Why Are Long-Term Care Insurance Premiums Skyrocketing?
Many individuals that have long-term care insurance policies are beginning to receive letters in the mail notifying them that that their insurance premiums are going up by 50%, 70%, or more in some cases. This is after many of the same policyholders have experienced similar size premium increases just a few years ago. In this article I’m going to explain……
Many individuals that have long-term care insurance policies are beginning to receive letters in the mail notifying them that that their insurance premiums are going up by 50%, 70%, or more in some cases. This is after many of the same policyholders have experienced similar size premium increases just a few years ago. In this article I’m going to explain:
Why this is happening
Are these premium increases going to continue?
Options for managing the cost of these policies
If you cancel the policy, alternative solutions for managing the financial risk of a LTC event
Premium Increases & Insolvency
Unfortunately, it’s not just the current premium increases that are presenting LTC policyholders with these difficult decisions. Within the letters, some of these insurance carriers are threatening that if they’re not able to raise premiums by 250% within the next 6 years, that the insurance company may not have enough assets to pay the promised benefit. What good is an insurance policy if there’s no insurance company to pay the benefit? I won’t mention any of the insurance companies by name but here is some of the word for word statements in those letters:
“This represents a 69% rate increase in the premiums for your policy.”
“A.M. Best has downgraded its rating of (NAME OF INSURANCE COMPANY) financial strength to C++ in September 2019, indicating A.M. Best’s view that (NAME OF INSURANE COMPANY) has marginal ability to meet its ongoing insurance obligations.”
“Please be aware that as of 06/06/21 over the next 3-6 years we are planning to seek additional rate increases of up to 250% for lifetime benefits”
This creates a very difficult decision for the policyholder to either:
Keep the policy and pay the higher premiums
Cancel the policy
Make adjustments to the current policy to make it more affordable in the short-term
These Policies Are Not Cheap
In most cases, these long-term care insurance premiums were not cheap to begin with. Prior to these premium increases, it was not uncommon for a robust policy in New York to cost between $2,500-$4,000 per year, per person. LTC policies tend to carry a higher cost because they have a higher probability of paying out when compared to other types of insurance policies. For example, with life insurance, they expect you to pay your premiums, you live a long happy life, and the insurance policy never pays out. Compare this to the risk of a long-term event, where in 2021 HealthView Services produced a study that stated:
“An Average healthy 65-year-old couple living to their projected actuarial longevity has a 75% chance that one partner will require a significant level of long term care. There is a 25% probability that both partners will need long-term care” (source: Think Advisor)
Couple that with the fact that long-term care expenses are very high and insurance companies have to charge more in premiums to balance the dollars in versus dollars out.
With these premium increases now in play, some retired couples are faced with a situation where they previously may have been paying $5,000 per year for both policies and they find out their premiums are going up by 70%, increasing that annual cost to $8,500 per year.
Affordability Issue
So what happens when a retired couple, on a fixed amount of income, gets one of these letters, and realizes they can’t afford the premium increase. They essentially have two options:
Cancel the policy
Make amendments to the policy (if the insurance company allows)
Let’s start off by looking at the amendment option. Many insurance companies, in exchange for a lower premium increase, may allow you to reduce the benefits offered by the policy to make it more affordable. You may have options like
Extending the elimination period
Reducing inflation riders
Reducing the daily benefit
Reducing the maximum lifetime benefit
Reducing home care options
These are just some of the adjustments that could be made, but remember, you are taking what you have now, and watering it down to make it more affordable. Caution, at some point you have to ask yourself:
“If I reduce the benefits of this policy, will it provide me enough coverage to meet my financial needs should I have a long-term event?”
If the answer is “No”, then you may have to look more closely at the option of canceling the policy. But what happens if you cancel the policy and you are now exposed to the financial risk of a long-term care event? Answer, you will have to identify another financial strategy to manage that risk. Two of the most common that we have implemented for clients are
Self-insuring
Setting up Medicaid trusts
Self-Insuring Alternative
The way this solution works is you are essentially setting money aside for yourself, acting as your own insurance company, should a long-term care event arise later in life, you will have money set aside to pay those expenses. If you were previously paying an insurance company $4,000 per year for your LTC policy, then cancel the policy, you would set up a separate investment account where you continue to deposit the amount of the premium payments that you were previously making each year so there will be a pool of assets to draw from should a long-term event arise.
