long-term disability coverage is NOW. Insurers will base your initial coverage limits on what you’re earning in your current job, which is important since entrepreneurs and unemployed often earn considerably less – at least for awhile — once they’ve left their current employer.

Make sure you can purchase more coverage as your income increases: Because you stand to earn more in future working years – if only based on inflation – you should make sure your benefit levels can rise to meet the demands of replacing that income if you need to in the future. Obviously, people who expect to make vastly higher salaries in the future need to plan for this.

Check for a non-cancellation feature: Make sure that once you’re approved, the insurer can’t cut your coverage unless it decides to stop writing coverage for everyone in your job class. It should also state that the insurer can’t raise your rates based on the benefits you’re to receive.

Compare benefits and premium cost: Get bids from several carriers and consider going to more than one agent. The premium you pay will depend on a wide array of factors and can vary dramatically from person to person. Such things as your age and your gender (women pay more for disability insurance because they currently tend to live and work longer, for example) will be a factor in what you pay.

Go for “own occupation” coverage: Even if you are able to work in a different capacity, own-occupation disability insurance will provide you with the income replacement you need if you are unable to work in your current occupation. Make sure you understand how that coverage fits your current profession.

Know what “elimination period” means: Like a deductible in home, health or car insurance, the elimination period is a big cost determinant in disability coverage. (It’s actually a big factor in long-term care policies as well.) Most long-term disability policies will kick in after 30 days after you’ve been declared disabled. But if you specify an elimination period of 60, 90 or 120 days, your premium will be lower. An important point about the 30-day elimination period:  the benefits don’t start accumulating until you’ve been laid up a month after the ruling date and you won’t get your payment until a month after that. Be very clear with your insurer when you’ll get your first check based on what elimination period you choose, and make sure you have a cash cushion to cover that need in your emergency fund.

What’s your benefit term: For each disabling incident, your policy may pay benefits for a certain period – two, five years or until retirement. It’s all in how your policy is constructed. Many policies may pay for life if you purchase this benefit and you are disabled prior to age 60. Also, make sure there’s language that increases your benefits as your income increases over time.

See if there’s a residual benefit feature: Some policies may offer you ‘residual benefits’ or a partial payment if you’re less than 100 percent disabled, but still can’t perform all the duties of your job.

April 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V. Higgins, CFP, CLU, AEP, a local member of FPA.

If you’ve never taken notice of disability coverage before, it’s time to start.

Disability insurance protects your ability to earn an income. It provides money to pay your rent, mortgage and basic living expenses if you are injured or sick for an extended period. It is called disability insurance or disability income protection but think of it as income replacement when you are sick or hurt and cannot work. At any age, you are about six times more likely to become disabled for some period of time than to die.

Think your employer’s coverage is enough? Think again. You may have whatever sick leave you have coming, and then if an employer offers short-term disability coverage, it generally doesn’t last more than 12 weeks. There are employers that offer long-term disability coverage, but if you’ve never checked the terms of that coverage, you should.

It never hurts to consult a financial advisor with expertise in this subject, such as a CERTIFIED FINANCIAL PLANNER™ professional.

Basic components of long-term disability coverage:

Monthly benefits:

Depending on your income, long-term disability insurance is generally structured to pay 50 to 70 percent of your income up to age 67 or your normal retirement age. Research if the policy you’re buying offers you the chance to buy more insurance as your income increases in future years.

Benefit term:

For each disabling incident, your policy may pay benefits for a certain period – two or five years, or until retirement. It’s all about how your policy is constructed. Some policies even pay for life if you purchase this benefit and you are disabled prior to age 60.

Buying younger is generally cheaper:

Like health and life insurance, the younger you buy, the less you’ll pay. Occupation enters into the picture because high-risk jobs (where disability is a greater work-related factor) tend to draw more claims. Like health insurance, the company will consider your medical history and your lifestyle, including your weight, pre-existing conditions and whether or not you smoke.

Premium cost:

The premium will depend on a wide array of factors and can vary dramatically from person to person. Such things as your age and your gender (women pay more for disability insurance because they tend to live longer and may work longer) will be considered.

