New California Bill regulates increases to life insurance premiums

Among several laws signed by Governor Jerry Brown on September 2018 is Assembly Bill (AB) 2634, which is intended to protect and assist consumers affected by cost increases in their existing life insurance policies.

Current California law requires a carrier to provide notice for premium increases.

AB 2634 goes into effect for all policies on April 1, 2019 and requires carriers to provide a “summary notice” to a policy owner of flexible premium policies 90 days before any cost of insurance increases. This summary notice must include:

  • The name and definition of “each nonguaranteed element in the current scale of nonguaranteed elements that is subject to an adverse change.”
  • A statement of the current rate or charge, the new rate or charge, and the percentage change.
  • An explanation that the “adverse change” is “based on expectations of the future cost of providing the benefits under the policy, and that the adverse change to the current scale of nonguaranteed elements will reduce the accumulation value and may increase the risk of policy lapse based on continued payment of current premiums.”
  • The date the adverse change will take effect.

The notice also requires carriers to notify the owner of the policy that they have the following options:

  • Do nothing – take no action
  • Pay the additional premium
  • Reduce the policy benefit amount
  • Surrender the policy
  • Convert the policy (if the policy qualifies for a conversion)

The bill also requires carriers to include “an inforce illustration of current and future benefits and values whenever the policy is subject to an adverse change in the current scale of nonguaranteed elements” and to advise the policy owner to contact the agent or carrier if there are questions.

Regardless of the type of insurance policy, owners should have their policies reviewed on a periodic basis. If you would like a review of your policy, we welcome your call.

Universal Life Insurance, a 1980s Sensation, Has Backfired

A long decline in interest rates caused premiums to soar when they were supposed to stay level

Cornerstone Comments: This Wall Street Journal article does an good job describing the earlier adoption of Universal Life Insurance policies, and the negative impact of lower interest rates on these policies over the past decade. However, it does not properly characterizing the insurance industry’s attempt in educating current policy owners of this impact, and the importance of policy reviews regardless of market conditions. Still, there are a few take-aways we have advocated for years.

  • Policies of all types, and in particular Universal Life policies, should be reviewed periodically. If your current advisor is not asking to review your policies, please call us for a complimentary review.
  • The need for life insurance can change over time. What at one point may have been a good idea can change as circumstances change. Be open to changes and alternative uses for your policy, including using unneeded cash values for other financial needs like long term care or guaranteed fixed income.
  • The world of Universal Life insurance and other policy types have evolved. Costs and surrender charges for many have been reduced.
  • Finally, although this article is a good starting point on this matter, it should not be assumed the opinions shared are actionable to you. Everyone’s circumstances are different. A good planner will not have one solution that fits all clients.

We hope you find this article a good starting point for your own questions in insurance and policy reviews. We view insurance as one among many different potential financial planning strategies. We are available to help educate on these and other financial matters.

A popular insurance product of the 1980s and 1990s has come back to bite many older Americans.

Universal life was a sensation when it premiered, and for some years it worked as advertised. It included both insurance and a savings account that earns income to help pay future costs and keep the premium the same.

That was when interest rates were in the high single digits or above. Today, rates are completing a decade at historically low levels, crimping the savings accounts. Meanwhile, the aging of the earliest customers into their 70s, 80s and even 90s has driven the yearly cost of insuring their lives much higher.

The result is a flood of unexpectedly steep life-insurance bills that is fraying a vital safety net. Some find they owe thousands of dollars a year to keep modest policies in effect. People with million-dollar policies can owe tens of thousands annually. Some retirees are dropping policies on which they paid premiums for decades.

“I’m very scared that everything will go down the drain,” said Bernice Sack, a 94-year-old former hospital billing clerk in North Carolina.

A $56 monthly premium Mrs. Sack paid when she bought the policy 35 years ago has climbed to $285, despite her efforts to keep the cost down by reducing her death benefit. Living with a daughter and getting by on Social Security, she skimps on medications to pay the insurance bill, sometimes runs late on her share of household costs and considers ice cream a splurge.

John Resnick, co-author of an American Bar Association book on life insurance, said of hundreds of older policies he has reviewed over a decade, “easily 90% or more actually were in trouble or soon to be in trouble.” Many people “are sitting on a ticking time bomb, and most probably aren’t aware of it,” he said.

Universal life is among the reasons Americans are approaching retirement in the worst shape in decades. The insurance policy type emerged in an era nearly four decades ago when the Federal Reserve was fighting inflation with high interest rates. Some financial advisers suggested people forgo traditional “whole life” insurance and buy less-expensive policies that covered just a limited term, investing what they saved in the mutual funds and money-market funds then proliferating. Insurance companies embraced this mantra of “buy term and invest the difference” by inventing a new product.

With universal life, the customer buys a one-year term-insurance policy and renews it annually. In the early years, the premium the customer pays is a good deal more than the actual cost of the insurance. The excess goes into a tax-deferred savings account.

The policies are designed so the gains in the savings account, which the industry typically calls a “cash-value” account, offset part of the cost of renewing the term insurance each year.

Much depends on what interest rate the account is earning. When these policies first were sold, U.S. interest rates were unusually high, and insurers often illustrated the policies to potential customers using a scenario of continuous 10% to 13% rates.

Companies typically showed worst-case scenarios, too. But with high rates common, the worst-case scenarios often got short shrift.

The interest projections were proving unrealistic by the mid-1990s, and especially so after the 2008 financial crisis depressed rates. Although many policies didn’t allow the savings-account return to fall below 4% or 5%, that wasn’t enough for early customers. The cost of a year of term insurance soars once people reach their late 70s.

