Free Money Finance

3 Common Mistakes to Avoid If You're Involved in a Car Accident

The following post is from FMF contributor Eric Olesen.

Car accidents are unnerving — to say the least. It’s normal to feel scared or anxious after a wreck, but it’s also extremely important to regain your wits quickly. After all, the actions you take immediately after a car wreck could impact your future. If you've been involved in a wreck, avoid these common mistakes.

Mistake #1: Failing to Report the Accident

If you were involved in a minor accident, you might assume it’s okay to exchange information with the other driver and leave, but you’d be wrong. It’s important to file a police report immediately for two reasons:

Your insurance company might require a copy of a police report before paying out any claims.

Not all automobile accident injuries show up immediately. Because of this, you might need to file a personal injury claim in the future, and not having a police report might affect your claim. For example, if your New York personal injury lawyer is forced to file a claim without a police report, it could result in a lower settlement or claim denial regardless of their legal expertise.

Mistake #2: Inadvertently Admitting Fault

Immediately after a car accident, what do you do? Unless you’re badly injured, chances are, you step out of your car and check on anyone else involved in the wreck. While it’s important to access the injury status of everyone involved, you need to choose your words wisely when you speak so you don’t accidentally admit fault — even if it was your fault. For example, it’s natural to apologize for the accident even if the wreck wasn’t your fault, but any apology given might be misinterpreted as an admission of guilt.

To stay on the safe side, verify everyone involved in the accident is okay, and then, remain silent. Don’t speak to the other party involved or any bystanders before the police arrive at the scene. When you give your statement, explain what happened as clearly as possible in as few words as possible. Keep it short and sweet. This way, if you need to hire a personal injury lawyer in the future, the documentation includes the facts, not opinions.

Also, don’t immediately hand over your auto insurance information. While it’s important to exchange contact and insurance information with the other driver, immediately offering it up may look as if you feel guilty. Instead, wait for the police to arrive on the scene and give the information to the officer taking the report. If the police don’t come to the accident scene, suggest to the other driver that you exchange information “just in case.”

Mistake #3: Refusing Medical Attention

Even if you feel fine after the accident it’s important to seek medical attention. Car accidents increase your adrenaline, so you might not feel pain right away. Also, you might not experience symptoms from auto accident injuries, such as whiplash, concussion, and soft tissue injuries, right away.

If emergency personnel doesn’t arrive at the scene of the accident, take the time to go to your doctor or visit the nearest emergency room to get checked out. This way, if you need to hire a personal injury lawyer to file a claim for you a few days later, there’s already a record of your medical treatment. Also, personal injury settlements often cover any pay you missed because the accident caused you to miss work and sometimes additional money for pain and suffering.

The fact is, you don’t know how you’ll react after a car accident until it happens. It’s okay if you’re a bit flustered after a wreck, but don’t let your fear, confusion, or anxiety control how you react. It’s important to keep your cool because if you receive a low settlement offer from your insurance claim or a portion of the claim is denied, you might need to hire a personal injury lawyer to receive a fair settlement. If that’s the case, you want to have all of the facts documented clearly.

Bonus Suggestion

And finally, be sure to take the proper steps to make the most of any auto insurance settlement due you.

How to Calculate Your Insurance Needs

While making a budget is not always easy, it’s usually easier than sticking to it. The first rule of budgeting is to make one you can stick to, one that allows for a little splurge now and then. The second rule is to figure out what you need to spend money on such as rent, groceries, and life insurance. Many singles might put insurance further down the list. For many families, however, parenting includes accounting for the unexpected.

The DIME Formula

In the past, a rule of thumb for deciding how much life insurance to buy was to multiply your income by 10 and purchase that amount. There are a few holes in this method, however, which doesn’t account for changes in the family makeup such as caring for a parent would bring; nor does it account for a stay-at-home parent who has no other income if his or her spouse dies.

Try using the DIME (debt, income, mortgage and education) formula, which encourages you to take a good look at your finances:

• Debt: Add up all debts other than your home mortgage and be sure to account for funeral expenses. Credit card debt, car payments, and student loans all count.
• Income: Multiply your annual income by the number of years you want to provide support for your family. Do you want to ensure coverage until your kids graduate high school or college?
• Mortgage: Determine the amount of money it would take to pay off your house mortgage.
• Education: Calculate how much it would cost to send your children to college.

Coming up With an Amount

Once you have added up all of these costs, subtract any liquid assets you may have such as current savings and life insurance. Don’t forget to include existing college funds as an asset to be subtracted. Now you’ve arrived at a pretty good estimate of how much life insurance you need. To refine it even more, contact a local insurance agent and discuss how to account for the rising costs of college, as well as increased income that comes with more job experience.

Which Type is Right for You?

There are basically two kinds of life insurance, term life and whole life. Term life insurance covers you for a specific number of years, usually between 10 and 30 years. When the term is up, the policy expires and you walk away with nothing. Whole life insurance does not expire. It combines a death benefit with a type of savings account that can build a cash value, from which you may be able to borrow or even withdraw money, depending on the type of account.

Your budget and your financial goals play a big part in choosing which type of insurance is right for you. Term life insurance is less expensive and you can look forward to not having to pay premiums after the term expires. Whole life can be considered more of an investment tool. Whichever type of insurance you decide on, it’s a good idea to include a little cushion for the unexpected by buying a bit more than what you’ve calculated you’ll need.

What to Keep in Your Fireproof Safe

Len Penzo lists 13 things to keep in your fireproof safe as follows:

1. Birth certificates
2. Property titles
3. Insurance policies
4. House photos
5. Safe deposit box keys
6. Social security cards
7. Passports
8. Financial account info
9. Spare car keys
10. Wills and living trusts
11. Health care proxies
12. Medical information
13. Emergency Cash

Yikes! I'm missing several of these!

Here's how we rate on keeping those in our home safe:

1. Birth certificates -- Yes.
2. Property titles -- Car titles are in the safe but home titles are in my (wooden) file cabinet.
3. Insurance policies -- Also in the file cabinet.
4. House photos -- I need to take pics of all the rooms in our house.
5. Safe deposit box keys -- We don't have a safe deposit box.
6. Social security cards -- Yes.
7. Passports -- Yes.
8. Financial account info -- this is in my files and my office desk.
9. Spare car keys -- In office desk.
10. Wills and living trusts -- In files.
11. Health care proxies -- In files.
12. Medical information -- In files.
13. Emergency Cash -- Not sure about this.

Other things in our safe include:

• Checks for both a personal and real estate account (yes, we still write checks)
• Some old coins that have dubious value, but could be worth something
• Various official documents like marriage certificate
• Some small, personal keepsakes I wouldn't want to lose in a fire

In other words, I've got some work to do to get up to speed.

Oh, and our safe is located in the most-obvious place to find it -- the bedroom closet. While I'm updating it, I'll move it too. :)

 

Buy Term and Invest the Difference

I've written a couple times about buying term life insurance and investing the difference. For those of you unfamiliar with the phrase "buy term and invest the difference," it simply suggests that you do not buy permanent life insurance and instead by the cheaper term life insurance and invest the money you saved doing so. If you do this, you'll end up having more money in the long run as well as life insurance during the time you need it.

Turns out that Money magazine's "Mole" agrees that buying term and investing the difference is the best option for most people:

If you are a disciplined saver, I strongly recommend buying term and investing the rest. If you need a forced savings vehicle and you can't find that vehicle elsewhere, then you may want to consider a permanent policy. But either way, make sure you understand what it is you're buying and how much it's costing you.

He hit this one exactly on the head in my opinion. If you are disciplined enough to actually invest the difference (and not spend it), then buying term and investing the difference is probably for you. But if you're not able to save on your own, permanent insurance, though much more expensive, is likely a better option for you.

I'm interested, how many of you buy term and invest the difference and how many own permanent insurance? Why do you do what you do?

Do I Need Life Insurance Once My Kids are Grown?

The book The Charles Schwab Guide to Finances After Fifty: Answers to Your Most Important Money Questions addresses the issue of whether or not a person needs life insurance once their kids are grown. It lists five questions people need to consider when making this decision as follows:

• Do you have a financial obligation? (such as a very large debt)
• Do you have a spouse or other dependent with on-going needs?
• Are estate taxes a concern?
• Do you want to leave a large portion of your estate to charity?
• Do you own a business?

If you answer any of these "yes", you may need life insurance well beyond the time when your kids are grown.

Here's my position on each of the above:

• I do not have a large financial obligation. In fact, I have no debt.
• I do not have a spouse or other dependent with on-going needs.
• Estate taxes are an issue for us, but we 1) plan to give away enough of our assets before we die so it's not an issue and 2) have an estate plan to minimize taxes.
• We will leave some of our wealth to our kids and some to charity. We want the kids to have enough to be provided for in part, but don't want them to "hit the jackpot" when we die. It's a balancing act for sure.
• I do not own a business -- at least one that would require me to have life insurance.

At this point, we are self-insured and will let our term life insurance lapse when it expires (which is about seven more years.) By this time, our kids should be out of college and on their way.

What's your take on this issue?

How Much Umbrella Insurance Do You Need?

A Money Magazine reader asked in their January/February issue how much umbrella insurance he needed. Money's response, in part, was as follows:

Base your umbrella policy on the value of your assets. In a lawsuit, lawyers will aim for your available assets but probably settle for a comparable insurance amount.

They also suggest "adding $1 million for peace of mind."

I recently bumped up my umbrella insurance to $4 million for the following reasons:

• To cover my assets (not that I have $4 million, but I have a sizeable amount).


• Extra "peace of mind" as they note above. I now have rental properties (which have their own $1 million liability policies) and will soon have a teenage driver -- so I'm looking for a bit more peace of mind wherever I can find it. :)


• Umbrella insurance is really affordable. The difference for an extra $1 million in coverage was $60.

How about you? Do you have umbrella insurance? If so, how much and why that amount? If not, why not?

Checking Out Annuities

Shortly after posting The False Promises of Annuities and Annuity Calculators, I ran into this piece from CNN Money. In it a reader writes in and asks whether or not an annuity is right for him. The response gets into the pros and cons of immediate annuities as well as references a resource for checking out options -- some things I thought we all might be interested in.

So with that said, here are the key points the piece makes about owning an annuity:

• Its biggest benefit is that it offers guaranteed income for life. You give the company a lump sum and they send you a check every month for as long as you live.


• Returns vary (and are low now due to interest rates being low), but it's likely that you couldn't get the rates/return the annuity gets without taking on an extra amount of risk. Do you want to do this? Can you do it?


• The downside of annuities? Once you give them the lump sum, it's theirs. You have no control over it.


• One point I thought was especially good was that you shouldn't think of an annuity as an income source, but also as insurance. Here's how the piece reconciles the fear that you would buy an annuity, die soon, and lose all your money: "But even if you die unexpectedly soon after buying one, you haven't thrown your money away any more than someone who bought car insurance but never ended up in a horrific accident did. With an annuity, you're buying insurance against the possibility of living so long that you outlive your assets." I think that's a very insightful statement.


• One common complaint against annuities is that they are expensive. But the piece doesn't talk about expenses, so I'm wondering if the costs are outright (do you have to fork over $1,000 -- or whatever -- to buy an annuity) or are they hidden (they are simply part of the (lowered) return -- and are hidden like a mutual fund's expenses are hidden)?


• The article makes a great point in that annuities are ONE of the options you should consider in funding retirement. For instance, your retirement portfolio might be a combination of annuities, Social Security, other investments (stocks, bonds, real estate), side income, and part-time work. When looked at as PART of an overall plan, annuities make much more sense. CNN Money even has a different piece on the options we all might want to consider when developing a multi-prong retirement income plan.

The piece links to a website where you can get a quote on an immediate annuity. For grins I went to the site and plugged in a few options that could be pertinent to me. Here's what I got:

• Amount invested: $1,000,000
• Ages of husband/wife: 55/58
• Added benefit: joint life income (if one spouse dies, the other still gets the payments)
• Monthly payment for life: $3,973
• Annual Payout Rate: 4.77%*

• Amount invested: $500,000
• Ages of husband/wife: 55/58
• Added benefit: joint life income (if one spouse dies, the other still gets the payments)
• Monthly payment for life: $1,987
• Annual Payout Rate: 4.77%*

• Amount invested: $500,000
• Ages of husband/wife: 65/68
• Added benefit: joint life income (if one spouse dies, the other still gets the payments)
• Monthly payment for life: $2,318
• Annual Payout Rate: 5.56%*

Note: Here's what the site says about the "annual payout rate":

*Annual Payout Rate – Percentage of the purchase price (i.e., the premium) which is paid back to you each year and includes both interest and return of principal. The Payout Rate is NOT an interest rate. It is significantly higher than the actual interest rate credited to the premium.

And so the games begin! Why can't they give you the actual interest rate? I'm guessing it's because it's not that good...

Overall, the article left me with a better impression about annuities and how they could be used than I had before reading it. However the website with the quotes looked a bit cheesy and I was put off by the “annual payout rate" they offered versus "actual interest rate" I wanted. It felt like they were trying to mislead me.

Anyway, I'll keep annuities in mind. They may or may not work for me in retirement, but at this point I won't rule them out for at least part of my retirement planning.

How about you?

How Various Traffic Tickets Impact Your Car Insurance (And What to Do About Them)

Smart Money has an interesting chart that lists the potential percentage increase in your car insurance rates when you get a ticket for various traffic infractions. The results:

• Reckless driving: 22%
• DUI first offense: 19%
• Driving without a license or permit: 18%
• Speeding 30 mph over the limit: 15%
• Failure to stop: 15%
• Improper passing: 14%
• Tailgating: 13%
• Speeding 1 to 14 mph over the limit: 11%
• No car insurance: 6%
• Seat belt infractions: 3%

They also tell you what you can do to minimize (or even negate) the impact of a ticket:

• Fight the ticket
• Weigh alternate pleas
• Shop for a new policy
• Keep your nose clean
• Take a driving course

My thoughts on these:

• I always thought that fighting the ticket was pretty much a hopeless cause. But the Smart Money piece says that, "If you fight the ticket, you can almost always come out ahead, even factoring in the time and court costs." It then goes into various strategies you can employ to try and get out of the ticket. Has anyone reading this ever gotten out of a ticket in court? What worked for you?


• Weighing alternate pleas sounds like an interesting option. If you can get your speeding over 30 mph ticket reduced to speeding under 14 mph, you've saved yourself a decent amount right there. BTW, anyone notice that speeding 15 mph to 29 mph over the limit isn't on the list above? Perhaps that's the "safe zone" for speeding? :)


• Shopping for a new policy could work if your company is socking you big time and a new company wants the business.


• "Keeping your nose clean" has to do with forgiveness programs that some insurance companies have for long-time customers. Then again, I think this is a one-time deal, so it won't work for habitual offenders (and many of the other tips likely won't either.)


• About 15 years or so ago my wife got a ticket for speeding (which is funny because she's generally the much slower driver between the two of us). She took a driving course and the points were taken off her record.

I considered most of these options when I got my last speeding ticket (which, by the way, was my first ticket since high school) and ultimately decided to pay the fine. My insurance didn't go up, so perhaps my company either forgave the infraction, they didn't notice it since it was out of state, or they assumed it was a very infrequent occurrence since it has been so long since my last one.  

Anyone gotten a traffic ticket recently? What did you do and what was the outcome?

Shopping for Insurance

Since "regularly shopping for insurance" was #31 on my list of the 52 best money saving tips, I thought I'd follow my own advice and compare our current insurance costs to those offered by other companies. Given the savings some people have seen ($1,400 here and $1,300 there), it seemed like the effort could well be worth it.

It's been a while since we quoted out our insurance. Too long in fact. We haven't shopped for insurance for years. We love the service at AAA (our current provider) and over the years they haven't raised our rates -- they have LOWERED them. So I felt like we were getting a good deal. Then in a discussion at work I mentioned that I had AAA insurance. Someone said, "Really, I always thought they were so expensive." So we decided to find out. If AAA was close to the others (even if they were a bit higher), we would stick with them. But if we found big savings elsewhere, we were ready to move.

My wife did all the hard work -- getting the quotes. I provided her with our current statements from AAA for car, homeowner's, and umbrella insurance to make sure we were quoting the exact same coverage we had now. In addition to asking for a quote given our current status, we also asked for quotes assuming my son was a driver -- which he will be in less than a month.

Next we had to decide what companies we should get quotes from. I prefer to have an agent I can go see if needed. Therefore the GEICOs of the world were out. They may be fine (I'd be interested in hearing from those of you who do/have had experience with them), but if anything happens, I want to have a dedicated person on the task. I've only needed insurance a few times, but when I have, it's been very nice to have an agent to rely on (and stop by their office if need be.)

From there, we asked our neighbors and friends what insurance companies they used and liked. We eliminated the ones we had never heard of and ultimately ended up with State Farm and Allstate as contenders. In addition, we decided we'd try Costco's insurance program just to see what they had to offer.

Over the course of a couple weeks, my wife got the bids. Here are the annual premiums given our current status:

• AAA - $2,253
• Allstate - $2,447
• State Farm - $2,794
• Costco - $3,230

Then with my son as a driver:

• AAA - $2,853
• Allstate - $3,391
• State Farm - $3,284
• Costco - $4,784

A few thoughts on these results:

• Looks like we are getting a good deal with AAA!


• Though I haven't broken out the numbers above, AAA was the cheapest option on each individual type of insurance (car, homeowner's, and umbrella) as well as the total.


• Allstate wasn't out of the realm of reason, but the other two seem high.


• For some reason, State Farm gave us a quote for umbrella insurance that was lower than what we wanted. Since they were already higher, we didn't get a re-quote, but their actual numbers would probably be $50 to $100 higher than what's above.


• My son adds $600 a year to the bill with AAA. This is less than I had expected. He adds only $500 with State Farm, but almost $1,000 with Allstate and $1,500 with Costco. Yikes!


• Looks like Costco is far from the cheapest alternative. I wonder how many people go with them simply because they assume everything at Costco is cheaper.

Of course, these numbers are particular to our vehicles, house, deductibles (which we keep high), area of the country, and so on. So the answers could be different for others based on their specific criteria. To be clear, I am NOT saying that what is cheaper for me will be the best deal for anyone else. I am saying you need to quote out your insurance to find out for yourself.

So we're sticking with AAA, which I am happy to do. They have always treated us quite well and it's good to know they are giving us a good price too.

How about you? Do you shop around for insurance? If so, what have you found? If not, do you feel you're leaving money on the table?

Why You Don’t Need Long Term Care Insurance

The following is a guest post from Neal Frankle.  He is a CFP in Los Angeles and the owner of Wealth Pilgrim. Since much of the discussion we've had recently about long-term care insurance has been rather positive (as in "we all need it at least in part" -- see Good Advice on Long-Term Care Insurance), I thought it was good to hear from a different perspective.

There is so much discussion (and hype) about long term care insurance these days. It makes sense to take a hard look at this and see if you really need such a policy or not.

Most financial professionals tout this coverage even if they don’t sell it. That’s because it can be dangerous (for them) if you need it and they don’t suggest it.