Non-cancellation provisions:

Make sure that once you’re approved, the insurer can’t cut your coverage unless it decides to stop writing coverage for everyone in your job class. It should also state that the insurer can’t raise your rates.

Guaranteed renewable:

Like the category above, this means your insurance can’t be canceled,. The insurer can, however, raise the rates for everyone in the category.

Own occupation vs. any occupation:

If you have “own occupation” coverage, it is intended to go into effect if you can’t perform the functions of your current job. “Any occupation” coverage pays only if you can’t work at any job where you’ve been reasonably trained to do the tasks. For example, if you’re working a desk job, you could easily be transferred to a receptionist’s job or some other function within the company that you can now do or is your former position. That could significantly interfere with your recovery time, so consider the benefits and specify “own occupation” coverage.

Elimination period:

Like a deductible in home, health or car insurance, the elimination period is a big cost determinant in disability coverage. Most policies will start paying after 30 days after you’ve been declared disabled. But if you specify an elimination period of 60, 90 or 120 days, your premium will be lower. An important point about the 30-day elimination period:  the benefits don’t start accumulating until you’ve been laid up a month after the ruling date and you won’t get your payment until a month after that. Be very clear with your insurer when you’ll get your first check based on what elimination period you choose, and funnel the money you’ll need in the meantime to your emergency fund.

Partial payments/Residual benefits:

Some policies may offer you ‘residual benefits’ or a partial payment if you’re less than 100 percent disabled, but still can’t perform all the duties of your job.

If you’re thinking about self-employment:

You’ll likely need disability coverage. But the time to buy is while you’re still in your current job. Why? You won’t be able to prove your income once self-employed, so consider obtaining your desired coverage before you leave.

February 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V. Higgins, CFP, CLU, AEP, a local member of FPA.

.

If you’ve never taken notice of disability coverage before, it’s time to start.

Disability insurance protects your ability to earn an income. It provides money to pay your rent, mortgage and basic living expenses if you are injured or sick for an extended period. It is called disability insurance or disability income protection but think of it as income replacement when you are sick or hurt and cannot work. At any age, you are about six times more likely to become disabled for some period of time than to die.

Think your employer’s coverage is enough? Think again. You may have whatever sick leave you have coming, and then if an employer offers short-term disability coverage, it generally doesn’t last more than 12 weeks. There are employers that offer long-term disability coverage, but if you’ve never checked the terms of that coverage, you should.

It never hurts to consult a financial advisor with expertise in this subject, such as a CERTIFIED FINANCIAL PLANNER™ professional.

Basic components of long-term disability coverage:

Monthly benefits:

Depending on your income, long-term disability insurance is generally structured to pay 50 to 70 percent of your income up to age 67 or your normal retirement age. Research if the policy you’re buying offers you the chance to buy more insurance as your income increases in future years.

Benefit term:

For each disabling incident, your policy may pay benefits for a certain period – two or five years, or until retirement. It’s all about how your policy is constructed. Some policies even pay for life if you purchase this benefit and you are disabled prior to age 60.

Buying younger is generally cheaper:

Like health and life insurance, the younger you buy, the less you’ll pay. Occupation enters into the picture because high-risk jobs (where disability is a greater work-related factor) tend to draw more claims. Like health insurance, the company will consider your medical history and your lifestyle, including your weight, pre-existing conditions and whether or not you smoke.

Premium cost:

The premium will depend on a wide array of factors and can vary dramatically from person to person. Such things as your age and your gender (women pay more for disability insurance because they tend to live longer and may work longer) will be considered.

Non-cancellation provisions:

Make sure that once you’re approved, the insurer can’t cut your coverage unless it decides to stop writing coverage for everyone in your job class. It should also state that the insurer can’t raise your rates

Guaranteed renewable:

Like the category above, this means your insurance can’t be canceled,. The insurer can, however, raise the rates for everyone in the category.