Compounding the problem, universal life offers flexibility that is alluring but dangerous. Within reason, customers plan their own monthly or annual premium payment. They can set it low, counting on high interest income in their savings account to keep the policy financially sound.

Customers also can choose to pay less than their planned premium sometimes if money is tight. Or they can skip a payment altogether. And they can borrow against their savings account.

Any such move, of course, will spell skimpier earnings in the account. It is widely accepted that not all customers—or even all insurance agents—fully understood years ago how borrowing or skipping payments could undermine a universal-life policy.

Defending their sales, insurers say they have paid out more than $150 billion on universal life policies, and some owners received value from their policies by borrowing from them. Insurers stress that materials given to customers say only a minimum interest rate is guaranteed; higher rates used in sales pitches are hypothetical.

Insurers send customers annual statements showing the change in the value of their savings account and what it has cost to renew their term insurance. Some companies seek to identify problematic older policies, sending customers extra communications to be sure they understand their situation.

“Lincoln annually provides all policyholders with an updated statement that they and their agent can, and should, use to manage their policy and assess how various activities including withdrawals, missed payments and loans may impact its value,” said Scott Sloat, a spokesman for Lincoln National Corp. , the company that sold Mrs. Sack her policy.

He said Lincoln sends additional letters to customers who could face a large, sudden jump in their premium in 10 years or sooner if they don’t take action, such as by voluntarily increasing premium payments or reducing the policy’s death benefit.

Nicholas Vertullo, an 85-year-old former high-school teacher outside New York City, has three universal-life policies issued by a unit of American International Group Inc. One of them initially earned 9% on its savings account. The policies’ accounts today fetch 4% to 4.5% interest.

“I was abstractly aware that interest rates could vary,” Mr. Vertullo said. After the 2008 financial crisis, “the whole thing came home in a way that it was no longer an abstraction…. These life policies were quicksand.”

For death benefits totaling about $475,000, Mr. Vertullo is paying about $30,000 a year, triple the original premiums.

He had planned to replace the income his wife will lose when, on his death, his teacher’s pension and Social Security check stop. Years ago, he cut the death benefit to repay a loan against the insurance, and now he is looking into a bigger cut to reduce his annual cost. Mr. Vertullo said he and his wife have forgone restaurant meals and travel, living “an austere and Spartan retirement.”

“I hate to confess this: I simply went along,” Mr. Vertullo said. “I don’t think I understood completely what the hell I was doing.”

AIG said it doesn’t comment on individual situations. It said universal life is one of a wide range of solutions it offers to meet families’ specific needs.

In the early years of universal life, buyers often were businesspeople and other professionals who found the tax-deferred interest feature attractive. The insurance industry’s reputation for conservative products helped allay skepticism. By 1985, universal life was generating 38% of the industry’s premiums for individual life policies, according to research firm Limra. Americans bought two million to three million universal-life policies a year in the 1980s and early 1990s.

As interest rates declined, some agents alerted owners that funding shortfalls were developing. One who did was Pennsylvania agent Allen Carr, who says he had been “gullible” to believe universal-life policies could be counted on to work as planned. When policies he had sold veered from their projected performance, Mr. Carr said, “it was embarrassing going back [to customers] saying, ‘We have a potential problem.’”

Industrywide, some customers angrily canceled their policies. Others took a shame-on-me attitude for not having read the details. Some began voluntarily paying larger premiums to put the policies on firmer financial footing.

Lawsuits arose, and from the mid-1990s to early 2000s plaintiffs’ lawyers reached settlements over allegedly deceptive sales practices, such as promising the savings buildup would eliminate the need to pay premiums at all in a decade or so. State regulators tightened rules on how insurers could illustrate the policies, including requiring them to cite interest rates that could be justified for the long haul.

The industry responded by offering a new wrinkle: guaranteed universal life, which had a fixed premium designed to ensure lifetime coverage if paid on time. Many early universal-life policyholders swapped into this.

The disappointed early buyers of universal life included people in the industry—a gauge of how poorly the policies often were understood. Early this year, MetLife Inc. alerted Ohio couple Thomas and Rebecca Bell they would need to start paying about $300 a month on a policy for which they had been paying $97 monthly since they acquired it in 1994. At that time, Mr. Bell was an insurance agent.

The Bells owned a universal-life version with some added twists and risk, “variable universal life,” which let them invest the savings in stock and bond funds. After having paid $26,000 in premiums over the years, the couple let the $25,000 policy lapse. “There was no way [a $300 monthly premium] would be in our budget,” said Ms. Bell, 79.

Her 86-year-old husband, who was a tools salesman in addition to selling insurance, said he didn’t remember much about the policy’s particulars, but “It’s not what I expected it to be.”

A MetLife spokeswoman said, “We understand it can be challenging to cover the cost of insurance” when a policy contains less built-up income than envisioned. She said MetLife updates policyholders annually on their accounts’ value and urges them to contact their agents or the company.

The tumble in interest rates didn’t affect just customers—it also dinged insurers’ profits. As corporate-bond yields fell below 5% in recent years, insurers earned less from investing premiums, yet still had to pay guaranteed minimums of around 4% on universal-life savings accounts.

With future profits expected to be hurt by low rates, at least a half-dozen insurers have invoked policy provisions that they say allow them to raise the rates used to calculate the annual cost of customers’ term insurance, according to ITM TwentyFirst, which provides policy-management services.

This means some customers see costs rising not simply because they are a year older, or because their savings account didn’t grow as planned, but because their insurer has changed its price formula. As a result, even some customers who kept their policies well funded are being hit with unexpectedly higher costs.

