1. personal financial planningWeb definitions1. A financial adviser is a professional who renders financial services to clients. According to the U.S. ...

Definition of 'Personal Finance'

All financial decisions and activities of an individual, this could include budgeting, insurance, savings, investing, debt servicing, mortgages and more. Financial planning generally involves analyzing your current financial position and predicting short-term and long-term needs

'Personal Finance'

Personal finance looks at how your money and future is managed. Often individuals will seek advice from financial planners, but the use of software or websites is also an option. For example personal finance would include monitoring your spending, budgeting for an emergency fund, and paying down debt.

1. Personal finance is defined as the management of money and financial decisions for a person or family including budgeting, investments, retirement planning and investments.Components to Personal Financial Planning Financial position: Your net worth (your household assets minus your household liabilities) and your household cash flow (your expected yearly income minus your expected yearly expenses). Adequate Protection: An understanding of how a household can be protected in event of an emergency such as natural disasters and death. Tax Planning: Lowering tax costs through tax reduction programs. Investment and Accumulation Goals: Planning and investing for financial goals, whether it is for a new house or to have a certain amount of profit from stocks. Retirement Planning: Planning for your or your families' retirement, knowing that you are going to be financially secure enough to retire at the time that you want to do so. Estate Planning: Planning for what will happen when you die, and planning for the tax due to the government at that time.a. An example of personal finance is knowing how to budget, balance a checkbook, obtain funds for major purchases, save for retirement, plan for taxes, purchase insurance and make investments.a. An example of personal finance is if you sit down with your spouse and plan out your spending for the mortage or the kids' college tuitions.a. An example of personal finance is debating whether or not to save five dollars or to spend it on a cup of coffee.

What Is Financial Planning?Financial planning is the process of meeting your life goals through the proper management of your finances. Life goals can include buying a home, saving for your childs education or planning for retirement. The financial planning process involves the following steps: Gathering relevant financial information Setting life goals Examining your current financial status Coming up with a financial strategy or plan for how you can meet your goals Implementing the financial plan Monitoring the success of the financial plan, adjusting it if necessary Using these steps, you can determine where you are now and what you may need in the future in order to reach your goals.What Are the Benefits of Financial Planning?Financial planning provides direction and meaning to your financial decisions. It allows you to understand how each financial decision you make affects other areas of your finances. For example, buying a particular investment product might help you pay off your mortgage faster, or it might delay your retirement significantly.By viewing each financial decision as part of a whole, you can consider its short and long-term effects on your life goals. You can also adapt more easily to life changes and feel more secure that your goals are on track.Can You Do Your Own Financial Planning?Some personal finance software packages, magazines or self-help books can help you do your own financial planning. However, you may decide to seek help from a professional financial planner if: You need expertise you dont possess in certain areas of your finances. For example, a planner can help you evaluate the level of risk in your investment portfolio or adjust your retirement plan due to changing family circumstances. You want to get a professional opinion about the financial plan you developed for yourself. You dont feel you have the time to spare to do your own financial planning. You have an immediate need or unexpected life event such as a birth, inheritance or major illness. You feel that a professional adviser could help you improve on how you are currently managing your finances. You know that you need to improve your current financial situation but dont know where to start.

Financial planning process

The financial planning process consists of the six steps listed below. While many financial planners are knowledgeable on a number of financial planning topics, some choose to focus their business on only some financial areas or on only a few steps of the financial planning process. Before you hire a financial planner, you should receive information that describes the specific services you can expect to receive.1. Establishing and defining the client-planner relationship.The financial planner should clearly explain or document the services to be provided to you and define both his and your responsibilities. The planner should explain fully how he will be paid and by whom. You and the planner should agree on how long the professional relationship should last and on how decisions will be made.2. Gathering client data, including goals.The financial planner should ask for information about your financial situation. You and the planner should mutually define your personal and financial goals, understand your time frame for results and discuss, if relevant, how you feel about risk. The financial planner should gather all the necessary documents before giving you the advice you need.3. Analyzing and evaluating your financial status.The financial planner should analyze your information to assess your current situation and determine what you must do to meet your goals. Depending on what services you have asked for, this could include analyzing your assets, liabilities and cash flow, current insurance coverage, investments or tax strategies.4. Developing and presenting financial planning recommendations and/or alternatives.The financial planner should offer financial planning recommendations that address your goals, based on the information you provide. The planner should go over the recommendations with you to help you understand them so that you can make informed decisions. The planner should also listen to your concerns and revise the recommendations as appropriate.5. Implementing the financial planning recommendations.You and the planner should agree on how the recommendations will be carried out. The planner may carry out the recommendations or serve as your "coach," coordinating the whole process with you and other professionals, such as attorneys or stockbrokers.6. Monitoring the financial planning recommendations.You and the planner should agree on who will monitor your progress towards your goals. If the planner is in charge of the process, she should report to you periodically to review your situation and adjust the recommendations, if needed, as your life changes

Step 1: Gatheringand discussing your financialinformationThis includesgatheringinformation on your financial and relevant non-financial situation.Step 2: Understanding your goalsThis step is meant to identifyand priorities through discussions with you what you would like toachieve in terms of your financial and personal future.Step 3: Analysing the informationThe information gathered is analysed and research is conducted to determiningwhat your resources are and howtoapply them towardsyour goals.Step 4: Constructing a financial plan for youBased on the understanding of your future goals and your current financial status, we will develop strategies that outline options available to you towards achieving your goals. It is at this point that we mutually agree to proceed tothe next step.Step 5: Implementing the strategies in the planThe strategies outlined in the plan are implemented usingyour financialresources allocated for this purpose.Step 6: Reviewing the plan and strategies annually Periodic reviews are undertaken to ensure your plan stays on track and to make adjustments where your personal situation or maket conditions have changed.We understand that everyone has different needs. Our approach is not a one size fits all solution. We will take the time to ensure you receive a personalised solution that is particular to your needs and circumstances

InsuranceLife insuranceComing to Grips with Life Insurance

Life insurance is one of those things you know you should pay more attention to, but can never seem to get around to doing. Part of the reason is an unwillingness to deal with our own mortality. But the vast array of insurance choices also makes it difficult to make decisions. To help overcome these obstacles, consider these points:

Do you really need life insurance? The most common reason for purchasing life insurance is to ensure your family can maintain their standard of living after your death. Generally, your life insurance needs will be highest after you start a family and will decrease over time as your children grow and become independent.

However, life insurance can also serve other important purposes. If a major portion of your estate consists of illiquid assets, life insurance can provide funds for heirs to pay estate taxes without liquidating those assets. Even though the estate tax is scheduled to be repealed in 2010, it will be reinstated in 2011 unless further legislation is passed. You may also want to leave a large inheritance to heirs or a charitable contribution through life insurance proceeds. Business owners often use life insurance to buy out a deceased partner's heirs or to provide funds to pay estate taxes so the business does not have to be sold.

How much life insurance do you need? Various rules of thumb exist, such as purchasing five to seven times your current income, but they don't consider your personal situation. The amount of life insurance you need depends on your current net worth, the lifestyle you want to provide for your family, and other personal needs and desires. See the article "How Much Do You Need?" for more details.

What type of insurance should you purchase? There are two basic types - term and permanent. Term insurance provides protection only, with none of the premium set aside to build cash value. If you die during the policy's term, your beneficiary receives the policy's proceeds. However, you get nothing if the policy is canceled.

Permanent insurance accumulates, from premiums paid and investment earnings, a cash surrender value that is returned to you if you surrender the policy. Also, you can borrow the cash value through policy loans, although outstanding loans reduce the insurance proceeds when you die.

Carefully assess which type of insurance is preferable for you. When you are younger, term insurance premiums tend to be lower. However, the premiums typically increase over time. If you are insuring a need that is likely to go away, such as providing a standard of living for minor children, then term insurance may be more appropriate. Those insuring a permanent need, such as providing funds to pay estate taxes or to maintain a standard of living for a spouse, may want to consider permanent insurance.