Own occupation vs. any occupation:

If you have “own occupation” coverage, it is intended to go into effect if you can’t perform the functions of your current job. “Any occupation” coverage pays only if you can’t work at any job where you’ve been reasonably trained to do the tasks. For example, if you’re working a desk job, you could easily be transferred to a receptionist’s job or some other function within the company that you can now do or is your former position. That could significantly interfere with your recovery time, so consider the benefits and specify “own occupation” coverage.

Elimination period:

Like a deductible in home, health or car insurance, the elimination period is a big cost determinant in disability coverage. Most policies will start paying after 30 days after you’ve been declared disabled. But if you specify an elimination period of 60, 90 or 120 days, your premium will be lower. An important point about the 30-day elimination period:  the benefits don’t start accumulating until you’ve been laid up a month after the ruling date and you won’t get your payment until a month after that. Be very clear with your insurer when you’ll get your first check based on what elimination period you choose, and funnel the money you’ll need in the meantime to your emergency fund.

Partial payments/Residual benefits:

Some policies may offer you ‘residual benefits’ or a partial payment if you’re less than 100 percent disabled, but still can’t perform all the duties of your job.

If you’re thinking about self-employment:

You’ll likely need disability coverage. But the time to buy is while you’re still in your current job. Why? You won’t be able to prove your income once self-employed, so consider obtaining your desired coverage before you leave.

December 2009 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V. Higgins, CFP, CLU, AEP, a local member of FPA.

If you’ve never taken notice of disability coverage before, it’s time to start.

Disability insurance protects your ability to earn an income. It provides money to pay your rent, mortgage and basic living expenses if you are injured or sick for an extended period. It is called disability insurance or disability income protection but think of it as income replacement when you are sick or hurt and cannot work. At any age, you are about six times more likely to become disabled for some period of time than to die.

Think your employer’s coverage is enough? Think again. You may have whatever sick leave you have coming, and then if an employer offers short-term disability coverage, it generally doesn’t last more than 12 weeks. There are employers that offer long-term disability coverage, but if you’ve never checked the terms of that coverage, you should.

It never hurts to consult a financial advisor with expertise in this subject, such as a CERTIFIED FINANCIAL PLANNER™ professional.

Basic components of long-term disability coverage:

Monthly benefits:

Depending on your income, long-term disability insurance is generally structured to pay 50 to 70 percent of your income up to age 67 or your normal retirement age. Research if the policy you’re buying offers you the chance to buy more insurance as your income increases in future years.

Benefit term:

For each disabling incident, your policy may pay benefits for a certain period – two or five years, or until retirement. It’s all about how your policy is constructed. Some policies even pay for life if you purchase this benefit and you are disabled prior to age 60.

Buying younger is generally cheaper:

Like health and life insurance, the younger you buy, the less you’ll pay. Occupation enters into the picture because high-risk jobs (where disability is a greater work-related factor) tend to draw more claims. Like health insurance, the company will consider your medical history and your lifestyle, including your weight, pre-existing conditions and whether or not you smoke.

Premium cost:

The premium will depend on a wide array of factors and can vary dramatically from person to person. Such things as your age and your gender (women pay more for disability insurance because they tend to live longer and may work longer) will be considered.

Non-cancellation provisions:

Make sure that once you’re approved, the insurer can’t cut your coverage unless it decides to stop writing coverage for everyone in your job class. It should also state that the insurer can’t raise your rates.

Guaranteed renewable:

Like the category above, this means your insurance can’t be canceled,. The insurer can, however, raise the rates for everyone in the category.

Own occupation vs. any occupation:

If you have “own occupation” coverage, it is intended to go into effect if you can’t perform the functions of your current job. “Any occupation” coverage pays only if you can’t work at any job where you’ve been reasonably trained to do the tasks. For example, if you’re working a desk job, you could easily be transferred to a receptionist’s job or some other function within the company that you can now do or is your former position. That could significantly interfere with your recovery time, so consider the benefits and specify “own occupation” coverage.