But, you have to run projections to determine how much money is estimated to be in those accounts at future ages to make sure it is sufficient to cover enough of those costs that it won’t put you in a tough financial situation later on. There is an upside benefit to this strategy that if you never have a long-term care event, there are assets sitting there that your beneficiaries could inherit. If instead that money was going toward long-term care insurance premiums and there’s not a long-term care event, all that money has essentially been wasted. However, this strategy does take more planning because your self-insurance strategy may be not cover the same dollar for dollar amount that your LTC policy would have covered if a long-term care event arises.
Medicaid trust
Understanding how Medicaid trusts works is a whole article in itself and we have a video dedicated just to this topic. But the general idea behind the strategy is this, if you have a long-term event and you do not have a LTC insurance policy, you essentially have to spend through all of your countable assets to pay for your care. Note, the annual costs of assisted living or a nursing home is often $100,000+ per year. For those that do not have assets, Medicaid will often pay for the cost of assisted-living or nursing home care. By setting up a trust and placing your assets in a trust ahead of time, if those assets are owned by the trust for a specific number of years, if there is a long-term care event, you do not have to spend those assets down, and Medicaid picks up the tab for your care. Like I said, there’s a lot more detail regarding the strategy and if you’d like to know more watch this video:
Medicaid Trust Video: https://www.youtube.com/watch?v=iBVQtrGiUso
Future Premium Increases
You also have to include in your analysis the risk of future premium increases which seem likely. These letters from the insurance companies themselves state that they may have to increase premiums by a lot more just to stay in business. So it’s not just evaluating the current premium increase in these situations but also considering what decisions you could face within the next 5 – 10 years if the premiums double again. This variable can definitely influence the decisions that you are making now.
Why Are These Premium Increases Happening?
This is a 20 year problem in the making. For decades insurance companies have miscalculated how long people were going to live and the rising cost of long-term care. Since they weren’t charging enough at the onset of these policies, they have not collected enough in insurance premiums to cover the insurance claims that are now being filed by policyholders. Thus, the policyholders that currently have policies are now being required to pay more to make up for those underwriting mistakes.
The second issue is that there is less competition in the long term care insurance market. Insurance companies in general do not want to issue policies in a sector of the market where the probability of a payout is high and the dollar amount of the payout is also high; they want to operate in sectors of the market where the probability of a payout is low so they get to just keep your premium payments. Many insurance companies have completely exited the Long Term Care Insurance market. For example, in New York state, there are only two insurance companies remaining that are issuing traditional long-term care policies. Less competition, higher prices.
The third issue is due to the dramatic rise in the annual premium amounts, they have become less affordable for new policyholders. Many retirees can’t afford to pay $4,000+ per year for each spouse’s LTC policy so the issuance of new policies is dropping; that again, saddles the current policy holders with the premium increases.
A Difficult Decision
For all of these reasons, if you are currently a holder of a LTC insurance policy, instead of just blindly paying the higher premiums, it really makes sense to evaluate your options with the anticipation that the premiums may continue to increase in the future. For those that decide to amend their policy to reduce the cost, you really have to evaluate if the policy covers enough going forward to make it worth continuing on with the policy. I strongly recommend seeking professional help with this decision. Professionals in the industry can help you evaluate your options because these decisions can be irreversible and the right solution will vary individual by individual.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
DISCLOSURE: This material is for informational purposes only. Neither American Portfolios nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions. Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. Investment advisory services offered through Greenbush Financial Group, LLC. Greenbush Financial Group, LLC is a Registered Investment Advisor. Securities offered through American Portfolio Financial Services, Inc (APFS). Member FINRA/SIPC. Greenbush Financial Group, LLC is not affiliated with APFS. APFS is not affiliated with any other named business entity. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Guarantees apply to certain insurance and annuity products (not securities, variable or investment advisory products) and are subject to product terms, exclusions and limitations and the insurer's claims-paying ability and financial strength. Before investing, consider the investment objectives, risks, charges, and expenses of the annuity and its investment options. Please submit using the same generated coversheet for this submission number. Potential investors of 529 plans may get more favorable tax benefits from 529 plans sponsored by their own state. Consult your tax professional for how 529 tax treatments and account fees would apply to your particular situation. To determine which college saving option is right for you, please consult your tax and accounting advisors. Neither APFS nor its affiliates or financial professionals provide tax, legal or accounting advice. Please carefully consider investment objectives, risks, charges, and expenses before investing. For this and other information about municipal fund securities, please obtain an offering statement and read it carefully before you invest. Investments in 529 college savings plans are neither FDIC insured nor guaranteed and may lose value.