How do you compare individual policies? Since life insurance companies offer so many different options, it can be difficult to compare several policies. Try following these steps: Compare only the same type of policy. For instance, don't compare a term policy to a variable life or whole life policy. Make sure the policies contain the same options and riders. If considering permanent insurance policies, review the assumptions used in the policy illustration, which shows the policy's projected value at some time in the future. Keep in mind that these illustrations are hypothetical and your value will depend on the policy's actual performance. Obtain illustrations based on three alternatives - the original illustration, one with an interest rate 1% lower than anticipated, and one with the minimum guaranteed rate. How do you assess the insurance company's financial strength? Since you may not receive benefits for many years, you should assess the insurance company's financial strength before purchasing the policy and periodically thereafter. A good place to start is with the ratings assigned by rating organizations, reviewing the ratings of at least two organizations. Familiarize yourself with each organization's rating systems, since the same grade from different organizations can mean different things.

A life insurance policy should be a long-term commitment, so spend the time up front to ensure you purchase a policy that adequately meets your needs.

How Much Insurance Do You Need?

This is a subject that most people would just prefer to ignore. After all, it requires you to face your own mortality and then make some hard decisions about how you want to provide for your family after your death. A recent study found that 39% of surviving families did not have any life insurance. Of those who had insurance, the average amount was just 2.1 times personal income. Thus, two-thirds of surviving spouses felt that there was a devastating or major impact on their family's personal situation after their spouse's death (Source: National Underwriter, July 5, 2004).

Many rules of thumb indicate how much life insurance you should purchase, such as five to seven times your annual income. While that might sound like a lot of insurance, it may actually understate your needs. In order to distribute the Victim's Relief Fund to surviving families of those lost on September 11, the U.S. Department of Justice estimated the economic loss for individuals, based on various ages, incomes, and number of dependent children. Their tables calculated settlements ranging from four times to as much as 50 times income. For instance, the loss for a married 40 year old with two minor children (newborn and nine years old) earning $150,000 annually was calculated as $2,822,558 (Source: U.S. Department of Justice). From those figures, other income sources were deducted, such as government benefits, investments, etc.

Thus, when calculating your life insurance needs, don't focus on rules of thumb. Rather, go through a detailed analysis of your insurance needs. In addition to the loss of your income, address issues such as: What standard of living do you want to provide for your dependents? Do you want to provide the same standard of living, including things like vacations and club memberships? Do you want to provide for college educations for your children? If your spouse doesn't work, do you want that lifestyle to continue. or do you expect your spouse to work after your death? If you expect your spouse to work, what is a reasonable amount of income to expect him/her to earn? Do you need to consider the support of elderly parents or other relatives? How long must your family live off the insurance proceeds? Will your current retirement fund provide enough income for your spouse to live on after retirement, or do you need to provide income until his/her death? Do you want to pay off a mortgage or other debt with insurance proceeds? Do you have estate tax considerations that you want to address with life insurance? Have you factored in a reasonable rate of inflation? Once you have thought through these issues, you can calculate an amount of life insurance that will help you achieve these goals.

Is There Still a Need for Second-to-Die Life?

Survivorship life insurance policies, also known as second-to-die life, insure two lives, with the insurance proceeds paid after the death of the second insured. This insurance is often used to provide financial liquidity to pay estate taxes after the death of the second spouse. But with the repeal of the estate tax slated for 2010, Is this insurance still needed?

Until 2010, the estate tax still exists. So unless you're positive you and your spouse won't die before then, you may still have a need for this type of insurance. After that, the estate tax will be eliminated in the year 2010, only to be reinstated in 2011 based on 2001 tax laws. Further legislation is required for permanent estate tax repeal, definitely not a certainty at this time. Thus, if you currently own second-to-die life insurance, you probably wouldn't want to cancel it until these issues are resolved. Whether you need to obtain a new second-to-die insurance policy is a more difficult decision.

Besides using these policies as a means to fund estate taxes, you may find them to be appropriate in other circumstances, including: Business owners wishing to leave the business to one child can use the policy proceeds to provide for children not involved in the business. The proceeds can be paid to a favorite charity, so the charity receives a substantial contribution without depriving heirs of estate assets. If both parents work, a second-to-die life insurance policy can ensure minor children are adequately provided for in the event both parents die. The premium for a second-to-die life insurance policy is typically less than comparable coverage on either individual life, since only one benefit will be paid. Coverage can usually be obtained for an uninsurable person as long as the other person is insurable. If the policy is properly structured, the proceeds can avoid both income and estate taxes.

Although not suitable for everyone, survivorship life can be an attractive planning tool to meet specific needs.Reevaluate Your Life Insurance at Retirement

As retirement age approaches, it's usually a good time to reassess your life insurance policies, since your needs may change then. With your children on their own and no earned income to replace, you may no longer need a large life insurance policy. Especially if your insurance premiums are high, you may be tempted to cancel the policy, take the cash surrender value, and enjoy retirement. Before you do so, make sure there aren't other uses for your life insurance policy. Some possibilities include: To leave a legacy to heirs Many people like the thought of leaving a large sum to their children or grandchildren. With an insurance policy in place, you can feel free to spend your retirement assets during your lifetime, knowing the insurance policy proceeds will be paid to your heirs after your death. If you have a large estate, the policy proceeds can be used to help pay estate taxes. To pay for college for grandchildren With the rapidly increasing costs of college making it more and more difficult for parents to cover this cost, you might want to use an insurance policy as a college fund for your grandchildren. If you're still alive when they start college, you might be able to borrow some of the cash surrender value to pay these costs. To support adult children There are a variety of reasons why you might want to provide financial help for an adult child. Perhaps your child is a doctor, but has significant debt from college. Or your child might work at a profession that doesn't pay much. To provide a large charitable contribution A life insurance policy can serve a couple of purposes when making a large charitable contribution. You can name the charity as the beneficiary of the policy. Or you can leave other assets to the charity that would have been included in your estate and possibly be subject to estate taxes. The proceeds of the life insurance policy, if properly structured, can then be paid to your heirs estate and income tax free. To help deal with long-term-care costs Many individuals don't purchase long-term-care insurance, believing their spouse will care for them. However, when one spouse dies, who will take care of the other spouse? The proceeds of a life insurance policy can be used to provide long-term care for the surviving spouse. To optimize pension benefits When retiring, irrevocable decisions about benefit payments from pension plans must typically be made. An individual life income option will pay higher benefits than a joint and survivor benefit, but then your spouse will not have pension benefits if you predecease him/her. You could use the proceeds of the life insurance policy as a source of income for your spouse after your death. While it is generally believed that life insurance needs decrease after retirement, there are a variety of reasons why you might want to retain your life insurance policy

Estate and Tax Planning for Qualified Plan Assets using Life Insurance

Executive Summary This article discusses and compares a wide range of planning options for maximizing and transferring qualified plan assets from a plan participant to his or her heirs. For demonstrative purposes, the focus of the article is on a hypothetical qualified plan participant, age 70, who does not require any portion of her $500,000 IRA to fund her retirement lifestyle. Her desire is to leave the IRA money to her heirs as efficiently as possible. The options reviewed herein range from simply taking required minimum distributions to purchasing life insurance inside a profit sharing plan. The article argues that the best technique for accomplishing the participant's goal is a combination of a qualified single premium annuity supported with permanent life insurance. Financial advisors and their clients should consider the numerous tax consequences of qualified plan ("QP") assets owned by wealthy individuals. A QP, due to long-term tax-deferred growth, is a beneficial and effective vehicle for asset accumulation. It is, however, a troublesome asset for a divestment minded QP participant with a large estate (defined in this article as one that is subject to federal estate tax and, possibly state succession tax). Not only is the QP owner (the "participant") compelled to take required minimum distributions ("RMDs") from the QP while he or she is living, but at death the remaining balance in the QP is subject to estate and income taxes. Many QP participants are unaware that the government is often the majority beneficiary of their QP. Without proper planning, a QP beneficiary may receive as little as 30 percent (depending on the federal estate tax, state succession tax, and the income tax rate of the beneficiary) of the QP's assets. The ability to offer solutions to this vexing problem creates an opportunity for tax and financial advisors. This article will address how financial products, including life insurance, can be part of the solution. It will also briefly discuss why two planning techniques, the so-called "Stretch IRA" and "Pension Rescue," may not be viable or desirable for many participants.

