August 2010 Personal Finance Newsletter
August 13, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
The August 2010 personal finance newsletter is now available. It includes information on how college scholarships are taxed, how the new healthcare law affects Medicare drug plans, and, as always, an investment market update. Enjoy! Click here to view the newsletter.
May 2010 Newsletter
May 10, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
The May 2010 newsletter is now available. It includes investing information with perspective on last week’s market plunge and an update on the new reduced fees for trading Vanguard ETFs. For taxes, there’s information on the new 3.8% medicare tax for high income individuals. For cash flow, we cover using a Roth IRA as a back-up emergency fund. For insurance, it includes information on incorporating TX state guarantee association coverage limits and exclusions into your financial planning. Click here to read the newsletter.
When an Insurance Company Fails
May 10, 2010 by Jean Keener, CRPC, CFDP · 1 Comment
Last week I attended the Financial Planning Association annual symposium in Dallas, and one of the speakers was Bart Boles, executive director for Texas’ insurance guaranty association. He shared the association’s processes when an insurance company fails, and how we as the consumer would likely be affected. Some of the exclusions and limits are important information to consider in your individual planning process. With this information, you can make smart insurance purchase decisions and avoid any surprises if the worst happens.
If your insurance company fails, here are the limits to what the association would cover.
Funds required for this coverage don’t come from tax payer dollars. They come from assessments of other insurance companies.
Health Insurance (all per individual per insolvent company)
- $500,000 for hospital, medical & surgical and major medical
- $300,000 disability and LTC insurance
- $200,000 all other health insurance
Life Insurance (all per insured life per insolvent company)
- $100,000 of cash surrender value
- $300,000 of death benefits
- $5 million per owner of multiple non-group policies
Annuities (all per insolvent company)
- $100,000 of the present value of annuity benefits per insured life (individual and allocated group annuities)
- $100,000 per payee for structured settlement immediate annuities
- $5 million per owner of unallocated group annuity
Aggregate Limit
- $300,000 of aggregate benefits for an individual per insolvent company (with the exception of the individual limits listed above exceeding this amount)
Exclusions
Some of the exclusions include:
- Insurance policies with insurance companies not licensed to do business in Texas
- Benefits of an insurance policy that are not guaranteed by the insurance company (such as the non-guaranteed portion of a variable life insurance or annuity contract)
- Benefits for which the policyholder bears the risk (such as certain variable or indexed annuities). Specifically, equity-indexed annuities are not covered.
- Interest rate yields that exceed an average rate set by the terms of the Texas Guaranty Association law. This can come into play with some annuities offering high guaranteed rates.
- Items not part of the specific written terms of the policy, such as claims based on marketing materials, side letters, riders not part of the approved policy form, misrepresentation, etc. For example, if the agent wrote a note on your application guaranteeing a benefit that’s not expressly in the contract, that’s not covered.
- PBGC protected annuities
- Property and casualty insurance policies (such as auto, homeowner’s, workers compensation, etc.). This is covered by a separate guaranty organization. Their website is: http://www.tpciga.org/
There are other exclusions as well. For more information on this, visit the FAQ section of the Texas Guaranty Assocation’s website.
In addition to the limits, being aware of the exclusions is also an important part of the insurance purchase process. If your policy is fully excluded, an extreme amount of due diligence needs to be done on the company prior to purchase. If a particular guarantee is a critical part of your purchase decision, you need to read the actual contract and make sure it’s clearly communicated in the contract and not just in the marketing materials. You should also verify that the guarantee falls within the limits of what’s covered. If it’s above the limits, consider the worst-case scenario and ask yourself if you could live with that outcome and if your purchase decision still makes sense given that possibility.
New Health Care Law Highlights
April 2, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
If you’re like me, you found it challenging to keep up with the provisions of the health care bills as they worked through the legislative process. But now that the bill is law, it’s helpful to understand how it may affect your individual situation and any changes that need to be made to your financial plan as a result. An overview of some of the most significant provisions:
For individuals
- U.S. citizens and legal residents will be required to have health insurance by 2014, with some exceptions. Those without insurance will face a tax penalty of as much as 2.5% of taxable income.