But the reality is you may in fact not need this expensive insurance. Let’s take a look to determine if this insurance is a good fit for you or not. To do that, let’s first let’s define our terms.

What is Long Term Care insurance?

If you become ill or disabled (in a very defined manner) the insurance company will make payments to you. The amount they pay has nothing to do with what it costs you for your care as I’ll explain in a moment.

How do you qualify?

Each policy is different but they all spell out what “qualifying events” are when you ask for an LTC insurance quote. Typically you must be unable to perform a certain number of “activities of daily life” such as walking, getting out of bed, bathing etc. If a doctor notifies the company that you are unable to perform 1, 2 or 3 of those activities of daily life, the insurance company will start paying you.

How much will they pay and for how long?

When you purchase a long term care policy, you tell the insurance company how much coverage you want in terms of daily benefits. The greater the daily benefit you want (and the longer you want that benefits to continue) the greater the annual premium you’ll pay.

As I said, once you qualify for benefits, they will send you monthly checks regardless of what your out of pocket expense turns out to be. Once you no longer qualify (because you either recover or pass away) the payments stop.

Can your premiums rise?

Yes and no. The insurance company can’t raise rates just because you get older or sicker. But they can raise rates for everyone in a certain age group – and this happens more and more often. I have clients who bought this coverage years ago. While the benefits have not increased, the premiums have gone up by a factor of 4.

The good news is they can’t raise rates whenever they want to. Depending on the State they operate in, the State Insurance Commission usually has to approve these increases.

Who shouldn’t buy long term care insurance?

A recent article I read in Investment News Magazine quoted the American Association for Long-Term Care Insurance. They reported that 32.5% of the people who make claims are men and 67.5% are women. So if you are a man it’s a long-shot that you’ll ever make a claim. But if you are a woman, coverage might make sense. If you are a couple and you only have enough money to insure one of you, it’s probably best to cover the woman.

But the analysis doesn’t stop there.

According to those same people at the American Association for Long-Term Care Insurance, the coverage doesn’t pay off too well. They reported that over 8 million people own this insurance, but only 180,000 people receive benefits. According to my calculations, that means a bit over 2% of the people who pay for policies make claims.

The industry goes on to tell us that one in four people age 65 or over are going to need long-term care at some point before they die. I don’t know if that’s true or not. But just because you might need long-term care assistance doesn’t mean you need long term care insurance.

Many people who need care get it from family or friends. Others die quickly after they become ill. That could explain why so few people actually make claims.

Other Reasons Not to Buy Long Term Care

If you have a sizeable estate and don’t care that much about leaving a pile of money to your heirs, this coverage may not be a wise choice. Likewise, if you are have enough retirement income that would pay for the care you need, why not self insure?

If you have very limited income and assets, Medicaid will likely cover you. Anyway, it will be difficult for you to hold on to the policy if the company raises rates in the future.

Forbes recently reported that only 5% of those 65 and older will spend more than $250,000 on long-term care costs. Maybe that’s why the Society of Actuaries concluded that people with less than $250,000 or more than $2 million probably don’t need it.

If you do decide to buy this insurance, it’s important to buy quality. It’s easy to find inexpensive term life insurance from high quality companies. With long term care, the field is much narrower. You’re going to have to pay significantly more for this coverage if you work with a top rated company but it’s worth it.

What is your position on long-term care insurance?

Should You Purchase Long-Term-Care Insurance?

Ever notice how once you begin thinking of a topic you seem to run into it everywhere? I have recently written posts titled Thoughts on Long-Term Care Insurance and Good Advice on Long-Term Care Insurance and now can't seem to get away from the topic. I have literally seen one article after another on the subject for a couple months now.

Many of the pieces re-hash the same issues -- ones that we've discussed on other posts. But this piece from the Wall Street Journal is a good one in my opinion. It features two "experts" on long-term care insurance (LTCI) arguing whether it should or shouldn't be something that we all use as part of our overall financial plans.

The "yes you need to have it" guy basically says that the poor and the rich don't need LTCI because the poor have Medicaid and the rich can cover costs on their own. (BTW, he doesn't define the poor or the rich, but later in the piece it notes that the "rich" are people with incomes of over $250k per year. I'm guessing the "poor" are those that qualify for government assistance.)

But he argues that the middle group -- which is most people -- do need LTCI. Here's what I think is the most valuable part of his thinking:

The important thing to understand is that there are a wide range of policies offering different degrees of security, but all preferable to taking the chance of being financially decimated. According to estimates done by the American Association for Long-Term Care Insurance, a typical couple buying a shared policy providing immediate benefits worth $328,500 at age 55 pays an annual premium averaging $2,700. By age 80 their joint benefit has grown to $708,000 with the built-in inflation protection. Alternatively, a typical couple buying a shared policy with $219,000 of coverage could reduce their premium by about 20% to 25%. That's a viable option for those who are worried about this risk. If more coverage is affordable, buy more coverage. But some is better than none.

Reading down the piece a bit, the "no you don't need it" guy gets his say. After he argues that LTCI is too expensive and the odds are low that you'll ever use it, he goes on to say that it's certainly not suitable for the poor or the rich, but may be for the middle group -- exactly what the first guy said (for the most part)!!! But he does differ in one major way. Instead of actually buying LTCI, he suggests this solution:

But instead of buying a policy and paying premiums, the consumer could set aside savings for long-term care. At $3,500 a year, in 20 years he or she could have $70,000 plus interest. In the statistical unlikelihood they end up in a nursing home, they could use these savings to pay the bills.

The "yes" guy counters this with:

In theory, it's true, if a person invested $3,500 a year instead of using it to pay insurance premiums, the investment might grow enough to cover any eventual long-term-care bill. But as nice as it sounds, most people simply won't set aside additional savings for long-term-care needs. Moreover, savings of $3,500—should the need for care come sooner than expected—will pay for only $3,500 of care.

Ha! Tell me about it. Most Americans can't be counted on to even fully fund their emergency savings much less save $3,500 a year in addition to it!

That said, if you are disciplined enough, it looks like saving the premiums instead of actually buying a policy is a better way to go. If you need long-term care, you can then use the money to pay for it. But if not, you can use the money for something else. If you buy a LTCI policy, you only have once choice -- use it or lose it.

The piece is interesting reading for anyone considering LTCI and I'd suggest you check it out if you are so inclined.

So to summarize this topic, I'll offer the following:

• If you are poor or wealthy, you probably don't need LTCI.


• If you are in the middle of those two extremes, you have two choices: either save for long-term care costs or buy LTCI.

I know it's not that simple and that everyone has a different situation, but do those two points present a workable "general rule" for most people?

So that settles the issue (for the most part) for us as individuals. But I ran into this piece discussing long-term care issues for our parents -- something we all need to consider as well. Ugh.

Good Advice on Long-Term Care Insurance

Based on my recent long-term care insurance post, many people are thinking about the same issues I am -- namely, what to do about it.

Shortly after I posted that piece, I ran into this article from Kiplinger's that IMO has some decent advice regarding long-term care insurance. The highlights of their advice:

Instead of buying enough long-term-care insurance to cover the full risk, you can keep the premiums more manageable by making some trade-offs.

Rather than buying a policy that provides lifetime benefits, go with a plan that offers benefits anywhere from three to five years. Advisers also prefer "shared benefit" policies for married couples. A three-year shared-benefit policy provides a pool of six years of coverage to divvy up between spouses. If you need five years of care and your spouse needs one, you're both covered. Such a policy costs about 15% more than two separate policies with three-year benefit periods.

Because you may wait 20 or more years to tap your policy, your daily benefit should keep up with rising costs. The 5% compound inflation protection is the gold standard, but some companies are offering cheaper policies that boost benefits by 3% a year. The 3% annual boost has kept up with general inflation recently, although the cost of care often rises faster than general inflation.

It's important to work with an agent who deals with many insurers, because the price differences can be huge.

Ryan says the major long-term-care insurance companies include Genworth, John Hancock, Mutual of Omaha, MassMutual, New York Life and Northwestern Mutual. "Make sure you give your agent as much of your medical history upfront, so the agent can match your risk with the company that can make the best offer," Ryan says.

Even with these cost-saving moves, Ryan says policyholders should be prepared for a premium increase of up to 20% every five years. To cap your future premiums, you can buy a "ten pay" policy. You pay more each year, but premiums end after ten years. Make sure you ask the insurer that it won't impose new charges after ten years.

Lots to comment on. Here are my thoughts:

• If you manage your finances correctly throughout your lifetime, their suggestions seem right on target. You should have enough saved up to cover much of your long-term care, so a three or five year plan seems appropriate. And the fact that you can share it with your spouse makes it an even better option for married couples.


• I have to think that inflation will be higher in the future than it has been in the recent past, so the 5% cost adjustment seems like a no-brainer to me.


• Where, oh where do you find a great long-term care insurance agent? Anyone have any suggestions? Ask friends and family? I have a good agent who helped me buy my disability insurance policy, but he's now out of that business. Perhaps I could ask him to refer someone who he's worked with.


• Anyone had any experience with any of these: Genworth, John Hancock, Mutual of Omaha, MassMutual, New York Life and Northwestern Mutual? Our company's 401k is with John Hancock, but I have no insurance experience with them. I believe my dad used to work for Northwestern Mutual for a short time selling permanent life insurance, but I have no direct experience with them either.


• That ten-pay policy seems interesting. I would need to run the numbers to see if it was a good deal, but there's something attractive about paying for a fixed amount of time and having the policy paid off. I guess it's kind of like an annuity -- you give them a set amount of money and that's it, it's all benefits from there on out. I wonder if they have a "one pay" where you can simply plunk down one lump sum and have all your benefits paid for in a single transaction.

In addition to the above, I ran into this copy of "Let's Talk", a PDF magazine from Genworth. It reminds us of another issue -- that our parents may need long-term care insurance. It suggests ways for bringing up the topic with them. Add this one to the "awkward conversations" list, just like talking estate planning with your parents. Ugh. It's bad enough we have to deal with these issues for ourselves, but we also need to work our parents through them.

Insurance You Need and Don't Need

The Wall Street Journal lists insurance you don't need, some you might consider, and policies you must have. The list begins with the types of insurance you can skip and includes the following:

• Pet insurance
• Home warranty
• Extended warranties
• Mobile-phone insurance
• Identity-theft insurance
• Flight insurance
• Wedding insurance

Personally, I don't have any of these (and never had.) I didn't even know some of them existed! I guess you can insure almost anything, huh?

Then they list one you may or may not want/need: travelers insurance.

This is one we struggled with when we went on our cruise. We had a friend whose mother got very sick just before a cruise and they had to cancel the entire trip. Because they had travelers insurance, they got all their money back (they had to send in a doctor's note to prove she was really sick.) We went back and forth trying to decide whether or not we wanted to buy it. There seemed to be a 50-50 split among those we asked -- half advocated getting it and half didn't. In the end we decided against it and everything worked out fine.

Finally they list the types of insurance most people need as follows:

• Medical insurance
• Auto insurance
• Umbrella insurance
• Renters insurance

Ok, I agree with these, but:

• What about disability insurance? You have to protect your #1 financial asset -- your ability to earn money -- right?

 

• What about life insurance? Same as point #1 except covering for death instead of disability.

 

• What about homeowner's insurance? Your house is a HUGE asset. You need to cover it. This applies twice as much to people who are building their own homes. Taking out new build insurance is vital, as it is law in the UK that all new builds have this type of cover”

 

• What about long-term-care insurance? Maybe this should be listed in the middle section of "maybe/maybe not"?

I have medical, auto, homeowner's, disability, life (on both me and my wife), and umbrella insurances. How about you? Do you have more, less, or the same?

Words of Advice on Selected Insurance and Risk Management Topics

The following is an excerpt from Securing Your Financial Future: Complete Personal Finance for Beginners courtesy of Rowman & Littlefield Publishers. All Rights Reserved.

A list of brief tips on some of the most common categories of insurance appears below, plus a few important items from the broader field of risk management. These are brief, so think of them as broad guidelines, not ironclad rules. You’ll need to do lots more research on your own. Above all, keep in mind that these comments are specifically intended for a typical person in the 1st third of their financial life. If you’re not in the 1st third—or if you’re not typical when it comes to that subject—then consider the advice with caution.

1.  Health insurance. People early in their financial life are famous for letting their right brains have complete and utter control of their health insurance decisions. Why? The choices are complicated, the costs are high, and the prospect of future illness or injury is unpleasant. Right-brain reaction: “I am young and healthy; in fact I’m downright indestructible. I don’t need any health or medical insurance, or else just the bare minimum.” Bad idea! Tell your right brain to have a seat and engage your left brain in truly understanding what your choices are. You are taking a big and unnecessary risk if you don’t. If you want to save on premiums, go with very high deductibles, not with big gaps in coverage. And keep yourself healthy!

2.  Homeowner’s and renter’s insurance. Whether you rent or own, you need it. And keep the list of valuables that you’re insuring current; if you don’t, you’re not getting the value for your premiums that you think you are.

3.  Car insurance. Car insurance is broken down into several subcategories. Each state requires that you your car in that state. The specific requirements vary from state to state, but the basic idea is that if you cause an accident, you must have insurance to cover people that you injure or cars that you damage. But there is no requirement that forces you to cover injuries to yourself or damage to your own car in an accident that you cause. Here is the point: of course, you will carry whatever types of car insurance your state requires, but it is a big mistake if that’s the only car insurance that you carry. You’ll want yourself and your passengers, as well as your car, to be covered in the event of an accident. You’ll also want your car to be covered if it is damaged in any other way not related to an accident (vandalism, storm damage, hit while parked, etc.). Save money by having high deductibles but not by skipping entire categories of coverage. And of course, drive safely!

4.  Life insurance.  Life insurance comes in two types: term and permanent. Here’s the recommendation: you want term life insurance, not permanent. Permanent life insurance comes in many varieties; some of the more common types are whole, universal, and variable. But whatever names they go by, all forms of permanent life insurance have a long-term investment aspect. In part IV, we’re going to discuss a completely different—and much superior—long-term investment strategy, so you’re not interested in any of the permanent insurance– related investments.

Even though your choice is term life insurance, you only need it during a very specific time during your financial life. That time begins as soon as you have any financial dependents, so don’t buy any life insurance at all before then. The time for term life insurance ends when your net worth becomes large enough that you can provide for these dependents through the provisions in your will, or as soon as your dependents are no longer dependent on you. As soon as you meet either condition, don’t renew your term life insurance policy when the current term expires.

5.  Private mortgage insurance (PMI). If you buy a house, you’ll probably be required to pay for this type of insurance if you pay less than 20% down. This isn’t good news, because even though you pay the premiums, the insurance is for the benefit of your lender, not you. But as you’ll learn in part III, you will pay 20% or more down, so you won’t need PMI.

6. Long-term care (LTC) insurance.  This type of insurance is increasingly advertised, so you may be curious about it. But LTC doesn’t make sense to consider in the 1st third of your financial life; you can ignore it at least until your late 40s. (If you are financially responsible for someone who is one or two generations older, though, you may need to investigate it.)

7.  Wills. A will isn’t insurance, but you can think of one as part of your overall risk-management strategy. You don’t need a will if you have no dependents or if your net worth is less than $100,000. But as soon as you meet either of these conditions, you do need a will, no matter your age or health. Don’t put it off—it’s a must. Unless your situation is unusually complicated, you can do it yourself inexpensively.

8.  Living trusts. These are often brought up along with wills. But it’s unlikely that you’ll need one in the 1st third of your financial life. Living trusts are important once your net worth becomes large (say, over $1 million), or if there is something unusually complex about your assets or about the way you want to distribute them after your death.

9.  Living wills. Despite the similarity in names, a living will is completely different from a living trust, or a standard will, but a living will is very important in its own right. A living will allows you to express your wishes in advance, in the event that you become incapacitated and unable to communicate them for yourself. In particular, you can advise health-care professionals whether you do, or don’t, want your life extended through artificial means if your chances for recovery are very limited or none. Yes, it is a grim prospect to think about, and it can evoke very strong feelings all around. But in the absence of a living will, you may be putting your loved ones, and/or the medical professionals caring for you in a very difficult position. Most people haven’t spent much time thinking about this, but when they do, they come to the conclusion that filing a living will is a simple and inexpensive precaution that potentially can save a lot of heartache. The laws concerning living wills vary from state to state. I highly encourage you to at least investigate this in your own state and then decide for yourself.

Thoughts on Long-Term Care Insurance

A few months ago I was traveling with a co-worker who's about 15 years or so older than I am. The conversation turned to personal finances and then, specifically, to long-term care insurance (LTCI). I asked him what his plans were and he took me through the issues he and his wife had discussed and ultimately what they had decided.

I've been thinking about this topic off and on and as a result have collected a few pieces I thought I'd share with you.

The first is from Fox Business and asks if buying long-term care insurance is worth the cost. They don't really answer their own question, but they do make a comment that I'd like to highlight:

You should purchase [LTCI] when it is financially affordable. Younger people who buy it now will have the benefits of longer protection with lower premiums than if they wait until a later age. Of course, before you purchase it you should also consider life insurance and disability insurance to protect your income.

I'm not sure I'm in the "buy it as soon as you possibly can" camp, but I do think it's better to buy it before you show any signs of needing it but are still close enough to potentially using it that it's not 40 years away -- which for most people would be in their 50's to early 60's.

Also, I'm starting to see where LTCI fits into the pattern of insurance throughout a lifetime. It goes something like this:

• During your working career, you need medical, life, and disability insurance to protect you and your family in case something should happen to you (and your income).


• As you get older, you become self-insured and can drop life insurance. For people who are at least decent money managers, this is 20 to 30 years into your career on average. (We took out 20-year policies when we had our first child and we will let them expire when he's 20. By then we will easily be self-insured.)


• As you start to transition from work to retirement, you need to add LTCI to the mix -- let's say at age 55, but it can vary widely.


• As you retire, disability insurance goes away and medical insurance transfers to Medicare (and potentially gap insurance to cover what it doesn't). LTCI remains and is your primary insurance at this point in life.

Does this progression seem reasonable or am I missing something?

The nest piece, from the NY Times, was interesting to me because it highlighted the potential costs of LTCI.  Their thoughts:

For instance, he gave an example of a 55-year-old couple in good health buying a typical “three year” policy—one that uses a daily rate of $150 over three years to calculate a maximum benefit payout. (A three-year policy doesn’t mean that it only pays benefits for three years. Rather, the time period is used to calculate a total pool of money that can be tapped over time, as needed.) The couple would pay about $2,000 a year in premiums for a policy with a current value of roughly $164,000 for each spouse (at a 3 percent inflation rate, the value would grow to $350,000 for each, at age 80).

By comparison, the same couple would pay more than double that premium — about $4,335 a year — for an unlimited policy.

Not the cheapest insurance in the world, but it's not crazy expensive either. I pay $3k or so for disability insurance each year and that's just for me. So to pay $4,335 to cover both my wife and me isn't out of the realm of reason. Then again, it's a lot more than the cost of life insurance!