How Much Does Your Car Insurance Increase When You Add A Teenager To Your Policy?
How much will the cost of your car insurance increase once you add a teenager to your policy. Here are a few strategies for reducing the cost……
You have probably heard the phrase “kids are expensive“. That phrase takes on a whole new meaning when you find out how much your car insurance is going to increase when you add your teenage child to your policy. In this article I’m going to share with you:
How much you can expect your car insurance premiums to increase when a teenager is added
What does the insurance company look at when determining the premium?
Are car insurance premiums higher for males or females?
Ways to reduce the cost
How much does the cost go up if they get into a car accident?
When your child turns 18, should you move them to their own policy?
Coverage mistakes
Ruger Personal Note: I have an 18 year old daughter that we added to our auto policy about a year ago. The two main things that I have learned so far are:
The cost increase was higher than I expected
New drivers hit stuff with their cars
By the time my oldest daughter was 18, she had already hit a deer, a post, and my car which was parked in our driveway. Yea, that last one was a rough day because I had to fix both cars. I’m writing this article because there are strategies that you can implement to reduce the cost of the insurance for your children and it’s also important to understand the liability that you take on by having a new driver on your policy.
How Much Does Your Car Insurance Increase?
The million dollar question: How much is your car insurance premium going to increase once you add your child to the policy?
Like so many other things in life, there is not a 100% straight answer because it depends on a number of variables such as:
Credit Score of the parents
Driving record of the parents
Will they have their own car or sharing a car with their parents?
What type of car will they be driving?
What state do you live in?
Coverage limits of the policy
The Insurance company issuing the policy
But let me give you a base case scenario to work with before we get into discussing all of the variables that factor into the premium calculation. In this example we have:
A 16 year old driver that is being added to their parent’s auto policy
Parents have a good credit score
Parents both have good driving records
Your child will have their own 2016 Honda Civic to drive
The annual INCREASE in your auto insurance premium may be between $1,000 - $1,500. This is more of a best case scenario. If the parents have poor credit scores or poor driving records, the premium could increase by $3,000+ per year in some cases. To get a better idea of where you might fall within this wide spectrum, let’s look at the variables that influence the cost of auto insurance when a new driver is added.
Credit Score of the Parent
I was surprised to learn that the credit score of the parents is one of the largest factors that many insurance companies use to determine the amount of the premium increase. They have apparently identified a trend that parents that are financially responsible tend to have children that are less likely to get in car accidents. Even though this will not be true for all families, insurance companies have accumulated a lot of data over a long period to reach these conclusions.
This brings us to our first strategy for reducing the cost of the car insurance for your children. If the parents are able to improve their credit score before adding the child to their auto policy, it could reduce the premium increase. There are many ways to do accomplish this but it is beyond the scope of this article. However, here is a good article from Nerd Wallet that can help.
The Parents Driving Record
This one is pretty self-explanatory. If the parents have a lot of marks on their driving records such as multiple accidents or speeding tickets, it could make the premium increase higher when you go to add your child to the policy. Again, the insurance company must have made a connection between the driving behavior of the parents and the driving behavior of their children.
Are car insurance premiums higher for males or females?
The answer to this one is “it depends on what insurance company you go with”. Some insurance companies do charge more depending on whether you are adding a son or a daughter to your policy, others do not. How do you know which insurance companies are gender bias? You can either ask the insurance company directly if it influences the premium or you engage the services of an independent insurance agency that knows the underwriting criteria of each insurance company.
Will The New Driver Have Their Own Car?
Another big factor in the insurance cost will be what vehicle your teenager will be driving. If you are adding a new driver to your policy and adding an additional car to your policy as well, the premium increase will obviously be larger than if you are just adding a new driver who will be driving the current cars listed on your policy. In the Honda Civic example above, adding the car and the new driver increased the annual premium by $1,000 - $1,500. If you are adding the new driver to your current policy but they will be co-driving a car with you, the premium may only increase a few hundred dollars but it depends on the value of the cars that you drive.
A Driver Assigned To Each Car
I asked about a work around here. Let’s say there are 2 parents and 1 child. If you add a third car to your policy for the new driver, most insurance carriers do not allow you to say that two of the cars belong to Parent A, the third car to Parent B, and the child shares each of the three cars. If there are 3 cars and 3 drivers covered by the policy, the insurance company typically wants to assign a “primary driver” to each vehicle listed on the policy.