Current Tax Environment Tax and estate planning with QP assets requires flexibility in light of uncertainty concerning the estate tax; ambiguity regarding valuation of life insurance policies;1 and the future liquidity needs of the participant and/or the participant's heirs. Two QP planning strategies, the "Stretch IRA"2 (a technique for "Multi-Generational" planning) and Pension Rescue3 are not suggested herein as solutions. Stretch planning is best utilized where the participant's estate has adequate liquidity to pay the estate tax due on the QP, and where the heirs desire to receive the money over a long time (the life of the heir). Moreover, recent Private Letter Rulings 200228025 and 200413011 have muddied the waters, and may complicate a positive aspect of stretch planning; that is, allowing younger heirs to receive money over their individual life expectancies, rather than that of the eldest heir.4 Stretch Planning's primary disadvantage is that it only defers the income tax, but it can, nevertheless, be effectively utilized with a primary solution.

Pension Rescue,prior to recently issued Proposed Regulations, Sections 1.79-1, 1.83-3, and 1.402(a)-1, 69 Fed. Reg. 7354 (Feb. 17, 2004), Revenue Procedure 2004-16, and Revenue Procedure 2005-25, contemplated a profit sharing plan purchasing a life insurance policy using QP assets and transferring the policy to a third party, such as a trust, for the policy's fair market value ("FMV"). Frequently, taxpayers relied upon the cash surrender value, the tax reserve value or (for whole life policies) the interpolated terminal reserve as the policy's FMV. The cash surrender value often was significantly less than the premiums paid at the time of the transfer. The Service, in Revenue Procedure 2005-25, permits a taxpayer to rely on a safe harbor value to meet the definition of FMV for a policy sold or distributed from a qualified plan5. For many policies, the safe harbor value will likely approximate the cash accumulation value for 'seasoned' policies, and the premium paid through the date of transfer for new policies. Certain aspects of the formula set forth in 2005-25 determining the safe harbor FMV are unclear. Moreover, the Service added an anti-abuse provision to preclude the artificial reduction or lowering of a policy's cash values (ostensibly via unreasonably high mortality, surrender or other charges). Consequently, this article will focus on planning strategies other than Stretch Planning and Pension Rescue.

The Client For our example, assume the participant has a taxable estate of which $500,000 is a rollover IRA invested in a fixed income portfolio. Further assume that the participant is a widow, in good health, age 70, and does not need the QP money for her retirement. Her effective federal income tax rate and that of her children is 28 percent. She wants to maximize the amount of QP money that her heirs will inherit. Assume that the IRA assets will grow at a rate of five percent and that any RMDs will also grow outside the IRA at five percent, before tax. The participant's children are the designated beneficiaries of her IRA and are the sole beneficiaries of any probate assets.

Option 1-Do Nothing. Under the "Do Nothing" option, the participant does no planning and simply withdraws her RMDs each year. This option is generally the default option for those participants without planning, which greatly benefits the government. For example, if the participant dies in year one, her heirs would receive about $180,000 of the $500,000, after federal estate and income tax. This assumes that the heirs withdraw the IRA assets, which are income in respect of the decedent, to pay the estate tax. If the participant dies at age 85, the heirs would receive between $170,000 and $310,000. The $170,000 is the net (after estate and income taxes) QP balance. The cumulative RMDs after income tax would be $280,000. After payment of an assumed 50% estate tax, the RMD money (if not spent by the participant while alive) passing to the heirs would be $140,000.

The obvious disadvantage of this option is that the participant is not maximizing the amount that will pass to her heirs, which is her primary goal. Another disadvantage is the uncertainty of how much money her heirs will receive.

The advantage is the existence of total flexibility as the participant has complete and direct access to the QP, in the event she decides she needs or wants the money for her own benefit.

Option 2-Immediate Lump Sum Distribution with Life Insurance. Under this option, the participant would take an immediate distribution of the $500,000 and pay the income tax thereon. The after-tax balance would be $360,000. This assumes that the effective tax rate does not increase as a consequence of the inclusion in one year of such a large amount of income. That sum will be gifted or loaned to an irrevocable life insurance trust ("ILIT") set up as a grantor trust. It can be an access ILIT where the trustees have the ability, with respect to any life insurance policy owned by the ILIT, to take withdrawals and/or loans from the policy. The trustees should also have the ability to make arm's length loans to third parties, including the beneficiaries and the participant. Proper drafting and implementation are required to insure that the participant does not have any incidents of ownership in the policy.6 The ILIT will apply the $360,000 to purchase a life insurance policy on the participant.7

Depending on the facts and circumstances, either whole life or universal life ("UL") can be used. Here, the policy is a typical non-guaranteed UL contract that assumes a five percent current rate, has surrender charges for 15 years, is (due to the large lump-sum premium) a modified endowment contract,8 and has extended maturity (to age 120) of death benefit. The death benefit is $1,140,000 (the death benefit can and will vary, depending on the carrier selected, type of policy, guarantees, and any riders selected). A so-called no-lapse UL with secondary guarantees will generally result in a greater death benefit than a traditional UL contract. A guaranteed no-lapse UL may be appropriate where the owner can and will pay the premiums in a timely manner, where the policy is a modified endowment contract, or where death benefit is the sole consideration. If the participant is younger or desires a policy with greater cash value, whole life might be a better option.

For this illustration, the participant has a 'select' rating, which, for the subject carrier, has a lower cost of insurance than a 'standard' rating, but a higher cost of insurance than if she had an "ultra select" rating. Under this option, the heirs will receive, regardless of the date of death of the participant, $1,140,000. If there are no incidents of ownership, the proceeds will be excluded from the taxable estate.

The advantage of this option is that the heirs will receive substantially more than they would under option 1.

The primary disadvantage is the "cost" of gifting the funds to the ILIT to purchase the policy because it is unlikely that there will be enough annual exclusions to cover the gift. Therefore, the participant, assuming the money is gifted to the ILIT, has to utilize a portion of her lifetime unified (gift tax) credit or pay the gift tax. Another disadvantage to the participant is that she relinquishes direct access to the QP money because it is now inside the policy in the form of cash values. Through the so-called "access" ILIT, the participant has indirect access to the policy's cash surrender value via loans from the ILIT to the participant (at the discretion of the ILIT's trustee). The ILIT could also provide for distributions for the benefit of the beneficiaries for their health, support, and education. However, because the policy is a modified endowment contract, accessing cash is not tax efficient. A potential problem, and certainly a consideration, would be if the $500,000 in income would place the participant in a higher bracket for the year in question. If so, the net distribution would be less, which, in turn, would result in a decreased death benefit.

An alternative to a lump sum distribution is to take distributions over, for example, five years. This would likely preclude the participant from being in a higher bracket when the money is withdrawn. It also increases the likelihood that annual exclusions using Crummey powers could cover the gift of the funds to the ILIT. The death benefit, however, will be less than if the entire premium were paid year one.

Option 3-Level Distributions and Life Insurance. Under this option, the participant will (to the extent the funds exist) withdraw a predetermined level amount each year from the QP, pay the tax thereon, and gift the net amount to the ILIT for the purchase of life insurance. An annuity payout indicates that at the assumed five percent rate of return, the participant can withdraw $30,000 annually for 30 years. After income tax, the amount gifted to the ILIT for annual policy premium would be $21,600. The $21,600 annual premium will support a policy of $840,000 (applying the identical policy facts and assumptions as set forth in option 2). Under this approach, the heirs will receive the full $840,000 of death benefit. The heirs also will receive the net date of death balance of the QP (here is a situation where Stretch Planning can be effectively employed). The net amount to the heirs will gradually decrease each year as the QP is depleted by the $30,000 annual distribution. After 30 years, under the assumptions, the QP will be completely exhausted. In year one, the heirs would receive about $1,023,000 comprised of the death benefit and the net after tax proceeds from the QP. If the participant dies at age 85, the heirs would receive about $973,000. If death occurs at age 100, the heirs would receive only the $840,000 of death benefit.

The advantage of this option is that the heirs receive a significant sum, less than under option 2 but more than under option 1. The design is flexible as the participant has direct access to the QP, as well as indirect access to the policy's cash values. An additional benefit is that the annual cost of transferring the funds ($21,600) to the ILIT will likely be within the annual gift tax exclusion, thus preserving the unified credit. Moreover, the participant maintains complete control over the QP investments, and can potentially achieve a higher rate of return than that assumed herein.

The risk with this design is that it assumes a five percent return in the QP each and every year to generate the annual $30,000 distribution for 30 years. This is certainly a reasonable expectation, but any downside deviation will reduce the amount available for distribution. With less money from the QP for premiums, the policy may lapse unless the ILIT reduces the death benefit and/or pays additional premium.

