Insurance Planning

How Annuities Can Help Provide a Retirement Income Floor

binoculars-2194228_1920

Here’s why many people choose annuities for for retirement income, and what prospective annuity holders should consider.

Imagine an income stream you cannot outlive.

That sums up the appeal of an annuity. If you are interested in steady retirement income (and the potential to defer taxes), you might want to look at the potential offered by annuities. Before making the leap, however, you must understand how they work.

Just what is an annuity?

It is an income contract you arrange with an insurance company. You provide a lump sum or continuing contributions to fund the contract; in return, the insurer agrees to pay you a specific amount of money in the future, usually per month. If you are skittish about stocks and searching for a low-risk alternative, annuities may appear very attractive. While there are different kinds of annuities available with myriad riders and options that can be attached, the basic annuity choices are easily explained. (2)

Annuities can be either immediate or deferred.

With an immediate annuity, payments to you begin shortly after the inception of the income contract. With a deferred annuity, you make regular contributions to the annuity, which accumulate on a tax-deferred basis for a set number of years (called the accumulation phase) before the payments to you begin. (1,2)

Annuities can be fixed or variable.

Fixed annuities pay out a fixed amount on a recurring basis. With variable annuities, the payment can vary: these investments do essentially have a toe in the stock market. The insurer places some of the money that you direct into the annuity into Wall Street investments, attempting to capture some of the upside of the market, while promising to preserve your capital. Some variable annuities come with a guaranteed income benefit option: a pledge from the insurer to provide at least a certain level of income to you. (1,3)

In addition, some annuities are indexed.

These annuities can be either fixed or variable; they track the performance of a stock index (often, the S&P 500), and receive a credit linked to its performance. For example, if the linked index gains 8% in a year, the indexed annuity may return 4%. Why is the return less than the actual index return? It is because the insurer usually makes you a trade-off: it promises contractually that you will get at least a minimum guaranteed return during the early years of the annuity contract. (3)

Annuities require a long-term commitment.

Insurance companies expect annuity contracts to last for decades; they have built their business models with this presumption in mind. So, if you change your mind and decide to cancel an annuity contract a few years after it begins, you may have to pay a surrender charge – in effect, a penalty. (Most insurance companies will let you withdraw 10-15% of the money in your annuity without penalty in an emergency.) Federal tax law also discourages you from withdrawing money from an annuity – if the withdrawal happens before you are 59½, you are looking at a 10% early withdrawal penalty just like the ones for traditional IRAs and workplace retirement accounts. (1,3)

Annuities can have all kinds of “bells and whistles.”

Some offer options to help you pay for long-term care. Some set the length of the annuity contract, with a provision that if you die before the contract ends, the balance remaining in your annuity will go to your estate. In fact, some annuities work like joint-and-survivor pensions: when an annuity owner dies, payments continue to his or her spouse. (Generally, the more guarantees, riders, and options you attach to an annuity, the lower your income payments may be.) (1)

Deferred annuities offer you the potential for great tax savings.

The younger you are when you arrange a deferred annuity contract, the greater the possible tax savings. A deferred annuity has the quality of a tax shelter: its earnings grow without being taxed, they are only taxable once you draw an income stream from the annuity. If you start directing money into a deferred annuity when you are relatively young, that money can potentially enjoy many years of tax-free compounding. Also, your contributions to an annuity may lower your taxable income for the year(s) in which you make them. While annuity income is regular taxable income, you may find yourself in a lower tax bracket in retirement than when you worked. (1)

Please note that annuities come with minimums and fees.

The fee to create an annuity contract is often high when compared to the fees for establishing investment accounts – sometimes as high as 5-6%. Annuities typically call for a minimum investment of at least $5,000; realistically, an immediate annuity demands a five- or six-figure initial investment. (3)

No investment is risk free, but an annuity does offer an intriguing investment choice for the risk averse. If you are seeking an income-producing investment that attempts to either limit or minimize risk, annuities may be worth considering.

JP-GTR-2018-48

▲Understanding annuities: Which annuity may be right for you?

Annuities come in all shapes and sizes, which can often confuse investors. This chart helps to identify the type of annuity that aligns to specific income needs and tolerance for investment risk, and provides information about how the annuity growth and payout amounts are determined, as well as other key characteristics to know.

Sources

  1. investopedia.com/articles/retirement/05/063005.asp
  2. forbes.com/sites/forbesfinancecouncil/2018/01/04/annuities-explained-in-plain-english/#626afc215bd6
  3. apps.suzeorman.com/igsbase/igstemplate.cfm?SRC=MD012&SRCN=aoedetails&GnavID=20&SnavID=29&TnavID&AreasofExpertiseID=107
  4. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

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.