NOTE: Be careful when you add new drivers to your policy. Make sure you provide them with clear direction as to who the primary driver is for each vehicle. If you buy your child a car and you drive a more expensive car than your child, you don’t want the insurance company assigning your child as the primary driver to your car which could result in a larger increase in the annual premium. It’s worth taking the time to review your auto policy after any changes have been made.
Not telling the insurance company about the new driver
Unfortunately, some families may decide not to tell their insurance company about the new driver in the family. Not a good idea. This opens you up to a whole host of liability issues. While car insurance does “follow the car”, meaning whoever is driving your car will most likely be covered in some fashion by your auto policy, however, if there is a claim and the insurance company finds out that you intentionally did not add the new driver to your policy, they may pay the claim, but they may also drop your coverage after that.
Ways To Reduce The Cost
There are a number of ways that you may be able to reduce the cost of the insurance for your teenager:
Defensive Driving Course
Good Student Discount
Student Away from Home Discount
Removing collision coverage on an older car
Notice I did not mention anything about Drivers Education. I was surprised to find out that in New York, more insurance carriers no longer offer a discount for the child completing a Drivers Ed course. Some carriers offer the “Good Student Discount” which provides a small discount for students that maintain over a certain GPA. The “Student Away From Home” discount is for children that go away to college, they are not allowed to bring their cars, but they will be driving when they come home for breaks. With this discount, the insurance company is recognizing that they will be driving less in that situation. Having your child complete a defensive driving course can decrease the premium and many of these courses are now available online.
Removing collision coverage on an older car can also reduce the cost of the coverage. If your child is driving a car that is worth $5,000 and you feel like you are in a position financially to replace that car if you needed to, then you may elect to waive collision coverage on the car which can lower the premium. For vehicles of higher value, this is a larger risk, and if there is a car loan against the car, most lenders will require you to maintain collision coverage until the loan is paid off.
Moving Your Child To Their Own Car Insurance Policy
One of the questions I asked the insurance agent was:
“When does it make sense for the child to obtain their own car insurance policy as opposed to being covered under their parent’s policy?”
The general rule of thumb is if your children are still living at home, in many cases it will make sense, from a cost standpoint, to keep them covered under your policy. If you want your child to be responsible for the car insurance payment, you can just charge them for their share of the coverage.
One of the largest discounts that most insurance carriers offer is a “multi vehicle discount” while could reduce the annual cost of the car insurance by around 25% for some carriers. So, let’s say that the Honda Civic for your child costs $1,000 per year under your policy, if your child goes and obtains their own insurance policy, they will lose the multi car discount that you are receiving under your policy, and it could increase their cost by 25%.
Also, remember that I mentioned before that the parents credit score can be a big factor in determining the amount of the auto premium for their child’s coverage. Most young adults have little to no credit history so if they go to obtain their own insurance policy, it could increase the cost. Previously, they may have been benefiting from their parent’s strong credit scores and driving history which leads me to my next planning tip. At some point, your child will leave home, and they will obtain their own car insurance policy. As a parent, you can help them but encourage them to begin establishing some credit history early on so when they go to obtain their first car insurance policy, they have a good credit score, and it could reduce that annual expense.
How Much Does The Cost Increase If They Get Into A Car Accident?
I’ll go back to my original point that “new drivers hit stuff”. There is a high likelihood that the new driver in your family is going to hit a mailbox, a garbage can backing out of the driveway, another car, or one of their friends could hit their car in a high school parking lot. When these life events happen, the question becomes, how much are your car insurance premiums going to increase? Does $1,000 go to $3,000 per year? The answer unfortunately is it depends on what happened. The size of the insurance claim can influence the amount of the premium increase.
With any damage to a vehicle, you have three options:
Don’t fix it
Pay to fix it out of pocket
Submit an insurance claim and fix it
The first question to answer in this analysis is “what is your deductible?” It’s common for car insurance policies to have deductibles which means when you submit a claim, you must pay a certain amount out of pocket before the insurance company picks up the rest; a $500 deductible is common. So, if your child hits something, does some minor damage, and the total cost to fix it is $600, if your deductible is already $500, submitting an insurance claim will only pay $100, and you run the risk of your annual insurance premiums increasing. It may be better to just pay the $600 out of pocket instead of submitting the insurance claim.