Option 4-Qualified Annuity Equals Steady Cash Flow. Under this option, the participant applies the $500,000 in the QP to purchase a qualified annuity. The income stream from the annuity, which satisfies the RMDs, is used to purchase life insurance. The annuity will be a single premium immediate annuity, known as a SPIA. A SPIA can generate fixed payments to its owner each year (or month) while the owner is alive. It stops payment upon the death of the participant. Middle-class people, especially those in good health, may purchase a SPIA to make sure that they do not outlive their money. As indicated below, a wealthy person can successfully employ a SPIA when it comes to QP tax planning.

SPIA payments, which are based on the actuarial life expectancy of the participant and the interest rate established by the carrier, are established at inception. Carriers assume that a participant will not live to age 100, so the annual cash flow from the SPIA, which is a guaranteed payment,9 will exceed the level annual distribution assumed in option 3. The annual guaranteed lifetime payment from the SPIA for our participant is $40,800 (the amount will vary depending on the issuer). After income taxes, the net amount to be transferred to the ILIT is $29,160. That annual premium will purchase $1,200,000 of death benefit (again using a non-guaranteed UL policy). The life insurance policy and the SPIA are purchased from different companies. Advisors should be cognizant that a SPIA can work, and may actually be very effective, if a participant is not in perfect health, but is still insurable. Some carriers issue what is known as a rated SPIA, which offers a higher payout if the carrier determines the participant has a reduced life expectancy. The higher payout might allow the purchase of additional life insurance in the event a different carrier offers a favorable medical underwriting decision (perhaps that the insured has a normal life expectancy).

Under this option, the heirs will receive the $1,200,000 of death benefit. If the participant attains age 100, the heirs would actually receive a slightly greater sum, as the policy no longer requires premium and the SPIA would still pay the participant.

The primary advantage of this option is that the heirs receive more money than they would than in any of the other options. The participant still has direct access to the annuity payouts and indirect access to the policy's cash value. The amount gifted to the ILIT each year is likely to be within the annual gift tax exclusion. Also, at inception, the $500,000 QP is no longer part of the participant's taxable estate, as it was removed from the estate.

The disadvantage of this approach is that the participant forfeits the ability to access the QP principal and that the participant locks in a low rate of return with the SPIA, which makes this option more appealing for older participants.

Option 5-Purchase the Policy Inside the Qualified Plan. Under this option, which is not suitable for all participants, the participant would purchase life insurance inside the QP. If the participant has earned income that she expects to continue, she can create a profit sharing plan. A properly designed profit sharing plan may purchase and own life insurance on the participant. A profit sharing plan may be structured to use all the money from another QP that is rolled into the profit sharing plan to purchase life insurance.

A $500,000 lump sum premium will purchase $1,700,000 of coverage. The participant can pay the premium in installments, but this results in less coverage. By using pre-tax dollars to purchase the policy, the amount of death benefit is maximized (as compared to option 2). There are a number of tax consequences, however, that must be considered with this approach. Upon the death of the participant, assuming the profit sharing plan still owns the policy, the death benefit is inside the QP and subject to the double tax (part of the death benefit is subject to income tax and all the death benefit is subject to estate tax). Furthermore, each year while the policy is in the QP, the participant pays income tax on the 'term cost' of the coverage that is "at risk" (the difference between the cash value and the death benefit). This amount is known as the reportable economic benefit ("REB").10

For example, the first year the amount at risk is $1,204,271 ($1,700,000 less cash value of $495,729). The term cost for REB purposes will likely be based on the Table 2001 rates.11 See Table 2001, which is Exhibit I. For an insured age 70, the cost of one-year term protection under Table 2001 is $20.62 per $1,000 of coverage. Thus, the REB for the first year would be $24,832. This sum is phantom income to the participant, and at the assumed income tax of 28 percent, she would owe tax of about $7,000. One positive note is that she is reducing her taxable estate by the $7,000 without: 1) reducing the amount that will pass to her heirs and 2) paying gift tax. The Table 2001 rates increase gradually so that at age 85, the cost is $88.76 per $1,000 of coverage. That results in a REB of $88,084. Should the tax due on the REB become prohibitive, the participant will have a number of options: 1) reduce the death benefit (one reason for using a UL policy is that some products allow death benefit reductions without assessing charges), 2) sell the policy to heirs or an ILIT for the policy's FMV (the measure of FMV is presently unclear but, under 2005-25, appears to be close to the cash accumulation value), 3) receive the policy as a distribution and pay income tax on the FMV or 4) surrender the policy or sell it on the secondary market.

If the policy is sold to a third-party other than in the secondary market, care must be taken so that the sale is not a prohibited transaction under ERISA (ERISA 406 (a)(1)(A)) or a transfer for value (IRC Section 101 (a)(2)). The sale of the policy from the QP to the participant, a relative of the participant, or a grantor trust for the benefit of the participant or a relative of the participant is not a prohibited transaction. If the policy is sold to the participant or partner of the participant it is not a transfer for value. Therefore, if the sale is to a grantor trust, the participant and the trust should be partners (in advance of the sale) in a private or publicly traded partnership.

At the participant's death, the at-risk amount on the date of death is received income tax free by the beneficiary. See IRC Section 101(a). Next, the total of the REB costs on which the participant/insured paid tax should be recovered income tax free. See Treasury Regulations Section 1.72-16(b). The balance will be taxed at ordinary income as a customary QP distribution.

There is also the estate tax to consider. The participant is single so there is no marital deduction (this option is significantly more attractive to a married participant with a younger or healthier spouse). Under IRC Section 2042, the entire death benefit is subject to estate tax.

A participant must still comply with the RMD rules. If the participant did not have other QP assets, then all the money could not be used for the life insurance (without the policy being invaded each year to pay the RMDs). Not only are there numerous tax consequences to address, there is currently too much uncertainty with respect to the cost of the REB and the FMV of a policy for this option to be attractive. Consequently, this option, for this participant, is arguably superior only to option 1.

Conclusion Many QP participants do not devote the necessary time and energy to explore the planning possibilities with QPs, which can turn a problematic tax asset into significant family wealth. Advisors must pay careful attention in determining the various income, gift and estate tax consequences of utilizing life insurance with a QP. The table at, Exhibit II, summarizes options 1&4. Each option discussed in this article has certain advantages and risks. Deciding which option(s) to employ should be made on a case-by-case basis after considering both the tax results and non-tax needs of the participant. The advisor, by applying the unique facts and circumstances of each client to the various options, can readily and clearly demonstrate to the client the merits of using financial instruments as a vehicle to effectively maximize and transfer QP assets.

Endnotes

1 The Treasury Department, on February 13, 2004, issued proposed Regulations and a Revenue Procedure (2004-16) regarding the fair market value of a life insurance policy that is distributed from a qualified plan or paid as compensation from a service recipient to a service provider (under IRC Section 83). Subsequently, on April 8, 2005, the Service issued new life insurance valuation rules in Revenue Procedure 2005-25, which supersedes Revenue Procedure 2004-16. 2 IRA 'stretch' planning is a common name given to a technique where a participant's designation of beneficiaries is done in such a manner so that heirs, often children or grandchildren of the participant, can take distributions from the QP over the heir's life expectancy upon the death of the participant so as to benefit from an extended period of tax-deferred growth. While the author does not generally advocate Stretch Planning as a primary solution, it certainly may be advisable where a participant is uninsurable. 3 Pension Rescue, to the best of the author's knowledge, is a registered trademark owned by Professional Financial Services, LP. 4 In PLR 200278025, the participant died before taking required minimum distributions. A trust for the benefit of grandchildren was designated beneficiary of the IRA. Under the terms of the trust, if a grandchild had no issue at death the assets passed to contingent beneficiaries, the oldest of which was an uncle, age 67. The IRS ruled that the RMDs to the grandchildren had to be based upon the uncle's life expectancy. 5 The safe harbor value fair market value (FMV) under 2005-25 for a traditional universal life policy sold or distributed from a qualified plan is the premium paid from issue to the transfer date, less reasonable mortality and other charges. 2002-05 provides for partial recognition of surrender charges for a policy distributed from a QP. The above figure is then multiplied by the applicable surrender factor, which is .7. Presently, there is uncertainty as to what charges are reasonable and how the word "reasonable" is to be construed. 6 Proceeds of life insurance are included in an insured's gross estate if the insured legally possessed and could exercise any incidents of ownership of a life insurance policy insuring his/her life at the time of death. IRC Section 2042 (2). Incidents of ownership include, but are not limited to, the rights to: name a beneficiary, surrender or cancel a policy, assign a policy, revoke an assignment, and take a policy loan or withdrawal. Treasury Regulation 20.2042-1(c)(2). 7 Universal life insurance is known as flexible premium life insurance. Premiums are not fixed as to amount or time of payment. Many universal life products offer guaranteed death benefit and cash value. Some also offer full coverage beyond age 100. For these reasons, and because universal life will generally offer a greater death benefit relative to the premium when compared with a whole life policy, universal life is more attractive for the type of planning discussed herein. 8 If a policy is a modified endowment contract (one that fails what is known as the 7 pay test under IRC Section 7702A(b)), it is taxed as if it were an annuity. Distributions, including loans, are taxable to the extent of gain. Gains are taxed first and return of basis follows. Distributions from a MEC may also be subject to a 10 percent penalty. Tax on the gain would be paid by the ILIT unless it is a defective grantor trust. It may be prudent in policies with significant cash values, where access to such cash in excess of basis is contemplated, to avoid the policy being a MEC by the use of a term rider. 9 A "guaranteed" SPIA payment is predicated on the solvency of the sponsor/carrier. Payments are not secured by any governmental guarantees. 10 See IRC Section 72(m)(3)(B) and Treasury Regulation 1.72-16(b). 11 The term costs for annual life insurance protection under Table 2001 were set forth in IRS Notice 2001- 10, 2001-1 CB 459. In limited circumstances, a taxpayer may rely on a carrier's alternate term rate or annual renewal term even if lower than Table 2001