Elimination period:

Like a deductible in home, health or car insurance, the elimination period is a big cost determinant in disability coverage. Most policies will start paying after 30 days after you’ve been declared disabled. But if you specify an elimination period of 60, 90 or 120 days, your premium will be lower. An important point about the 30-day elimination period: the benefits don’t start accumulating until you’ve been laid up a month after the ruling date and you won’t get your payment until a month after that. Be very clear with your insurer when you’ll get your first check based on what elimination period you choose, and funnel the money you’ll need in the meantime to your emergency fund.

Partial payments/Residual benefits:

Some policies may offer you ‘residual benefits’ or a partial payment if you’re less than 100 percent disabled, but still can’t perform all the duties of your job.

If you’re thinking about self-employment:

You’ll likely need disability coverage. But the time to buy is while you’re still in your current job. Why? You won’t be able to prove your income once self-employed, so consider obtaining your desired coverage before you leave.

December 2009 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V Higgins, CFP,CLU, AEP, a local member of FPA.

You have finally retired. Your children are secure. Your grandchildren are your greatest joys. You have some funds that you don’t think you will have to use for your retirement that you would love to leave to your grandchildren. But, in today’s volatile economy, where is a safe place to put it? Is there a safe place that can hedge against market fluctuations?

In considering the answers to these questions, don’t overlook one of the safest and simplest tools, life insurance. Many people overlook life insurance because they are in good health and feel that they can invest the money elsewhere for larger returns. However, if the senior does not anticipate needing the money for a number of years, but wants to be able to easily access it should it become necessary, and safety and simplicity are their goals, then life insurance should definitely be considered. Life insurance looks even better if there is a strong likelihood that the senior will not use the money.

Mr. Singleton is 60 years old, a standard non-smoker and has a substantial sum to invest. Currently, he is in a 35% tax bracket. He has sought advice because he wants to hedge all of the current market fluctuations, but still have a good return. He hopes that he can leave it to his grandchildren.

He finds that he can use the lump sum available for investing as a single premium for a whole life policy. The life insurance^† would have a face amount of approximately two times the single premium for a whole life (permanent) life insurance contract.

Graph 1

In Graph 1, the blue line represents the death benefit of the new life insurance policy. The graph compares an alternative savings program ^‡ earning 5% before taxes every year. At life expectancy, 18.2 years for a male age 60, the life insurance death proceeds would be about 25% greater than that of the alternative savings plan. The breakeven point would be after 24 years – if death occurred prior to age 84, the life insurance would have the greater gains. If death occurs after age 84, the alternative savings would have the larger gain.

The life insurance values and gains are very attractive if death occurs in the next 24 years. But what if Mr. Singleton needs the money for an emergency, or whatever? Although some values could be obtained from the permanent life insurance, the values would be less than those of the alternate savings program, as seen in Graph 2.

Graph 2

Even though Mr. Singleton thinks he will hold this investment until death, he must consider the values available for an emergency.

Of course, the rate of return for the life insurance is very high if death occurs in an earlier year. The alternative savings has been assumed to earn 5% before taxes throughout.

Graph 3

Graph 3 shows the life insurance returns will be quite high if death occurs sooner than life expectancy, but only slightly lower if death occurs after life expectancy.

Life insurance that has almost no market fluctuations is a very good long-term asset, especially if it is anticipated that it will be held until death.

PlanLab News provides no investment advice nor does it offer any opinion with respect to the suitability of any transaction. Clients should consult their legal, tax, and/or financial advisor before taking actions based on this information.

^† Based on a major US life company’s policy illustration for a standard male non-smoker with a one-time premium payment of $100,000.

^‡ The 5% return is hypothetical earnings for purposes of this illustration. It is assumed that 35% of the earnings each year are used to pay the taxes on the earnings.

Findings from the “Woman’s Guide to Long Term Care Insurance Protection”, a publication of  The American Association for Long Term Care Insurance (AALTCI), indicate that women who are older than 65 comprise 980,000 nursing home residents in the U.S. This is compared to only 337,000 men in that age group.

According to the Association’s Executive Director Jesse Slome, women benefit more from owning LTC insurance, as two-thirds of all insurance benefits are paid to women.