Then I saw that Forbes recently said that LTCI is one of the most complicated personal insurance products.  They start with what I consider to be a great overview of the situation:

Not everyone will need long-term care insurance (LTC), but everyone needs a long-term healthcare plan.  Your long-term care plan should incorporate the following: facts about you (and your spouse, if applicable), your age, your personal health, longevity of lineage, your retirement income and assets, your tolerance for risk, the costs and demographics of long-term care in your geographic area and information about any long-term care insurance that you own or have considered owning.

They then cover the various considerations we all need to make when looking at LTCI before they get to this summary:

In addition to making sense of the myriad of moving pieces in the policies, the problem that scares away most prospective insureds is the bottom line price.  If you buy the policy designed to insure virtually every possible scenario you may encounter—say, a $200 per day benefit guaranteed to pay a benefit for the rest of your life—you will, indeed, find shocking premiums that may send you packing.  The solution, however, for many people is to partially-insure the risk of a long-term care incident or incidents. Consider a policy with a reduced benefit, like $100 or $150 per day, and a shorter benefit period, like three or five years.

This seems reasonable to me. To use LTCI for a major part of potentail needs, but to also partially self-insure yourself through your own retirement savings.

Finally, I ran into a couple resources dealing with LTCI. The Forbes article above links to an app that helps you compare LTCI options and start on estimating pricing. And this cost of care map helps estimate the sorts of costs you may be looking at covering. The cool thing is that it allows you to compare one state's cost to another's -- so if you're thinking of moving in retirement, you can see if your LTC costs will increase or decrease.

So I'm still researching this subject, not 100% sure of what I'm going to do. How about you? How are you dealing with/thinking about this issue?

"Good" LTC Insurance is All You Need

Smart Money has a piece on why some long-term-care (LTC) insurance is better than none. The post basically boils down to two points:

• It's likely that we all need some LTC insurance.


• Just having a "good" plan is good enough. Don't forego LTC insurance in search of the perfect plan (which is often elusive and probably not affordable for the masses anyway.)

Their summary:

Which brings us to Voltaire. His notion -- that the best solution can make a good solution seem less beneficial than it actually is -- explains why many people turn their backs on long-term-care insurance. (Nearly 15 percent of individuals over 60 have coverage, according to a recent report.) Typically, financial advisers and insurance agents push us to buy the best coverage possible: policies with hefty daily payouts (at least $200) that will cover years (and years) of care. Their intentions, for the most part, are good -- but the "best" option is expensive. Depending on your age, annual premiums can easily reach $4,000 or more. The result: We decide against buying any protection at all.

Don't let your search (or an adviser's clamoring) for perfect coverage prevent you from considering policies that are simply good. Indeed, we choose good frequently in our lives -- in cars and investments, to name two. When it comes to long-term-care insurance, options other than the so-called best can do more for you and your family than you might realize.

The point is not just that some coverage is better than none. It's better only if it can meet your particular needs when the time comes. And that's the point: designing a reasonable and affordable policy to meet your specific needs.

I'm still sorting through what I'm going to do regarding LTC insurance, but after reading Toileting and Retirement, Should I Purchase Long-Term Care Insurance? there's no question I'll be doing something. The Smart Money article was freeing to me. I don't have to be concerned with "the best" policy -- I simply need to find a good one that covers my needs. This should be a lot easier to find (and much more affordable) than the perfect LTC insurance policy.

I was recently traveling with a friend from work and he was sharing with me his plans and thoughts on LTC insurance. He's about 10 years older than me, and it was insightful to hear what he had considered and ultimately decided to purchase concerning LTC insurance. I'm going to try and talk to more people a bit older than I am this year and see how they are dealing with the issue.

How about you? Anyone out there recently purchased LTC insurance (or are you planning to)? Any insights for the rest of us?

Ten Insurance Policies You Need To Own

The following is a guest post from Hank who writes about personal finance on Money Q&A.

I wish I had more insurance coverage. How many times do you actually hear that or say that to yourself? Most people hate talking or even thinking about insurance. It isn’t a pleasant subject. In fact, more people would rather visit their dentist for a filling than think about the types or amounts of insurance that they need to purchase in order to protect themselves, assets, and families. There are an incredible number and array of different types of insurance policies that you can purchase and quite a few that you should own. You may look at the number ten and think that is just way too many, but when you get right down to it, they might be just right to keep you and your family protected.

Ten Insurance Policies You Need To Own

1. Disability Insurance – A third of Americans will find themselves disabled and unable to work at some point during their careers. In fact, almost half of all home foreclosures are a direct result of people being disabled and unable to work. While disability insurance may be an expensive addition to your insurance coverage, it is well worth having it protect your future income. You can choose to purchase long-term disability insurance that does not start until you have been disabled for over six months in an effort to save money on your premiums, but of course this assumes that you have a fully funded emergency fund in place to cover you until then.

2. Umbrella Insurance – No longer is umbrella insurance something that only the rich need to purchase. We continue to live in an ever-increasing litigious society that is quick to sue each other over the smallest issues. People mistakenly think that they will not be sued if they do not have much in the way of assets, but they often forget their most important asset of all, their future income. The cost of umbrella insurance is incredibly small for the large amount of liability insurance coverage that you obtain as a result.

3. Long-Term Care Insurance – Almost 70% of Americans will require some type of care such as an in-home nurse or a nursing home after they reach the age of 65. A year-long stay in a nursing home can cost $60,000 per year or more depending on the amenities. That can quickly eat up any savings or retirement nest egg that you have spent decades to accumulate. Long-term care insurance can provide you with money to live out your last years comfortably while not depleting your retirement portfolio that your spouse may later need.

4. Term Life Insurance – Term life insurance is one of the best deals in personal finance and provides an excellent amount of life insurance coverage for a specific period of time. There are very few needs in life for permanent insurance, and most people find themselves not requiring life insurance after their home mortgages are paid off and their children are grown. Term life insurance can fill the gap when you need life insurance the most while keeping your premium costs low.

5. Health Insurance – Not having health insurance is one of the fastest ways to find yourself in financial trouble and possibly on the way to bankruptcy. One accident or significant illness without coverage can leave you holding hundreds of thousands of dollars in medical bills if you are not careful. If you are recently out of work and without coverage, you may want to consider purchasing COBRA insurance coverage for you and your family or even catastrophic health insurance coverage until you can hopefully receive coverage through a group plan with an employer.

6. Renter’s Insurance – Homeowners with mortgages accept homeowner’s insurance as a fact of life, but far too many renters go without purchasing renter’s insurance. This is a huge mistake. For as little as $20 per month, you can purchase renter’s insurance that will protect your assets from theft, fire, liability, and many other disasters. Renters often mistakenly think that their landlord’s insurance policy will cover them, but the policy only provides protection for the building and not your items inside your rental home or apartment. Too many renters are risking huge losses by not owning inexpensive renter’s insurance.

7. Flood Insurance – Flood insurance is not simply for homeowners who live in a flood zone. In fact, FEMA estimates that one third of all homes damaged by flooding are not even in a flood zone or near a body of water. Flood insurance is very cheap, costing just a couple of hundred dollars per year, if you do not live in a federally designated flood zone. It is a critical piece of insurance protection that too many homeowners are lacking.

8. Earthquake Insurance – Most homeowners realize that their typical homeowners insurance policy does not cover them for earthquake damage, and many simply think that they do not need coverage because they live so far from a fault line. But, the unusual recent earthquake along the northeast coast of the United States shows that earthquakes can strike almost anywhere in the country. You could find yourself paying a hefty amount out of pocket if you are not covered and an earthquake damages your home.

9. Rider Or Floater Insurance – Did you know that your homeowner’s insurance and renter’s insurance only covers a small amount of losses on specific items such as electronics, artwork, and jewelry? In many cases, the amount of coverage in a basic homeowner’s insurance policy is limited to as low as $2,500. One nice engagement ring and wedding band can quickly eclipse your coverage limits, but you can add a floater insurance policy or a rider on your current homeowner’s insurance that can add extra insurance coverage for specific items. These insurance policies are called riders because they ride the coattails of your primary policies, and the additional insurance can be bought for a very low sum.

10. Title Insurance – Title insurance is something that homeowners are very familiar with, but you can also buy title insurance for other large purchases as well. If you are considering purchasing an expensive used car, for example, you may want to consider buying separate title insurance as well. Like purchasing a home, title insurance can protect you from a fraudulent seller or undisclosed damage to the property that would ultimately make reselling it a nightmare.

Do you really need ten different types of insurance policies? Maybe you do and maybe you don’t. But, do the risks of not having these policies outweigh their costs? In many cases, you are taking potentially devastating financial risks by not having these insurance policies in place even though they ultimately have very low premium costs. The benefits of owning these insurance policies far outweigh their costs.

The Dangers of Life Insurance Policy Loans

The following is an excerpt from The Questions and Answers on Life Insurance Workbook: A Step-by-Step Guide to Simple Answers for Your Complex Questions.

Policy loans can be a useful short-term option when immediate cash is needed, but they are not the long-term solution so widely proclaimed. In fact, policy loans (available with most, but not all, forms of permanent life insurance) are one of the most complex, misunderstood, and misused components of a life insurance policy. Out-of-control policy loans can erode a life insurance policy over time, eventually draining the death benefit—and saddling you with a substantial tax bill.

Here’s a frightening example. As part of a divorce settlement, a woman owned a whole life insurance policy that had been issued to her ex-husband in 1967, who was 38 at the time the of issue. The death benefit was $100,000 to be paid upon death or at age 90.

The Different Types of Permanent Life Insurance Policies

The following is an excerpt from The Questions and Answers on Life Insurance Workbook: A Step-by-Step Guide to Simple Answers for Your Complex Questions. Since this is a workbook (meant for you to fill in sections of it), you can't get the full meaning/impact in a basic blog post. But I think you'll get most of the key ideas.

Think of a permanent/cash value policy as a bucket into which you pour liquid money. The bucket has a spigot at the bottom, and the company turns the spigot to drip money out of the bucket to pay for the expenses associated with the policy, such as cost of insurance (COI)/mortality expenses and other expenses (including overhead and other policy specific fees). Meanwhile, money left in the bucket earns interest at a rate declared by the company. It’s your responsibility to keep enough money in the bucket (by making adequate, timely premium payments) to pay the policy expenses as they come due. Even though you must put enough money into the bucket to keep the policy in-force (otherwise it will lapse), there is complete discretion as to when premium payments will be made—annually, semiannually, quarterly, or monthly—and in what amounts—depending on how often payments are made and whether you have the option (as with some policies) to choose your payment amount based on a range provided by the insurance company.

There are a few different categories of permanent life insurance, and each category may present multiple options. It would be impossible to cover all of those here, so please review the content on permanent policies in Questions and Answers on Life Insurance if you are considering this path. Here I will outline the basic information for the most common forms of permanent life insurance and help you determine which category of permanent life insurance may be best for you.

Review the following information, check those types of insurance that are most interesting to you, and then perform the self-assessment at the end of step 2 to determine which types of policies will really meet your needs and preferences.

Whole Life

With whole life, the insurance company promises to pay a certain death benefit upon your death, regardless of when that occurs, up to a certain agreed-upon age based on mortality and expense projections, along with dividend scale assumptions. All three components are projected and integral to a whole life policy. The company often pays you the full face value of the policy if you live to the end of the specified mortality table, which, as its name suggests, tabulates your life expectancy based upon your age and health. But this isn’t always the case and is not always spelled out in the contract. With most forms of whole life, premium payments are made for life at a fixed rate, and the policy cannot be canceled as long as you pay the premiums on time. The cash value normally increases at a consistent rate so that it equals the face value at the age at which the policy expires. Loans against this cash value are often available. Whole life is less flexible than are other forms of permanent life insurance, and the premiums are often higher than some other forms, such as Universal Life.

In Questions and Answers on Life Insurance, I go into great detail about the many and varied forms of whole life insurance options, including Endowment, Limited Payment Whole Life, and Indeterminate Premium Whole Life. However, in the interest of keeping the process in this workbook manageable and succinct, I explore in the following pages just two types of whole life, which are appropriate for most people: Current Assumption Whole Life and Participating Whole Life.

Current Assumption Whole Life

Current Assumption Whole Life policies make use of a current dividend scale in setting the cash value, along with an indeterminate premium structure. The dividend scale is not fixed—it does change—and is usually declared on an annual basis by the insurance company. The gross premiums are fixed, while the net premiums can sometimes be reduced/offset by dividends.

Participating Whole Life

All whole life policies are either participating or non-participating. A participating policy charges a higher premium and in return pays you regular dividends. Dividends are not guaranteed and depend on the company’s actual investment return experience with all of their in-force policies. Dividend options include:

• Cash
• Purchase of fully paid-up life insurance in small increments with each dividend
• Reduction of the next premium payment
• Retention by the company at interest
• Purchase of one-year term insurance in an amount equal to the cash value at the time of purchase.

A trade-off for dividends is with higher or lower or no further premiums. The policyholder under some policies can have the option at some point to switch his or her dividend option to reduce or pay premiums in full. The higher premiums are for particular policies (not always an option) where they are called “limited payment,” though not guaranteed limited payment.
 
Universal Life (also known as Flexible Premium/Adjustable Life)

The biggest difference between Universal Life (UL) and whole life is that UL gives you considerable flexibility as to the amount and timing of premium payments. And the face amount of coverage can be changed (down at any time, up with evidence of continued insurability).

UL is unique in the sense that this type of policy “unbundles” the pricing elements that make up a traditional cash-value permanent policy—interest earnings, mortality costs, and company expenses—and prices them separately. Ideally, this gives you better transparency into the moving parts of your policy. In practice, however, this can get a little complicated. With a traditional whole life policy, you have but one responsibility: to pay the premiums when due. If premiums are paid when they come due, the policy will never lapse, and eventually it will mature as a death claim, period.

UL is different. If the policy owner fails to fund it adequately, UL may turn out to be temporary rather than permanent life insurance. The company may change pricing elements subject to certain limits set forth in the policy. So the company may raise the expense charges and mortality costs and lower the amount of interest credited to the accumulating funds. If these policies are handled incorrectly, they can turn out to be more expensive as you grow older, the cash value can erode, and the policy could end up lapsing if premium payments aren’t high enough to continue to fund the policy (remember the bucket analogy from the beginning of this section). Most UL policies sold prior to the mid-1990s were based on the assumption that the higher interest rates of that era would continue indefinitely. Falling interest rates mean that many of those policies are destined to lapse long before the policy pays off as a death claim due to inadequate premium funding. Furthermore, some UL companies have subsequently increased their mortality and expense charges to levels higher than those illustrated when the policies were originally issued.

Therefore, it’s essential with UL policies that you order an in-force illustration at least every 2 or 3 years, as it’s the only effective way to monitor the progress of a UL policy. (Sample request letters for this purpose are provided in step 7.) An in-force illustration is a report of current values and assumptions compared with guaranteed minimum values.

Guaranteed Universal Life

Guaranteed Universal Life policies comprise one of the fastest growing segments of the life insurance industry. These policies guarantee the death benefit as long as all scheduled premiums are paid in full when due. These policies may or not accumulate a cash value—they are designed to provide coverage past age 95/100 and up to age 120. Most insurance policies will terminate (mature) at age 95 or 100 and cash out at that time, leaving the insured to self-insure. In essence, they function as a lifelong term life insurance policy, where you have the option to accumulate a cash value. A note of caution: if you miss a scheduled premium or pay less than the total premium due, you may lose the guaranteed death benefit.

Equity-Indexed Universal Life

Equity-Indexed Universal Life (EIUL) is a newer form of UL insurance that is extremely complex and combines elements of variable life (which you’ll read about next) into the mix. Thee main differences between this and traditional UL is in how excess interest is credited. Most EIUL policies have two separate accounts that can be used to credit interest. One account has a fixed interest rate that is declared by the insurance company periodically. The second account provides an equity index option that offers you the opportunity to earn rates of interest based on positive equity (stock) market returns. However, the cash value of the EIUL policy is not exposed to losses due to negative market returns.

The amount of interest credited to your cash value is tied to the performance of the policy’s particular equity index. Companies use a range of indexes that include the S&P 500, Dow Jones Industrial Average, Lehman Brothers Bond Index, and FINRAAQ. In years where the index performs well, the interest credited to the policy’s cash value rises, and in years where the index performs poorly, the interest rate falls. Typically EIUL policies guarantee that the interest rate will never fall below zero so that the policy won’t lose money if the stock market index declines.

The first thing to watch out for is that these policies usually have a cap or limit on the amount of interest that can be credited to your policy. Therefore, if the cap is 10 percent, and the index return is 14 percent, you will only earn 10 percent. The reasoning is that this would offset the liability the life insurance company assumes in years where there is a negative return in the stock market index.

The insurance companies can, at their discretion, also adjust what is called the participation rate, so that a policy owner receives a lesser percentage of the total return. This is an important thing to look for. Some companies will offer a 100 percent participation rate guaranteed for the life of the policy. But if a policy has an 80 percent participation rate, and the policy has a cap of 10 percent, the most you will ever earn on the policy is 8 percent (80 percent of 10 percent).

There are also different indexing methods that are used in measuring the market return, which you should understand before signing a policy. You can learn more about those methods on my website.

Variable Life and Variable Universal Life

As with Universal Life polices, Variable Life and Variable Universal Life policies provide death benefits and cash values to beneficiaries. But here’s the crucial difference: whereas the premiums paid into most standard UL polices earn interest within a life insurance company’s General Account, as it’s known, Variable Life policies earn interest on a portfolio of investments that you as the policy owner choose from a selection offered by the company (key: check the selections). In addition, a Variable Life or Variable UL policy may be surrendered for its cash value at any time, and the policy owner also has the option of exchanging the policy for an annuity contract.

Depending on how financially savvy you are, selecting your own portfolio can be an acceptable aspect of this type of policy or a very dangerous one. When an insurance company invests your premium into their General Account, it bears the risks inherent to investing, and credits your policy with interest based on the account’s performance. There’s no direct link between the company’s investment portfolio and the declared interest rate on your policy. But with Variable Life policies, there’s a direct link between the cash value of your policy and the performance of the portfolio of sub-accounts you choose. You bear the risk. The cash value and death benefit of your policy is not guaranteed. (But some policies do guarantee that the death benefit cannot fall below a minimum level.) So if your portfolio does well, the earnings on the cash value of your policy may exceed what you would have earned through a standard UL. But if the performance of your portfolio tanks, you’ll have to put in additional funds to keep your policy in force. That can get pricey, and could endanger your policy.

While you may see tax advantages with this type of policy—you are earning returns or income that you do not have to pay taxes on—there are fees associated with the policies that may offset the tax advantages. Federal and state premium taxes average around 3 percent of premiums. Mortality and expense charges assessed against cash values can range from .6 to .9 percent. Asset management charges can vary from .2 to 1.6 percent. And surrender charges can typically exceed the first year’s premium and last 10 to 15 years.

Overall, the costs of Variable Life policies can be higher than other types of permanent policies.

You’ll get a legally entitled prospectus from an insurance company before you purchase either a Variable Life or Variable UL policy. And you’ll definitely want to read it, even though it’s lengthy and tedious to pore through. If you have a tough time understanding it, find someone who does who can explain it to you. (But if you have to do that, ask yourself: Is this the right kind of policy for me?) Many factors affect the performance and well-being of a Variable Life or Variable UL policy. For advice on the investment accounts, always consult a properly licensed financial/investment advisor.