One is Douglas Bradley, 83, a longtime health-insurance broker in California, whose premium roughly doubled because of a change made by insurer Transamerica. “I am absolutely stupefied at this,” Mr. Bradley said.

Transamerica, a unit of Aegon NV, declined to comment on Mr. Bradley’s situation but said its change was contractually permitted.

Such increases are “causing more life-insurance policies to expire even quicker than before” as customers who can’t afford them drop their policies and hand insurers “windfall profits,” said Henry Montag, a principal with The TOLI Center East in Melville, N.Y., which evaluates policies held in trusts.

Mrs. Sack, the 94-year-old retired hospital billing clerk, was warned by her insurance agent in 2000 that the universal-life policy she bought in 1983 was financially off track. Mrs. Sack had borrowed a little over $4,000 from it and had skipped some payments. Also, while the policy’s savings account initially earned over 10%, by 2000 this was down to 5.7%. She lowered the death benefit to $21,000 from $25,000 to repay the loan but still had to nearly double her premium, to $100 a month.

The premium kept rising. She borrowed a few thousand dollars more from the policy, and the interest return continued to slide, to the 4% minimum.

Her experience is detailed in an inch-thick stack of documents, bills and correspondence, with scribbled names of Lincoln National representatives she and her daughters have spoken to in their efforts to figure out the situation.

Mrs. Sack complained last year to North Carolina’s insurance department. It responded that “we understand your frustrations” but that the company appeared to be in compliance with policy provisions.

Even though Mrs. Sack has paid more for the insurance—approximately $39,000—than her heirs will ultimately receive, she doesn’t dare stop paying and let it lapse.

“My prime concern is my burial,” Mrs. Sack said. “My children are all so supportive, but I don’t want them to pay for mine.”

This article was prepared by a third party for information purposes only. It is not intended to provide specific advice or recommendations for any individual. It contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent, Guarantees are based on the claims paying ability of the issuing company.

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How Much Money Will You Really Spend in Retirement? Probably a Lot More Than You Think

When we retire, every day becomes just like the weekend. And on the weekend, we have all kinds of time and opportunities to spend money. Many of us vastly underestimate the percentage of income we’ll need. Here’s how to make sure you get that number right.

I was asked recently by a former student-CFP® candidate to recommend a software program for a friend who wanted to create a plan on her own. I get this question every-so-often. While there are a few pretty slick sites that produce easy to create financial profiles, my experience is that it is often user-error that causes them to create a plan that looks promising but falls apart on quick review. One of the biggest reasons in understatement of spending. The following article by Dan Ariely and Aline Holzwarth, begins to describe this gap. Other assumptions not covered in this article are also missed, like assumed performance, treatment of assets and taxes, and the introduction of risk during the plan. If you want a great plan, my recommendation is to choose a great planner who can integrate technology with planning experience. Ask for a sample of her/his work. Ask her/him to explain how the plan was assembled. Ask if she/he holds a CFP® designation. These few questions alone will help you learn which advisors view planning as a foundation for your financial life, and other advisors say they are planners but prefer to only manage your investments. I hope this article helps.

By Dan Ariely and Aline Holzwarth

It’s the question that plagues pretty much everybody as they look ahead: How much money will I need in retirement?

Most likely, a lot more than you think.

Let us explain. The typical approach most people take is to ask what percentage of their final salary they think they will need in retirement. If you have ever visited a financial adviser, you must have been asked this sort of question. You most likely dedicated a whole minute (at most) to formulating your answer.

And no one would blame you for it. Answering a question as complex as this requires knowledge far beyond most people’s grasp—and far beyond the grasp of even many professionals.

Just imagine for a second the sorts of inputs you might use to get to the right number, such as the cost of living where you want to retire, the cost of health care (and how much of it you will utilize), the state of Social Security, the rate of inflation, the risk level of your investment portfolio, and especially how you want to spend your time in retirement. Do you want to take walks in the park or join a gym? Drink water at dinner or expensive wine? Watch TV or attend the ballet weekly? Visit family once a year or twice a year or four times a year? Do you want to eat out once or twice or five times a week? And so on.

Try it yourself. Stop for a minute and think to yourself what your percentage might be. Clearly, it’s a daunting task to transform all these hard-to-predict inputs into a single percentage.

To understand better how people grapple with this question, we invited hundreds of people—of different age groups, income levels, and professions—to our research lab and asked them how much of their salary they thought they would need in retirement.

The answer most people gave was about 70%. Did you also choose a percentage around 70%-80%? You’re not alone. In fact, we, too, thought that 70% sounded reasonable. But reasonable isn’t the same as right. So we asked the research participants how they arrived at this number. And we discovered that it wasn’t because they had truly analyzed it. It was because they recalled hearing it at some point—and they simply regurgitated it on demand.

The 70%, in other words, is the conventional wisdom. And it’s wrong.

Sticker shock

To find out what people actually will need in retirement—as opposed to what they think they will need—we took another group of participants, and asked them specific questions about how they wanted to spend their time in retirement. And then, based on this information, we attached reasonable numbers to their preferences and computed what percentage of their salary they would actually need to support the kind of lifestyle they imagined.

The results were startling: The percentage we came up with was 130%—meaning they’d have to save nearly double the amount they originally thought.

How could this be? Just think about it. Working is actually a very cheap activity. When you’re working (never mind the fact that you are actually making money), you aren’t spending much. There’s no time to spend money at work. And when we do spend money, it is often paid for by our employers. At least some companies pay for our coffee, our travel, team-building activities, happy-hour drinks and so on. It is one of the cheapest ways to spend our time.