- Existing employer-sponsored health insurance plans will be allowed to remain essentially the same except the plans will be required to extend dependent coverage to qualifying children through age 26, lifetime limits (and eventually, annual dollar limits) on coverage must be eliminated, waiting periods for coverage cannot extend beyond 90 days, and insurers will not be able to deny coverage or charge higher premiums to people based on their health status and gender.
- Medicaid eligibility will be expanded to include individuals under age 65 whose income is less than 133% of the Federal Poverty Level.
- For families with incomes up to 400% of the Federal Poverty Level, tax credits and subsidies will be available to purchase health insurance through state-run exchanges, and to offset out-of-pocket costs.
- Contributions to a health flexible spending account will be limited to $2,500 per year. Reimbursements from health FSAs and HRAs for over-the-counter drugs will be restricted, and tax-free reimbursements from HSAs and Archer MSAs for over-the-counter drugs will not be allowed, while the tax on HSAs and Archer MSAs increases for distributions not used for qualified medical expenses.
- A rebate of $250 will be available to Medicare Part D (drug coverage) beneficiaries who reach the coverage gap (donut hole) and the coinsurance rate for costs within this gap are gradually reduced to 25%.
- Adults with pre-existing conditions will be able to purchase coverage from temporary high-risk pools until 2014, when coverage cannot otherwise be denied for pre-existing conditions.
- A national program will be established to provide limited reimbursement for long-term care expenses for individuals who participate by contributing to the program’s cost through voluntary payroll deductions.
For employers
- Employers with 50 or more employees that do not offer health insurance coverage will generally have to pay a premium tax of up to $2,000 per full-time employee.
- Employers with more than 200 employees must automatically enroll employees in health insurance plans from which employees may opt out.
- Employers providing health insurance must offer a voucher to qualifying employees to purchase insurance through an exchange.
- Qualifying small employers may receive a tax credit for providing health insurance to employees.
Tax changes
- The threshold for itemized deductions for qualified medical expenses will be increased from 7.5% of adjusted gross income (AGI) to 10% of AGI, though a temporary exception will be maintained for those 65 and older.
- The tax for Medicare Part A (hospitalization coverage) is increased 0.9% for individuals with earnings exceeding $200,000, and for couples with joint earnings greater than $250,000. Also, high-income taxpayers will be subject to a surtax of 3.8% on unearned income, such as capital gains, dividends, annuities, and rental income.
- The law imposes a 10% tax on the amount paid for indoor tanning services.
As provisions go into effect and more details become known, it will be important to update your investments and insurance plans to minimize your tax burden, get the most insurance for your money, and stay in compliance with the law.
January 2010 Newsletter
January 12, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
The January 2010 newsletter is now available. Beginning in 2010, it will be published the second week of each month. This month’s newsletter includes a brief 2009 market update, an update on the estate tax for 2010, how to conduct a home inventory, and more. Click here to read it.
Recovering from Unemployment
January 11, 2010 by Jean Keener, CRPC, CFDP · 1 Comment
If you’ve been out of work for a period of time, it’s a huge relief when the paychecks start rolling in again. Depending on how long you were unemployed, what your finances were like before the job loss, and other sources of income in your household, getting back to work could be just the beginning of a long recovery process for your finances.
But here’s the good news. While you were unemployed, you and your family probably got used to spending less. Those habits can now be a huge benefit to your finances long-term, in some cases even allowing you to be stronger financially within a couple of years than you were before the lay-off.
To make this work, you need to resist the status quo expectation that your spending “should” return to former levels. This doesn’t mean you can’t celebrate the new job or enjoy a few small additional luxuries. But, if you can consciously choose to maintain a lower level of spending, you will have a powerful tool to quickly rebuild. With the cash you’re saving, here’s a 6-item priority list to tackle:
1) If your emergency fund is completely depleted, rebuild a small buffer first (start with $1,000 to one month’s expenses). See my blog post on 10 ways to rebuild an emergency fund for ideas on this.
2) If debt has been accumulated, create the typical debt “snowball” program by paying off highest interest rate debt first. See my December 2008 newsletter for details on this strategy.