If there is more significant damage like $3,000+, it may make sense to just submit the claim, pay the deductible, and let the insurance company pay for the rest. My friend that is in the insurance industry will remind people, “This is why you have insurance….use it.”
It’s a more difficult decision when the dollar amount of the fix is somewhere in the middle of these examples. If the car has $1,000 of damage but you have a $500 deductible, what should you do? This is where having an independent insurance broker can help. You can call your broker, explain the situation, and they may be able to provide you with an estimate of how much your insurance premium will increase each year if you submit the claim, then you can make an informed decision based on that information.
Know Your Coverage
All car insurance policies are not the same!! While, of course, everyone wants their car insurance premium as low as possible, do not make the mistake of just blindly running to the lowest cost option. Lower cost can mean lower coverage. The day that your child gets into a car accident is going to be a very bad day. That day will get even worse if your child hits a $75,000 Tesla and you find out that your auto policy only covers $25,000 of property damage so you are on the hook for the other $50,000!!! Make sure you are not being sold a watered-down car insurance policy that will open you up to gaps in coverage. You may have saved $400 per year on the insurance premium but when an accident happens, you could be out of pocket $10,000+.
Two more points to make about knowing your coverage:
No one ever gets up in the morning and says “I’m going to get into a car accident today”
New drivers hit stuff
Thank You to HMS Agency
I want to send out a special thank you to Steve Mather, a partner at HMS Agency, for helping me collect the information that I needed to write this article. As a financial planner, I enjoy helping people to save money, but I know very little about the inner workings of car insurance which is why I rely on experts like Steve and his team.
This information is for educational purposes only. For information specific to your insurance needs, please contact a licensed insurance agent.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
DISCLOSURE: This material is for informational purposes only. Neither American Portfolios nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions. Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. Investment advisory services offered through Greenbush Financial Group, LLC. Greenbush Financial Group, LLC is a Registered Investment Advisor. Securities offered through American Portfolio Financial Services, Inc (APFS). Member FINRA/SIPC. Greenbush Financial Group, LLC is not affiliated with APFS. APFS is not affiliated with any other named business entity. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Guarantees apply to certain insurance and annuity products (not securities, variable or investment advisory products) and are subject to product terms, exclusions and limitations and the insurer's claims-paying ability and financial strength. Before investing, consider the investment objectives, risks, charges, and expenses of the annuity and its investment options. Please submit using the same generated coversheet for this submission number. Potential investors of 529 plans may get more favorable tax benefits from 529 plans sponsored by their own state. Consult your tax professional for how 529 tax treatments and account fees would apply to your particular situation. To determine which college saving option is right for you, please consult your tax and accounting advisors. Neither APFS nor its affiliates or financial professionals provide tax, legal or accounting advice. Please carefully consider investment objectives, risks, charges, and expenses before investing. For this and other information about municipal fund securities, please obtain an offering statement and read it carefully before you invest. Investments in 529 college savings plans are neither FDIC insured nor guaranteed and may lose value.
How Much Life Insurance Should You Have? Top 8 Factors
When we are assisting clients in building their personal financial plan, inevitably one of the most frequent questions that comes up is: “How much life insurance should I have?”
how much life insurance do you need
When we are assisting clients in building their personal financial plan, inevitably one of the most frequent questions that comes up is: “How much life insurance should I have?” It's an important question to ask because if something unexpected were to ever happen to you or your spouse, it could put your family in a very difficult financial situation. To help mitigate this risk, people buy life insurance to guard against this type of unfortunate event but it’s important to know how much life insurance protection you should have. If you have too little, the coverage might not be enough to meet your family’s financial needs. If you have too much, you might be wasting money on insurance that you don’t need.
In this article we're going to go over the top 8 variables that factor into how much life insurance you should have, as well as, what type of insurance might make sense for you.
#1: Amount of Debt
First, you should tally up the total value of all of your outstanding debt.
Mortgage
Student Loans
HELOC
Credit Cards
Car Loans
Any other debt…………..
If you have dependents and something were to happen to you, the goal is to minimize the future annual expenses for your family. If you are married and you are used to having two incomes in the household to pay the mortgage, student loans, and car loans, if one spouse passes away, the family loses that income stream and it could be very difficult to meet the monthly payment on the debt with only one income. The life insurance would payout at the death of the insured spouse and those proceeds can be used to wipe out all of the debt which in turn reduces the monthly expense burden on the family.