• 41 percent to single women and 25 percent to married women = 66%
• 12 percent to single men and 22 percent to married men = 34%
• The 2000 census found that there were 20.6 million women age 65 and over, compared with 14.4 million men, i.e. 50% more women than men.
• So, out of every 1000 seniors 600 are women and 400 are men•
• LTC stats say that 60% of all Americans over age 65 will need some kind of LTC before they die, i.e. 600 out of every 1000•
• Therefore 400 women and 200 men out of every 1000 seniors eventually use long-term care.
• Conclusion, women are 50% more likely to use long-term care than men.

If you would like to receive a “Woman’s Guide to Long Term Care” go to www.savethespouse.com or call us 24 hrs a day @ 856-988-7722 x2 and order your FREE copy today!

Maximizing Your Pension with Life Insurance

Introduction

If you participate in a traditional pension plan (known as a defined benefit plan) with your employer, you may receive monthly benefits from the plan after you retire. These benefits are generally based on your age at retirement, as well as your years of service and your average earnings with the company. Depending on your plan’s provisions, you may have more than one payout option to choose from. You want to select an option that will provide you with sufficient retirement income. In addition, if you are married, you want to be sure that your spouse will have sufficient income in the event that he or she outlives you.

When you retire, a defined benefit plan must offer you and your spouse a joint and survivor annuity. If your spouse consents in writing, you can generally decline the joint and survivor annuity and elect a single-life annuity instead. Some defined contribution plans offer similar options, so consult your plan administrator or benefits department if you participate in one of these plans.

With a joint and survivor annuity, payments continue as long as either you or your spouse is alive. When one spouse dies, the benefits paid to the surviving spouse generally cannot be less than 50 percent (or more than 100 percent) of the joint benefits. By contrast, with a single-life annuity, payments last for your lifetime and cease upon your death. For example, if you received one payment after retirement and then died, the single-life annuity would provide no further payments from your pension. Your spouse would receive nothing.

So why would you choose a single-life annuity knowing that payments will stop at your death? One reason is that the single-life annuity generally pays a larger monthly benefit than the joint and survivor annuity. This is because the payments are designed to last for a smaller number of years (i.e., one life expectancy instead of two). Retirees who want to maximize their monthly income sometimes choose the single-life annuity for this reason. The retiree can then use the additional income to purchase life insurance with his or her spouse as the beneficiary, thereby protecting the spouse’s financial future. This strategy, commonly called pension “maximization” using life insurance, may be appropriate for you.

Caution: Be sure to seek qualified professional advice, since choosing a pension payout option and life insurance coverage can be complex and will impact both your financial future and your spouse’s.

Factors to consider

Difference in benefits between the two payout options

As mentioned, a single-life annuity pays larger monthly retirement benefits than a joint and survivor annuity. The amount of the difference is a key factor when deciding between the two payout options. This information is generally provided to you prior to distribution as part of the spousal consent/waiver process. If the single-life annuity pays significantly more than the joint and survivor annuity, then electing the single-life annuity along with the purchase of a life insurance policy may be a viable strategy. The larger the monthly benefits under the single-life annuity, the more income you will have to pay the premiums for the life insurance policy. However, if the difference between the two payout options is relatively small, it may be better to elect the joint and survivor annuity. This is especially true if the single-life annuity will not provide enough income to pay the insurance premiums.

Tip: Always consider the impact of federal and other income taxes on annuity payments when determining the net amount of benefits available for you (and your spouse).

Insurability and cost of insurance

If you are not insurable because of your health and/or other reasons, then electing the single-life annuity along with the purchase of a life insurance policy is not an option. If you are insurable, determine how much life insurance coverage would be needed to compensate your spouse for the loss of your pension income if you elected the single-life annuity. Then look at the cost of that amount of coverage, and compare it with your monthly income from the single-life annuity. This will help you decide if using the pension maximization strategy makes financial sense. If you are relatively young and in good health, the insurance premiums may be much more affordable than if you are older and/or in poor health. However, as the cost of the insurance becomes more expensive, using life insurance to maximize your pension payout becomes less attractive.

