Maximize the Benefit of a Losing Variable Annuity

I had the chance back in the 01-03 bear market to help some clients with variable annuities maximize the benefits of investments that had gone sour, and just this past week ran across another opportunity to help a potential client with this same strategy. Here is what to look for:

• You purchased a variable annuity that has lost value.
• The death benefit of your annuity is calculated based on a dollar for dollar reduction for withdrawals.

Here is how this strategy works:

Let's say you originally put $100,000 in the annuity and the value has now dropped to $70,000. The death benefit of this annuity equals premium payments less withdrawals on a dollar for dollar basis. You withdraw most of the money from your annuity, leaving only enough to keep the policy active. Let's say you must leave $5,000 in the policy so the insurance company can't cancel the contract. That means you withdraw $65,000 from the policy and move that money elsewhere to recover as the markets recover. Your death benefit on the annuity falls from $100,000 to $35,000 refecting this withdrawal.

What you have done in effect is to create a synthetic paid up whole life insurance policy that will pay out one day to your heirs. Meanwhile your remaining value can be invested to create even more wealth and income for you and your heirs.

This opportunity may also apply if you have a 403b plan that utilizes group variable annuities.

This strategy will not work if the death benefit of your policy is calculated on a pro rata basis, and the insurance industry has caught on to this ploy so most new policies have a pro rata calculation. So before you exchange an old annuity or just give up on it check to see if there may be a better way to skin that cat.

Longevity Insurance

According to the National Center for Health Statistics a man living in the United States who reaches age 65 has a life expectancy of another 17 years and a woman who reaches sixty five has a life expectancy of 20 years. In fact according to Wikipedia 1 in 50 women and 1 in 200 men living in the United States will attain the ripe young age of 100.

Statistically, life expectancy is the point where 1/2 of a group will be dead and of course the other half will continue living. So half of the women living in the US that are 65 will live to be older than 85, and half of the men will live to be older than 82.

That is a long way to get to where I wanted to start. With expanding longevity in the US, making sure your money lasts longer than you do becomes increasingly harder. Defined benefit pensions are going the way of the dinosaur so individuals have to shoulder an increasing risk of longevity (which I believe is a good problem to have as far as problems go).

Enter your friends from the insurance industry who are willing to sell you longevity insurance.
Some think the policies are over priced but I believe it is an option that some should consider. here's how it works:

Let's say a 65 year old male needs $50,000 a year of income in addition to his social security benefits. Guessing that inflation will average about 3% annually this gentleman will need just over $90,000 to buy the same amount of groceries when he reaches age 85. For about $131,000 he can buy a longevity insurance policy that will guarantee him $90,000 a year in income beginning at age 85. Doesn't sound like too bad of a deal so far, but remember less than half of the men age 65 today are expected to live long enough to collect even one cent (that's right if you die before age 85 you get nothing and the insurance company keeps all the money).
Still if you are one of the lucky ones who lives long enough to collect you'll be ahead after about a year and a half.

If you have reason to believe you'll live a long time this could be a good deal. If like Mickey Mantle you feel "If I had known I was going to live this long I would have taken better care of myself" then maybe it's not for you.

Life Insurance Needs

Most folks own some life insurance, few have any idea if it is too little, too much, or just right. Many are confused by all the flavors - term, whole life, universal, variable universal. There is no quick and easy way to determine your flavor, too much depends on your personal goals and family situation. Term is great for pure protection, but totally useless for estate or charitable planning. Whole life is easy to understand, but sometimes universal or variable universal would be a better choice.

If you have real concerns about your insurance needs it is important to review your current policies with an advisor that has no conflict of interest. That means don't ask your agent, his interest is in selling life insurance. Insurance needs analysis is a key component of your financial plan. A fee only advisor who receives no commission or other benefit from your insurance purchase is ideally suited to help you with this problem.

If you want to get started on your own or if you are just curious you can find a pretty good online insurance needs calculator at the Life and Health Insurance Foundation for Education.

technorati tags:Finance, Life Insurance Needs, financial planning

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

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