Searching for Health Coverage in the Years Before Medicare

doctor pointing at tablet laptop

Photo by rawpixel.com on Pexels.com

What are your options for insuring yourself prior to age 65?

If you retire before age 65, you must be prepared to address two insurance issues.

One, finding health coverage in the period before you can sign up for Medicare. Two, finding a way to pay for that coverage.

You know it will probably be expensive, but do you realize just how expensive?

A single retiree may pay as much as $500-1,000 per month for private health insurance. For a couple, the monthly premiums can surpass $2,000. These are ballpark figures; fortunately, seniors without pre-existing health conditions can locate some less expensive plans offering short-term coverage, albeit with high deductibles. (1,2)

If you find yourself in this situation, what are your options?

It is time to examine a few.

You could retire gradually or take a part-time job with access to a group health plan.

Ask your employer if a phased retirement is possible, so you can maintain the coverage you have a bit longer. Securing part-time work with health benefits elsewhere could be a tall order, as it may be much tougher to find a job in your early sixties; not all employers value experience as much as they should.

You could turn to the health insurance exchanges.

Purchasing your own coverage could be a first for you, and you may not be optimistic about your prospects at the Health Insurance Marketplace (healthcare.gov) or a state exchange. Your prospects could be better than you assume. As a Miami Herald article points out, a married couple younger than 65 earning around $65,000 could likely get a bronze plan for free through the Marketplace, thanks to federal government subsidies. A couple would be eligible for such aid with projected 2019 earnings in the range of $16,460-$65,840. For the record, the open enrollment period for buying 2019 coverage ends December 15. (2)

You could arrange COBRA coverage.

If you voluntarily or involuntarily retire from a company or organization that has 20 or more employees and a group health plan, that employer must give you the option of extending the health insurance you had while working for up to 18 months (or in some instances, up to 36 months). This is federal law, part of the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985. (There is a notable exception to this: an employer can legally choose not to offer you COBRA benefits if you were fired due to “gross misconduct,” though the law defines that term hazily.) COBRA coverage is expensive: you effectively pay your employer’s monthly premium as well as your own, plus a 2% administrative fee. If you miss a premium payment by more than 30 days, your COBRA benefits may be canceled. (3,4)

You might be lucky enough to secure retiree health insurance.

Some employers do offer this to retiring workers; if yours does not, your spouse’s employer might. It is not cheap by any means, but it may be worthwhile. (1)

As a last option, you could move to another country (or state).

You could relocate to a nation that has either a universal health care system or much cheaper health care costs than ours does, either temporarily or permanently. If you decide to stay in that nation for the long term, you will really need to think about whether or not you want to sign up for Medicare at 65. Alternately, another state may present you with a cheaper health care picture than your current state does; a little research may reveal some potential savings. (1)

Review these options before you retire.

See how the costs fit into your budget. Have a conversation about this topic with an insurance or financial professional, because you may end up leaving work years prior to age 65.

JP-GTR-2018-30

▲ Rising annual health care costs in retirement

This chart illustrates the current range of total out-of-pocket health care costs experienced by today’s 65-year-old, and how those costs may increase over time. These costs include traditional Medicare with a supplemental policy. Supplemental policies, called Medigap, fill in gaps in Medicare coverage such as co-pays and deductibles. Part D for prescription drugs and out-of-pocket expenses are also included. Median costs are about $5,210 per person. Median costs are projected to more than triple over 20 years for three reasons: 1) higher than average inflation for health care expenses; 2) increased use of health care at older ages; and 3) Medigap premiums that increase not only with inflation but also due to increased age. It is important to note that these costs do not include most long-term care expenses. (4)

Sources

  1. forbes.com/sites/nextavenue/2018/08/07/shopping-for-health-insurance-before-medicare-kicks-in
  2. tinyurl.com/yccclxmc
  3. bizfilings.com/toolkit/research-topics/office-hr/what-is-cobra-what-employers-need-to-know forbes.com/sites/heatherlocus/2018/10/21/what-you-need-to-know-about-3-key-options-for-health-insurance-after-divorce/
  4. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

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 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.

Life Insurance 101: The Different Types of Life Insurance Policies Explained

umbrellas art flying

Photo by Adrianna Calvo on Pexels.com

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 provides coverage for a set period.

Term life provides coverage for 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)

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 financial advisor who can help you examine these factors, so you can determine which type of coverage may be appropriate.

Sources

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

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.

 

Are You Properly Insured? Should You Insure Your Kids? [VIDEO]

September is National Life Insurance Awareness Month – a good time to think about the value and importance of insuring yourself.
 insurance-thumbnail-2-play

Too many Americans Have No Life Insurance At All

According to a recent Bankrate survey, 42% of Americans have no life insurance at all. (1) Many growing families have inadequate life insurance coverage. The Bankrate survey discovered that 37% of parents with children under age 18 had no policy at all. The Good news life insurance coverage has become much more affordable than it once was.