#2: Income Level of Each Spouse
If you are married, the income level of each spouse will factor into how much life insurance each spouse should have. If spouse 1 makes $200K per year and spouse 2 makes $40K per year, typically you will need more insurance on spouse 1 than spouse 2. If Spouse 1 passes away, over the next 5 years, that’s $1 million in income that would need to potentially be replaced ($200K x 5 Years). However, if spouse 2 passes away, there would only need to be $200K to cover the next 5 years of income ($40K x 5 years).
A common mistake that married couples make is they blindly go in and purchase two insurance policies with the same death benefit without taking the different income levels into account. For possibly the same combined premium amount, in many but not all cases, couples can be better served by shifting more of the insurance coverage to the spouse with the higher income.
#3: Future College Expenses
If you have children and you expect those children to attend college, if you do not expect to receive large amounts of need based financial aid, it's important to factor in future college expenses into the amount of the insurance coverage. If you have 3 children and you planned on paying for their first 4 years of college, assuming college tuition with room and board is $25,000 per year, that’s $100,000 per child, multiplied by 3, for a grand total of $300,000 in anticipated college costs.
#4: Household Expenses
Everyone has a different lifestyle. One couple that has a combined income of $300,000 may need $250,000 to support household expenses if one of the spouses were to pass away. But another couple making the same $300,000 per year may only need $150,000 per year in income to support the household if one of the spouses passes away. You have to determine how your annual expenses would be impacted based on the untimely death of each spouse.
#5: Outside Savings
The amount of wealth that you have already accumulated absolutely factors into the amount of insurance that you may need. For example, if you sold your business and have $2 million in cash and non-retirement investment accounts, you may essentially be self-insured, meaning if something happened to you, you have accumulated enough savings to meet all of your family’s future financial needs without the need for additional insurance coverage.
However, if you and your spouse are both below the age of 50, have 2 children, and all of your wealth is tied up in 401(k)’s or retirement accounts, if you or your spouse were to pass away, the surviving spouse would have to withdrawal that money from the retirement accounts to meet expenses and pay tax on those distributions. So that $200,000 in their 401(K) may only be $150,000 after the taxes are paid but it depending on your tax bracket. By comparison, personal life insurance policies that you pay for out of pocket, the insurance proceeds are received tax free when paid to your beneficiaries.
So it’s not just a question of how much you have accumulated but also how accessible are those assets to your beneficiaries if they need to use those assets to supplement their income.
#6: Retirement Savings
You also have to consider the impact of an untimely death of a spouse on your retirement projections. If you or your spouse are covered by an employer sponsored retirement plan, like a 401(k) or 403(b), your retirement projections probably have you both making those regular annual contributions up until your retirement date. If one spouse passes away, those retirement contributions that were supposed to be there, no longer will be, which could force the surviving spouse to work longer than they wanted too.
You have to pay close attention to individuals that have pensions. Some pensions require the employee to turn on their pension benefit to reserve the survivor benefit for their spouse. If the employee passes away prior to their pension start date, the generous pension benefit which the family was depending on could be replaced by a much lower lump sum death benefit. In addition, retirees that elect a pension benefit with no survivor benefits to their spouse will sometimes use life insurance to cover the risk that they pass away and the pension stops within the early years of retirement.
#7: Adult Children with Disabilities
For families that have adult children with disabilities, it's not uncommon for the parents to be providing some form of continued financial support for their disabled child for the duration of their adulthood. If the parents were to pass away, the concern is that there has to be enough assets inherited by the child to provide them with support for the remainder of their life. Parents will often set up a Special Needs Trust to serve as the beneficiary of these life insurance policies so if the policies do payout it does not jeopardize the Social Security, Medicaid, Medicare or other government assistance that the disabled child may be receiving.
#8: Estate Plan
For some clients, it’s part of their estate plan that no matter what happens they want to know that $500,000 will go to each child, their favorite charity, to a trust for their grandchildren, or for clients with larger estates to pay the anticipated estate tax. To guarantee that those amounts will be available to meet their estate wishes, individuals can purchase permanent life insurance that will payout at the death of the insured.
Case Study
Let's run through a simple example given the following fact set:
Spouse 1 Income: $200,000 (Age 30)
Spouse 2 Income; $50,000 (Age 31)
Children: Susan Age 4 and Rebecca Age 2
Mortgage: $250,000
Student Loans: $20,000
The couple above has the college savings goal to pay for the first 4 years of the kid’s college expenses which is anticipated to be $25,000 per year.
