Not agents. Brokers.
At CameronDowning we broker life, disability income, and long-term care insurance. What does this mean to you? It is the distinction between an agent and a broker. An agent is an employee of an insurance company, who represents that company to the public, and is responsible for selling that company’s products. A broker, on the other hand, represents his client to the insurance market. The broker shops the market on behalf of his client, in order to find the best deal. Is it better to work with a broker or an agent? We think broker. As insurance brokers our interests are completely aligned with yours. There is no selling involved. It is a matter of us presenting the best products in the marketplace to you for your choice. We are licensed in Florida to offer life, disability, and long term care insurances. We are also licensed to sell fixed and equity-indexed annuities.
Life policies sold today are not the ones your father bought. Today’s policies have significant living benefits for the policy owner – providing pools of money to be drawn down in the case of chronic, critical, or terminal illnesses on a tax-free basis. The planning point here is that these benefits can be an essential part of a client’s risk management strategy, providing for long-term care costs in the
Life insurance can also be used to provide a tax-free income in the future. This is, in fact, a common planning strategy. The only places to get a tax-free income in retirement are from a Roth IRA or from life insurance. The Roth account is subject to contribution limits ($5500 in 2015 with an additional $1000 for those over age 50) which tend to limit the account size. If an investor has a modified adjusted gross income over $131,000 (single) or $193,000 (married filing jointly) he or she is prohibited from contributing to a Roth IRA. There is a conversion Roth, but that brings up a whole series of tax consequences. Using life insurance for tax-free income can be a more flexible option in that there are no income limits for contributions.
How do you earn money in a policy? Interest or earnings are credited in various ways, depending upon the type of policy. Generally these are fixed, variable, and equity-indexed. If you are a conservative investor you might be happy with a whole life policy, where you can see predictable growth over time and no investment risk. In a variable universal life policy you invest in mutual fund like subaccounts, and the investment return on the policy is whatever these subaccounts have earned – or lost. This is for the aggressive investor. In the middle is the equity indexed universal life policy, where returns are pegged to a stock market index, such as the S&P 500. In this strategy the policy value can never decline due to unfavorable investment results – only increase.
There are many ways, then, to use a policy:
- A death benefit to secure the future of loved ones
- As a security for a bank loan or business transaction
- As income in case of chronic or critical illness
- As tax-free retirement income
- In a wealth replacement charitable trust arrangement
- To secure the future of children and grandchildren with policies on their lives
Most clients seriously need to re-visit the issue.
Insurance is an essential part of any financial plan – it completes the plan. The type and amount of insurance depend a lot on your other assets and your personal philosophy. For example – in terms of life insurance – we’ve heard clients say, I want to have enough insurance in place for my wife to never work again; send the kids to college; and then live out her days in comfort. On the other hand we have literally heard a client say that she wanted the last check she wrote to bounce – that she wanted to spend down her assets completely. So the type of life insurance a person owns is a very personal choice.
Qualified non-U.S. residents may enter the insurance market. Many life insurers will welcome applications from foreign nationals. Usually they look for some significant U.S. tie: a taxpayer ID, property or business interests here, a residence or family here. Premiums must be paid in U.S. Dollars, and the qualifying medical exams must be done here in the States as well. For people concerned about the financial security of both their families and their assets in their home countries, there is nothing else like life insurance.
Full Disclosure: insurance products are sold on a commission basis.
Disability Income Insurance
Insurance always insures something. Life insurance pays at a death. Your homeowner’s insurance pays after a hurricane comes through. What does disability insurance insure? Your income. Just that. It insures you against the loss of your ability to earn your income.
If you are a young professional, for example, what is typically your most valuable asset? You haven’t had time yet to build up a real estate or investment portfolio. Your biggest asset is your education – which is your ticket to earning your living. This is what is insured in DI insurance, as it is called.
If you insure your life, your car, and your health, why wouldn’t you insure your pricing varies a lot policy by policy, because you choose exactly the features and benefits you want:
- The amount insured. You must demonstrate this with tax returns. It is your earned income that is insurable – not investment income. Typically 60% to 65% is the maximum coverage obtainable.
- An inflation factor, if chosen. At just 3% inflation, $1000 today is worth only $737 after ten years.