The Basics of Life Insurance

The purpose of life insurance is to do one thing, and that is to replace the income of the breadwinner if they should die prematurely. Prematurely meaning while still having financial responsibilities such as a mortgage, raising a family, and having dependents.

Life insurance is the foundation for every financial plan. You may have a great investment program going for you, and may very well be on your way to debt freedom; but if you should die before you retire then your savings plan immediately stops. Life insurance is meant to fill that void if it should occur so your plans are still carried out after your death and your dependents are taken care of.

Simply put, life insurance falls into two basic categories: 1. Term 2. Whole Life This goal of this article is to discuss the basic differences between the two types, and to help you decide what type of policy is best for your needs.

TERM Insurance Term life insurance is pure insurance. There are no "bells & whistles" to this type of insurance and it is the most affordable form of life insurance. Term protection covers you for a specific period of time, anywhere from 10 years to 30 years. The forms of Term insurance are: Annual Renewable Term / Decreasing Term / Increasing Term / Level Term (the most popular form).

WHOLE LIFE Insurance Whole life insurance is a bundled product. It combines insurance w/ a cash value accumulation component. Because of this accumulation feature it is the most expensive type of life insurance. Whole life insurance is a permanent product and usually expires when the policyholder reaches age 100. Whole life or 'permanent' insurance comes in many different varieties: Whole Life / Modified Life / Universal Life a.k.a. Flexible Premium Life / Variable Life / Variable Universal Life (the most popular form). The following is an "apples to apples" comparison of the two. Term InsuranceWhole Life Insurance

Average cost per $1,000$2.96$13.82

Cash AccumulationNoYes

Coverage Last10 years to 30 yearsPermanent (age 100)

Borrow $$$NoYes (at 6-8% interest)

Death Benefit goes toBeneficiariesBeneficiaries (but not the cash value)

Consumer advocates have long advised buying cheaper level term insurance and investing more of your money into mutual funds that are held in IRAs; preferably a Roth IRA if you qualify for one. This concept, which is known as 'split funding', in my opinion is more beneficial to the consumer. Term buys you the most insurance dollar for dollar. Stock mutual funds (which historically have averaged 12.53% over the last 30 years), when held in IRAs, while using a systematic investment program; will give you far greater returns with lower fees than even the most sophisticated whole life polices. The point: You are better off renting an estate while you build one. 'Split funding' may be the way to go for most people.

Disability InsuranceWhat about Disability Insurance?

While most people understand the need for life insurance, the need for disability income insurance is less widely understood, probably due to several misconceptions:

Misconception: Your odds of a long-term disability are small. Reality: At all age groups, the odds of a disability are higher than the odds of death. Every year, 12% of U.S. adults incur a long-term disability. One of every seven workers will have a long-term disability lasting five years or longer (Source: Money Central, 2004).

Misconception: You don't have to worry about a disability because you work in a safe profession. Reality: Accidents outside of work and lingering diseases are estimated to cause 60% of disabilities (Source: National Safety Council, 2004).

Misconception: Social Security will pay disability benefits. Reality: The criteria for Social Security benefits are very strict - your disability must be so severe you are unable to engage in any substantial gainful activity and the disability must be expected to last at least one year or result in death. Approximately 60% of claims are denied (Source: Gale Group, 2004).

Misconception: You have sufficient disability coverage at work. Reality: Many employers only provide short-term disability coverage, typically lasting four to six months. Even if you have long-term coverage, make sure the benefits are adequate. When assessing benefits, keep in mind you must pay income taxes on any benefits paid by your employer. If you pay the premiums, the benefits are income tax free.

Misconception: You won't need much income during a disability, because work-related expenses and taxes would decrease. Reality: While some expenses are likely to decrease, others, such as medical and rehabilitation expenses, are likely to increase.

Misconception: You can always purchase disability income insurance later. Reality: Once you are disabled, you won't be able to purchase insurance. You could also develop a health problem that will prevent you from obtaining this insurance. Disability income insurance becomes more expensive as you grow older

Disability Insurance Basics

If you suffered an injury or illness and couldnt work for weeks, months, or even years, how would you support yourself and your family?

Won't the government provide? Well, maybe. Social Security disability insurance pays benefits to qualified individuals under age 65, and Supplemental Security Income pays benefits to disabled individuals over 65, but neither program covers partial disabilities, and both programs define disability strictly. All states and the District of Columbia offer workers compensation--but only if your injury or illness is work-related. And current or former military personnel are entitled to veterans benefits only if their disabilities are service-related. If you're injured in a traffic accident or at home, you may be out of work-- and out of luck when it comes to benefits from these programs. Accordingly, you might consider purchasing private disability insurance.

Disability defined You're disabled (at least, for insurance purposes) only if you meet the policy's definition of disability. While no single definition exists, all policies define disability either according to how an illness or injury affects your ability to do your job or any job (total disability), or according to how it affects your ability to earn income (residual disability). When you purchase disability insurance, make sure you understand what will be covered.

First you wait, then you benefit If you become disabled, you'll have to wait a certain amount of time (the elimination period) before you'll receive benefits. Once you begin receiving benefits (which typically cover 50% to 70% of your normal earnings, subject to a monthly maximum), you'll get them for a certain amount of time (the benefit period). You'll get what you pay for: The shorter the waiting period and/or the longer the benefit period, the higher the premium you'll pay.

The long and the short of it Some disability policies are short-term; others are long-term. Short-term disability insurance covers temporary disabilities that last for a few weeks or months. Long-term disability insurance covers disabilities that last for an extended period. Common benefit periods offered are two years, five years, or up to age 65; some policies even offer lifetime benefits. If you can't afford both short- and long-term disability insurance, it generally makes more sense to purchase long-term coverage. Most disabilities last only a short time, and you may be able to financially survive a temporary disability even without insurance. Also, you may have short-term coverage through your employer.

Join the group, but act on your own Even if you have disability coverage through your employer, you may want to consider purchasing additional protection, since the group coverage may be minimal and you can't take it with you if you leave your job. If that happened, you could end up without coverage when you need it, especially if you develop health problems that might prevent you from buying individual income disability insurance. So don't wait until it's too late; consider purchasing an individual disability income insurance policy now. An individual policy can be tailored to meet your needs, and it may offer more liberal benefits than those offered through group protection.

For your consideration Here are points to consider when purchasing individual disability income insurance: How does the policy define disability? What are the contractual guarantees of the policy? Is it noncancelable and guaranteed renewable? Does it offer any special provisions or contain any exclusions? What base and optional features does the policy offer? How long is the elimination period and the benefit period? Can you add optional benefits, such as a cost-of living rider to adjust the benefits for inflation? How much will the policy cost? If comparing premiums, make sure you compare equivalent policies. How is the insurer rated for its financial strength and claims-paying ability? Do You Need Disability Income Insurance? No one likes to think about becoming disabled. But it happens far more often than you may think. According to the Social Security Administration, a 20-year-old worker has a three-in-ten chance of becoming disabled before reaching retirement age. The most recent Census counted 49.7 million people with some type of long-lasting health condition or disability. That's nearly 20% of the U.S. population over the age of four.