Total Debt: $270,000
Total Estimated Future College Expense: $200,000 ($25K per year for each child)
From an income replacement standpoint, we would be looking to provide this family with a minimum of 5 years of income replacement. For the coverage on Spouse 1 that would be:
$200K Annual Income x 5 Years = $1M
Total Debt and College Costs = $470K
Total Insurance Coverage on Spouse 1: $1.5M (round up)
For the coverage on Spouse 2 that calculation would be: $50K Annual Income x 5 Years = $250KTotal Debt & College Costs = $470KTotal Insurance Coverage on Spouse 2 = $750K (round up)
How Much Does Insurance Cost?
In general, term insurance is cheap and permanent insurance is more expensive. For 90% of the individuals that we work with for their financial plan, term insurance typically makes the most sense. To give you an idea, a $1M 30 Year Term policy with William Penn Insurance Company, for an individual with the following fact set:
Age 30
Gender: Male
Resident of New York
Non-Smoker
Preferred Health Class
The monthly premium would only be $70.46 per month as of July 2020.
New York Residents: We Can Help
Michael Ruger & Rob Mangold are independent insurance agents which means we are not tied to a single insurance company. If you are a resident of New York, we can consult with you, help you to determine the amount of insurance that you need, evaluate you current life insurance coverage, and run free quotes for you across the major life insurance carriers in NY to determine the most appropriate carrier for your insurance policy. Contact Us
Michael Ruger
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
How Pension Income and Retirement Account Withdrawals Can Impact Unemployment Benefits
How Pension Income and Retirement Account Withdrawals Can Impact Unemployment Benefits As the economy continues to slow, unemployment claims continue to rise at historic rates.
How Pension Income and Retirement Account Withdrawals Can Impact Unemployment Benefits
As the economy continues to slow, unemployment claims continue to rise at historic rates. Due to this expected increase in unemployment, the CARES Act included provisions for Coronavirus related distributions which give people access to retirement dollars with more favorable tax treatment. Details on these distributions can be found here. With retirement dollars becoming more accessible with the CARES Act, a common question we are receiving is “Will a retirement distribution impact my Unemployment Benefits?”.
Unemployment Benefits vary from state to state and therefore the answer to this question can be different depending on the state you reside in. This article will focus on New York State Unemployment Benefits, but a lot of the items discussed may be applied similarly in other states.
The answer to this question also depends on the type of retirement account you are receiving money from so we will touch on the most common.
Note: Typically, to qualify for unemployment insurance benefits, you must have been paid minimum wage during the “base period”. Base period is defined as the first four quarters of the last five calendar quarters prior to the calendar quarter which the claim is effective. “Base period employer” is any employer that paid the claimant during the base period.
Pension Reduction
Money received from a pension that a base period employer contributed to will result in a dollar for dollar reduction in your unemployment benefit. Even if you partially contributed to the pension, 100% of the amount received will result in an unemployment benefit reduction.
If you were the sole contributor to the pension, then the unemployment benefit should not be impacted.
Even if you are retired from a job and receiving a pension, you may still qualify for unemployment benefits if you are actively seeking employment.
Qualified Retirement Plans (examples; 401(k), 403(b))
If the account you are accessing is from a base period employer, a withdrawal from a qualified retirement plan could result in a reduction in your unemployment benefit. It is common for retirement plans to include some type of match or profit-sharing element which would qualify as an employer contribution. Accounts which include employer contributions may result in a reduction of your unemployment benefit.
We recommend you contact the unemployment claims center to determine how these distributions would impact your benefit amount before taking them.
IRA
No unemployment benefit rate reduction will occur if the distribution is from a qualified IRA.Knowing there is no reduction caused by qualified IRA withdrawals, a common practice is rolling money from a qualified retirement plan into an IRA and then accessing it as needed. Once you are no longer at the employer, you are often able to take a distribution from the plan. Rolling it into an IRA and accessing the money from that account rather than directly from the retirement plan could result in a higher unemployment benefit.
About Rob……...
Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.
How Much Life Insurance Do I Need?
Do you even need life insurance? If you have dependants to protect and you do not have enough savings, you will most likely need life insurance. But the question is how much should I have? Well, your home will be one of your biggest assets, and in some cases the money that it makes from its sale when you have passed away is a significant inheritance
How Much Life Insurance Do I Need?
Do you even need life insurance? If you have dependants to protect and you do not have enough savings, you will most likely need life insurance. But the question is how much should I have? Well, your home will be one of your biggest assets, and in some cases the money that it makes from its sale when you have passed away is a significant inheritance for your children.