When we retire, it is as if someone took 10 waking hours of our workday and gave us free time to do as we please. Every day becomes just like the weekend. And on the weekend, we have all kinds of time and opportunities to spend money. We shop, travel, buy tickets for events and eat out.

Sure, we may have the time in retirement to do certain things ourselves that we would pay for while working (like mow the lawn, clean the house or make our own lunch). But for the most part, it is much easier to spend money when we’re not spending most of our waking hours at work.

Self-assessment

Now that we know how misguided the 70% figure is, here’s the hard question: How can each of us figure out more precisely the kind of life we’ll want—and what it will cost?

In a study conducted in collaboration with MoneyComb, a fintech company that participated in our Startup Lab academic incubator program at our Center for Advanced Hindsight at Duke University, we found out that a good way to think about spending in general is to think about the following seven spending categories: eating out, digital services, recharge, travel, entertainment and shopping, and basic needs.

To help you think about your time in retirement, imagine that every day was the weekend. How much would you like to spend in each of these categories? How often would you eat out? Which digital subscriptions would you want to have? How would you pamper yourself? How often, where and how luxuriously would you want to travel?

Clearly, those who prefer spending time at the beach and watching Netflix won’t spend nearly as much as those who prefer the opera and good wine three times a week. Those who want to spend vacations visiting family won’t spend nearly as much as those who want to take a few cruises a year. Believe it or not, what might seem like minor preferential differences like these can quickly add $20,000 a year to your spending requirements. This is precisely why it’s so important to factor in these preferences when determining how much you need for retirement.

Details, Details

Failing to account for all of your expected costs in retirement, no matter how small, can be costly. Here are some specifics—many of which people often forget—to factor in when making projections.

1 Water, gas, electricity, heating/cooling, garbage collection    2 Rent, mortgage, insurance, maintenance    3 Primary-care doctor, specialists, hospital bills, medications, insurance    4 News sources, Netflix, Hulu, etc.    5 Loan/lease, maintenance, insurance, gas, car wash, parking

Source: Dan Ariely and Aline Holzwarth

Try this exercise yourself: Close your eyes and picture a single representative year in retirement. Live it in the best way you can imagine. (And remember that “best” doesn’t necessarily mean “more expensive.”) The more expensive you imagine your future, the larger the sacrifice you will have to make today.

Now, answer each of the following questions from the list of categories.

We know that just thinking about retirement, not to mention doing the math, can be overwhelming. So pour yourself a glass of wine and make this a rewarding process for yourself. Just take note of how much you spent on the bottle for future reference.

  • Eating out and in:Do you like to cook, or do you prefer going out to eat? How often do you want to go out to dinner in retirement? How much do you spend on each meal, on average? How often do you see yourself splurging on dessert, or a fancy bottle of wine?
  • Digital services:What are the digital services you pay for now? Do you have a subscription to The Wall Street Journal? (You won’t want to give that up.) Do you have cable? How about videogames? Apps and software? Online courses? What are all the digital services you want to have in retirement, and how much do they cost? Would you like to spend more or less on digital services in retirement?
  • Recharge (recreational and personal services):Do you like to pamper yourself? What sort of pampering do you imagine in retirement: reading a book at the beach, treating yourself to the occasional $15 manicure, or going all in with luxurious spa treatments? How often do you want to get a massage? Are you a member of a country club, or would you like to be?
  • Travel:Do you like to travel? How often? How much do you spend on everyday transportation? What do you spend on flights in a year? Do you imagine traveling more or less in retirement than you do now? What sort of traveling suits you? Do you like to go on cruises? Are you the type to go on a cross-country road trip in your 60s, or would you prefer the comfort of first class on a plane? Or perhaps you want to have your own private jet that takes you to your own private island. (We can all dream.)
  • Entertainment:How will you spend your time in retirement? What sorts of events will you want to attend? How much do you want to spend on the opera, concerts, musicals, ballet, sports events, museums, classes and so on? Will you buy books or borrow them from the library?
  • Shopping:Are you a shopper? Do you like to give your friends and family gifts? What about donations to charity? How much shopping do you see yourself doing in retirement? How much do you imagine spending on clothing, electronics, home goods and other shopping?
  • Basic needs (utilities, housing, health care):Finally, we arrive at the least exciting but most necessary category—our essential spending. How much do you think you will spend on utilities, housing, health care and other basic needs? (This is of course a very complex number to estimate, and this is where getting input from professionals can be very useful.)

 

Doing the math

Now that you have a guide for determining roughly how much you’d like to spend in each category, you’re ready to add everything up. Here is an Excel spreadsheet that you can download and play with. It is prepopulated with example numbers, but you should change things around to fit your own personal preferences. To get your percentage, you’ll need to add your salary in the spreadsheet. (And if you’d like, go to our survey to let us know what percentage you got and share any feedback.)

If you want to take the next step in this process and translate your annual amount to the total amount you will need over the course of your full retirement (to know the total amount you need to accumulate from until then, for example), simply multiply the annual amount by the number of years you expect to be in retirement. For most of us, that should be about 20 years.

As we live longer, funding retirement is a moving target. And to have any hope of successfully securing our future lifestyles, we have to start early and we have to build a more detailed and accurate picture of the way we hope to live. We have to understand not just how much we will earn in our life and how far we are from retirement (in years and in dollars), but also how we want to spend our time both during our working years and after.

Once we have determined how much we truly need to save for retirement, we can then focus on how to get to this amount. We can adjust our current lifestyle accordingly, figuring out which trade-offs we are willing and unwilling to make. We should also work backward to determine how much risk we need to take in our investment portfolios in order to reach these goals. And finally, for most of us the retirement we desire may be out of reach, so we need to start being extra nice to our children.