Cost-of-living adjustment

Some pension plans have a cost-of-living adjustment (COLA) feature that allows the monthly benefits to be periodically increased to keep pace with the rate of inflation. If your pension contains this feature, you may need to consider a larger insurance policy to protect your surviving spouse from the loss of your pension income (assuming you elect the single-life annuity). This is because your surviving spouse would receive an ever-increasing amount of annual income over his or her lifetime if you elected the joint and survivor annuity with a COLA feature, and the rate of inflation goes up over time. Thus, the presence of a COLA clause in your pension plan may be a factor against using life insurance to maximize your pension. You will have to work through the numbers to see if it makes more sense to elect the single-life annuity and buy an insurance policy, or to simply elect the joint and survivor annuity.

Health and life expectancy of your spouse

If your spouse is in poor health or has a short life expectancy, then selecting the single-life annuity along with the purchase of a life insurance policy often makes more sense than selecting the joint and survivor annuity. This strategy is more practical if your spouse is more likely to die before you. As the plan participant and the surviving spouse, you will then have the benefit of the higher monthly payout from the single-life annuity for the rest of your life. You can then choose to discontinue the life insurance policy, or continue to make the premium payments and name a new beneficiary (as long as an irrevocable designation of beneficiary has not been made).

Age difference between you and your spouse

If there is a large difference between your age and your spouse’s age (with you being much older), then opting for the single-life annuity along with the purchase of a life insurance policy may make more sense because the difference in benefits between the single-life annuity and the joint and survivor annuity will typically be greater. If your spouse is considerably younger than you, his or her longer life expectancy will be factored into the calculation of the joint and survivor annuity benefits, resulting in smaller monthly payments. This could leave you and/or your spouse without sufficient retirement income using a joint and survivor annuity. However, if you select a single-life annuity that ends because you die soon after retiring, your much-younger spouse may have to survive financially without the benefit of your pension for a long period of time.

Gender of the plan participant

If you (the plan participant) are female and insurable at an affordable cost, then selecting the single-life annuity along with the purchase of a life insurance policy may make more sense than selecting the joint and survivor annuity. The reason: All other factors being equal, women are statistically more likely to outlive men of the same age. You will benefit from the higher monthly payout under the single-life annuity while you are alive, and the life insurance coverage will protect your spouse in the event that you die first. By contrast, if you select the joint and survivor annuity and your spouse dies first, you may be stuck with a smaller payout for the rest of your life (unless the plan has a “pop-up” provision–see below).

“Pop-up” provision

Some pension plans offer their participants a “pop-up” provision specifying that if they initially select a joint and survivor annuity payout and the spouse dies first, they can then retroactively select a single-life annuity payout. This gives you flexibility to adapt if things do not go as planned. If your pension plan offers this option, you may not want to select a single-life annuity with the purchase of a life insurance policy. It may be better to initially select the joint and survivor annuity.

Advantages of maximizing your pension with life insurance

It may increase your retirement income

Most people who use a single-life annuity with life insurance to maximize their pension payouts are trying to increase their income during their retirement years. Under most pension plans (and depending on various factors such as the age of the two spouses), a single-life annuity will pay out substantially more per month than a joint and survivor annuity. Most people would like to have that extra income during their retirement years. However, most people are also concerned about providing for their spouses if they should die first. By selecting a single-life annuity along with the purchase of a life insurance policy on the participant’s life, some couples can increase their income during retirement and provide for the surviving spouse’s financial future.

It may work well even if the nonparticipant spouse dies first

Using life insurance to maximize your pension payout will work well financially if your nonparticipant spouse should die first. In fact, this strategy may actually produce greater financial benefits if your nonparticipant spouse does die first, because you (the surviving spouse) will receive the higher single-life annuity payout for the rest of your life. You can then either discontinue the insurance policy or name a new beneficiary and continue to pay the premiums.