If you do not have dependents or you have enough savings to cover the current and future expenses for your dependents there really is no need for life insurance. Life insurance sales professional can be very aggressive with their sales tactics and sometime they mask their services as "financial planning" but all of their solutions lead to you buying an expensive whole life insurance policy.
Remember, life insurance is simply a transfer of risk. When you are younger, have a family, a mortgage, and are just starting to accumulate assets, the amount of life insurance coverage is usually at its greatest. But as your children grow up, they finish college, you pay your mortgage, you have no debt, and you have accumulated a good amount in retirement savings, your need to transfer that risk diminishes because you have essentially become self-insured. Just because you had a $1M dollar life insurance policy issued 10 years ago does not mean that is the amount you need now.
Which kind of insurance should you get?
It's our opinion that for most individuals term insurance makes the most sense. Insurance agents are always very eager to sell whole life, variable life, and universal life policies. Why? They pay big commissions!! When you compare a $1M 30 year term policy and a $1M Whole Life policy side by side, often times the annual premium for whole life insurance is 10 times that amount of the term insurance policy. Insurance agents will tout that the whole life policy has cash value, you can take loans, and that it's a tax deferred savings vehicle. But often time when you compare that to: "If I just bought the cheaper term insurance and did something else with the money I would have spent on the more expensive whole life policy such as additional pre-tax retirement savings, college savings for the kids, paying down the mortgage, or setting up an investment management account, at the end of the day I'm in a much better spot financially."
How much life insurance do you need?
The most common rule of thumb that I hear is "10 times my annual salary". Please throw that out the window. The amount of insurance you need varies greatly from individual to individual. The calculation to reach the answer is fairly straight forward. Below is the approach we take with our clients:
How much debt do you have? This includes mortgages, car loans, personal loans, credit cards, etc. Your total debt amount is your starting point.
What are your annual expenses? Just create a quick list of your monthly expenses, they do not have to be exact, and our recommendation is to estimate on the high side just to be safe. Then multiply your monthly expense by 12 months to reach your "annual after tax expenses".
How much monthly income do you have to replace? If you are married, we have to look at the income of each spouse. If your monthly expenses are $50,000 per year and the husband earns $30,000 and the wife earns $80,000, we are going to need more insurance on the wife because we have to replace $80,000 per year in income if she were to pass away unexpectedly. Married couples make the mistake of getting the same face value of insurance just because. Look at it from an income replacement standpoint. If you are a single parent or provider, you will just look at the amount of income that is needed to meet the anticipated monthly expenses for your dependents.
Factor in long term savings goals and expenses. Examples of this are the college cost for your children and the annual retirement savings for the surviving spouse.
Example:
Husband: Age 40: Annual Income $70,000
Wife: Age 41: Annual Income $70,000
Children: Age 13 & 10
Total Outstanding Debt with Mortgage: $250,000
Total Annual After Tax Expenses: $90,000
Savings & Investment Accounts: $100,000
Remember there is not a single correct way to calculate your insurance need. This example is meant to help you through the thought process. Let's look at an insurance policy for the husband. We first look at what the duration of the term insurance policy should be. Our top two questions are "when will the mortgage be paid off?" and "when will the kids be done with college?" These are the two most common large expenses that we are insuring against. In this example let's assume they have 20 years left on their mortgage so at a minimum we will be looking at a 20 year term policy since the youngest child will done with their 4 year degree within the next 12 years. So a 20 year term covers both.
Here is how we would calculate the amount. Start with the total amount of debt: $250,000. That is our base amount. Then we need to look at college expense for the kids. Assume $20K per year for each child for a 4 year degree: $160,000. Next we look at how much annual income we need to replace on the husband's life to meet their monthly expense. In this example it will be close to all of it but let's reduce it to $60K per year. It is determined that they will need their current level of income until the mortgage is paid in full so $60,000 x 20 Years = $1,200,000. When you add all of these up they will need a 20 year term policy with a death benefit of $1,610,000. But we also have to take into account that they already have $100,000 in savings and their levels of debt should decrease with each year as time progresses. In this scenario we would most likely recommend a 20 Year Term Policy with a $1.5M death benefit on the husband's life.
The calculation for his wife in this scenario would be similar since they have the same level of income.
Michael Ruger
About Michael.........
Hi, I'm Michael Ruger. I'm the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