- Benefit period (3 years; 5 years; to age 65)
- Elimination period (30 days; 60 days; 6 months). This is a waiting period after the time initial claim is approved before the policy actually pays anything.
- Medical underwriting. You can be classified as a standard, preferred, or substandard risk, and priced accordingly.
Typically 3% to 5% of the amount insured is a good approximation of premium
If you are covered by an employer’s group DI policy, you should know that your employer is deducting the premiums – which makes the benefits taxable to you.
So if you net 60% of your salary, after tax you may only be replacing 40% of your salary. If the premiums were never deducted, the benefit is tax free.
Policy definitions are crucial. Are you covered under your own occupation, or under any occupation? If you have an own occupation definition, and you are a trial lawyer and lose your voice, for example, the policy will pay. You can no longer try cases, but there is nothing to prevent you from earning income as an attorney in another capacity. You can double-dip, is the point. On the other hand, if you have an any occupation definition, and in this circumstance you could still earn money as an attorney doing research, the insurer may decline your claim. The policy will pay when you can no longer perform the functions and duties of the occupation for which you are suited by reason of education, training, and experience. The any occupation definition is less advantageous.
The take-away, however, is that no insurance company will decline your claim and make you flip burgers if you’re able.
Long Term Care Insurance
Long term care insurance pays costs of custodial care. Medical insurance pays for care when one is sick or injured and expected to recover. Medicare pays for recuperative care after a hospital stay of 3 or more days. LTC pays for palliative care when the insured needs – and this is the definition – substantial help and assistance in performing 2 out of the 6 activities of daily living (ADLs). To remember the ADLs, think of what you do when the alarm clock goes off in the
- Get up (transferring)
- Go to the bathroom (toileting)
- Wash up (bathing)
- Get dressed (dressing)
- Have breakfast (eating)
- Maintain continence
A cognitive impairment by itself would also trigger benefits.
This is an evolving marketplace. When LTC policies were first introduced about a generation ago, insurance companies vastly mispriced the policies. Consequently many carriers have left this line of insurance. Policies today are significantly more costly than those of even ten years ago.
Pricing is much like that of a disability policy. Premiums are based upon:
- A daily benefit – $150/day; $250/day, etc.
- An inflation factor is selected (3% compound; 5% simple)
- The benefit period (coverage for 3 years, or 5 years, or more)
- Elimination period – sort of like a deductible – before the policy begins to pay.
For example, if I purchased a $200/day benefit for 5 years and a 3% inflation factor, with a 90 day elimination period, the insurance company is initially reserving a pool of money in the amount of $365,000 ($200/day * 5 years * 365 days) for a potential claim. Pricing, then, is dependent upon all these factors taken together. The longer the elimination period, for example, the lower the premium. Policy terms spell out where care is available. Most policies today pay for care at home, in an assisted living facility, adult daycare, and nursing homes. Some carriers also pay for care obtained outside the United States. The purpose of the insurance is to pay expenses when needed. The larger purpose is to preserve sufficient assets to sustain the second spouse. A long, debilitating illness – Alzheimer’s, for example – could easily drain the investment account of even the most responsible couples. LTC gives a measure of assurance that the second spouse will still be able to live, financially.
This is a huge topic in retirement planning, and a discussion that every family needs to have. Not only is a retiree concerned about outliving his assets, he or she is also concerned about consuming them all, and leaving an impoverished spouse. This is a heartbreaking circumstance. Who wouldn’t give everything to care for a beloved spouse of many years?
LTC policies can quickly become prohibitively expensive if you wait until your early 60’s to make a purchase. Even at that premiums will be a few thousand per year, depending upon benefits chosen. Insurance companies cannot raise your premium if you have too many claims, like an auto policy. They can only raise premiums on an entire class of insureds and with the approval of the state department of financial affairs. The good news is that the premiums you pay are deductible, at least partially, subject to a 10% floor of your Adjusted Gross
Income on Schedule A.
Beyond LTC policies there are life policies with riders which can offset care costs to a significant degree. There are several other arrows in the quiver for financing a long term illness in retirement: the reverse mortgage, selling a home to a child and renting it back, and Medicaid trust planning. Each of these would require the services of a different specialist – one in reverse mortgages, and an eldercare attorney – and we would be pleased to make introductions.
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