Basically, a disability is any condition that makes it difficult or impossible for a person to perform one or more activities of everyday living, such as moving around, getting dressed, or communicating with others. A disability might be physical, such as mobility impairment, blindness, or deafness; mental, including learning disabilities, Alzheimer's, and depression; or developmental, such as Down syndrome or autism.

Not surprisingly, financial planners recommend that anyone who works for a living include disability income insurance in their overall financial plan. Without adequate coverage, an unexpected period of disability could wipe out your personal savings and investments in short order and, potentially, leave you and your family with no income.

Employer-provided Coverage If you have insurance through your employer, take a close look at the policy. Find out just how much coverage you have. Be sure you have a clear understanding of the circumstances under which you would receive benefits, how much you would receive, and for how long.

A typical group long-term policy covers only 50% to 65% of an employee's salary. These benefits usually are taxable income, so the amount you'll actually receive will be less. Be aware that the definition of 'disability' differs from one policy to another. Read the policy's fine print and ask questions if you're not clear about the limits on your coverage.

Individual Policies When you buy disability insurance for yourself, do your homework carefully. Don't duplicate any group insurance you already have. Look for a policy that classifies you as disabled if you're unable to perform your regular job ' as opposed to being unable to perform any job ' for a certain period of time.

Many policies pay benefits only in the event of total disability. So, if you can function on a part-time basis at your regular occupation, you won't be able to collect any benefits. For an additional fee, you can add a 'residual' rider to your contract, which will give you coverage even if you are able to earn some income.

Fine-tuning Your Benefits Disability policies that are noncancelable or guaranteed renewable are generally the best choices. As you compare different policies, pay attention to how long you must wait to start receiving benefits after becoming disabled. Under a standard contract, you may have to wait as long as 90 days. For a small cost, you can choose a shorter waiting period. With most policies, disability payments end when you become eligible for Social Security retirement benefits. Adding a rider to your policy can extend your coverage for life.

Some policies offer inflation protection so that your benefits keep pace with increases in the cost of living. Others allow for projected increases in benefits to compensate for the raises you might have earned on the job. In addition, you might want to consider adding a catastrophic disability benefit (CDB) rider. A CDB rider provides additional benefits if you should suffer a major disability that results in expenses that go beyond your normal income needs, such as the cost of a home health-care aide.

Your ability to earn an income is one of your biggest assets. It's your means of achieving your life goals and providing your loved ones with financial security. So insuring that income with disability income insurance makes good sense. For a review of your disability income needs and coverage, talk with your financial planner.

Disability Insurance: Factors that Affect Your Premium

Disability insurance is known by various names such as Disability Income Protection, Disability Income Insurance, or Income Replacement Insurance. The basic function of all of the policies is the same: To replace your earned income in the event you cannot earn a living due to a sickness or accident. The different names are mostly a factor of what the insurance company chooses to label their product.

There are several factors that affect what your premium will be. Because of this, two people of the same age who are at the same income level may be charged different premiums. The following are the most common factors that affect premiums: 1. Occupation - The more day-to-day hazards involved in your occupation, the higher the premium. For example, someone who works with heavy equipment will pay more than someone who works primarily at a desk. Also, many occupations such as chiropractors, dental assistants, dental hygienists, beauticians, and jewelers may pay a higher premium than accountants and attorneys due to the fact that a relatively small occurrence such as a sprained finger or a strained back can prevent them from working at their occupation. 2. Health - A person with a history of potentially disabling conditions will usually have to pay more for disability than one without such history. A brief list of potentially disabling conditions would include, but would not be limited to, back/spinal injuries or disorders, arthritis, asthma, heart conditions, etc. 3. Benefit Period - The amount of time for which the company will pay for a disability. A benefit period of 2 years will cost substantially less than a lifetime benefit period. 4. Elimination Period (Waiting Period) - The amount of time you must be disabled before a benefit is payable. The most common elimination periods are 30, 60, 90, and 180 days. For example, with a 90 day elimination period, a person must be disabled for 90 days before benefits are payable. Once the 90-day elimination period has passed, payments begin retroactive to the first date of disability. Waiver of Premium (which is a separate feature) will refund premium paid for the first 3 months, once the elimination period has been satisfied. 5. Policy Provisions - For example, a policy that pays both total and partial disability will cost more than one that pays only for total disability. There are several other provisions that can affect the cost of a policy. Be sure you understand all provisions of a policy when comparing it to others. A properly licensed agent or financial representative can help you decide which policy provisions are best for your individual situation. Disability insurance is one of the most cost-effective ways to help cover your expenses if you become unable to work due to illness or injury. The purchase of such coverage should be made carefully with the assistance of a qualified professional.

The opinions expressed in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you consult your representative, attorney, or accountant with regard to your individual situation.

Disability Insurance: Protecting Your Income

If you are in business, you probably insure the components of your business against loss beyond your control. You insure your premises against fire, accidental injury, and theft of property. Your equipment is probably insured. You probably have business interruption insurance to compensate you if your property is rendered unusable due to accidental damage. Whether or not you own a business, you probably insure your car so you can be sure that you?ll always have the means to get to work. You probably insure your dwelling so you can be sure that there will be a roof over your head in the event of a catastrophe.

Life, homeowners, and other types of insurance policies provide important kinds of coverage, but they will not safeguard you from financial impact if a disability prevents you from working. The stark reality is that without disability income insurance, a serious injury or illness could be financially devastating to you and your family.

You may believe you?re less likely to become disabled than to die prematurely, but statistics show exactly the opposite is true. According to tables prepared by the Society of Actuaries in 1985, at any given time in your career, the chance that a long-term disability will occur is several times the likelihood of death. For example, at age 37, the odds of a long-term disability vs. death is 3.3 to 1. At age 42, the odds are 3.5 to 1, at age 47, they are 2.8 to 1, and at age 52, they are 2.2 to 1.

Before you read further, please get a piece of blank paper and a writing utensil. On the paper, write the names of 20 people that know each other. Some examples are members of your family or members of a club, service, or religious organization. Once you have finished, circle the ones who have had a disability lasting 90 days or longer. My experience has shown that more than 90 percent of you will have circled at least 1 name on your lists.

If you earn $50,000 per year, in 20 years you will have earned 1 million dollars. Without you in it, will your car earn you that kind of money? Will any of the other things you insured enable you to continue receiving your income? Disability income insurance, also known as disability income replacement insurance, is an important vehicle that will help replace a portion of your income in the event that you become disabled due to accident or illness.

There are several types of disability insurance policies. A properly licensed agent or financial representative can explain which is best for you.

The opinions expressed in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you consult your representative, attorney, or accountant with regard to your individual situation.

*Like most insurance policies, Disability Income Insurance policies contain exclusions, limitations, reductions of benefits and terms for keeping them in-force. Your agent or financial representative can provide you with costs and complete details.

Consider Long-Term-Care Insurance

Have you made provisions for long-term care in your financial plan? Many people don't believe they'll ever need this type of care, but it is estimated that individuals age 65 and over face a 43% chance of entering a nursing home. And approximately 21% of those entering a nursing home will remain there for at least five years (Source: Agency for Healthcare Research and Quality, 2004). The average annual cost of a nursing home is $66,153 (Source: SmartMoney, 2004). If you're trying to decide whether you should obtain long-term-care insurance, consider these factors: How do you feel about public assistance? Medicaid funds a significant portion of nursing home costs, but those benefits are typically only available after exhausting most of your assets. You may not like the idea of relying on public assistance or may not want to exhaust your assets if your spouse is still alive. Can you obtain a policy at a reasonable cost? Individuals in their 50s or early 60s can typically obtain a policy at a reasonable cost. After that, the cost can become prohibitive and most insurers won't insure individuals over age 79. Did members of your family require long-term care? If your parents or other family members needed long-term care, you are more likely to need care. Do you have family members who could care for you? You may not need long-term-care insurance if you can count on other family members for this care. However, before relying on this alternative, consider whether you want to risk having your family provide years of assistance. The physical, emotional, and financial strain of caring for an elderly family member can be enormous. Do you want to ensure an estate for your heirs? The costs of nursing homes are so high that many years of those costs can deplete your estate. Insurance can make sure assets will be left for heirs, even if you need nursing home care. If you decide to purchase long-term-care insurance, there are a number of features to consider, including requirements for care, services covered, impairments and illnesses covered, renew-ability provisions, benefit periods, waiting periods, and inflation provisions.