Joint-Survivor (Second to Die) Life Insurance

Joint-Survivor Life is a type of coverage that can be a part of any type of permanent cash-value policy. This type of coverage insures two people (usually spouses) and pays a benefit only at the second death. It’s used primarily for estate planning purposes, as the estate tax is usually only payable at the second death.

Finding the Life Insurance That Is Best for You

The following is an excerpt from The Questions and Answers on Life Insurance Workbook: A Step-by-Step Guide to Simple Answers for Your Complex Questions. Since this is a workbook (meant for you to fill in sections of it), you can't get the full meaning/impact in a basic blog post. But I think you'll get most of the key ideas.

Take a breath. Thinking about death is serious, exhausting business. And subjecting your financial situation to an X-ray isn’t always fun. But you did it—and for good measure. When it comes to life insurance your needs come first.

Now the bad news: More than 1,500 life insurance companies are active in the business, and each usually offers several different types of insurance products. That means there’s a bewildering array of options at your fingertips. It can be overwhelming.

But here’s the good news: Despite the seeming complexity, there are major similarities between certain types of life insurance contracts: term insurance typically works the same from company to company, and so do different types of permanent or cash value policies. However, the devil is in the fine print/details. And here’s the bottom line: all life insurance policies promise to pay an agreed-upon sum of money should you die while your policy is in-force (that is, while you’re paying your premiums on time and while you’re still operating within the terms of your contract). That’s essentially what life insurance is all about.

Here’s the biggest difference between the two major families of life insurance: One family provides coverage only for a specified amount of time; this is known as term life coverage. The other provides permanent coverage until you die (this can now go up to age 120+ on newer policies; older policies may or may not have extended maturity dates/maximum ages) and often accumulates a cash value over time.

Term life coverage means that the face value of your policy will be paid to your beneficiary if you die within the term period and not afterward—unless the term policy is renewed upon its expiration, which almost always means higher premiums. These policies do not build cash value. Most term policies include an option to exchange or convert the policy to a permanent policy without evidence of insurability.

Permanent coverage essentially means that whether you die 5 years from now or fifty, the net death benefit of your policy will be paid to your beneficiary. Permanent coverage has the potential to build cash value, which means that, generally, the premiums you pay (1) grow with interest; (2) can, in some cases, be borrowed against; and (3) on indexed and variable policies, can be placed within investment accounts.

As you’d expect, each of these families of life insurance has a wide set of variations and options. So the first question becomes: Which family is right for you? That’s what we’re here to find out.

1. Reviewing your needs

Since the decision between term and permanent life insurance relies primarily on your own needs and circumstances, revisit those needs now. Looking back at exercise 1 in step 1 answer this question: Were the majority of your checkmarks (your motivations for purchasing life insurance) next to numbers 1 through 5 or next to numbers 6 through 11?

• Motivations fell within numbers 1 through 5: It is likely that term life is the better fit for you. In fact, term life is the best fit for the vast majority of people.


• Motivations fell within numbers 6 through 11: It is possible that a permanent policy may be the right fit for you. However, you’ll need to do some deeper exploration into your preferences and needs to be sure.

2. Examining your preferences, concerns, and long-term financial health

Now, before we begin matching your needs to different life insurance options, let’s take a look at your general preferences. Answer the following to the best of your ability (do you agree or disagree):

• I am actively saving or accumulating assets to cover the costs of college, retirement, emergencies (a rainy day fund of 6 to 9 months of income), and other long-term financial needs.


• My debts are under control and I expect them to remain so or to continue to lessen over time.


• I view life insurance as a form of emergency planning, and I expect that one day I will no longer need it.


• I am concerned about the cost of life insurance coverage in the short term.

If you agreed with the majority of these statements, term life insurance is the appropriate path for you. The fact is that most people have a finite, short(ish)-term need for life insurance, and they are interested in getting the maximum life insurance possible for the lowest cost possible (term life is substantially less expensive than permanent life when you are younger). They need to provide an emergency fund for young dependents in the case of their untimely death. And over time, their financial obligations (debts) lessen and their assets, such as retirement and college savings, increase. As this happens, their need for life insurance decreases (their dependents would have access to those assets in the case of their death).

However, if you disagreed with the majority of these statements, some form of permanent life insurance may be appropriate for you. If you believe it is important that you have coverage for the full span of your life, that you will always have a need for the security of life insurance for your family, regardless of the age of your dependents or how your other assets may grow, you should carefully investigate your permanent life insurance options.

Everything else being equal, the main reasons to purchase permanent insurance are: (1) if you have a dependent, such as a special-needs child or handicapped loved one, who relies almost solely on your income to live and who will need to rely on it after your death in perpetuity, or (2) if you have few, if any, other assets and don’t actively plan on having any that could be used to cover the cost of your funeral, to pay off any outstanding debts, or to provide some inheritance to your family.

But I think it’s safe to assume that you’re the type of person who takes an active interest in financial planning. Otherwise you wouldn’t have purchased this workbook, right? And for that type of person, term insurance—and paying cheaper premiums while investing the difference elsewhere—will most likely fulfill all your needs. If you would like to consider your options further, I urge you to consult Question 6 in Questions and Answers on Life Insurance.

To review the overarching pros and cons of purchasing term or permanent insurance, I’ve created the tables that follow. (But remember to look at each type of policy to understand its unique advantages and disadvantages.) This graphic comparison is pretty simple to understand; a qualified insurance agent (more on those in step 5) can help you make still more sense of the details.

Term Life Insurance Pros

• Premiums are lower than for permanent insurance. If you’re young, that means you can buy more coverage when the need for protection is usually greatest.


• It insures specific needs that will disappear in time, such as mortgages or loans.


• It usually provides the largest amount of death protection for your premium dollars.


• Most policies are guaranteed renewable for one or more additional terms, even if your health has changed.


• Many term insurance policies can be exchanged for or converted to a permanent policy during the term period. This conversion privilege could prove to be very important, especially if your health deteriorates and you are unable to qualify for a new permanent policy. Be sure to check the conversion eligibility period as you review the coverage before applying for a policy.   

Term Life Insurance Cons

• The older you get, the higher your premiums go. This is also true of level term coverage: at renewal time, the premium goes up and remains level for the next term.


• Coverage ceases when the term ends. Even when the policy may be renewed for another term, the ever-increasing premium may make coverage prohibitively expensive. Be sure to check the premium schedule at the specified renewal ages, and find out for how long the policy can be renewed.


• Generally, term policies don’t offer cash value or a reduced paid-up insurance option.


• According to a 1993 Penn State University study covering more than 20,000 policies, only 1 percent of the policies resulted in a death claim. But that’s not a con if your perspective on life insurance is to protect that 1 percent chance.

Permanent Life Insurance Pros

• As long as the necessary premiums are paid, protection can be guaranteed for life.


• Premium payments can be fixed or flexible to meet personal financial needs.


• The policy can accumulate a cash value that can typically be borrowed against.


• The policy’s cash value may be surrendered partially or wholly for the cash value, or it may be converted to an annuity. (An annuity is an insurance product that provides an income for a person’s lifetime or for a specific period of time.)


• A “rider” (additional feature) can be added to a policy, giving you the option to purchase additional insurance without taking a medical exam or having to furnish evidence of insurability.


• It pre-funds rising high insurance costs.

Permanent Life Insurance Cons

• Higher premium payments, compared to term life insurance, may make it hard to buy enough protection.


• It may be more costly than term insurance if you don’t keep it long enough. Premiums are higher than term in the early years of the contract. Policies typically have a high surrender charge in the first few years.


• Policy loans must be paid back with interest or else the beneficiary will receive a reduced death benefit. In rough times especially, policy loans can initiate a race to keep enough cash in the bucket and endanger the policy of lapsing.


• The cash value accumulates on a tax-deferred basis in most cases, but this is based on current tax law, which could change.

If you’ve determined by now that you want term insurance, continue to the next section (“Choosing a term life insurance policy”), where I will break down the options for term policies. If you want permanent coverage, however, skip to section 4 (“Choosing a permanent life insurance policy”) further on.

Exploring Why You Need Life Insurance and How Much You Need

The following is an excerpt from The Questions and Answers on Life Insurance Workbook: A Step-by-Step Guide to Simple Answers for Your Complex Questions. Since this is a workbook (meant for you to fill in sections of it), you can't get the full meaning/impact in a basic blog post. But I think you'll get most of the key ideas.

Following are a number of scenarios or life situations that support a need for life insurance. Put a check next to the descriptions below that best correspond to your needs for life insurance.

1. I’m a primary breadwinner for my family. I have young children and my family is absolutely dependent on my income. If I were to die tomorrow, they’d be in big trouble.

2. I’ve got debt. I have mortgages, car loans, credit cards, student loans, or some other form of large, significant debt that I couldn’t burden my family or cosigners with if I passed away tomorrow. It would break them.

3. I don’t want to burden my family with the costs of my funeral.

4. I’m saving for my child’s or children’s private school or college education. If I passed away, the kind of education that I’d like to be able to provide my child or children would very well be out of reach.

5. I want to have an emergency fund.

6. I have a special needs child who absolutely depends on my income for his or her care, probably for the rest of his or her life.

7. I’m worried about estate taxes. I want my family to have liquidity upon my death to fund the estate tax liability.

8. I’d like to donate a sizable amount to charity once I pass, but I don’t necessarily want to significantly reduce the amount of my estate donated to heirs.

9. I want to make sure my heirs each get an equal share of my assets when I pass away.

10. I’ve got assets that haven’t been taxed yet (a tax-deferred retirement account, for instance), and I don’t want my family to be burdened with those taxes, or for those taxes to reduce the benefit my family receives upon my death.

11. I’m in a second or third (or beyond) marriage or domestic partnership, and I’d like to provide my new partner with financial security; I want to avoid any conflict that may arise about my estate once I pass.

Looking at these scenarios, you can see that some are broader in context (the income-dependent ones) and some are much more specific (like the handling of estate taxes). Which scenarios best describe your situation will largely depend on how much in assets you have or can reasonably expect to have, what stage of life you’re in, and your personal family situation. Although these aren’t even all the reasons for purchasing life insurance, they do capture the most common motivations or reasons for purchasing it.

Determining How Much Life Insurance You Actually Need

Every advisor, financial columnist, and relative has a formula they think is best for determining how much life insurance you need. Some of these formulas are simple, whereas others look like something only a Wall Street numbers whiz could cook up. But don’t let complexity overwhelm or discourage you. If your needs are more complex, a qualified life insurance agent or financial advisor can help you determine the right amount for you. For most people, however, the simplest methods are often the best.

The simplest, most direct formula for determining how much life insurance you need is:

Income (replacement) + Expenses – Assets = Life insurance needed

The worksheet on the following pages will guide you through this equation. If you are interested in exploring other methods, information and resources can found on my website in the “How Much Life Insurance” section. Or you can refer to Question 3 in Questions and Answers on Life Insurance.

The best starting point for each of us in solving this equation is a simple, sound understanding of our own financial health. The more complicated we make it for ourselves, the better the chances are that something won’t work out as planned. Life is beautiful and dynamic. Ultimately, life insurance isn’t about reducing something as precious as life to numbers and figures; it’s about freeing us up to focus on what really makes us happy.

Note that even though you may already own a policy, it’s still important to complete this exercise. Why? Because your needs may have shifted as a result of certain milestones in life, such as having children, children graduating from college, retirement, changing careers, and so on.

For some people, this can be an emotional exercise. Just try to be as realistic about your financial health as you can be. The accuracy of any calculation depends on the information used. The more assets apart from life insurance you have, the more flexible your predictions about your life insurance needs can be. The fewer assets you have, the more you’ll need a reasonable, actionable forecast of your financial future. Don’t get hung up on the details you can’t reasonably predict—again, this is about making best guesses. Some of the questions in the worksheet may not apply to you.

Financial Strategy #8: Planning Your Legacy

The book Your Stronger Financial Future: The Eight Essential Strategies for Making Profitable Investments lists eight misconceptions, truths, and strategies to help readers deal with a variety of major financial issues.

Today we'll look at strategy #8 which deals with planning your legacy. The book says the following on this subject:

• The misconception: The American dream is to kick back and never work again.


• The truth: We are all here to work for a lifetime, no matter what work we choose.


• The strategy: Plan your legacy through children and charity.

What do they mean exactly with that last statement? They suggest that you be sure you have enough insurance so you can leave behind enough for your kids and/or for charity.

Here's my take on this:

• You don't need to insure yourself for a fortune. Neither your kids nor your favorite charity should hit the life insurance lottery when you die.


• Our kids will get a good amount when we pass away, but not a fortune. They'll get enough to get them ahead and help them out a bit, but not so much that they will never have to work again. (FYI, this assumes we don't spend all the money on ourselves before we die.)


• If there's money left over after the kids get what we want them to receive, charities will get the rest.


• For both the kids and charities, we prefer to do the majority of our giving while we're alive. This will allow several benefits such as seeing how the kids handle money (which may impact how much we leave them after we pass on), giving charities money to help people NOW instead at some time way down the line, and keeping us under the estate tax cap (assuming the government doesn't lower it).


• As for life insurance, we're already close to being self-insured and by the time our current term policies expire, we'll be there easily.

How about you? Are you following a similar plan or doing something else?

Long-Term Care Insurance: Policies and Benefit Choices

The following is a guest post from Genworth Financial and is a follow-up to their post titled How to Buy Long-term Care Insurance: What Every Policy Should Include.

To continue the series on long-term care insurance, I’d like to further discuss important considerations when choosing policies and benefits.

As of 2010, two-thirds of people will need some long-term care, such as home care, assisted living or nursing home care after they reach age 65, yet only 35% of people believe they will need such care. That’s a staggering discrepancy, and speaks to an underestimation of the financial, emotional and even social anxieties that can result from under preparedness. But if you familiarize yourself with policies and offerings now, then you’ll be better equipped to make some important decisions earlier, rather than when it’s too late.

Here are some of the policy and benefit choices currently available:

• You can choose a daily benefit amount (say, $100/day), which serves as the maximum daily amount the policy will pay. The majority of policies range from $50/day to $500/day.  It’s possible to delineate benefits on a monthly basis, so you have greater flexibility in choosing when to receive care (if you have an arrangement with family members on certain days then this is especially helpful).


• Most policies allow you to choose the amount of the benefit received in proportion to the cost per setting (i.e. you may choose a policy that pays less for home care, which is less expensive than nursing home care). According to the U.S. Department of Health and Human Services, usually choices “include a home care benefit of 50 percent or 75 percent of the daily nursing home benefit amount.”


• There is a difference between a Maximum Lifetime Benefit and the total lifetime amount. Generally, policies offer a fixed lifetime dollar amount of your choosing (for example, $200,000) that corresponds to a certain amount of time (as in a three-year or five year policy). It’s also possible to choose coverage with no dollar limit. Such “Lifetime” or “Unlimited” coverage allows you to receive benefits as long as you continue to need long-term care.


• Based on your needs, you can opt for a wider range of available services and settings, including in-home care in a “comprehensive care” plan or “facility care only.” The majority of policies are comprehensive, but if you look for “a facility care only” policy, which is often less expensive, then determine beforehand that the facilities covered will be sufficient for your needs.


• It is also possible to customize coverage with additional optional benefits or “riders.” With the cost of care rising beyond the rate of inflation, look for Inflation Protection (like that in many homeowners’ insurance plans). Types of long-term care Inflation Protection are varied, so review carefully the options available in the policy. Commonly, Inflation Protection riders build the cost into the starting premium, so that cost doesn’t increase with inflation.


• Cost of long-term care insurance is based on age, health, the policy and the type of coverage you select. Not everyone is eligible for LTCI, and only sometimes are additional costs covered. There are many online resources available to assist you in determining overall costs and the type of coverage you need which provide estimates of LTC costs per state.

Review carefully your options, and consider rationally what kind of future you envision for yourself.

Financial Strategy #7: Planning for Longevity and Health Care

The book Your Stronger Financial Future: The Eight Essential Strategies for Making Profitable Investments lists eight misconceptions, truths, and strategies to help readers deal with a variety of major financial issues. I'll be highlighting these in several posts and giving you my thoughts on them.

Today we'll look at strategy #7 which deals with planning for longevity and health care. The book says the following on this subject:

• The misconception: Health and long-term care will be available and free for all.


• The truth: With increased longevity, health care costs will be a substantial portion of your budget.


• The strategy: Utilize annuities and other strategies to account for longevity and health care.

These two issues -- health care and long-term care -- are the great unknowns in retirement. And, unfortunately, they both can devastate your finances if they aren't planned for properly. That's one reason I've been writing about them more recently, because they are top-of-mind for me and issue I'm currently working through.

I'm not sure what my plans will be, but I'm open to a combination of personal savings and annuities (with Social Security in support.) Still a long time before I need to decide on these so I have some time to ponder them.

FYI, the good news is that just as I'll be buying long-term care insurance I'll likely be able to drop my (pricey) disability insurance, so hopefully it will be a wash for me cost-wise.

Another Warning for Using Social Media

Hot off my piece on how posting online can harm your job prospects is this article which says it can also mess up your chances of getting an insurance claim filled. The details:

Your friends aren't the only ones interested in what you're saying on Facebook and Twitter. Insurance companies are exploring how to use social media to learn more about you.

Does that mean your car insurance rates will go up if you post about your interest in drag racing? Will your home insurance premium rise if you tweet about your vacation and let everyone know that no one's home? No -- not yet, anyway.

But insurance companies already check social media sites to investigate suspicious or expensive claims. And technology companies are building tools that will help insurers mine social media data to improve marketing and perhaps one day help price policies.

There's not much cause for worry now (the insurance companies are trying to figure out how to find the information), but it could be in the future:

With millions of such car insurance and home insurance claims filed each year, "insurers can't check everybody's Facebook page," says Peter Foley, vice president for claims administration for the American Insurance Association. "It's not a very effective tool."

But they may check social media sites if there are signs of fraud, he says.

"It's now common practice to use social media for investigating suspect claims," says Craig Beattie, a London-based insurance analyst for Celent, a research and consulting firm.

So, the lesson here is that if you're trying to rip off your insurance company, don't post it on Facebook.

No, wait, that's not the lesson. The lesson is actually the same as the previous conclusion when we discussed careers: BE CAREFUL WHAT YOU POST ONLINE. Assume everyone can see (or find) what you post and consider this before you comment, submit photos, and the like.

Again, you've been warned. ;-)

How to Buy Long-term Care Insurance: What Every Policy Should Include

The following is a guest post from Genworth Financial and is a follow-up to their post titled Long-term Care: What are the Options?

I recently wrote about the options available when considering long-term care, and four general ways it can be paid for. Now I’d like to do a deeper dive into some of the basics you should look for when you’re thinking of purchasing a long-term care insurance plan (LTCI). There are standards that every policy should uphold as well as additional, more personal considerations to take into account.

A long-term care insurance policy is a contract, and it would be a mistake to consider marketing materials in place of actual documents. It’s a good idea to talk to an agent or producer so that you can explore your options. The session should be free and without obligation. Be prepared to discuss your family, your assets and your health. Look to work with someone who’s willing to personalize your policy, who will listen to your concerns and help you get where you want to be.