3) If you borrowed from retirement plans, be mindful of the plan’s rules for repayment to avoid a taxable distribution which could trigger taxes and penalties that would hurt your recovery efforts. These rules could trump the ideal strategy of paying back the highest interest debt first.
4) If you let critical insurance lapse, get your insurance back to the needed levels. This is also a good time to re-assess your insurance needs. It’s possible to be over-insured, and there may be some policies you let lapse that you’re better off without.
5) As the worst debt is eliminated, start adding to the emergency fund to get to 3-6 months’ expenses while paying off the last of the debt.
6) Update your retirement or other goal projections to determine what your contributions need to look like to make up for the lost time.
Once you’ve accomplished these 6 priorities, you will be well on your way to creating your desired financial future. You’ll probably be used to living on less by this point. And you’ll have created the freedom to choose when you’ll indulge in a splurge that you’ll really enjoy, as opposed to feeling trapped with a high level of fixed expenses.
If you have other ideas on financially recovering from unemployment, I’d love to hear them. Please feel free to contact me directly or post them as a comment to this article.
Pension Max: Is it right for you?
December 15, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
If you’re near retirement and have a pension, you may be considering a pension max strategy. With all the variables involved, it can be challenging to determine if it’s really in your best interest.
First – what is pension max?
Pension max is used by married couples to increase their net retirement income while still protecting the surviving spouse’s income in the event the pension recipient dies first. Basically, the pension recipient elects a single life pension instead of one with a survivor benefit for their spouse. This results in a higher monthly pension benefit. Then the pension recipient purchases life insurance to allow the surviving spouse to replace the pension income in the event that the pension recipient dies first. In some situations, this approach can result in a higher net retirement income if the cost of the needed life insurance is less than the increased pension benefits.
Pension max always results in more premiums for the insurance company, but doesn’t always result in more income for you. How do you decide if it’s in your best interest?
First — at the risk of stating the obvious — if you’re not married, there’s no reason to consider it. Depending on your estate goals and health, there may be other strategies that make sense.
Second – the health and age of the pension recipient matters a great deal. If the pension recipient is in excellent health and can likely qualify for preferred life insurance rates, pension max has a lot better chance of being a good idea.
Third – you need to determine how much and what kind of life insurance is needed to replace the income. As the pension recipient gets older, less life insurance death benefit will be required to replace the pension income. Usually some combination of tiered term-life policies and a small amount of permanent insurance fit the bill.
Fourth – the surviving spouse should have an idea of how they will use the life insurance death benefit to replace the pension income. For many, a single-premium immediate annuity makes the most sense, however other draw-down investment scenarios can also be considered.
Fifth – you need to consider taxes in your calculations on both the life insurance benefit and the increased pension benefit.
- Life insurance death benefits are generally not subject to income taxes. With an unlimited marital exemption, the estate tax will not be an issue when the first spouse dies. However, depending on the overall size of the estate and the death benefit, it could be an issue when the second spouse dies.
- The increased pension benefit will be subject to income taxes. So when you’re comparing the net effect on your income, you need to calculate how much your pension will be worth after taxes because you will be paying the life insurance premiums with after-tax dollars. This is an easy area to ignore, but depending on your tax bracket the effect of taxes can make or break the plan.
Sixth – consider the convenience factor. If there’s just a very small financial benefit to using a pension max strategy in your situation, it may still make sense to forego it. You need to weigh the simplicity of just taking the pension against the extra effort of going through life insurance underwriting and paying the premiums ongoing.
If you’re seriously considering using a pension max strategy, it’s a good idea to have an uninterested third party talk through the analysis with you. A fee-only financial advisor who doesn’t have a big insurance commission at stake based on your decision will be able to offer objective advice. And even though you spend some money on the advice, it may help you save much more over the long term and at very least feel confident that you made the right decision based on your unique situation.