Mr. Ariely is the James B. Duke Professor of Psychology and Behavioral Economics at Duke University. He is the founder of the Center for Advanced Hindsight. Mrs. Holzwarth is the head of behavioral science at Pattern Health, and principal of the Center for Advanced Hindsight at Duke University.

Appeared in the September 4, 2018, print edition as ‘How Much You’ll Really Spend in Retirement.’

This article was prepared by a third party for information purposes only. It is not intended to provide specific advice or recommendations for any individual. It contains references to individuals or entitles that are not affiliated with Cornerstone Wealth Management, Inc. or LPL Financial.

 

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Test Your Smarts on Insurance

How much do you know about insurance? Take this WSJ quiz, courtesy of wsj.com

For many consumers, insurance is a confusing maze of possibilities.

There are myriad kinds of policies available, including life, auto, homeowners, health, disability, flood and even pet insurance, that could be appropriate for people, depending on their circumstances and where they live. But many consumers don’t fully understand what each of these policies covers, and they may struggle to find the information they need to make informed decisions.

Insurance professionals recommend consumers review their policies and coverage options yearly to ensure they are properly protected. How much do you really know about insurance?

Take our quiz to find out.

  1. True or false: All disasters are covered under standard homeowners and renters insurance policies.

ANSWER: False. Standard homeowners policies typically cover damages from some potential disasters, including tornadoes, lightning strikes and winter storms, according to the Insurance Information Institute, which helps educate consumers on insurance-related issues. These policies can vary, so read the fine print. What’s more, standard homeowners policies generally don’t cover damages from disasters such as floods, earthquakes or sewer backups; separate endorsements or policies may be needed to protect against these types of problems, according to the institute.

  1. If a policy has a $500 deductible, and the insurance company determines that the insured loss is worth $10,000, the claimant would receive a check for ____________.
  1. $10,500
  2. $9,500
  3. $15,000
  4. None of the above

ANSWER: B. $9,500. The dollar amount of a deductible comes off the top of the claim payment. Deductibles can be specific dollar amounts or percentages, as is generally the case with homeowners insurance. With an auto-insurance or homeowners policy, the deductible applies each time you file a claim. One exception to this is in Florida, where homeowners policies usually require consumers to pay only one hurricane deductible per calendar year, rather than after each storm.

  1. When thinking about the amount of coverage to place on personal possessions, a good rule of thumb is to insure them at ___% to ___% of a person’s dwelling coverage amount.
  1. 10% to 15%
  2. 20% to 30%
  3. 50% to 70%
  4. None of the above

ANSWER: C. Most homeowners-insurance policies provide coverage for personal possessions at about 50%-70% of the insurance on the person’s dwelling, according to the Insurance Information Institute. So, if a person insures a dwelling for up to $150,000, he or she would want to insure personal possessions for at least $75,000.

  1. Usage-based insurance is _______________.
  1. A new type of biometric device.
  2. A type of vehicle insurance where premiums can depend on driving habits such as speed, miles driven and hard-braking incidents.
  3. A policy based on your life expectancy.
  4. A way of measuring how much your personal property is worth.

ANSWER: B. Usage-based insurance, also known as telematics, tracks driving behavior through devices installed in a vehicle or through smartphones. Wireless devices transmit data in real time to insurers, which use the information to help set premiums. The devices record metrics such as the number of miles driven, time of day, where the vehicle is driven, rapid acceleration, hard braking, hard cornering and air-bag deployment. By year-end, 80% of new cars for sale in the U.S. could be equipped with onboard telematics devices, and by 2020, 70% of all auto insurers will use telematics, the National Association of Insurance Commissioners predicts.

  1. Some ___% of households didn’t have life insurance in 2016, according to Limra, an industry-funded research firm.
  1. 5%
  2. 10%
  3. 20%
  4. 30%

ANSWER: D. 30%. The good news is that more households seem to recognize the need for life insurance. Nearly five million more U.S. households had life insurance coverage in 2016 than in 2010, according to the most recent data available from Limra.

  1. When choosing an insurance company, consumers should consider _____________________________.
  1. Whether the insurance company is licensed in their state.
  2. The cost of the insurance policy.
  3. The financial strength of the insurer.
  4. All of the above.

ANSWER: D. There were nearly 6,000 insurance companies to choose from in the U.S. in 2016, according to the National Association of Insurance Commissioners, so consumers should do their homework before choosing one. A good place to start is with their state insurance department, which can help identify which insurers are licensed to do business in the state. The department may even publish a guide that shows what insurers charge for different policies. Independent credit-rating firms—such as A.M. Best, Fitch, Kroll Bond Rating Agency (KBRA), Moody’s and S&P Global Ratings—are another source of information. They rate insurers’ financial strength, which can be an important indicator of whether a firm will have the assets and liquidity to pay claims as promised. Consumers should also gauge the level of service insurers are providing and their comfort level with the company’s representatives.

  1. True or false: While not required, business-interruption insurance is a good idea for entrepreneurs and startups.

ANSWER: True. After a catastrophe or disaster, about 40% of businesses don’t reopen and an additional 25% fail within a year, according to data from FEMA and the U.S. Small Business Administration. Business-interruption insurance can help compensate small-business owners for lost revenue due to closure. This type of insurance can also help owners cover the cost of fixed expenses such as rent and utilities, as well as mitigate the expense of operating from a temporary location.

  1. True or false: People who don’t have health insurance in 2018 will still face a penalty when they file their taxes in early 2019.