What Life Insurance Does for You

Life insurance is about managing risk, and if other people rely on you financially, you need to have it in place in case your passing puts them at financial risk. When a spouse or parent dies, there are financial matters to address: a sudden lack of income for a household, bills and mortgages or rent to pay, final expenses such as funeral or cremation costs, and the cost of children’s education. Without adequate life insurance coverage, a household is hard-pressed to meet these immediate, financially draining challenges.

How Much Coverage is Adequate For You?

Ideally, you should determine that with the help of an insurance professional. As a rough rule of thumb, the death benefit on a policy should be about 15 times your income.
Ideally, you should determine that with the help of an insurance professional. As a rough rule of thumb, the death benefit on a policy should be about 20x’s income in your 40’s 15x’s income in your 50’s. You can use this calculator to help determine what may be right for you.

What Kind of Insurance Should You Get?

There are basically 2 types of insurance: Temporary (Term) and Permanent (Whole Life). What’s right for you depends on so many factors you will probably need to discuss this with a professional. Term is significantly less expensive but will end after a specified period of time. If you are considering a term life policy, the term should not end before your envisioned retirement age.(2)

Should You Have Life Insurance on Your Children?

A small life insurance policy could help cover these expenses if the unthinkable occured:
  1. Outstanding Healthcare costs
  2. Lost income from taking time off to mourn
  3. Funeral costs

Make Sure You Have Coverage in Place

While you may decide you prefer one kind of policy over another, the important thing is to have coverage in place – not just to reassure yourself, but those you love. Life insurance can help a spouse or a family maintain financial equilibrium at a time when it is most needed.


Sources

  1. bankrate.com/finance/insurance/money-pulse-0715.aspx [7/8/15]
  2. forbes.com/sites/timmaurer/2016/01/05/10-things-you-absolutely-need-to-know-about-life-insurance/ [1/5/16]
  3. nerdwallet.com/blog/insurance/should-you-consider-cash-value-life-insurance/ [5/6/15]
  4. This material was prepared, in part, by MarketingPro, Inc.

3 Smart Financial Moves For August [VIDEO]

#1 Check Your Credit Score

It’s that time again: Review your credit score at http://www.CreditKarma.com, paying special attention to any fraudulent charges, so you can report it to your credit card company.

#2 Review Your Insurance

Review your auto and homeowners insurance coverage and to shop around. Make an appointment with your agent, or go online and see what other insurers charge for similar coverage.

#3 Review Your Benefits

Review your current benefits situation. Each fall, employees have a brief window of time when they can make changes to their insurance policies or set up and adjust contributions to health savings accounts (HSAs) and flexible spending accounts (FSAs). Check out any new options that are available and decide whether you should make any switches

Sources:
1. http://www.learnvest.com/knowledge-center/your-january-2016-financial-to-dos/
2. http://money.usnews.com/money/personal-finance/articles/2014/12/02/your-end-of-year-financial-checklist
3. http://www.forbes.com/sites/learnvest/2013/01/04/your-financial-to-dos-for-every-month-in-2013/#14fe6d3d41d4

How to Protect Your Loved One’s Financial Future

Financial Planning Tip: February

As Valentine’s day approaches, we are thinking about the one’s we love and coming up with ways to show them we care. Once you have finished purchasing your cards, flowers and chocolates take some time this month to think about those people and whether you have appropriately planned for them. It may not be the most romantic thing to do, but now is a great time to sit down and determine if you have the proper insurance coverage to protect your loved one’s if you are not around to provide for them or if you become incapable.

To get started, ask yourself a few questions. Have your needs changed over the years? Did you get married? Did you have a child? Did you retire? Are you thinking about retirement? Have you taken on other financial responsibilities that would negatively affect the people you care about should you pass away too soon? The answers to these questions will help you figure out if you need to make some changes to your coverage. You should periodically evaluate your life insurance coverage, disability insurance coverage, and determine if long-term care insurance is appropriate. There are many resources online to help you get started. For example, to get a basic idea of how much life insurance coverage you may need, use this online calculator as a starting point. Thinking about your own demise is no fun at all, however with smart planning you will sleep better at night knowing you have taken the right steps to protect the one’s you love most.

Watch this video for even more tips:

If you would like to discuss your particular situation and how much insurance you may need to protect your family, feel free to contact me at sweiss@weiss-financial.com.

For more financial planning tips download my free report: 8 Steps to Organize & Optimize Your Financial Life. It’s packed with helpful advice, useful tips and valuable resources.

To learn what I can do for you visit www.weiss-financial.com.