2010 Key Numbers
December 2, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
The key numbers guide from Forefield has been updated for 2010. Not a lot of changes from last year, but still a convenient reference. It includes limits on retirement plan contributions, tax brackets, tax credit and deduction phase-outs, social security benefits, medicare, and much more. 2010 Key Numbers
October 2009 Newsletter
October 2, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
The October newsletter is now available. It includes a reminder about the October 15 deadline to recharacterize 2008 Roth IRA conversions, a market update, how to calculate your net worth and why net worth is the financial number to watch, and more. To read the newsletter, click here.
New Texas Teacher Long-Term Care Insurance Option
September 4, 2009 by Jean Keener, CRPC, CFDP · 1 Comment
Beginning on September 1 this year, the new long-term care insurance provider for the Texas Teacher Retirement System (TRS) switched from Aetna to Genworth. During open enrollment from September 15 – November 15 this year, teachers will have the option to sign up for this insurance. If you’re thinking about getting long-term care insurance anytime soon, now is the time to take action while you have the greatest number of options.
How do you know if the TRS Genworth group option is right for you?
The first thing to do is to get a quote for the TRS group policy through the Genworth website. To do this, go to www.genworth.com/groupltc For active employees, the group ID is TRS. For retirees, the group ID is TRSRetiree. The access code for both is groupltc.
After you’ve received your quote, you’ll want to go out and shop for individual quotes. Some of the companies in addition to Genworth offering long-term care insurance are John Hancock, MetLife, Prudential, Mass Mutual, Berkshire, and New York Life. You’ll want to make sure you’re comparing apples to apples, so print out the options you selected for the Genworth TRS policy to show to your insurance agent.
If you want an objective second opinion on when you should get long-term care insurance or the “right” amount of long-term care coverage to purchase for your situation, that’s something an independent financial planner like myself can help with.
If you find that the Genworth group TRS program is providing the best pricing and benefits for you, then it’s easy. You’ll want to go ahead and sign up if you’ve decided now is the right time for you to get long-term care insurance.
If you find an individual option could provide superior benefits at the same cost or comparable benefits at a lower cost, you’ll have some additional work to do. You need to go through under-writing and make sure you qualify. You will need to answer some health questions and possibly have an exam. This process can take some time, so you should start now. Only after you’ve been offered coverage through the other company can you really make a decision about which option to choose.
If you’re declined by the other company — good news — you still have the TRS group option. During the initial enrollment period, Genworth is providing a coverage guarantee to active employees. The coverage guarantee is why it’s so important to investigate this group option now if you have any health issues that may prevent coverage on an individual policy. According to the Genworth website, “During your enrollment period, if you are an actively at work employee on the day you apply, and on the day your coverage becomes effective, your coverage is guaranteed without answering any health questions. Also, during this time your spouse will have streamlined underwriting which limits the health questions they´ll have to answer. If you decide to apply after the enrollment period, you will be required to complete a full health questionnaire and go through underwriting. There is a chance that a health condition may prevent you from qualifying for coverage.”
Just to give you one example of this process, I compared the TRS group option for one couple. In this couple’s particular situation, the couple’s group coverage through TRS was going to cost slightly more than purchasing a comparable individual policy through Genworth directly, about the same as through MetLife, and a little less than through John Hancock.
Also of note, in the 3 individual quotes received, the prices were based on 100% of the maximum daily benefit being available for home healthcare vs. 75% for the Genworth group policy. 75% may be enough because home healthcare can be less costly than skilled nursing care. But if you can get 100% for the same or less premium — all other things being equal – it’s definitely the smart move.
In addition to price and features, it’s important to look at the ratings of the insurer, claims-paying experience of policyholders, and length of time the company has been in the long-term care arena. For this couple, it made more sense to go with one of the individual options. However, if they had health issues that would have kept them from qualifying for the individual policy, taking advantage of the TRS group policy during this initial enrollment period would have been a wonderful opportunity. It’s also important to note that everyone’s situation is different, so you need to complete this process for yourself.
Bottom line: if you’re thinking about getting long-term care insurance anytime soon, now is the time to take action while you have the greatest number of options.
For more information on making this decision, you can visit these links:
TRS long-term care information
U.S. Department of Health and Human Services site on long-term care information
Medicare’s site on long-term care
My blog post on 5 claims to watch out for in Long Term Care Insurance
My blog post Long Term Care is a Women’s Issue