Consider both the policy under discussion as well as a “shopper’s guide to policies” so that you can see the bigger picture. Ask to see the company's financial rating and a summary of each policy's benefits or an outline of coverage. And know that every state has an insurance regulatory department to aid the consumer.

Here are the key points that your policy should include:

• One year of care coverage at the very least (nursing home or home health care should not be limited to skilled care – give yourself options). This should also include intermediate and custodial care.


• Coverage for Alzheimer's disease (if developed after purchase of plan). Consider this startling statistic from the Alzheimer’s Association: about 5.4 million Americans have Alzheimer’s disease; this translates to one in every eight Americans age 65+, and nearly half of Americans aged 85+. This is an important clause in any policy.


• An inflation protection option to either 1) automatically increase the initial benefit level on an annual basis or 2) guarantee the right to increase benefit levels periodically without providing evidence of insurability.


• “Outline of coverage" describing all benefits, limitations, and exclusions.


• A comprehensive guide of all plans available provided by the company so that you can compare policies and determine what meets your needs best.


• Guarantees that the LTCI plan will be there for you when you need it most; the policy should not be permitted to be canceled, non-renewed, or terminated by the company just because you are getting old and are experiencing mental or physical problems.


• Ability to return the policy and receive a premium refund; you should have 30 days to be able to reconsider in what is called a “free look” period.


• Policy purchasers should not have to fulfill preexisting conditions before being able to opt for a plan (preconditions to look out for include hospitalizations or care of any kind).

As you venture into the long-term care insurance policy marketplace, it’s useful to educate yourself about the costs of care in your state. Know the breakdown by type of care and facility. It’s good to know whether the kind of care you’ll need is going to be both available and financially feasible.

Long-term Care: What are the Options?

The following is a guest post from Genworth Financial. I have added some of my thoughts on this subject at the end.

Most of us are (justly) concerned with the current state of the economy and our own personal budget crisis. It’s hard to plan ahead when we’re constantly trying to stay on top of immediate concerns like mortgages and bills, especially in a doubtful job market.

But it is precisely in the midst of such uncertainty that we should be planning for the future. Armed with the knowledge that at least 70% of people over age 65 will require some long-term care and that 40% of people under age 65 already require long-term care, it’s safe to assume that at some point either you or a loved one will need long-term care, whether through the effects of disease, injury or even the normal ageing process.

There are some emerging trends marking changes in long-term care services. Certainly, the overarching trend is the rise in costs; the cost of care among facility-based providers has steadily increased, representing roughly 4.35% compound annual growth. To put it in hard numbers, Americans can look forward to paying approximately $17,520 more per year today for a nursing home than they had to pay in 2005.

As the cost of care increases, the cost of long-term care insurance (LTCI) increases as well. Most people look at four ways to potentially pay for long-term care: Medicare, Medicaid, out-of-pocket or private long-term care insurance, and each of these methods of payment have different issues as follows:

• Medicare is a federal program that requires co-payment and provides hospital and medical insurance to people 65 years or older and to qualified ill or disabled persons. Don’t count on Medicare unless you meet certain stringent requirements (Medicare pays 100% for the first 20 days only after a three-day hospital stay).


• Medicaid is reserved for low-income individuals.


• Self-insuring necessitates a thorough understanding of the cost of care you can expect in your area.


• LTCI policies are varied based on location, facility chosen and other factors.

Given these, LTCI is a viable option for many (most?) people. Here are the top five things to consider when buying long-term care insurance:

• Don't buy out of fear and don’t buy when you are highly emotional; this decision merits a steady head and the ability to plan for contingencies.


• Don't buy more or less insurance than you think you may need. Be realistic about your assets and income, and be realistic about whether you have family members who can assist financially. Remember that usually you will have the option of lowering your amount of coverage, but as you age and your health declines, it can be increasingly difficult to raise coverage.


• Make sure you understand the limitations of the policy you are considering. Depending on the type of policy you choose, you could be excluded from certain things that may not be covered. Make sure you plan for other expenses, such as supplies, medications and linens.


• Aside from health and age, external factors can lower the cost of LTCI. If your employer offers a group long-term care plan, then the costs may be significantly less than an individual plan. Also, see if your state offers a Partnership Program, a collaborative effort between the state and private insurance companies selling policies in that state and to state residents. A partnership qualified policy provides the purchaser with the ability to apply for Medicaid under a feature called “asset disregard.” It’s worth looking into.


• Consider your options with your family, make sure the decisions are sound financially and talk with a professional before making a decision.

-----------------------------------------

Some thoughts from me (FMF):

• I see this issue (how to deal with a potential long-term illness/inability to care for yourself) as a sub-section of the "retirement healthcare" issue. The key question: once you retire, how do you plan/manage for both in-and-out healthcare as well as long-term, end-of-life healthcare? The issues seem full of potential potholes and, unfortunately, the potholes are very, very expensive.


• I was surprised that LTCI costs are only increasing at 4.35%. I would have guessed that they were growing at a much higher rate.


• Out of the four options described above, there's NO WAY I'm counting on either Medicare or Medicaid as my LTC solution. I don't trust the finances of the federal government and I will plan for my own end-of-life needs accordingly.


• That said, the final two options are both up for consideration. Self-insurance could work for me and LTCI could be an option as well -- or maybe a combination of the two. I'm still researching the issue (not old enough to buy LTCI yet), and I have time to decide.

Anyone out there made a decision on this issue -- or have something to say about it?

Why Do We All Hate Annuities?

The combination of a couple posts on annuities has had me thinking the past few days and I thought I'd share it all with you.

Let's start with Smart Money's suggestion that retirees should have fewer stocks and more annuities as follows:

Fewer stocks, more annuities. That, in essence, is the advice gleaned from two just-published reports for the benefit of those living in or approaching retirement.

Retirees should invest just 5% to 25% of their portfolios in stocks, or at least that's the case for those whose primary goal is to minimize the risk of running out of money and sustaining their withdrawals, said one report published by Putnam Investments new think tank.

And, Americans can avoid the risk of outliving their assets by saving more, working longer, investing wisely, delaying Social Security and buying a life annuity, according the Government Accountability Office (GAO).

A few thoughts on these:

• I know Putnam offers investing products, but do they sell annuities as well? Interesting if they don't since they'd be telling people to do LESS business with their company.


• "Saving more" -- something most people should be doing and the best way (IMO) of getting your retirement nest egg to where it needs to be.


• "Working longer" -- not something you can count on (what if you can't physically work longer)?


• "Investing wisely" -- easier said than done, though index funds offer a pretty good option for anyone.


• "Delaying Social Security" -- depends on how long you think you will live (I know, hard to determine).


• "Buying a life annuity" -- the topic of conversation today.

The heart of the issue is that annuities offer guaranteed income while stocks may go up or may go down and are thus not dependable for a steady stream of income -- something many retirees need and/or MUST have.

That's the same issue the NY Times recently discussed when it wrote on the annuity puzzle. The quandary is this: when given the option of steady income but with no ownership control of the underlying assets or a variable income that could go way up or could go way down but still be within the control of the owner, most people pick the steady income. But when it comes to practice, most opt for stocks over annuities -- they choose the risk over the guaranteed income.

Why is this? Basically, it's because Americans hate annuities. Yes, there's much more to it than that, but that's the bottom-line IMO. Some thoughts from the Times:

There are other explanations for the unpopularity of annuities, but I think two are especially important. The first is that buying one can be scary and complicated. Workers have become accustomed to having their employers narrow their set of choices to a manageable few, whether in their 401(k) plans or in their choice of health and life insurance providers. By contrast, very few 401(k)’s offer a specific annuity option that has been blessed by the company’s human resources department. Shopping for an annuity with hundreds of thousands of dollars at stake can be daunting, even for an economist.

The second problem is more psychological. Rather than viewing an annuity as providing insurance in the event that one lives past 85 or 90, most people seem to consider buying an annuity as a gamble, in which one has to live a certain number of years just to break even. But, as the example of Dave and Ron shows, it’s is the decision to self-manage your retirement wealth that is the risky one.

The most complex and unknowable part of that risk is in predicting how long you will live. Even if there are no medical advances in the coming years, according to the Social Security Administration, a man turning 65 now has almost a 20 percent chance of living to 90, and a woman at this age has nearly a one-third chance. This means that a husband who retires when his wife is 65 ought to include in his plans a one-third chance that his wife will live for 25 more years. (A “joint and survivor” annuity that pays until both members of a couple die is the only way I know for those who are not wealthy to confidently solve this problem.)

My take on these thoughts:

• Buying an annuity is certainly complicated. And there seems to be so much fine print. Are you comfortable forking over $500,000 while signing a document with 15 pages of 5-point font? I know I'm not really excited about it.


• Many who sell annuities aren't the trustworthy types. Many are "slick" insurance salesmen who you get the sense are just out to rip you off. I think these people have turned many off of annuities.


• Fees don't help either. There's a perception that annuities are expensive and have lots of fees. Compared to investing in stocks, they are and do. But they also provide a service/safety that stocks don't. Besides, the real comparison is the "value" they offer, not how their costs compare to those of stocks. If they offer what you want for less than what you can do it for yourself, they are a worthwhile purchase, correct?


• There are legitimate issues with the solvency of the issuing company. You don't want to fork over a boatload of money that goes bankrupt several years down the road. And picking the most solid of the solid companies isn't any sort of guarantee. Ten years ago no one would have thought AIG would have had the trouble they have had the past few years. And with insurance-company-killers like Hurricane Katrina and the tsunami in Japan seemingly on the rise, is anything completely safe with an insurance company?


• Americans certainly like to be in control of things, and annuities force you to give up control.


• There is certainly a case for the psychological argument. Maybe annuities inherently seem like a gamble that most people will never win.


• Perhaps it's the "death by a thousand cuts" problem. I mean, look at all of the reasons I've been able to list for why people may hate annuities. At some point, there are simply so many negatives that people probably just think there's no way it's worth all the trouble and potential problems.

I'm not sure what I'll eventually do with annuities -- whether I'll get one (or more) or try to go it the do-it-yourself route. One thing that will give me some flexibility is that I'll likely have much more saved than I'll need for income, giving me a bit more freedom to decide whether or not an annuity is the right move for me.

And if I do decide to go the annuity route, I will probably consider laddering them (including going with different companies for different annuities) as part of my overall strategy.

What's your take on the issue? Do annuities get an unfair bad rap or is the bad rap deserved? Anyone out there decided for or against annuities? Why do you think this way?

Your Insurance May Cover More than You Think It Does

Remember the story of my friend who put gasoline into his diesel engine? Since then, the story got worse for him. The gas had penetrated most of his fuel system to the point where he needed an additional $4,000 in repairs. Ugh. That's a HUGE amount. But the car was only a couple years old, so he had to go ahead with it.

On a whim, he called his insurance company to see if they would offer any help. They said they would cover the whole thing, less his deductible. Pretty cool for him, huh?

I asked him why this was when the problem was something he caused. He said he asked them and they said:

• They cover many situations when you do something that harms your car and is completely your fault (for lack of paying attention or whatever.) For example, if you back your car into a pole, they'll cover the repair. Same goes for the situation where you put gasoline into a diesel engine.


• They cover lots of things that most people assume they don't. People simply fail to ask if they do and thus miss many of the benefits of their insurance.

A few thoughts on this from me:

• I would never in a million years think that they would cover something as blatant as putting gas into a diesel engine. Shows what I know.


• Like mom used to say, "it never hurts to ask."


• In many (most?) cases, it's not worth making a claim. If you do something that costs $200 to repair, it's probably better IMO to simply pay for it. The hit to your premiums will likely be more than the benefit you gain.


• That said, if the cost is very high, go ahead and claim it. Sure, my friend's premiums will likely go up, but they can afford to go up a ton since he's getting way over $4,000 (the new cost PLUS the cost of work he had done previously). It will take a long time for premium increases to cover that amount.

Anyone out there ever had a problem they thought would never be covered by insurance but it turned out to be covered?

Why Insurance Agents Prefer to Sell Whole Life Policies

The July issue of Money Magazine details the financial incentive an insurance agent has to sell you a whole life insurance policy versus a term life policy. They list the advisor's cut of the premiums on a $500,000 policy as follows:

• Whole life -- $5,250 upfront plus $113 per year for years 2-10 equals $6,263 total


• Term life -- $540 upfront and total

Same policy value but over 11 times the commission. Of course there are additional benefits to the whole life policy too, so you would expect it to cost you more. But still -- 11 times more????? Wow. No wonder there are so many advocates for whole life policies in the insurance world.

Then again, term life policies aren't always the best choice are they?

Thoughts? Comments?

How to Get Retiree Health Insurance Before 65

One question I've gotten a few times about the possibility of retiring early is "what are you going to do about health care?" That's a very good question, right? If you retire at 55, what are you going to do to secure health insurance before you reach the age where Medicare kicks in?

Well, US News has some options for health care before 65 as follows:

• Retiree medical insurance. To encourage employers to maintain their healthcare coverage for early retirees, the healthcare reform bill promised to reimburse employers for high healthcare costs for retirees age 55 and older who are not yet eligible for Medicare. So far, more than 5,000 employers have signed up for the Early Retiree Reinsurance Program.


• COBRA coverage. You can buy back into the group health insurance plan offered by your former employer using COBRA continuation coverage, typically for up to 18 months if your company had at least 20 employees. If your company offers you COBRA when you get to be 63 1/2, then you could use COBRA for 18 months and then go right into Medicare.


• Other forms of group coverage. If your spouse is still working, you may be able to get health insurance through his or her employer. A lot of professional associations and societies and some churches have group coverage.


• Individual insurance. Shop around carefully when selecting an individual insurance policy.


• High risk pools and pre-existing condition plans. Many states have high-risk pool programs that help people with medical problems get health insurance.


• Part-time job. If you are still able and willing to work in retirement, some companies provide health benefits to part-time employees.


• Exchanges coming in 2014. People who retire before age 65 will be able to purchase health insurance through insurance exchanges beginning in 2014, with tax credits for those with low and moderate incomes. On July 1, 2012, you could take COBRA for a year and a half and then be able to purchase health insurance through the exchanges in 2014.

So far, here are my leading options:

• Don't fully retire, but work enough at my current or another employer to get health care benefits for my family.


• Put my wife to work and get coverage through her job. She will be free to work once our kids graduate and since her background is in health care, I'm guessing that medical benefits would be part of any package she'd receive.

One thing I will NOT do is voluntarily retire without some sort of health care option in place. It's too risky to do so (for many reasons) and I will not do it.

For those of you who retired early (or those planning on it), what did you (or are you planning to) do regarding health care coverage?

Money Commandment #8

The book The 10 Commandments of Money: Survive and Thrive in the New Economy lists money commandment #8 as follows:

The old-school rules: Buy plenty of insurance. You never know what will happen.

The bubble economy rules: Buy insurance so you don't have to pay out of pocket. Make claims whenever you can -- why have insurance if you never need it?

The new rules: Reserve your insurance for catastrophic expenses. Make a claim only as a last resort.

Insurance is a funny thing -- you spend money on something that you hope you never use! ;-)

• I agree 100% with the final statement. We buy insurance to cover potentially catastrophic problems and we make claims only as a last resort.
• We also set our deductibles pretty high as a result -- and have bumped up our emergency fund to cover the high deductibles if need be.

Here's what we try to cover/protect through insurance:

• My career -- Your career is your most valuable financial asset, worth millions of dollars over a lifetime, so you certainly want to protect it. So we protect it with medical insurance (you can't work if you're sick), disability insurance (you can't work if you're physically unable to), and life insurance (you can't work if you're dead.)
• Our house -- Obviously, you need to cover your big assets from potential destruction. A home certainly falls into this category, so we have homeowner's insurance (with the largest possible deductible our insurer has, BTW.)
• Our assets -- Even bigger than our house is the value of all our assets. We protect these with umbrella insurance and car insurance. Yes, I see car insurance as more of a liability coverage that the coverage of an asset (which it is as well, of course.) If one of us was in a car accident and totaled a car, replacing it ourselves, if we had to, would not be financially devastating. Having a $2 million lawsuit against us for a car crash is another thing entirely. That's why car and umbrella insurance work well together to protect our assets.
• My wife -- Though my wife doesn't work, what she contributes to our family financially is not meaningless. In fact, it's quite important. That's why we have life insurance on her as well.

The one thing we're missing is long-term care insurance. I'm in the beginning phases of learning about this type of insurance and what works best for us in this area.

How to Prepare for a Major Home Disaster

The Consumerist tells the story of a woman's house that burned down and nine things she wished she had done before the fire broke out. IMO these really serve as a list of what to do to prepare for any sort of home disaster -- fire, flood, storm, etc. and are as follows:

1. Subscribe to an online data backup service (my external back up drive sat right next to my laptop in my office) 

2. Keep passports in a safe deposit box

3. Take pictures of each room initially and update them as improvements are made (storing them somewhere offsite - like Flickr)

4. Take pictures and keep hyperlinks of all expensive purchases, including jewelry

5. Hire an architect (my dad in our case) or use floorplanner.com to document each floor layout along with precise wall/ceiling measurements, each outlet, light switch, crown molding, other trim, type of flooring, any unique items to structure of property

6. Put phones in a consistent place each night

7. Get fire ladders for any second floor bedrooms

8. Scan each photo and receipt [for expensive purchases], again keeping them offsite, or on an online data backup service

9. Do not be frugal with homeowner's insurance. Spend the extra $50 per year for the most coverage.

Here's what I do for each of these:

1. I backup my computers once a month and take the storage drive to work (so it's offsite.)

2. We keep our passports in a fire resistant safe.

3. A few years ago, I made a video tape of our entire house and I store it at work. I need to update it though.

4. Ooops. I do not do this...

5. Not sure why I would need to do this, especially if I had pictures or videotape of the house.

6. We are pretty good about returning the phone to its base every night. Then again we have a land line service. That said, I do also put my cell phone in the same place every night (but it's not easily accessible from our bedroom.)

7. Need to do this for the kids' rooms (ours leads out to the roof and we could easily jump down from there.) Then again, does anyone put a ladder in the room of a teenage? Isn't that just asking for trouble?

8. I do backup our photos when I backup the computer, but I do not scan and make copies of expensive receipts.

9. We have replacement coverage. Not sure what they mean by "most" coverage.

How about you? Do you have these covered or do you see some you need to catch up on? Or perhaps some items you'd add to the list that they missed?