ANSWER: True. While the penalty under the Affordable Care Act for not having health insurance has been repealed, the change doesn’t take effect until 2019, according to Louise Norris, a health-insurance broker who has been writing about health insurance and health-law overhaul since 2006. People who are uninsured in 2019 and beyond won’t be subject to a penalty, she says.

 

 

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What Determines Car Insurance Rates?

Driver history is just one factor; there are many others.

Your auto insurance payment is not just based on your driving history. Assorted variables come into play that have nothing to do with your accident record or your experience behind the wheel.

Where you live counts. If you reside in a congested big-city neighborhood with an unyielding traffic stream, that could push your premium higher. Certainly, the accident threat is greater there than in a rural area. In addition, high-density neighborhoods may see more vandalism, break-ins, and auto theft than lower-density communities – plus, more car insurance fraud schemes.1

The vehicle you drive factors into the calculation. Yes, a luxury car will commonly cost more to insure than an economy car, but vehicle price is not the only factor. Certain makes and models are stolen more than others: the Honda Civic, the Nissan Altima, and the Toyota Camry are prime targets for auto thieves. If you drive a 4×4 SUV, the insurer may factor in some off-road use, even if you just want to drive it to work, the beach, and the mall. Engine horsepower could also affect your rates.2

If you own a home, your auto insurance premium might be less than that of a renter. Renters are perceived to have more trouble with their household finances than homeowners. Whether this is true or not, the status of being a homeowner is a positive element in auto insurance rate calculation.2

Are you married? That is a plus when it comes to auto insurance rates, because some insurers think married people lead less risky lives than single people. This belief was reinforced back in 2004, when the National Institutes of Health released a study that concluded that single people were twice as likely as married people to get into car accidents. Like it or not, this presumption affects rates.1,2

If you are an older male, your rates might be the lowest. A Consumer Federation of America white paper looked at the rates set by some companies and found that older men (at least in ten cities) paid less than older women. On the other hand, younger men are thought to be the most reckless drivers (and drivers from that demographic are most often the drivers in fatal wrecks).1

Bad credit can mean higher premiums. It can elevate premiums even more than an accident in some states. In three states, this does not apply: California, Hawaii, and Massachusetts. All three bar insurance carriers from hiking auto insurance rates due to personal credit histories.1

Your job (and how you commute to work) may matter. In its 2018 State of Auto Insurance Report, car insurance comparison website The Zebra says that the typical, full-time worker will save about $30 in car insurance costs compared to a part-time worker. Active duty military and veterans tend to pay around $50 less than civilians. If you work from home, that is a positive factor. If you drive a long way to and from work, that is a negative factor. If you commute during peak hours or between 12:00-2:00am, that is another negative factor.2

Insurers run these variables through their own refined algorithms. This is another reason car insurance rates vary so much from carrier to carrier. Compare and contrast and shop around, for one company may give more weight to some factors than others – and the savings found through thorough shopping could be significant.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – nerdwallet.com/article/5-surprising-factors-inflate-car-insurance-rate [1/8/18]
2 – wisebread.com/7-things-that-affect-your-car-insurance-rates [5/10/18]

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Role of tending to family members typically falls to women

65 percent of older adults rely on family and friends for long-term care needs”

As parents reach their golden years, many need their adult children’s help for daily living or for simple tasks like rides to doctor’s appointments and going to the grocery store or more intense care such as dressing, bathing and administering medication.

According to the Family Caregiver Alliance, 65 percent of older adults rely on family and friends for long-term care needs with 30 percent supplementing family care with paid providers. These informal providers give nearly $500 billion in valued services. A majority of the time — an estimated 66 percent — the caretaking tasks fall to women who give at least 20 hours of unpaid care on average while also balancing their own families and working outside the home.

When folks are giving so much of themselves to others, caregivers often suffer burnout from physical, mental and emotional exhaustion, including anxiety, stress and depression. “You have to make sure that you are not overextending yourself,” said Tammy Bresnahan, AARP’s associate state director for advocacy. “… That is why we recommend that you find breathing exercises and/or yoga or try to carve out a little bit of time for yourself so you are not all consumed.”

She suggests siblings may want to split up duties if possible, such as one takes the parent to doctor’s appointments while the other does home visits.

Elizabeth Weglein, CEO of the Elizabeth Cooney Care Network, believes it is important for caregivers to take time for themselves.

“If you are able to take care of yourself, you can take better care of someone else,” she said. “Most caregivers put themselves at the bottom row and take care of themselves last. Their health deteriorates fairly quickly. So really the mantra should be always take care of yourself.”

The advice is similar to the scenario you hear before an airplane flight from attendants who instruct caregivers, in the case of an emergency, to put on their oxygen masks first before helping their loved ones.

“Caregivers don’t always realize it when they are in the midst of it,” Weglein said. “They need to be taking care of themselves, getting time off. Even just going to the grocery store alone or going to get their hair done or seeing a friend and having lunch. Just having some downtime to talk. The value of that break is so high.”

One of the biggest needs for caregivers is respite care. Some caregivers need to attend out-of-town funerals or important events. Others need to have surgery or be in a medical facility for a short time.

Maryland is one of 16 states that utilizes a federal grant to provide emergency respite care services within 72 hours, allotting families $225 a year for services. Beginning in fall 2017, the Elizabeth Cooney Care Network serves as administrator.

“The individuals who have utilized (the grant) were very thankful,” Weglein said. “They really did not have any resources to turn if it had not been for the grant. …The good part is it doesn’t have a lot of strings. There is no economic requirement. They just have to have a need. It is supporting respite care which means it is helping the primary caregiver.”

Weglein believes the grant is unique because it can be triggered so quickly and families may call themselves.