Long-Term Health Care May Require Long-Term Investment Planning

The good news is that developments in medical technology are enabling people to live longer than ever. The bad news is that the number of people in U.S. nursing homes is expected to increase by more than 60% over the next 30 years. The New England Journal of Medicine estimates that 43% of people who reach age 65 will need nursing home care at some time in their lives.

The technological advances in prolonging life have exceeded the ability to overcome the problems of older people who are unable to perform simple daily tasks. This often means that older people will require assistance either in a nursing home or in their own homes. These daily tasks or 'activities of daily living' (ADLs) include the ability to bathe, dress, feed, or transfer oneself.

The inability to accomplish these activities may result in a person having to pay large out-of-pocket dollars to have them provided. As a person gets older, the likelihood of requiring such services becomes greater. People over the age of 75 are three times as likely to have difficulty in performing ADLs than those between the ages of 60 and 74.

There are a variety of options available to people requiring such assistance. The most popular and time-tested method is assistance from family members. However, with more women in the work force, the ability for a daughter or daughter-in-law to stay home and take care of an older person becomes more difficult. To assist people with this lifestyle, adult day care centers are becoming popular because the elderly parent can be taken care of during the day while the adult children are working.

For people who prefer familiar surroundings, the services of a home health-care agency can be secured to provide care on a daily basis, and on a temporary basis, respite care can be provided. Of course, there are times when a nursing home is the most appropriate choice, particularly if the inabilities are expected to last indefinitely. National statistics show that nursing home patients with stays of five years or longer account for more than 50% of total nursing home care, while those with stays less than a year account for only 5%.

Except for a family member providing the care, all of these options cost money. Home care is always the least costly method. But even with two or three weekly visits, the cost could run as high as $15,000 per year. The average daily nursing home stay can cost more than $100 a day. With inflation, the average annual cost could exceed $40,000 within five years.

Nursing home costs could financially devastate the elderly or family members who are paying the bills. In this case the families can either risk their assets, or shift the risk through private insurance. Without long-term care insurance, a lifetime of savings could be depleted very quickly. Today, more than ever before, preparing for long-term care should be an integral component of retirement planning.

Buying Long Term Care Insurance

When you purchase a long-term care insurance (LTCI) policy you are entering into a contract with an insurance company. This contract is written in so- called plain English. And it is very important that you know the terms of the LTCI policy so you are not surprised later.

One of the biggest problems with LTCI policies comes from two little words? 'and' and 'or.' They may appear to be used interchangeably in the LTCI policy. But in reality, each time you see one of those little words, they can make a very big difference in your insurance coverage.

Here is why the difference between the two words is so critical. The two situations may seem the same, but the second one is far easier to meet. In order to qualify for benefits, the insured must be unable to perform two of our six activities of daily living AND must be under the care of a physician who certifies the need for LTC. In order to qualify for benefits, the insured must be unable to perform two of our six activities of daily living OR must be under the care of a physician who certifies the need for LTC. (These two coverage examples are discussed in Society of Certified Senior Advisors, Working With Seniors, p. 222 (December 2003)).

The capitalized, bolded words are not going to be that way in the policy. To require someone be under the care of a physician who certifies the need for LTC and to have to prove you can't do the two activities of daily living may not sound like much. But it can actually be quite difficult.

For example, if your custodial care needs came about suddenly, you might not be under the care of someone who could help you meet the second criteria.

Then you could have to pay your own LTC expenses until a physician certifies your needs, and that could take time.

Planning for Long-term Care

Daily, 13 million people need assistance with routine activities such as dressing, eating and bathing, according to the Direct Care Alliance. Four out of 10 people turning 65 can anticipate stays in a nursing home, and by the year 2025, 78 million Americans will be over age 65. Most health insurance programs will not usually cover long-term-care expenses. Are you financially prepared for your care during your golden years?

Proper planning for your future care can ensure that your needs are met when you can no longer perform simple daily tasks. A long-term-care insurance policy can help you manage your care without draining your savings or creating a physical or financial burden to your family. With a long-term-care policy, you can pay for services in whole or part. You typically pay monthly premiums, and if you need long-term care, the care expenses will be covered as specified in the policy.

Long-term-care insurance policies vary in benefits. However, most policies cover the cost of nursing care, in-home assistance with daily activities, adult daycare and other community-based programs, assisted living services (including meals, health monitoring and help with daily activities provided in a setting outside the home) and daily nursing supervision for those with chronic illnesses. Premium costs typically depend on the policy's coverage and the length of time benefits will cover.

One of the major benefits of planning for long-term care is that you can decide where you would like to receive your care. In recent years, home health care has become a popular alternative to care in a nursing home. Other options include assisted living facilities and adult daycare centers. Coverage typically begins when a doctor certifies that you need assistance in performing two or three activities of daily living.

Before purchasing long-term-care insurance, you should consider your age, health, retirement goals, and income. While there is no right time to buy long-term-care insurance, there is a cost for waiting too long. The cost increases the longer you wait, and waiting carries an additional risk. If you wait until you reach your 70s or 80s or experience failing health, policy restrictions or cost could make it more difficult if not impossible to purchase long-term-care insurance. It's important to remember that buying earlier can reduce costs substantially.

Because any insurance policy is a long-term investment, you need to carefully consider a long-term-care policy like a major investment and part of your entire financial plan.

Top Ten Features of Long Term Care Insurance

Will you outlive your resources? As health awareness increases and medical care improves, we can expect to live longer than any generation before us. As we live longer, the need for care in our latter years increases. Illness and injury can be prevented and cured, but the odds are we'll still need assistance with the activities of daily living. Long term care is a reality. Long term care insurance can be the means to provide the necessary support. Why consider long term care insurance? 1. LTCi can provide coverage in the home or in alternative facilities, like assisted living or adult day care facilities. 2. LTCi gives you a choice of provider. You're not limited to certain government-approved facilities. In fact, some policies even allow a trained friend or family member to provide care. 3. LTCi can provide a benefit for life so you won't run out of coverage. LTCi protects against catastrophic risk. 10% of us will need more than 5 years of care ($250,000 in today's dollars). Care for life could cost millions. What asset(s) you own for other purposes will you liquidate to pay for coverage? 4. The cost of LTC continues to increase but you can buy LTCi with an increasing benefit to help counteract the effects of inflation. 5. Some LTCi policies offer the ability to pay for coverage over a certain number of years so you don't have to pay forever. 6. Some LTCi policies can guarantee the premium will not change for a certain number of years. 7. LTCi is available with certain life insurance and annuity products so, if you never need care, you can use the money you've invested or pass it to your heirs. In other words, you don't have to choose to 'Use it or lose it.' 8. LTCi offers several tax advantages. Premiums are includable as a medical expense on individual income tax returns. Company-paid LTCi can be deductible by the company and not taxable to employees. Qualified LTCi benefits are tax-free. 9. LTCi can provide benefits for pennies on the dollar. A 65-year-old could pay $2,000 per year for a $3,000 monthly benefit. One year of care (12 months x $3,000/month) would be worth 18 years of premiums (18 years x $2,000/year). 10. LTCi will allow you to maintain your independence without burdening family. We have home insurance even though only 1 in 1,200 houses will catch fire.

If you have a 1-in-10 risk of losing $250,000 or more, wouldn't you want to protect yourself and what you've worked so hard for against such a catastrophe? Keep in mind long term care insurance policies and companies are different. A thorough analysis of your objectives and needs is necessary to recommend a particular solution.

Medical insurance and medicare

What Are HSAs?

Effective starting in 2004, health savings accounts (HSAs) provide a way to help save on medical costs.

To qualify, you must be covered by a health insurance policy with a minimum deductible of $1,000 for individuals and $2,000 for families in 2005. Maximum out-of-pocket costs for the medical insurance plan, including deductibles and copayments, must not exceed $5,100 for individuals and $10,200 for families in 2005.

If your plan meets those requirements, you can then set up an HSA account, where you can deposit pre-tax dollars up to your deductible each year. In 2005, these amounts are capped at $2,650 for individuals and $5,250 for families. These limits increase every year based on inflation. Individuals over the age of 50 can make a catch-up contribution of $600 in 2005 (increasing by $100 per year to a maximum of $1,000 in 2009). Contributions can be made by you, your employer, or a combination of both. There are no income limits or requirements for setting up an HSA.