Cavalcade of Risk

Welcome to the latest edition of  the Cavalcade of Risk, the blog carnival focused on insurance and managing your financial risks. Here are this week's group of submissions along with the author's summary of each post:  

• Why Your Credit Score Affects Your Insurance Rates - Car insurance, life insurance, homeowner’s and renter’s insurance – you name it, and your credit score probably has a pretty big effect on it.
• Are You Really Buying Insurance? - Traditionally, small to mid-sized businesses have offered group health benefits to their workforce by utilizing insurance carriers. During the last decade, consolidation in the market has resulted in fewer carriers within the insurance industry, limiting the choice for the employer.
• Insurance Strategies for Small Business Owners - There are many different types of insurance small business owners need to consider. If you are a small business owner you need to read this article.
• Primary Insurance Amount – What Exactly Is It? - This article tells your what a Primary Insurance Amount is and how it is figured.
• Snow Insurance? Be Sure to Manage Weather Risks - With bad winter weather - and it's aftermath - a common occurence in many parts of the country, it's important to assess risks and manage insurance coverage accordingly.
• Value-Based Insurance Design - Does value-based insurance work? The Healthcare Economist reviews some recent studies and discusses a key resource for researchers interested in value-based insurance design.
• Obamacare is a Bust - InsureBlog reports on the latest numbers from ObamaCare's efforts to help reduce the number of uninsureds, a truly risky proposition.
• Hedging Your Stock Investments: The Basics - Manage your market risks with hedging strategies.
• TRICARE Prime Benefits Enrollment Fee Increases Coming Your Way Soon - Many military retirees who rely on TRICARE Prime for health insurance will soon see higher TRICARE enrollment fees. This article explains the details regarding when to expect the rate hikes, and how much.
• A Risky Proposition With Colorado Senate Bill 6 - Colorado Senator Kevin Lundberg (R, Berthoud) has introduced Senate Bill 6, which would introduce an element of free market enterprise into the state’s Medicaid program for the elderly.  Basically, SB6 would allow seniors who qualify for Medicaid to opt out of the traditional Medicaid program to instead receive 70% of their expected benefit amount, to be used for health care services at a provider of their choice. 
• Credit Card Car Rental Insurance - If you were counting on your credit card car rental insurance to protect you, it would be a wise idea to reconsider.

Posts with No Summaries

• What is Private Mortgage Insurance?
• What is Title Insurance and Why Do We Need It?
• Growing Globally? Travel Assistance Insurance Coverage Is a Must | Risk Management for the 21st Century

One Insurance Not Worth the Money: Term Life Insurance

WalletPop lists seven insurance policies that aren't worth the money and to my surprise, they included term life insurance in the mix with divorce insurance, car rental insurance, and others. Their thoughts:

Some insurance agents may disagree, but Canton says term life insurance can be a big waste of money. In his opinion, term life is like renting a home; it's a "wasting asset." Whereas whole life insurance, while more expensive, is like buying a home. With a whole life policy, part of what you pay is a set amount that goes into a "forced savings" account where you earn interest or dividends and can even borrow against at low interest rates. Term life runs until the end of the term and then it is done -- unless you renew the policy at a very high cost.

According to Canton, about 92% of all term insurance policies never pay a benefit because people lapse (give up) the policy before they die. That's one of the reasons why term insurance is cheaper; carriers know they only have to pay out on about 8% of policies, says Canton.

For a small minority of people who are investment savvy and who believe they will not need coverage later in life, buying term and investing the rest of the money they would have spent on a whole life policy might be a good option, Canton says. For the vast majority of people, however, whole life is a better option because they can be assured that they will have a guaranteed nest egg in their golden years.

Let me highlight a few phrases:

• "Some insurance agents may disagree." Probably. But most would likely recommend whole life. Why? More fees.
• "Term life insurance can be a big waste of money." Yes, it can be a waste of money, just like whole life can be a waste of money -- and just like many things CAN be a waste of money. Think they used the qualifier "can" as an out in case people complained?
• "Term life is like renting a home; it's a 'wasting asset.' " Actually, it's an expense, not an asset at all IMO. Consider this: does anyone put it on their net worth statement as an asset? No, I didn't think so.
• "Whole life insurance, while more expensive." How about "way" more expensive?
• "For a small minority of people who are investment savvy and who believe they will not need coverage later in life, buying term and investing the rest of the money they would have spent on a whole life policy might be a good option." Like those of us who have a plan, know how to handle our money, and eventually become self-insured? Count me in.

Overall, my take is they should have stopped with six insurance policies that aren't worth the money. Term life insurance, IMO, is not a waste of money any more than whole life is, and you can certainly argue that it's LESS of a waste.

What are your thoughts on this issue?

Why You Need an Umbrella Insurance Policy

Kiplinger tells us why many of us need an umbrella insurance policy and gives the following guidelines:

He recommends that everyone have at least a $1-million umbrella policy to provide liability coverage beyond the limits of their auto- and homeowners-insurance policies -- even if they have less than $1 million in assets. That’s because in the rare event you are sued, you could be forced to pay a legal judgment from your current assets and future earnings. The policy can also pay for defense costs, which can quickly add up even if you win your case. It’s an inexpensive way to protect your finances from devastating lawsuits.

Freedman recommends getting more than $1 million in umbrella coverage if you earn more than $100,000 per year or have more than $1 million in assets. “Our clients get liability-insurance limits that are at least as much as their net worth,” he says. Daniel Morris, a CPA in San Jose, recommends at least a $2-million umbrella policy for most people, or a policy for $3 million to $5 million if you have rental property.

The price varies by risk, but someone with one house and two cars would generally pay about $200 a year for the first $1 million in umbrella coverage and another $100 for the next $1 million, says Bill Howard, an independent insurance agent in Alexandria, Va.

Umbrella policies are inexpensive because they kick in only after you’ve exhausted your liability coverage under your auto or homeowners policy. Most insurers first require you to have $300,000 or $500,000 in liability coverage on your car and home. For example, if you have $500,000 in liability insurance on your auto policy and a $1-million umbrella policy, you’ll have a total of $1.5 million in liability coverage.

Some thoughts from me:

• This was key for me: "you could be forced to pay a legal judgment from your current assets and future earnings." Even if your assets are low, your future earnings are probably not (unless you're 70 or older.) As such, you need to protect them and umbrella insurance is a great way to do so.
• I've had umbrella insurance for quite some time now and I've increased it over the years. In fact I just talked to my agent last month and I will be bumping it up again when it's due later this month.
• As they say, it's pretty inexpensive for the coverage you get. Here's what I was quoted by my agent:
-- $2 million in coverage - $228
-- $3 million in coverage - $304
-- $4 million in coverage - $365
-- $5 million in coverage - $410

For more on umbrella insurance, check out these posts:

• The Basics of Umbrella Insurance  
• Why You Might Need Umbrella Insurance  
• Umbrella Insurance Is Always the Right Answer  

How about you? How many of you have umbrella insurance? And if you don't have it, why not?

Six Ways to Buy Long-Term Care Insurance Right

My post titled Toileting and Retirement, Should I Purchase Long-Term Care Insurance? was more than enough to get me thinking about buying Long-Term Care insurance. But this is a subject I don't know much about, so I'll need to do some research. Thankfully enough, the research found me -- in the form of this piece form MoneyWatch. It lists the six ways to buy long-term care insurance as follows:

1. Buy group insurance, if your employer offers it.

2. Be prepared for your policy’s premiums to rise.

3. For individual coverage, choose a large, well-diversified insurance company, rated no lower than A.

4. If a big insurer won’t take you, go for the small insurer anyway.

5. Consider hybrid products (life insurance policies or annuities that let you divert part or all of the benefit to long-term care expenses).

6. Cut the cost of a policy while still providing yourself with a reasonable safety net.

My thoughts on these:

• I wish my employer did offer it, but I have no such luck. I'm guessing most companies don't either.
• I was talking to a financial planner friend the other day and he said that insurance companies aren't allowed to raise the price of your policy, but they can raise the price of the policy class your policy happens to be in -- which basically gives them the ability of raising your price.
• Of course you'll want to go with a company that's going to be around when you need the insurance -- just like when you buy any insurance product.
• Still a lot of ins and outs for me to learn such as when is the best time to buy, what are the options I want/need and which ones I don’t need, how much coverage is suitable, etc.

Anyone else thinking through these issues as well?

Ignore Long-Term Care Planning at Your Peril

If my post titled Toileting and Retirement, Should I Purchase Long-Term Care Insurance? Part 1 wasn't enough to scare the you-know-what out of all of us (concerning the need to at least consider getting long-term care insurance), here's a piece from the NY Times that says you should ignore long-term care planning at your peril. A summary:

You would think that there would be far more than seven million policyholders, given that costs for long-term care could easily reach seven (yes, seven) figures per individual 20 or 30 years from now.

Gulp. Seven figures? Yikes!!!!

And yet very few people have long-term care insurance. Why? The Times lists the following nine reasons:

• Medicare will cover it. 37 percent of people think that Medicare will cover their long-term care costs. But it won’t.
• I won't need/use it. Why invest in insurance if there’s a chance you’ll never need it? It’s a reasonable question, so consider your odds. The consulting firm Milliman, which does a lot of work for the long-term care insurance industry, thinks your odds aren’t so great. For people age 65 and older who have long-term care insurance, there is a 45 percent chance of making a claim, though it ranges from 30 to 56 percent depending on gender and marital status.
• I can self-insure. How much might it cost to pay for care yourself?
• Medicaid will pay for it. Medicaid may not offer the same choices that a long-term care policy will.
• My kids will care for me. If you changed your children’s diapers, then they should be prepared to change yours someday too, right?
• My kids will pay for my care. Still other parents assume, without really asking, that their children will pay for their care if the parents run out of money. Or one sibling assumes, without ever discussing it with the others, that the children will split any costs for care equally.
• The government will take care of me. One part of the landmark health care bill earlier this year is something called the Class Act. In effect, it sets the government up in the long-term care insurance business. No one will be able to enroll until 2012 at the earliest, and the plan may not pay much more than $75 or $100 a day for claims (and only after a five-year period of paying premiums first), though that will be indexed for inflation.
• It's too expensive now. In the first half of 2010, individuals buying through an insurance agent or financial adviser paid a $2,180 annual premium for common plans that pay claims that are not taxable for the policy holder. Given the price tag, it’s easy to see why shoppers might have demurred as the economy swooned over the last two years.
• It's too expensive in the future. Long-term care insurance premiums aren’t like those for, say, term life insurance. They can go up.

The issue isn't clear cut and (of course) there's not one plan of action that will work for everyone, but I think it's wise for everyone to at least consider their options, the costs, etc. as well as talk to their families about the issue well in advance of needing long-term care insurance. Otherwise, you may be sitting on a ticking time bomb.

But my suspicion is that most Americans will bury their heads in the sand (like they do when the issues of life insurance or disability insurance come up) and pay no attention to considering long-term care insurance until it's too late. Please, do not let yourself be one of these people.

I haven't yet explored whether or not my wife and I need/want long-term care insurance, but you can bet your bippy (yes, I said "bippy") that we will. It's too important of an issue to ignore.

Umbrella Insurance Is Always the Right Answer

The following is a guest post from Marotta Wealth Management.

If you have a personal umbrella insurance policy, congratulations. If you don't, you must not have a lot to lose. This important insurance can extend your liability coverage beyond your home and auto insurance by millions of dollars.

We live in a litigious society. Anyone can sue you for any reason. Those with money are targets simply because suing someone without assets is pointless.

Car and home insurance are required, but even $300,000 liability coverage won't protect you in the event of a catastrophe. Your teenage driver is at fault and young people in both cars are seriously injured. Your dog bites a child. You chaperon a class trip and are judged negligent when one of the students tragically dies. You cause an accident on the freeway and a truck filled with expensive cargo is involved. A neighbor slips on your steps and sues you. You write something reckless and unwarranted on the Internet about a certain financial columnist, and he sues you for slander and libel.

The good news is that these events are relatively unlikely. The bad news is that any one of them could result in a judgment well in excess of your liability limits. Your insurance company will just pay their $300,000 share and leave you to defend yourself in court for the remainder. If the judgment doesn't ruin your finances, the legal fees will.

If you receive a judgment for more than your net worth, you could lose everything. Your taxable investments and savings may be subject to the claim. The equity in your house may be at risk. A large judgment can also garnish 2.5% of your wages for the next 10 years and/or any current or future inheritance you receive. Any inheritance left in a generation-skipping trust offers protection against creditors and failed marriages, but many families leave an inheritance outright instead.

You don't want a single accident to wipe out your life savings. Umbrella insurance helps protect you against that possibility.

Personal umbrella insurance sits on top of your auto and homeowners insurance. To get umbrella coverage you must first increase your home and auto insurance liability coverage to where the umbrella policy begins, usually $300,000. Only then can you get additional coverage of $1 million or more. If you get sued for $1.3 million, you would first pay your $1,000 deductible. Your home or auto insurance would pay $299,000 to reach the $300,000 liability on the policy. The umbrella insurance would pay the final $1 million. You would pay nothing more than the initial $1,000.

Being sued for more than $300,000 is not a remote possibility. For example, with today's more effective air bags, surviving an auto accident even with serious injuries is much more likely. As a result, the cost of life insurance policies is decreasing while medical expenses continue to accelerate. We've made cars safer and more people survive the accident. They survive, and then they sue for damages.

Anyone with assets they don't want to lose will benefit from umbrella insurance. Many accidents are the fault of someone with no assets to lose. Unfortunately they can simply not pay or at worst declare bankruptcy and lose nothing. If you are saving and investing, you have something to lose. It isn't clear at what level of assets you should get protective umbrella coverage, but financial pundit Dave Ramsey recommends it for families who have more than $200,000. It certainly isn't just for the ultra rich.

Consider buying more than $1 million in coverage. Getting the same amount of coverage as you have assets won't protect the assets you have. For example, if you have $1 million in assets and you purchase $1 million of coverage, you will lose all of your savings in a $2 million judgment. Thus you need to have enough coverage to satisfy the worst judgment you might receive. Coverage of $2 to $4 million will suffice for most of today's lawsuits.

I am usually not an advocate of insurance products. Umbrella insurance is the exception. It is designed to cover very unlikely but very costly events, exactly what insurance is supposed to do, at a reasonable price. In review courses for the certified financial planner (CFP) exam, prospective advisors are told, "Umbrella insurance is always the right answer."

About 12% of homeowners purchase umbrella insurance. For the wealthy, that number grows to about 50%. The tragedy is that half of wealthy homeowners are betting their entire net worth against the odds of a freak accident, which unfortunately do happen.

Insurance companies will only write an umbrella policy if they also provide your home and auto insurance. They want to know if the underlying coverage gets cancelled for any reason, and they don't trust another insurance company to defend their interests.

Another excellent feature of an umbrella policy is that the insurance company is obligated to provide your legal defense, and the legal costs are paid in addition to your coverage.

The first million dollars of coverage usually costs the most. A typical annual premium might be $150. Subsequent costs are about 65% of the first million for each subsequent million. So $2 million of coverage would cost about $248, and $4 million would cost $443.

Premium costs vary and are subject to a host of issues. When you apply for an umbrella policy, your answers to a number of questions may raise your rates or even disqualify you. Own a Rottweiler or a have been recently convicted of reckless driving and you may not be able to get umbrella coverage. If you serve on a board, you may not be able to get coverage for more than the board's coverage. And if you have a driver younger than age 25 or have a very poor driving record, coverage may cost a $100 more per million. Even if you don't plan on getting umbrella insurance, you might want to apply just so you know what behaviors may limit your likelihood of being sued.

Remember, personal umbrella liability insurance covers only nonbusiness activities. Umbrella policies are also available for businesses and well worth the money. Any umbrella insurance won't cover intentional acts or punitive damages.

For the cost of a splurge on a not particularly memorable restaurant meal, you can enjoy the protection of a $1 million umbrella policy. Insurance agents don't make much commission on an umbrella policy. So you have to call them. Just do it.

Help a Reader: Whole Life Policy

Here's a question I recently received from a reader:

Most whole life policies seem to be aimed at the young. I am 60 years old and wish to know if whole life is for me. I have a 20 year term for 100K and am contemplating purchasing a 50k whole life as an investment in the event I pass 80 years.

Also, it seems to be a good investment for my children and grandchildren. The 50k would cost me $2,025 yearly. Is this a smart thing to do?

Not a lot of detail, but the heart of the question is whether or not it's generally a good idea to purchase whole life insurance at an older age. Thoughts?

Toileting and Retirement, Should I Purchase Long-Term Care Insurance? Part 3

The following is an excerpt from 20 Retirement Decisions You Need to Make Right Now. This is part three (the final part) in a series about long-term care insurance. If you want to read previous parts, here's part one and here's part two.

Nursing Home, Assisted Living, and Home Healthcare

Nursing home coverage is just one of several types of long-term care. Most policies also include coverage for assisted living facilities and home healthcare.

Assisted living is the step between living in your own home and living in a nursing home. If your health won’t allow you to continue living at home, but you don’t require round-the-clock nursing-home care, an assisted living facility will suit you nicely. The goal of assisted living is to help you continue living as independently as possible. Assisted living facilities provide the privacy and feel of living in your own apartment, condominium, or small home. However, assistance is available to help you with the basic activities of daily living. Assisted living facilities average $36,372 per year.

No one wants to leave his or her home any sooner than necessary, even when health conditions begin to deteriorate. The best way to ensure you can remain in your home as long as possible is to hire a home healthcare agency to provide you with the level of help you need. Non-skilled help, which can assist with dressing, bathing, preparing meals, and other household duties, can cost $1,000 per month. Skilled help provided by a physical therapist or healthcare professional can cost much more. Home healthcare averages $29 per hour.

What Is Not Covered by Long-Term-Care Insurance?

If you purchase a policy, make sure you understand exactly what is covered and what is not. Long-term-care policies do not cover a number of items, and the exclusions in each policy differ. Treatment that was under way or recommended before obtaining long-term coverage is usually not. In addition, the following ailments are often excluded:

• Mental disorders (other than Alzheimer’s disease or other dementia)
• Nervous disorders
• Alcoholism
• Drug abuse
• Care necessitated by an act of war
• Intentional self-inflicted injury

Focus on the Benefits

The most serious blunder people make when purchasing a long-term-care policy is that they focus on the premium more than the benefits they may need. Here are some benefits to focus on:

Coverage Amount

Long-term-care policies generally pay benefits on a daily, weekly, or monthly basis. Check the costs of nursing homes in your area to determine the amount of coverage you need. For example, if nursing homes in your area run $150 per day, you can buy a policy that will pay $150 per day, $1,050 per week, or $4,500 per month. Usually, assisted living and home healthcare benefits will be paid as a percentage of the nursing-home coverage amounts.

Inflation

Many people save a lot of money on premiums by purchasing a policy that doesn’t adjust for inflation. They’ll save money in the short run, but it’s not likely that their policy will provide them with nearly enough benefits if they enter a nursing home. If nursing-home costs continue to increase at 4 percent per year, a nursing home that costs $150 per day today could cost $328 per day in twenty years. If costs continue to soar at this pace, wouldn’t it be wise to add a feature to your policy that adjusts your benefits by 4 percent per year to combat this inflation?

Choosing a policy that adjusts for inflation will increase your premium. For example, one plan that pays a $150-per-day benefit for four years of nursing home coverage would cost a sixty-five-year-old about $1,500 annually without an inflation feature. With 4 percent compound inflation protection, the same policy would cost $2,700 yearly. However, the additional cost is worth it if it protects you and your spouse from bankrupting your life savings.