“In Maryland, there are a lot of gatekeepers where you have to call this entity, get prequalified and then call,” Weglein said. “This particular grant was really designed to be very free and accessible that a family caregiver could just call Elizabeth Cooney 24 hours a day, trigger the grant and then services would be rendered within a 72-hour period for the total of $225. We’ve been very creative with that $225 to create support systems that really maximize the need for that individual.”

The Maryland Healthy Families Working Act, which took effect in February, also helps caregivers. The bill, vetoed by Gov. Larry Hogan but overridden by the Maryland General Assembly, requires employers with 15 or more employees to provide paid sick/safe leave for up to five days. Before the act, some fields, such as retail and food service, had no paid sick/safe leave.

“There is some fear from some businesses that it is going to hurt the business,” Weglein said. “… My perspective on how we treat our employees and also how we treat our clients (is) you support your team. The stronger and happier and healthier your team is, the stronger your company is.”

Weglein notes the better we understand taking care of our own families, especially with the aging population, the better we will be as a society in the state.

“Overall, financially, if we keep and take care of our citizens, it is really a matter of keeping our economic base strong so people don’t move to Delaware,” Weglein said. “They don’t move to Florida or North Carolina. They don’t look and seek other pathways to get care.”

This Article was prepared by a third party for information purposes only. It is not intended to provide specific advice or recommendations for any individual.

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Keep Your Life Insurance When You Retire

Some good reasons to retain it.

Do you need a life insurance policy in retirement? One school of thought says no. The kids are grown, and the need to financially insulate the household against the loss of a breadwinner has passed.

If you are thinking about dropping your coverage for either or both of those reasons, you may also want to consider some reasons to retain, obtain, or convert a life insurance policy after you retire. It may be a prudent decision once you take these factors into account.

Could you make use of your policy’s cash value? If you have a whole life policy, you might want to utilize that cash in response to certain retirement needs. Long-term care, for example: you could explore converting the cash in your whole life policy into a new policy with a long-term care rider, which might even be doable without tax consequences. If you have income needs, many insurers will let you surrender a whole life policy you have held for some years and arrange an income contract with the cash value. You can pull out the cash, tax-free, as long as the amount withdrawn is less than the amount paid into the policy. Remember, though, that withdrawing (or taking a loan against) a policy’s cash value naturally reduces the policy’s death benefit.1

Do you receive a “single life” pension? Maybe a pension-like income comes your way each month or quarter, from a former employer or through a private income contract with an insurer. If you are married and there is no joint-and-survivor option on your pension, that income stream will dry up if you die before your spouse dies. If you pass away early in your retirement, this could present your spouse with a serious financial dilemma. If your spouse risks finding themselves in such a situation, think about trying to find a life insurance policy with a monthly premium equivalent to the difference in the amount of income your household would get from a joint-and-survivor pension as opposed to a single life pension.2

Will your estate be taxed? Should the value of your estate end up surpassing federal or state estate tax thresholds, then life insurance proceeds may help to pay the resulting taxes and help your heirs avoid liquidating some assets.

Are you carrying a mortgage? If you have refinanced your home or borrowed to buy a home, a life insurance payout could potentially relieve your heirs from shouldering some or all of that debt if you die with the mortgage still outstanding.2

Do you have burial insurance? The death benefit of your life insurance policy could partly or fully pay for the costs linked to your funeral or memorial service. In fact, some people buy small life insurance policies later in life in preparation for this need.2

Keeping your permanent life policy may allow you to address these issues. Alternately, you may seek to renew or upgrade your existing term coverage. Consult an insurance professional you know and trust for insight.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – forbes.com/sites/forbesfinancecouncil/2018/03/06/using-life-insurance-for-retirement-purposes/ [3/6/18]
2 – nasdaq.com/article/4-reasons-to-carry-life-insurance-in-retirement-cm946820 [4/12/18]

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Life Insurance Explained

A quick look at the different types of policies.

When it comes to life insurance, there are many choices. Whole life. Variable universal life. Term. What do these descriptions really mean?

All life insurance policies have two things in common. They guarantee to pay a death benefit to a designated beneficiary after a policyholder dies (although, the guarantee may be waived if the death is a suicide occurring within two years of the policy purchase). All require recurring payments (premiums) to keep the policy in force. Beyond those basics, the differences begin.1

Some life insurance coverage is permanent, some not. Permanent life insurance is designed to cover you for your entire life (not just a portion or “term” of it), and it can become an important element in your retirement planning. Whole life insurance is its most common form.2

Whole life policies accumulate cash value. How does that happen? An insurer directs some of your premium payments into a reserve account and puts those dollars into investments (typically conservative ones). The return on the investments influences the growth of the cash value, which builds up according to a formula the insurer sets.3

A whole life policy’s cash value grows with taxes deferred. After a while, you gain the ability to borrow against that cash value. You can even cancel the policy and receive a surrender value. Premiums on whole life policies, though, are usually higher than premiums on term life policies, and they may rise with time. Also, beneficiaries only receive a death benefit (not the policy’s cash value) when a whole life policyholder dies.2,4

Universal life insurance is whole life insurance with a key difference. Universal life policies also build cash value with taxes deferred, but there is the chance to eventually pay the monthly premiums out of the policy’s investment portion.5

Month by month, some of your premium on a universal life policy gets credited to the cash reserve of the policy. Sooner or later, you may elect to pay premiums out of the cash reserve – so, the policy essentially begins to “pay for itself.” If all goes well, a universal life policy may have a lower net cost than a whole life policy. If the investments chosen by the insurer severely underperform, that can mean a dilemma: the cash reserve of your policy may dwindle and be insufficient to keep paying the premiums. That could mean cancellation of the policy.5