Individual contributions result in an above-the-line tax deduction on your income tax return. Any contributions made by your employer are not taxable to you. Self-employed individuals and employers can deduct contributions as well as insurance premiums. Individuals not covered by an employer's medical plan can purchase a qualified medical insurance policy on their own and make tax-deductible contributions. However, premiums are not tax deductible for individuals.

Money in the HSA can be spent tax free on health care expenses, including eye care, dental expenses, prescription and non-prescription drugs, COBRA premiums, and qualified long-term-care services.

Unlike flexible spending accounts, you don't have to use all the money in the current year. Any unused amounts stay in your account and grow tax deferred. Thus, individuals who can afford to pay their deductibles from personal funds can use the HSA as a way to save funds on a tax-deferred basis. This may be particularly attractive to individuals who have made the maximum contributions to 401(k) plans and individual retirement accounts (IRAs), providing another way to save for retirement.

If you use funds before age 65 for other than qualified medical expenses, you must pay income taxes as well as a 10% penalty on the funds. After age 65, the 10% penalty is waived. At all times, the money in the account belongs to you.

After age 65, you can't make new contributions to an HSA, but you can still use money in the account to pay medical expenses, including premiums for Medicare Part A and B and the employee's share of medical insurance premiums paid by an employer.

Despite the benefits, not many employers currently offer HSAs, but that is expected to change in the near future. In a recent survey, 73% of companies indicated that they would add HSAs to their benefits by 2006 (Source: CNNMoney, October 22, 2004).

Medicare Part D Checklist: A Step by Step Process for Making a Decision

Step 1 First be aware of some deadlines Deadline for application is December 31, 2005 so that you can have your choice of program in effect for January 1, 2006

Deadline: May 15, 2006 to make a decision without a penalty for those who are eligible to enroll. After that date, there is a 1% per month of the premium as a penalty for every month you delay. For instance if you delay ten months, you would pay 10% more for your premium.

If you wait until after May 15th, your program starts January 2007.

Some questions to ask yourself:

Step 2 "Do I want help paying for medicines?" "Do I need help paying for medicines?" If the answer is yes, then continue.

If the answer is no, you can stop here. This is a voluntary program. You do not have to sign up. If you are eligible, but decide to sign up at some later time, you will be subject to the penalty.

Step 3 "Do I have a plan now that pays for prescriptions?" "Am I relying on doctor's samples"? "Do I have a Medigap plan that covers prescriptions?"

Step 4 If I have a plan, have I read the mail they sent? Was it clear to me? Did it require me to make a phone call, make a change, sign up? Did I follow up with the company to make sure I did whatever was necessary?

The next questions are about the plan:

Step 5. ELIGIBLE Are you eligible for one of the Medicare Part D plans? Who is eligible? Anyone with Medicare A or B or both A and B.

Who is not a right fit for the plan? You do not need a new Medicare Part D plan if you have a plan that is as good as, or better than the Medicare Part D benchmark. This equivalent plan is called a "creditable" plan. 1. As a retiree if you have a creditable plan through your union or former employee, you will not need to sign up for Medicare Part D. 2. If you have a Medicare Advantage plan with a creditable prescription drug plan, you will not need a Medicare Part D plan. Also be aware that if you have such a plan, you can lose it if you sign up for Medicare Part D. 3. If you are covered by the Department of Veterans Affairs or Tricare you do not need to apply for Medicare Part D. 4. As an individual your income and resources are $11,500 or less. As a couple your income and resources are $23,00 or less. Seek help through Social Security. There are programs which will help you if you have limited resources. 5. You are on Medicaid or Mass Health and you have already been assigned to a plan. If so, check that your medicines are covered by that plan. 6. If you are outside of your service area for more than six months each year, you are not eligible for that service area. Your plan should be chosen in the area you claim as your residence for voting and where you live six months or more. Step 6 Make a list of your current medicines. This is the critical tool for evaluating which plan will make financial sense for you.

Step 7 What are you paying per month for prescriptions? What are you paying per year?

Step 8 Will a Part D plan help you save money? That depends on how much your medications cost and which level of plan you enroll in.

Many of the listed insurance companies offer three plans: the standard plan, which is their least expensive; a middle level plan, and a more comprehensive plan, which will be their most expensive plan but covers more prescriptions.

There are four stages is each plan. In the standard plan, which is generally the lowest cost plan from each carrier, the stages are as follows: Stage One is the deductible of $250, which you pay. Stage Two: As you purchases add up to $2,000. of total drug costs, you pay 25%, which is $500. and the insurance company pays 75% which is $1,500. Stage Three: As you spend the next $2,850 of drug costs, you pay it all. There is no insurance contribution with the basic, standard plan in this stage. This is called the coverage gap. It is more popularly called the donut hole. Stage Four: After you have spent $3,600. out of your pocket, then you pay the greater of either 5% or a set dollar amount for generic, preferred brand drugs, other drugs. If you pay 5%, then the insurance company pays 95% for the remainder of the year. Here is an example of using the Standard Plan:

Be aware as we go through this example of the difference in the plan between the concepts "out of pocket" and 'total drug cost'. These terms are important. The versions of Medicare Part D, other than the Standard Plan, use these terms "out of pocket" and 'total drug cost' to calculate when you pay and when the insurance pays. Many insurers have three levels of plans and there is a difference in the use of these terms "out of pocket" and 'total drug cost'. Stage One: You pay $250. You have spent $250. The value of medicine may be many times higher. You went to the pharmacy and you paid maybe $2. for a generic, but the value of that medicine, the contracted price between your pharmacy and the insurance company may be $80. That contracted price is the total cost of the drug. Stage Two: You pay $500, but you have bought $2,000 of medicine. You paid 25% of $2,000 or $500. The insurance company has paid $1,500. The total drug cost is $2,000. Your out of pocket expense is $500. Stage Three: You pay $2,850. This is the donut hole or coverage gap. You have paid $2,850, but the total cost of the medicine may be higher. Once you have paid out of your pocket $3,600, you have come to the upper limit of the donut hole, or coverage gap. Then you enter Stage 4 and are covered again by the insurance. Stage Four: In this example, you pay 5% of the $900. for your medicines, which is only $45. You pay the greater of 5% or the flat fee for generic, preferred brand, etc. So the cost to you in each stage in this example is $250, $500, $2,850, $45 for a total out of pocket of $3,645. Remember if a drug is not covered, and you can not get it covered, you may be paying for that drug in addition. The medicines themselves cost more than what you paid.

In the past you had paid $6,000 for the medicines, now you paid maybe only $3,645. out of your pocket.

Your savings will be reduced by the amount you pay for the premium on for the insurance coverage. The range of the cost of standard plans currently offered in Massachusetts is from $7.32 a month to $37.61. With the least expensive standard plan, your yearly premium would be $87.84, for the most expensive standard plan it would be $451.32. Even after paying the premium for the plan, you would have saved money in this example.

There are about 20 insurance companies in Massachusetts which are offering Medicare Part D plans. Many of them have three plans starting with the Standard plan which matches the benchmark Medicare established. To find out which companies in your state offer plans go to www.medicare.gov or call Medicare at 1-800- 633-4227. TTY users should call 1-877-486-2048.

The premiums for the Medicare Part D plans may change. Remember that if you are on Medicare B that you will continue to pay your Medicare Part B monthly premium which is $78.20 in 2005, and $88.50 in 2006. Step 9 Now that you have figured out in Step 7 what your medicines cost, you can apply those costs for each level of coverage. Some insurance companies have two plans in addition to the Standard plan which pay more of the prescription cost and as you would guess, the premium you pay for those plans is higher. However, such plans may be right for you. You need to do the arithmetic. You need to watch for the terms "out of pocket" and 'total drug cost'.

The example in Step 8 showed the cost and savings with the standard plan for a individual with $6,000 in costs. Maybe you are better off --depending on your situation with a more comprehensive plan. It takes a few minutes with a pencil and paper to figure that out.

Either do the calculations yourself, or call Medicare to help you, or call one of the insurance carriers to help you, or talk with an insurance agent who sells Medicare Part D. Each of them has a drug cost calculator.

Step 10 Now if you have determined that a plan can help you save money, which company will you ap