Elimination Periods

An “elimination period” represents the number of days you must be in a nursing home before your policy kicks in and begins paying benefits. Most policies offer a range between zero and one hundred days. Not surprisingly, the longer the elimination period you select, the lower your premium will be. You can determine your optimum elimination period by looking again at your retirement plan to estimate whether or not your investment resources are sufficient. If you have plenty of assets, you may want to opt for a policy with a longer elimination period.

How Long Will Benefits Be Paid?

Most policies provide a maximum dollar amount, or ceiling, on the number of covered days. Often, benefits will last two to six years or a lifetime. In addition, some policies have various limits for different types of coverage—nursing homes, assisted living facilities, home healthcare, etc.

When Will the Policy Pay?

Most policies will begin paying benefits when you need substantial assistance with at least two of six activities of daily living. These activities include bathing, continence, dressing, eating, toileting, and transferring (moving in or out of bed or a wheelchair). Incidentally, the ability to bathe is typically the first daily living skill to go.

Getting a Quote

When you begin shopping for a long-term-care policy, you may want to follow the example of Alan Rucker, a recently retired sixty-two-year-old. To get the ball rolling, Alan requested premium quotes from three top-rated companies using the following key parameters:

• Coverage for both Alan and his wife, Margaret, age sixty, who both enjoy excellent health
• Three-year benefit period
• $100 per day of coverage
• 90-day elimination period
• 4 percent compound inflation protection
• Nursing home, assisted living, and home healthcare coverage

For this coverage, premiums ranged from $2,100 to $2,400 per year. Alan then used the following questionnaire to compare the policies and narrow his choices down to the policy that best fits his needs.

Long-Term-Care Questionnaire

1. What services are covered?
   A) Nursing home care
   B) Home healthcare
   C) Assisted living facility
   D) Adult day care
   E) Alternate care
   F) Respite care
   G) Other

2. How much does the policy pay, per day, for nursing home care? For home healthcare? For an assisted living facility? For adult day care? For alternate care? For respite care? Other?

3. How long will benefits last in a nursing home? At home? In an assisted living facility? Other?

4. Does the policy have a maximum lifetime benefit? If so, what is it for nursing home care? For home healthcare? For an assisted living facility? Other?

5. How long must I wait before preexisting conditions are covered?

6. How many days must I wait before benefits begin for nursing home care? For home healthcare? For an assisted living facility? Other?

7. Are Alzheimer’s disease and other organic, mental, and nervous disorders covered?

8. Does the policy require an assessment of activities of daily living? An assessment of cognitive impairment? Physician certification of need? A prior hospital stay for nursing home care? Home healthcare?

9. Is the policy guaranteed renewable?

10. What is the age range for enrollment?

11. Is there a waiver-of-premium provision for nursing-home care? For home healthcare?

12. How long must I be confined before premiums are waived?

13. Does the policy have a non-forfeiture provision? (This feature returns part of your premium if you cancel or lapse your policy.)

14. Does the policy offer an inflation adjustment feature? If so, what is the rate of increase? How often is it applied? For how long? Is there an additional cost?

15. What does the policy cost per year?
   A) With the inflation feature?
   B) Without inflation feature?

16. Is there a thirty-day free look?

17. What is the insurance company rated?

18. Is the policy tax qualified or non-tax qualified?

19. Has the insurance company ever raised its long-term-care insurance rates?

Is Long-Term-Care Coverage Worth the Cost?

The answer depends, of course, on whether you wind up needing long-term care. Let’s assume you purchase a policy at age sixty-five to cover the average cost of a five-year stay in a nursing home. The premium is $2,500 per year. Let’s also assume your policy has an inflation feature, so your benefits will increase as long-term-care costs escalate.

At age eighty, you incur a chronic illness that requires your admission into a nursing home for the average stay of two and a half years. Was this a good investment? For fifteen years, you paid $2,500 per year in premiums for a total of $37,500. The total cost of your two-and-a-half-year nursing home stay, adjusted for inflation, is $307,997. By having the coverage in place, you avoid having to withdraw $307,997 from your investment accounts to pay for your stay. The ability to keep this money invested may prove vital if your spouse is using it as a source of retirement income.

In this scenario, buying a long-term-care policy was a very wise investment decision. If you never used the coverage, you would have spent $37,500 on a policy you didn’t need. But would it be worth the risk of financial ruin to bet that you and your spouse will never require long-term care? Looked at in that light, $37,500 may seem like a small sum for peace of mind.

Understandably, “toileting” is not a term most people want to think about when they’re dreaming about their happy retirement. It’s not enjoyable to consider a future where you might need others to care for you, either in your own home, in an assisted living facility, or in a nursing home. But by thinking about it now and planning for its eventuality, you’ll save your spouse and children the burden of caring for you later on. By taking the simple steps outlined in this chapter, you’ll have enough money to cover your long-term-care needs, leaving your spouse a healthy nest egg. After all, none of us wants our kids to be forced to take the job of home healthcare aid.

Toileting and Retirement, Should I Purchase Long-Term Care Insurance? Part 2

The following is an excerpt from 20 Retirement Decisions You Need to Make Right Now. This is part two in a series about long-term care insurance. Part one is here.

Playing the Odds

What are the chances you could be afflicted with a chronic illness or disability that would leave you unable to care for yourself for an extended period of time during retirement? The answer might surprise you.

The vast majority of Americans don’t believe they will ever enter a nursing home or need any long-term-care services. If you’re age sixty-five, you have a 45 percent chance of entering a nursing home. Fifty-three percent of those who enter nursing homes stay for more than one year. Those odds, of course, increase with age. Women, because they live longer than men, have a greater likelihood of needing long-term care at some point. Sixty-eight percent of nursing home residents are women.

The High Cost of Aging

Long-term care is not just a health issue, but also a financial concern that can throw a wrench into your retirement planning. Currently the average cost for a one-year stay in a private room in a nursing home is $76,460 ($209 per day); semi-private rooms run $68,408 ($187); assisted living facilities average $36,090 per year ($99 per day); and the average home healthcare rate runs $29 per hour. Two hours of home healthcare each day would cost $21,170 per year.

Today, the average nursing home stay is two and a half years at a total cost of $171,020.10 The same stay will cost $374,725 in twenty years, assuming nursing-home costs continue to rise 4 percent per year. What will it cost for a two-and-a-half-year stay when you reach age eighty? You can see the impact these costs can have on reaching your retirement goals. Large long-term-care expenses could deplete your assets prematurely. The strain on your nest egg is compounded in the event of Alzheimer’s. The average nursing home stay for Alzheimer’s victims is seven years.

Who Pays for Long-Term Care?

Long-term care leads to poverty for a disturbing number of retired Americans. Of those receiving long-term care, 18 percent pay for it out of pocket. Within a year of admission, more than 90 percent of these private-pay residents are impoverished. Medicare and health insurance coverage typically pay little for long-term-care nursing home facilities. Medicaid, a government welfare program, will pay, but only after you have depleted all other financial resources. The government currently pays about 70 percent of all long-term care expenses. Although long-term-care coverage is affordable, only 7 percent of long-term care expenditures are paid for through the utilization of private insurance coverage.

According to these statistics, if you don’t own a long-term-care policy, the odds are very high that a lengthy nursing home stay will completely eat away your assets and leave you dependent upon Medicaid.

Cost of Coverage

Long-term-care coverage, like life insurance, is cheaper if you purchase it when you are younger and healthier. A policy purchased at age sixty-five will generally cost twice as much as a policy bought when you’re fifty-five. For example, a fifty-five-year-old can plan on paying a premium between $500 and $1,000 per year for four years of coverage. That same policy would cost a sixty-five-year-old between $1,000 and $2,000. Those in their seventies may be required to pay as much as $3,000 to $8,000 for similar coverage, depending on the policy’s features. Premiums will almost double for coverage purchased for a married couple.

Buying coverage when you are younger will reduce your premiums, though you will likely pay them for a longer period of time. To obtain a quick, free quote to get an idea of how much a long-term care policy will cost, spend five minutes at www.ltcq.net or www.insure.com.

Who Should Purchase Long-Term Healthcare Coverage?

Long-term-care insurance is not for everyone, but very essential for some. The following will help you decide if you should buy a long-term-care policy.

LTC is for you if...

• You would like to insure your independence and not become a burden to your family.
• Your family has a history of ailments requiring long-term care (e.g. Alzheimer's, diabetes, strokes.)
• You have sufficient money to pay premiums every year.
• You want to preserve assets for family members.
• Paying for long-term care for one spouse would seriously hamper your ability to accomplish retirement goals.
• You are in good health and qualify for lower premiums.
• You are between age forty-five and sixty and can lock in lower premiums for life.

LTC is not as important for you if...

• You have health conditions making the cost of LTC coverage too expensive compared to the benefit you may receive.
• You are likely to cancel the policy because your fixed income won't keep up with the increasing premium payments.
• Your only source of income is Social Security.
• You're self-insured because of the size of your financial portfolio.
• Buying an LTC policy stretches your budget to the point of having to forego other financial needs (e.g. paying for utilities, buying food or medicine.)
• You are seventy-nine or older (although you may need coverage, premiums will likely be too high.)

How Much Coverage Do You Need?

You can purchase coverage that will provide a daily benefit of anywhere from $50 to $400. To determine how much long-term coverage you need, first decide how much long-term care you can afford to cover out of your own pocket. For example, if the average nursing home cost is $150 per day in your area, and you can afford to pay $50 per day, then you would need a policy to cover the $100 difference. You should plan on needing this benefit for at least two and a half years, which is the average nursing home stay.

Estimating what you can pay out of pocket can be a difficult process. You must attempt to predict your future financial status and the future cost of long-term care. The best method for doing this is to revisit the retirement section of your financial plan and enter some additional hypothetical situations. For example, how would it affect your retirement assets if you or your spouse entered a nursing home at age seventy-five, eighty, or eighty-five, and you had to pay $68,000 per year, adjusted for inflation? Would this eat up all of your assets? Would the spouse living outside the nursing home have enough money to meet living expenses? Your retirement plan can help you answer all these questions. Be more exact in your planning by contacting nursing homes in your area and base your estimates on local costs.

Click here to read part 3 in this series.

Toileting and Retirement, Should I Purchase Long-Term Care Insurance? Part 1

The following is an excerpt from 20 Retirement Decisions You Need to Make Right Now. This is part one in a series about long-term care insurance.

"Toileting” is not a term you’d expect to find in a retirement-planning book like this. However, it is a term that describes what many retirees, their families, and caregivers must face every day. The definition of toileting is “getting to and from, and on and off, the toilet and performing associated personal hygiene.” As you age and your health deteriorates, you may need help with many of the things you take for granted today. If you do need assistance performing the basic activities of everyday living, who is going to provide it for you? Not being prepared for this possibility carries some devastating consequences, such as prematurely depleting your assets, receiving substandard long-term care, or becoming a burden to your family.

How interested do you think your children would be in applying for the following job listed in your local paper’s Help Wanted section?

Home Healthcare Aide: Home healthcare aide needed to provide twenty-four-hour, seven-day-a-week care for a poor, eighty-five-year-old bedridden patient suffering from Alzheimer’s disease. The elderly patient requires room and board and must move in with you and your family. The patient requires constant supervision and will need a baby-sitter when you leave your home. Must be able to administer eight to ten medications daily and make frequent trips to the doctor’s office. Applicant should enjoy cooking and cleaning and be proficient at toileting. Diaper changing skills are also a plus. The job will likely last one to two years but may last ten or more. This is a volunteer (unpaid) position. No experience necessary.

Now ask your children how they would feel about accepting this healthcare aide position if you were the patient needing the care. Would you like to heap this burden upon your children and their families? If you don’t want to take the risk of becoming a burden to your family, you need to do some planning. You can either purchase a long-term-care insurance policy or acquire sufficient assets to provide for both you and your spouse if you should enter a nursing home during retirement.

Becoming a Burden to Your Family

The above scenario is one Howard and Karen Everett know all too well. Three years ago, while visiting Karen’s eighty-four-year-old parents, Glenn and Shirley Kramer, Karen discovered that the Kramers were no longer able to take care of themselves. For example, Karen noticed that her parents weren’t washing their clothes regularly, and when they did wash them, they did it by hand because they couldn’t remember how to use the washer and dryer. Karen also noticed that her parents left the stove on frequently and were eating spoiled food. Cleanliness was becoming an issue.

It looked as if Shirley and Glenn had forgotten how to live. It was clear that Glenn was beginning to exhibit some early signs of dementia, and Shirley was diagnosed soon after with Alzheimer’s disease. Allowing them to continue to live alone would be dangerous. They clearly needed help.

Because of her parents’ limited assets and lack of planning, Karen believed that she and Howard had only two options: they could place her parents in a nursing home and let Medicaid pick up the bill, or they could move Glenn and Shirley into their own home and take on the daunting task of twenty-four-hour care.

They started to explore nursing-home options and visited several inexpensive homes. Unfortunately, the facilities were run down, often smelled bad, lacked cleanliness, and were understaffed. The Everetts concluded that their parents deserved better and immediately made arrangements to move them into their own home. Little did they know what they were getting themselves into.

Most of us wouldn’t have the stomach and stamina required to take care of one elderly parent, let alone two. Watching up close as both parents completely lost their dignity and were reduced to the equivalent of one-year-olds took its toll emotionally and physically on the Everetts. Would you like your children to do for you what Karen and Howard did for their parents? Consider for a moment their daily routine.

Karen worked around the clock, cooking, cleaning, bathing, toileting, dressing, feeding, blowing noses, administering medicines, clipping toenails, changing bed sheets when wet or soiled, cleaning up when accidents occurred because of incontinence, changing diapers, answering the same questions over and over, and helping them find their beds when they wandered the house at night. Around-the-clock care was utterly exhausting.

Although less costly than a nursing home facility, home care carries its own financial drain. Adult diapers and specialty dietary items are not cheap. Utility costs also increased, since neither parent could sleep with the lights off. Home maintenance costs rose, because of accidents such as the basement flooding when Shirley left the water running in the bathroom. Also, many modifications were made to the home to assist with deteriorating physical health.

The Everetts’ lifestyle changed completely. Three years ago, with their kids grown, they were looking forward to winding down Howard’s career by traveling and enjoying their increased freedom. This is not exactly what happened. All travel was completely out of the question. In fact, it was difficult just to go the store. Somebody always had to be home. This meant that the Everetts rarely, if ever, went out together or even visited other relatives. If they did leave the house, they had to find a baby-sitter. Their married and college-age children helped out when they could but weren’t always excited about having to change Grandma’s diaper.

Besides not being able to leave the house, Karen and Howard found that they couldn’t have friends over, either. Shirley had difficulty getting dressed by herself, but she had mastered the skill of taking her clothes off (and often did), making stark-naked appearances at the least expected times. Most dinner guests would prefer not to see an eighty-four-year-old in her birthday suit. Their only social outings, it seemed, were occasional visits with support groups to cope with the pressures of taking care of elderly parents.

The worst component, however, was the realization that their relationship with their parents had changed. Adoration grew into aversion, and respect decayed to resentment. While they still loved their parents and would continue to provide the needed care, they privately wished their parents would have been more wise by preparing for this stage of life.

So what advice would the Everetts give you? “Buy long-term-care insurance. You will maintain your relationship with your children and grandchildren, and they won’t have to experience with you the loss of your dignity.” The Everetts felt so strongly about this that they bought themselves a long-term-care policy to cover the costs of professional care.

Leaving Your Spouse with Nothing

Let’s fast forward to the day you reach age eighty and assume you enter a nursing home and stay for five years before dying. Let’s also assume your spouse is healthier and younger than you. Could the assets you’ve accumulated cover the additional expense of a nursing home stay? A nursing-home stay could double your annual retirement expenses. Of course, in addition to covering the cost of a nursing home, your spouse, who will likely continue to live in your family home, will still need money to meet the expenses of everyday life. And who knows, your spouse may need a continued stream of income for another twenty years.

If your assets aren’t sufficient to cover the costs incurred by your going to a nursing home and also the continued cost of retirement for your spouse, then you are a candidate for long-term-care insurance. If your nursing-home stay completely drains your nest egg, your spouse could be literally left with nothing but your home and a monthly Social Security check. No one wants to be forced to live on Social Security alone.

$500,000 to Spare or $0 and Destitute

David Sanders, a sixty-two-year-old office manager, plans to retire this year and begin enjoying the good life with his wife, Mary, age sixty. According to his retirement calculations, he has accumulated enough money to enjoy a $50,000 annual retirement income (after taxes and inflation). In fact, using modest rates of return, his projections show that thirty years from now they will still have a nest egg of more than $500,000. A modern-day success story, right? Well, maybe.

One thing David did not plan on is the possibility that some of their assets may be needed to cover long-term-care expenses. What would happen if either David or Mary require nursing-home care sometime during retirement? Could their nest egg withstand the additional expense? To answer this question, David needs to take a few extra steps in his retirement calculations.

What if, at age seventy, David enters a nursing home that costs $60,000 per year and stays for five years before he dies? Of course, $60,000 per year will have to be withdrawn from the Sanders’s nest egg for five years to take care of David in the nursing home, while Mary will continue to need $50,000 of income each year to cover the originally planned retirement expenses. The additional nursing-home expense will more than double the amount they must withdraw from their investments during these years. Should this occur, their investment assets would be completely depleted by the time Mary is age eighty. She would have to live out her remaining life on Social Security alone.

If David does not require this nursing-home care until he reaches seventy-five or eighty, their assets would last a little longer. Mary would run out of assets at age eighty-one and eighty-three, respectively. Needless to say, an extended long-term-care stay by David would leave Mary penniless.

The Sanders have two basic options: accept the risk of depleting their assets and do nothing in hopes that neither one of them requires care or purchase a long-term-care insurance policy to cover the cost of long-term-care expenses should they arise. What would you do? Have you considered long-term care expenses in your retirement projections?

Click here to read part 2 in this series.

How Much Life Insurance Do I Need?

The following is an editted excerpt from Questions and Answers on Life Insurance: The Life Insurance Toolbook. This section goes on for 23 pages in the book. I have selected key highlights to give you a sense of what the author is saying.

This is an excellent question to which there are as many answers as there are people to ask. Every advisor, financial columnist, and relative has a formula that they consider the best. This section is designed to present the various methods used, as well as the pros and cons of each method ranging from the simple to the extremely complex. As these issues deal with how to value a life, it is indeed a very complex proposition.

The method that makes the most sense to you is probably the one that may work the best for you. No method is perfect, as you are trying to hit a moving target. Life brings many changes and your needs will change with them. The more assumptions you make, the more complex you’ll make your planning, and the more chances there are that something will not work as planned. This does not mean that you should only use the simplest methods—it is to give you a concept of why it is important to actively participate in all of your planning, fully understand it, and constantly monitor it. After all, it is your money. Remarkably, the simplest formulas can often be the best.

All of the issues discussed in this question will have an impact on the amount of life insurance and other assets needed. Often the desired goals may not be financially feasible.These issues are not only financially based; they can also be extremely emotional.

Another thought to keep in mind is that as your other assets grow, such as retirement plans and investments, your need for life insurance will decrease.

These are some of the more commonly used approaches.