It may provide assets for your heirs and beneficiaries

Another benefit to selecting the single-life annuity with the purchase of a life insurance policy is that there may be assets left over for your heirs and beneficiaries. If you and your spouse select a joint and survivor annuity, no benefits from your pension plan will be paid to your heirs and beneficiaries (e.g., your children) when the surviving spouse finally dies. If, however, you select a single-life annuity and purchase a life insurance policy on your life, some of the insurance proceeds may still be left for your heirs and beneficiaries after the death of your surviving spouse. This is especially true if your surviving spouse invests the proceeds wisely and does not spend them rapidly, or if your spouse predeceases you and the life insurance proceeds are paid to your beneficiaries upon your death.

Disadvantages of maximizing your pension with life insurance

The income earned on the insurance proceeds may not meet expectations

This strategy may not work well if, for some reason, the investment earnings on the insurance proceeds are too low to adequately provide for the surviving spouse. To illustrate, consider the following hypothetical scenario.

Example(s): Upon your retirement, you select a single-life annuity for your pension and purchase a $300,000 life insurance policy on your life with your spouse as beneficiary. Based on market conditions at the time of your retirement, you believe that the earnings generated by the insurance proceeds will provide sufficient income for the rest of your spouse’s life if you die first. You die three years later, when market conditions have deteriorated substantially. The life insurance proceeds may now not provide enough income for your surviving spouse.

Your surviving spouse may squander the insurance proceeds

Another potential problem with this strategy is that your surviving spouse may make poor investments with the insurance proceeds, spend them too quickly, or otherwise squander the money. If this happens, your surviving spouse may be in a difficult financial situation for the remainder of his or her lifetime. With the joint and survivor annuity, you minimize this risk because your surviving spouse would at least be assured of receiving the designated pension payout each year.

The life insurance policy may lapse

If you choose to maximize your pension with life insurance and then stop paying the insurance premiums due to financial problems or other reasons, the insurance policy may lapse. With no insurance proceeds and no pension benefits, your surviving spouse may be in a difficult financial position after your death. In this case, your surviving spouse would have been in a much better position if the two of you had selected the joint and survivor annuity for your pension.

When this strategy makes sense: a short case study

Example(s): Assume you are about to retire at age 65, and your spouse is age 62. Your pension plan gives you the option of either a single-life annuity or a joint and survivor annuity. If you select the single-life annuity, you will receive $4,500 per month for the rest of your life, but your spouse will receive nothing if you die first. If you select the joint and survivor annuity, you and/or your spouse will receive $3,000 per month as long at least one of you is alive. That’s an additional $1,500 per month (or $18,000 per year) with the single-life annuity.

That sounds attractive, but what will happen to your spouse if you select the single-life annuity and you die before your spouse? Your spouse gets no survivor benefit. Your spouse may need a way of replacing that lost pension income. One way to accomplish this may be to purchase a life insurance policy on your life, and name your spouse as the beneficiary of the policy.

You need to determine whether the extra $1,500 per month under the single-life annuity (less income taxes) will buy enough insurance coverage to produce a replacement income of $3,000 per month if you die before your spouse. That is the amount of income your spouse would have received had you selected the joint and survivor annuity. You also need to determine whether your spouse will live off of only the income from the insurance proceeds, or need to dip into principal as well. You must run the numbers to see what is affordable and what makes financial sense.

Income tax considerations

The monthly retirement benefits you and your spouse receive from your pension are generally treated as taxable income, subject to federal (and possibly state and local) income tax. This is true regardless of whether you elect a single-life annuity payout or a joint and survivor annuity payout. However, since the pension benefits are larger with a single-life annuity, electing this payout option will increase your taxable income during retirement.

If you elect the joint and survivor annuity payout, when the first spouse dies, the pension payout to the survivor will be included in the survivor’s taxable income. If you instead use the pension maximization strategy and die before your spouse, the life insurance death benefits will not be included in your surviving spouse’s taxable income. This is because life insurance death benefits generally pass free from income tax to the beneficiary of the policy. Of course, your surviving spouse may invest the insurance proceeds in taxable investments. Any earnings from such investments (e.g., interest, dividends, and capital gains) will generally be included in your spouse’s taxable income.

Caution: While life insurance proceeds are generally free from income tax to the beneficiary, estate taxes are another matter. If this is a concern, you should consult a qualified estate planning attorney for appropriate strategies.

