Health Savings Accounts

We all know the cost of healthcare has been exploding over the years, far outpacing the rise in general inflation. The 2005 annual survey of employer health benefits conducted by the Kaiser Family Foundation and the Health Research Educational Trust found the average cost of health insurance for a family of four has grown to over $10,800 per year - nearly doubling since 1998. The survey also reported that in 2006 Starbucks will spend more on health insurance for its employees than it will spend on raw materials to brew coffee. An alternative that merits attention is Health Savings Accounts or HSA's.

Health Savings Accounts we created as a part of the Medicare Prescription Drug Improvement and Modernization Act signed into law by president Bush in 2003. HSA's are designed to help individuals save for qualified medical and retiree health expenses on a tax advantaged basis.

Any adult who is covered by a high deductible health plan (minimum deductible of $1,000), and has no other first dollar coverage may establish an HSA. Tax advantaged contributions can be made in three ways:

1. The individual or family can make tax deductible contributions to the HSA even if they do not itemize deductions.
2. The individuals employer can make contributions that are not taxed to either the business or the individual
3. Companies that offer cafeteria plans can allow employees to contribute untaxed salary through salary reduction.

Once an individual enrolls in Medicare they can no longer contribute to an HSA. Amounts contributed to an HSA are the property of the individual and are fully portable. Funds in the account grow tax deferred and are tax free when used for qualified medical expenses.

Using myself as an example I currently pay about $1,100 per month for a family of five. I have a deductible of $400 per individual, or $2,000 per year maximum out of pocket expense. The high deductible policy I am likely to buy will cost about $680 per month have a deductible of $3,000 with a $6,000 maximum out of pocket expense per calendar year.

Initially I expect to save about $420 per month in premium expense. With this savings I expect to contribute the $3,000 per year tax free in about 7 months. This means I expect to save about $2,100 net ( 5 months x $420). If I add in the tax benefit of the HSA, $3,000 x my tax rate 28%, I can expect to save another $840 each year in reduced tax liability. So my total saving works out to around $2,900 each year - sweet! This assumes I spend the entire $3,000 in deductibles each year - not likely. So maybe the HSA account will grow and leave me with some extra funds to cover expenses I will surely have when I reach Medicare eligibility age.

Resources:
US Treasury FAQ's
The Heritage Foundation

technorati tags:Finance, Health Savings Account, financial planning

How Much Does Your Broker Get Paid?

Many people wonder about their stockbrokers pay. Disclosure often isn't required by regulators or the industry. You may or may not know that your broker does not get to keep all the commissions he generates. The gross commissions are called production, and the broker is paid a share of his gross production that varies from firm to firm and by product type. Also the larger the broker's gross production the larger his share of the take. "On Wall Street" an industry magazine has just published it's annual review of broker payout. If you would like to learn a little more about how your broker is paid you can view the information here.

Aside from the different share of commissions you should know that different products pay different rates too. For example if you purchase a closed end or exchange traded bond fund that already trades on an exchange you will pay the firms standard or discounted commission rate. If you are offered a closed end bond fund or ETF that is just being issued you will probably be told that you pay no commission. That is true enough, but the selling firm will receive a "selling concession" that will almost certainly be a lot higher than normal commission rates, meaning the broker earns more. Annuities and mutual funds usually pay much higher commissions than the cost of purchasing an individual stock. Trying to figure out just how much you are being charged for many investments and how much financial incentive your broker has to recommend those investments can be confusing.

This is one of the biggest reasons I believe a fee only financial advisory practice is better for many consumers. All fees are fully disclosed, there are no hidden expenses, and there is no incentive to promote one type of investment or investment product over another.

technorati tags:Broker, pay, commisions, fee, only

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Shorter Long Term Healthcare Insurance?

A report from the American Association for Long-Term Care Insurance suggests that for the majority of policy owners, three years of coverage is sufficient. With high cost of coverage the primary reason for not having coverage this study suggests that some coverage is better than none, and for most is all that is needed.

There are a couple of caveats you should consider. The study only includes individuals who actually purchased LTC insurance. For those with no coverage what would be the length of coverage they should have purchased? Secondly, is the population that can afford LTC coverage healthier than the group that could not or did not purchase coverage thereby making their need for long-term care less than the total population?

My feeling is if you need LTC coverage (cannot afford to self insure) you should buy the most protection you can afford. Leaves you with one less thing to worry about, so you can get on with enjoying your life.

To read the article in it's entirety click here.

Technorati Tag Long Term Healthcare Insurance

Per Stirpes - Two Small Words That Make A Big Difference

Per Stirpes is a term you must learn about in order to build a successful estate plan. It is a Latin term meaning "per branch". Sometimes it is omitted from beneficiary forms, wills, and trusts with sometimes devastating consequences.

Per Stirpes is an important term because it indicates how property should be distributed in the event of a deceased beneficiary or heir.

For example let's say you have a son and daughter who each have two children of their own. You have an IRA which you wish to leave to your children in equal shares. If you have indicated this on the IRA beneficiary form you may think all is well. However, suppose your daughter is traveling with you when you both die in an automobile accident. What will happen to the assets in the IRA?

Without the per stirpes indication your son will inherit all the assets in the IRA, leaving your grandchildren from you daughter with no share. If, however, you included the per stirpes designation on the beneficiary form, your surviving son would inherit his half of the IRA, and your daughters heirs would inherit the other half of the assets. This dramatic difference is due to those two small words - per stirpes.

The lesson is to be sure to review your beneficiary forms for IRA's, insurance policies, employee retirement plans, wills, and trusts to be sure your assets transfer according to your wishes when you are no longer here to explain your intent.

Technorati Tag financial planning, estate planning, per stirpes

SEC Podcasts

The Securities and Exchange Commission has begun a series of short (five minute) podcasts. The series titled "Your Money" is designed for beginning investors but has information that is appropriate for all investors. My favorites are "Choosing a Financial Professional" and "No-Load Funds". You can access the series here.

Technorati Tag SEC Podcast financial planning