What about variable life (and variable universal life) policies? Variable life policies are basically whole life or universal life policies with a riskier investment component. In VL and VUL policies, you may direct percentages of the cash reserve into investment sub-accounts managed by the insurer. Assets allocated to the sub-accounts may be put into equity investments of your choice as well as fixed-income investments. If you choose equity investments, you (and the insurer) assume greater risk in exchange for the possibility of greater reward. The performance of the subaccounts cannot be guaranteed. As an effect of this risk exposure, a VUL policy usually has a higher annual cost than a comparable UL policy.6

The performance of the stock market may heavily affect the performance of the subaccounts and the policy premiums. A bull market may mean better growth for the policy’s cash value and lower premiums. A bear market may mean reduced cash value and higher monthly payments to keep the policy going. In the worst-case scenario, the cash value plummets, the insurer hikes the premiums in order to provide the guaranteed death benefit, the premiums become too expensive to pay, and the policy lapses.6

Term life insurance is life insurance that you “rent” rather than own. It provides coverage for a set period (usually 10-30 years). Should you die within that period, your beneficiary will get a death benefit. Typically, the premium payments and death benefit on a term policy are fixed from the start, and the premiums are much lower than those of permanent life policies. When the term of coverage ends, you may be offered the option to renew the coverage for another term or to convert the policy to a form of permanent life insurance.2,7

Term life is cheap, but the tradeoff comes when the term is up. Just as you cannot build up home equity by renting, you cannot build up cash value by “renting” life insurance. When the term of coverage is over, you usually walk away with nothing for the premiums you have paid.7

Which coverage is right for you? Many factors may come into play when deciding which type of life insurance will suit your needs. The best thing to do is to speak with a qualified insurance professional who can help you examine these factors, so you can determine which type of coverage may be appropriate.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – thebalance.com/does-a-life-insurance-policy-cover-suicide-2645609 [6/5/18]
2 – fool.com/retirement/2017/07/20/term-vs-whole-life-insurance-which-is-best-for-y-2.aspx [7/20/17]
3 – investopedia.com/articles/personal-finance/082114/how-cash-value-builds-life-insurance-policy.asp [4/30/18]
4 – insure.com/life-insurance/cash-value.html [12/12/17]
5 – thebalance.com/what-you-need-to-know-about-universal-life-insurance-2645831 [5/8/18]
6 – insuranceandestates.com/top-10-pros-cons-variable-universal-life-insurance/ [9/1/17]
7 – consumerreports.org/life-insurance/how-to-choose-the-right-amount-of-life-insurance/ [3/30/18]

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Key Person Insurance

A way for businesses – especially niche businesses – to address a major risk. 

Who are the people most crucial to your business? Have you taken steps to insure them?

At every company, there are certain people whose absence would cause day-to-day operations to grind to a halt. If they die or become disabled, the future of the company may be jeopardized.

Key person insurance is designed to help businesses deal with this kind of major disruption. Its payout can offer some monetary relief so that operations can continue running smoothly.

Small & large businesses choose key person insurance for a variety of reasons. The insurance benefit can be used to settle outstanding loans, and to fund the recruitment and training of a new hire. Key person insurance benefits may also help in an ownership transition, and become a component in an executive compensation plan. If a key person dies, the business owner(s) may want to provide his or her spouse or family with the equivalent of their salary for a time.

How easy it is to arrange this type of insurance? In a word, very. As private insurance, it requires no IRS filings or disclosures. In the case of key person life insurance, both permanent life and term life options may be explored. Typically, term coverage is the choice.1,2

Key person disability insurance amounts to an insurance contract, whereby the policy provides coverage up to a certain age or a certain date – for example, the end of the period in which monthly cash benefits are paid to the disabled employee, or the retirement date of the employee.

The payout from a key person insurance policy is tax-free. As a tradeoff for that, the premium payments are not tax-deductible. Typically, the company owns the policy, pays the premiums and is listed as policy beneficiary.2,3

This is the kind of perk that can help you attract & keep good employees. The knowledge that a manager or executive can count on some financial support in the event of a health crisis, the understanding that his or her family could receive insurance benefits in the event of a tragedy – this may make a job offer that much more compelling.

Key person insurance can even be continued after the key employee retires or transfers his or her ownership interest – a nice addition to that person’s retirement package.

Key person insurance can also boost your standing as you seek financing. It can give your business added financial stability that might help its loan prospects and credit position. If you apply for a business loan, the question of whether you have key person insurance will come up quickly. If your company lacks key person coverage, the loan may not be forthcoming. If you intend to apply for a loan guaranteed through the Small Business Administration, key person insurance is often a prerequisite.4

Niche businesses arguably need this coverage the most. A software development firm, a biomedical company, any kind of business where the owner or employees must have “expert” knowledge of a discipline or an industry … these businesses may be most at risk if a key employee dies or is left disabled.

Does your company lack key person insurance? Too many businesses do. While insuring a company’s information, equipment and inventory against loss is par for the course, insuring a business against the loss of human and creative capital is not. A loss of knowledge and mastery can spell the end for a business that has transitioned from survival to success, and even for an established sole proprietorship or partnership. Look into this today, for you never know what tomorrow may hold.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – rbcinsurance.com/business/small-business/key-person-insurance.html [11/9/15]
2 – smallbusiness.com/manage/why-you-need-key-person-insurance/ [11/9/15]
3 – raymondjames.com/small_business_key.htm [11/9/15]
4 – sba.gov/offices/headquarters/oca/resources/4950 [11/9/15]