Forefield Inc. does not provide legal, tax, or investment advice. All content provided by Forefield is protected by copyright. Forefield is not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.

From time to time, you may need to resolve a dispute with your insurance company. Disagreements often arise about the amount due on a bill, the amount the company paid on a claim, or the nonpayment of a claim. Here are some steps that can help you resolve a dispute efficiently and agreeably.

Know your rights

The insurance industry is highly regulated. Your state has laws that dictate what insurance companies can and cannot do when it comes to bill collecting, settling claims, and other matters. The law may be called the Unfair Insurance Practices Act, the Unfair Claims Settlement Practices Act, or something similar. To learn about the laws in your state, call your state insurance department or check its website. Most states have the following regulations in place:

• An insurance company cannot misrepresent your policy. In other words, the company cannot knowingly tell you that the policy means something that it doesn’t actually mean. In addition, the company cannot change the policy without informing you in writing ahead of time.
• The company cannot withhold payment on a claim against one part of your policy in order to force an issue on a claim against another part of your policy. For example, your insurer cannot withhold payment on a claim against the collision portion of your auto policy to force you to settle on the liability portion.
• Companies must acknowledge and process claims promptly. In some states, companies have to acknowledge within 15 days that they received notice of a claim. After receiving the claim, they must investigate, process, and settle it quickly.
• Companies cannot ask you for unnecessary forms in an effort to delay an investigation or payment of a claim.
• Companies cannot make it a practice to appeal most court awards that favor their policyholders. Companies are allowed to appeal decisions they truly believe are unfair, but they cannot use the appeal process to force their policyholders to settle for less than they are due.
• A company has to have a good reason to deny or delay a claim and must explain the reason to the policyholder. In most cases, lack of coverage or nonpayment of premiums is the reason for a denied claim. Or, the company could be misinformed about the details or circumstances of the claim.

Use your insurance agent or broker

If you have an insurance agent or broker, he or she can be a valuable resource in resolving disagreements amicably. Your agent or broker has an established relationship with the insurance company and knows where to go for help. An agent or broker can usually resolve the problem over the phone right from his or her office. Give him or her your policy number, copies of disputed bills, canceled checks, any written correspondence, and records of any phone conversations. If you don’t have an insurance agent or broker, discuss the problem with a customer service representative from the company.

Write a letter

If you’ve had no luck resolving the problem through your agent or broker or by calling the company, write a letter to the appropriate manager at the company. For example, address letters regarding disputed bills to the accounting or finance manager. If possible, obtain the manager’s name before writing the letter. Your letter should clearly state the problem and what you think would be a fair resolution. Include information about phone conversations you had with customer service representatives, such as dates of the calls and the names of the people you spoke with. Your letter should also include your policy number and your daytime telephone number. Finally, include copies of written correspondence, bills, canceled checks, or bank statements.

Get a third party involved

Complaints rarely come to this point, but if your company still hasn’t resolved the problem to your satisfaction, there are a number of options you can pursue. Calling your state’s insurance department is one such option–there are state insurance regulators who investigate policyholder complaints. In fact, if the state finds that the company is violating any state laws or regulations, the state could fine or otherwise reprimand the company. You might also consider contacting your state’s consumer protection division or the Better Business Bureau. Another option is to seek an out-of-court settlement through arbitration or mediation. There are independent organizations that will provide this service when you have a dispute with your insurer.

Take legal action

As a last resort, you can take the insurance company to court. If the amount in question is below a certain threshold (this amount varies by state), small-claims court may be an option for you. You do not need an attorney in small-claims court.

If the amount is too big for small-claims court, you can hire an attorney. It is in the insurance company’s best interest to settle disputes quickly, especially if they involve expensive litigation. Chances are good that once you hire an attorney and he or she contacts the insurance company, the dispute will be settled out of court.

If you educate yourself, have all the information at your fingertips, stay organized, and be persistent, you should be able to resolve your problem quickly.

Forefield Inc. does not provide legal, tax, or investment advice. All content provided by Forefield is protected by copyright. Forefield is not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.