• Multiple of Income - This method (also known as the “human capitalization value”) uses the approach of a multiple of your annual income—typically ranging from five to eight times your annual income. This is one of the oldest and best known methods to determine how much life insurance you need, as well as one of the easiest to use. It’s also the most frequently mentioned by financial columnists in consumer publications. While simple, this earnings-multiple method misses a range of important factors. For example, it ignores household demographics, past savings, Social Security offsets, housing expenses, taxes, etc. It also ignores expected life changes and individual preferences about sustaining the living standards of survivors. It is simply a “best guess.”
• Cover Your Debts - This entails buying only enough life insurance to cover debts such as your mortgage, student loan bills, or outstanding car notes. The issues are similar to the issues for the multiple of income approach discussed above in that it misses a whole range of factors, such as not considering any future debts or needs like child care or college education costs. This method is also too simplistic to provide any real value.
• Human Life Value Concept - The human life value concept deals with human capital. Human capital is a person’s income potential. We all have a human life value. In wrongful death litigation, human life value is measured daily in court (however, the litigation value tends to be significantly different). Insuring human life value is the primary purpose of life insurance. The human life value concept goes beyond numbers and considers the entire impact caused by the loss of a human life and the value to a person’s loved ones.
• Capital Preservation and Capital Liquidation - This method can be used in conjunction with a needs analysis approach or separately as a quick calculation, if you just want do an income replacement approach on its own. Whether you are using this method strictly on its own or in conjunction with a needs analysis, once the amount of income that needs to be replaced is determined, a decision must be made as to whether the pool of capital to provide this income will be preserved or liquidated. Capital Preservation: The capital used for income replacement is left intact and the beneficiaries live off the income it produces. Capital Liquidation: The length of time of income needs to be replaced becomes a major factor in determining the capital needed for income replacement.
• Life-Cycle Model of Consumption and Savings - The life-cycle model of consumption and savings is a new approach that is based on the life-cycle model which was developed in the 1950s and 1960s by Professor Franco Modigliani and his colleagues at Massachusetts Institute of Technology. Modigliani won the Nobel Prize in 1985 for developing the model, which built on early work by Yale economist Irving Fisher in the 1920s. This model assumes that an insured’s goals are to secure the living standards of the household and ensure comparable living standards for his or her survivors. This approach is based on the fundamental goal of saving money and having insurance—the desire to avoid major disruptions in a household’s standard of living. This approach uses advanced mathematical techniques to calculate the savings and life insurance needed to balance consumption in the present with consuming in the future and to preserve a household’s living standard for survivors. This method describes how life insurance holdings are adjusted as life insurance needs change. All economic resources, tax liabilities and benefits—Social Security retirement benefits, and survivor benefits, etc.—are taken into account in the calculation, along with family demographics, tax-deferred savings, housing plans, special expenditures, estate plans, capacity to borrow, and lifestyle preferences.
• The (Capital) Needs Analysis Method - Like the earnings-multiple method, the Capital Needs Analysis method projects the income the insured will earn between now and retirement (or later) and sometimes discounts these flows. But this procedure goes further; it calculates the net contribution of the insured to the family’s living standard by subtracting the insured’s present values of future tax payments and living expenses from his or her present earnings.The net contribution of the insured is then compared with today’s spending needs of potential survivors. Such a needs analysis incorporates factors such as mortgage payments, other household expenses and special expenditures.

What Is Life Insurance, Where Did It Come From, and Why Should I Care?

The following is an excerpt from Questions and Answers on Life Insurance: The Life Insurance Toolbook.

Life insurance is a type of insurance that pays money when someone passes away. That’s simple. However, to understand what life insurance is today you should look at how life insurance originated. Life insurance is one of the very oldest types of insurance/financial products in existence. It stems from the old principle that if a villager’s house burned down, the other villagers would help to rebuild the house.

The first life insurance came from this concept. Then a concept known as the tontine annuity system was founded in Paris by the 17th century Italian-born banker Lorenzo Tonti. Although essentially a form of gambling, this system has been regarded as an early attempt to use the law of averages and the principle of life expectancies in establishing annuities. Under the tontine system, associations of individuals were formed without any reference to age, and a fund was created by equal contributions from each member. The sum was invested, and, at the end of each year, the interest was divided among the survivors. The last remaining survivor received both the year’s interest and the entire amount of the principal.

However, as the amount of money that people wished to be insured for increased, and the risk potential for violent fluctuations for those involved increased as well.To minimize this effect,it was necessary that the law of large numbers be applied to this situation.This is where we see the first roots of the actuarial practice. An actuary is a mathematician employed by an insurance company to calculate premiums, reserves, dividends, and insurance, pension, and annuity rates, using risk factors obtained from experience tables. These tables are based on the company’s history of insurance claims as well as other industry and general statistical data.

This is an example of the principle known as the Law of Large Numbers. This principle states that the greater the number of similar exposures (in this case—lives insured) to a peril (e.g. death), the less the observed loss experience will deviate from the expected loss experience. Basically, the more people that the risk is spread out over, the more money (premiums) will be coming in. So, when a person does die, it will not be as big of a burden to the rest of the insureds. Of course, in certain circumstances, there will not be much that can be done.

The function of insurance is to safeguard against misfortunes by having the losses of the unfortunate few paid for by the contributions of the many that are exposed to the same peril. This is the essence of insurance—the sharing of losses and, in the process, the substitution of a certain small “loss” (the premium payment) for an uncertain large loss. (Reference—Black, H. and Skipper, K.; Life Insurance, Twelfth Edition, Prentice Hall (Englewood Cliffs, NJ), p. 18)

Life insurance, like any other financial product, is a tool to assist you in accomplishing a specific goal (or goals). As such, it will assist the beneficiary when there is an economic loss, due to the death of the insured that extends well beyond just funeral or final medical expenses. The loss of future income, due to the death of a breadwinner, can have a severe impact on the lifestyle of the surviving family members. Debt owed by the deceased may become due and payable as well as possible estate or inheritance taxes. Life insurance can create an immediate source of funds to enable the payment of these expenses and to provide a source of future income.

Benjamin Franklin helped found the insurance industry in the United States, in 1752, with the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire.The current state insurance regulatory framework has its roots in the 19th century, with New Hampshire appointing the first insurance commissioner in 1851. Insurance regulators’ responsibilities grew in scope and complexity as the industry evolved. Congress adopted the McCarran-Ferguson Act in 1945 to declare that states should regulate the business of insurance, and to affirm that the continued regulation of the insurance industry by the states was in the public’s best interest.

The purchasing of life insurance is an uncomfortable task for many people, and the image of most life insurance advisors leave something to be desired with examples such as Bill Murray in Groundhog Day and Mel Brooks in High Anxiety.Typically, there is recognition of an obligation to protect one’s dependents from the financial hardship of an untimely death, but no one likes to think about the fact that they will die someday. This is another reason—aside from the potential discomfort of dealing with a life insurance advisor—that can make it easy to delay and put off the decision to purchase life insurance.

Keep in mind as you go through this process that life insurance is not for you, it is for your survivors. Therefore, you typically will only have a need for life insurance when you are leaving behind someone or some entity that is dependent on your income.

15 Insurance Policies You Don't Need

Yahoo lists 15 insurance policies you don't need as follows:

1. Private Mortgage Insurance
2. Extended Warranties
3. Automobile Collision
4. Rental Car Insurance
5. Car Rental Damage Insurance
6. Flight Insurance
7. Water Line Coverage
8. Life Insurance for Children
9. Flood Insurance
10. Credit Card Insurance
11. Credit Card Loss Insurance
12. Mortgage Life Insurance
13. Unemployment Insurance
14. Disease Insurance
15. Accidental-Death Insurance

The only one of these I have is #3. My "old" car is still worth $9,000 or so according to Kelly Blue Book, so I have it covered. Now if it was worth $2,000 or less, that would be different.

I'm sure there is someone (or several people) out there who will disagree with one or more items on this list (arguing that people SHOULD have a type of insurance), so let's have at it. If you disagree with the list, let your thoughts be known below.

How to Know Whether or Not You Need Long-Term Care Insurance

As a follow-up to my piece on the four times you'll probably need long-term care insurance, Money 911: Your Most Pressing Money Questions Answered, Your Money Emergencies Solved suggests that there are financial guidelines that can help you decide whether or not the insurance is for you.

Before I give the details, I need to mention that the book says that there are two schools of thought on long-term care insurance. The first says that you need it no matter what your financial situation. The second says that you need it only if you fall within certain financial parameters. Jean Chatzky, the author of the book, agrees with the latter way of thinking. As such, she offers this suggestion for telling when you do and don't need long-term care insurance:

If you have a significant amount of assets -- upward of $2.5 million or $3 million -- you don't need insurance for long-term care because you'll be able to pay for your own care. If you have little or no assets -- less than $300,000 -- you'll spend them down and then Medicaid will pick up the tab.

I've heard this "you don't need long-term care insurance if you're rich or poor, only if you're in the middle" line of thinking before (I may have even posted on it.) Seems to make sense in general. That said, I have a few comments of the advice:

1. I'm expecting to be at or above $3 million by the time I retire. Still, I think I will investigate long-term care options when the time comes. I guess that puts me more in group #1 than group #2.

2. $300k is "little to no assets"? From what I could find online, a net worth of $300k places you well above the median net worth for Americans. (Sources: Wikipedia, CNN Money, and Bargaineering). As such, this isn't really a "rich and poor" set of instructions, but she’s really saying that most people will not need long-term care insurance because they won't have enough assets to warrant it. They will simply let the government take care of them.

3. Does anyone really want to "let the government take care of you?" Yikes! I shudder at the thought!!!

4. If the government is going to take care of most of the people and if people are living linger, doesn't this mean the government will be providing for an ever-increasing set of people needing long-term care? What's that mean for taxes as well as the lifestyle sacrifices/demands on those paying the bill for all the others in long-term care? Seems like a recipe for disaster to me.

What's your take on the issue? Is long-term care insurance something most people need or not? Are there any general rules-of-thumb you can suggest to guide people in making a decision on this subject?

Four Times You'll Probably Need Long-Term Care Insurance

How to Retire Happy: The 12 Most Important Decisions You Must Make Before You Retire, Third Edition lists some instances when it's more likely that people will spend some time in a nursing home and thus need long-term care insurance. Their thoughts:

According to AARP, research suggests that about half of today's older people will spend some time in a nursing home -- from as little as a few weeks to as much as five years. AARP cites several factors that could increase your chances of going to a nursing home:

• You live alone or have no relatives who could care for you at home.
• Your family members tend to live into their eighties or older.
• Your family has a history of heart problems, high blood pressure, diabetes, or some other serious or chronic health problems.
• Your family has a history of stroke or Alzheimer's or Parkinson's disease.

I'm a ways away from making the long-term-care insurance decision, but my parents are certainly in that range. In fact, they're probably past the best time to buy LTC insurance (too old).

Anyway, my family history is scattered -- one grandfather died in his early sixties and one died in his seventies. One grandmother died shortly after childbirth and the other lived to 95 (even with diabetes.) My dad is relatively healthy but my mom has had cancer (but she's smoked for 40 years or so.) We have some history of strokes and diabetes, but nothing major. So, I have a lot to think about.

Anyone been down the long-term care insurance road? What did you decide to do and why? 

The Seven Pillars of Financial Success, Pillar 6: Get Insured

For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why.

The Bible discusses the keys to personal finance success quite plainly. If you read the book of Proverbs in particular, you'll see that the path to financial success isn't that difficult or extensive. In fact, the wisdom to be prosperous can be found in a few simple steps.

I've been sharing what I consider to be the seven pillars of financial success from the Bible.  I picked up on the number seven from Proverbs 9:1 where it says:

Wisdom has built her house; she has hewn out its seven pillars.

Today we'll be discussing Pillar #6: Get Insured.

In Ecclesiastes 11:2 where the Bible says:

Give portions to seven, yes to eight, for you do not know what disaster may come upon the land.

This verse is often quoted when someone talks about diversifying investments, but I like it for insurance discussions as well. After all, insurance is needed for disasters that may come upon the land, right? Of course! It's a cushion that helps protect you from financial disasters.

I think of insurance as a very big emergency fund that supplements a cash emergency fund in case a person experiences a BIG emergency -- a major accident, death, or injury. It's there to cover an amount that's impossible for most people to save (like the loss of an income, house, and so on.)

The types of insurance we all need to at least consider include health, life, and disability insurance (to replace the income from your career – your #1 financial asset), homeowner’s insurance, car insurance (to replace your vehicle and also to cover potential liability claims), and umbrella insurance to cover general liability (for example in case you’re sued.)

I've heard it said on more than one occasion that insurance is not acceptable for a Christian, that we should be trusting in God and not trusting in insurance. I agree -- we shouldn't be trusting in insurance over God. And I haven't said anything about trusting in it. Our trust is in God for everything, even the air we breathe. But He's given us instructions throughout the Bible on how to be good money managers. Some of these directions cover planning for times that could mean financial trouble. The wisdom of the Bible tells us to prepare when times are good for future times when things might not be as good -- and insurance is one way to do that. I don't trust in insurance any more than I trust in savings, credit cards, budgets, or any other financial tools. I simply use it to help me be the best money manager I can be of the money God has entrusted to me.

Do you agree or disagree?

Come back next week as I discuss Pillar #7!

Using Life Insurance for Estate Planning

The following is a guest post from Joel Ohman at Insurance Providers. Joel is a Certified Financial Planner™ and somewhat of an Internet nerd/serial entrepreneur depending upon who you ask.

One of the best tools that estate planning attorneys, financial planners, and CPA's have at their disposal for estate planning is life insurance. Estate plans big and small, complex to simple, and extraordinary to typical almost always involve some form of life insurance policy to complete the estate plan. Here are some of various things to understand about using life insurance in the estate planning process as well as tips for what type of strategies you may want to investigate further when crafting your estate plan.

One Common Misconception About Life Insurance

Before diving into some of the various ways that life insurance is used in estate planning it is worth pointing out a not insignificant issue that involves life insurance and estate taxes.

"The great thing about life insurance is that the death benefit that is paid out is tax free!" - have you ever heard that statement before? Many people say it and if you have ever listened to a sales pitch from a life insurance agent then no doubt covering the tax advantages of life insurance was one of their key talking points.

However, many people do not realize that the above statement is not necessarily true. The great thing about life insurance is that the death benefit is paid out income tax free and not necessarily tax free altogether as life insurance proceeds are typically included into the gross estate of the decedent (the deceased) and are thus subject to estate taxes (sometimes called "death taxes").

In a Nutshell: Why Use Life Insurance for Estate Planning?

If you get nothing else from this article then please understand this one thing: the reason why life insurance is so valuable as an estate planning tool is that life insurance allows one to guarantee that a lump sum of money will be available upon their death to be directed in a way that will provide maximum benefit to their estate. This is just a fancy way of saying that many very wealthy people have a lot of their wealth tied up in non liquid assets like houses, property, businesses, etc. that if their estate was forced to liquidate some or all of those assets at death then they would likely greatly inconvenience the beneficiaries of the estate at best or at worst force a very unwise business decision (selling a business before the ideal time, being forced to quickly sell a piece of land, etc. - all in order to pay estate taxes due). Using life insurance in estate planning gives enormous freedom to those who upon their death may be ultra wealthy but relatively cash poor.

Life Insurance Estate Planning Strategy #1: Credit Shelter Trust

The first very practical way to use life insurance in estate planning that we will take a look at is the credit shelter trust (also known as a "by-pass" trust or "exemption" trust). The purpose of the credit shelter trust is to fully utilize the estate tax unified credit to which both spouses are entitled. Practically speaking, this is how it works:

Estate tax law seems to always be up in the air and of course consult a qualified tax adviser for any specifics but just for example's sake let's say that a husband and wife combined have assets of $5,000,000 and the estate tax unified credit is constant at $1,000,000. If the husband were to die first and leave all of the assets to his wife then there would be no estate taxes due because of the unlimited marital transfer rule. However, if the wife died later on not having remarried and having assets of $5,000,000 then she would be forced to pay estate tax on $4,000,000 after the $1,000,000 unified tax credit. Wait! You say - if only we could have used the husband's unified tax credit as well then we could have only had to pay taxes on $3,000,000 rather than $4,000,000. That is where the credit shelter trust comes into play.

The credit shelter trust is a testamentary trust ("testamentary" meaning it is created and funded upon death through the decedent's will and is not an "inter vivos" trust that is created and funded while the trust grantor is still alive) that is funded typically with life insurance proceeds (although it can be funded with some other type of liquid assets) from a life insurance policy that is held on the trust grantor so that when the trust grantor dies the credit shelter trust is funded with an amount equal to the unified tax credit. The money contributed to the credit shelter trust is not subject to estate taxes because the amount contributed is equal to the unified tax credit, the corpus of the trust can be used to kick off income to pay to the spouse while still keeping the corpus of the trust excluded from the second spouse to die's estate.

Life Insurance Estate Planning Strategy #2: QTIP Trust

The QTIP trust (Qualified Terminal Interest Property trust) is designed to allow a decedent "control beyond the grave" of their assets without surrendering control of those assets to their surviving spouse - and at the same time allowing for the estate to take advantage of the marital deduction for the assets used to fund the QTIP.

Practically speaking, a QTIP is most commonly used in cases where one spouse is significantly older than the other spouse and/or there are kids from multiple marriages in the picture. A QTIP trust will allow the older spouse that passes away first to make sure that their surviving spouse receives all of the income from the trust (the surviving spouse gets all of the income while alive and is also allowed to dip into the trust principal only to meet their MESH needs: Maintenance, Education, Support, or Health - no, no, no - the surviving spouse won't be able to rack up a ton of credit card debt with a new love interest and expect the QTIP to pay off the credit cards) while at the same time preserving all of the corpus of the trust to be distributed to the children of the first spouse to die (rather than the pool boy that the surviving spouse may choose to remarry, children from a second marriage, etc.).

Life insurance is of course a great vehicle to fund a QTIP trust. One important detail to note about the QTIP is that unlike the credit shelter trust the assets in the QTIP will be included in the surviving spouses federal gross estate (this is why many estate planning attorneys will get paid the big bucks to recommend intricate strategies that involve both a credit shelter trust, a QTIP trust, and potentially many other types of trust in combination.

Life Insurance Estate Planning Strategy #3: Irrevocable Life Insurance Trust

The ILIT or irrevocable life insurance trust is an inter vivos trust (as opposed to both the credit shelter trust and the QTIP trust which are both testamentary trusts) and is designed with a very simple purpose in mind: the ILIT owns a life insurance policy on the life of the trust grantor so that the death benefit proceeds from the life insurance policy will not be included in the federal gross estate of the insured upon their death.

As mentioned above under the "common life insurance misconception" header almost all life insurance death benefit proceeds are included in the federal gross estate of the insured. The reason why it is included in the federal gross estate is because when tabulating the decedent's estate one must include all assets where the decedent had any "incidents of ownership". Typically the decedent owns the life insurance policy on their own life and has the power to make changes to the policy which counts as an incident of ownership. The ILIT avoids this incident of ownership by letting the grantor irrevocably assign away ownership of the life insurance policy to the ILIT.

What do YOU Think?

What is YOUR take on using life insurance for estate planning?