Hello everyone. I am sick and tired of people recommending cash value life insurance as a way to pay estate taxes. Cash value life insurance are ripoffs and have no purpose. I've been in financial services for many years now and if you are worried about estate taxes when you die, then here are some ways to lower or eliminate your estate taxes on your own. I am not an estate planner, but someone who is very knowledgeable about many different financial products. If you want to use an estate planner and pay money, then that's up to you.
You may be able to invest in
your state municipal mutual fund and you won't pay any income taxes at all. Not
all states offer tax-exempt municipal mutual funds. So it is important to check
with your state if municipal bonds are exempt from income taxes. Almost every
investment company offer municipal mutual funds in every state. How they work is
that these mutual funds invest only in muncipal bonds, which is offered by
state, city, or local governments. They are low risk and you can withdraw money
any time. They don't provide high returns, but they do pay monthly dividends or
interest. The only big problem with municipal mutual funds is that they have
high annual operating expenses, which reduces the rate of return on your
investment.
Life insurance can also cover estate taxes if you die. I
highly recommend setting up an Irrevocable Life Insurance Trust (ILIT). You will
need an attorney to help set this up. An ILIT offers the opportunity of escaping
taxes not just in one estate, but in several estates. The ILIT is typically a
trust for the benefit of the spouse and/or children. I suggest getting a level
term insurance policy from Primerica. I don't know your age, but if you are 70
years old or younger, you can get a 10 year to 20 year level term. Primerica
offers the lowest renewal rates on term policies in the entire life insurance
industry (as of 2010). When you are applying for life insurance, make the ILIT the owner and
beneficiary of the policy. You will lose your right to make changes to the
policy (such as getting more coverage or changing beneficiaries). You must make
an annual tax-exempt gift to the ILIT so that the ILIT can pay the premiums
every year. If the premiums become too expensive, you can let the policy lapse
by not putting any money into the ILIT. Don't forget, you can withdraw money from your state municipal mutual fund.
You can rollover a 401k or
Traditional IRA into a Roth IRA. You will owe income taxes upon the conversion.
Money can grow in a Roth IRA forever and you pass it on to your heirs tax free.
If you are currently working, you can contribute up to $5000 (if you are 49 yrs
old or younger) or $6000 (if you are 50 yrs old or older) every year into your
Roth IRA. If you earn less than $5000 or $6000 per year, then you can 100% of
whatever income you earn from your job. For example, if you only earn $4000 for
the year, then you can only put in a maximum $4000, not $5000 or
$6000 (*Please note that your contribution limits into IRA may change in the future. Consult with IRS website and search for Publication 590).
Open a 529 plan. You can make a tax-free gift contribution of up
to $13,000/year (don't forget about the contributions you made to the ILIT if you set that up). You can name anyone as the beneficiary (hopefully you name your
child or grand child as beneficiary). You have full ownership of the plan. If
you have financial hardship, you can take money out, but you will pay a 10%
penalty and income taxes on the earnings.
You should also consider
setting up a Will to make sure who in your family gets what ever belongs to you
from personal belongings, house, cars, to all your assets and investments. I
remember there was one family where 2 sisters fought over silver forks and other
silver ware when their dad died. They went to court over silver forks. Its
ridiculous, but its true. You should get a Will through Prepaid Legal. It cost
about $20/month and the Will is done for free. After you get the Will and setup
the ILIT, its up to you if you want to keep Prepaid Legal.
Saturday, December 11, 2010
Sunday, December 05, 2010
Children life insurance
I am totally against any children life insurance since there is no reason to buy a life insurance policy on children. If you think you need to get life insurance on your children for whatever reason, then add a child rider to your current life insurance policy. If you don't have a life insurance policy and you are a parent, then why are you getting life insurance on your children first and you don't have one for yourself? Life insurance's purpose is to replace the breadwinner's income in the event they may die. What income does a 5 year old bring to the family? NOTHING!
I recently saw a TV ad from Gerber Life Insurance about Gerber Grow-Up plan. They advertise as if its a great savings plan for college. They don't say its a savings plan, but instead they said "With $10,000, that money double to $20,000 when your child becomes 18 years old at NO EXTRA COST." That money is the death benefit. Then they go on to say, "Your child can get 10 times the coverage of up to $100,000." It then ends in a quick ending, "Your child may borrow from the cash value."
Let me break it down on how this Gerber Grow-Up plan really works:
Basically its a whole life policy where your premiums are paid for two things: The insurance and the cash value. While premiums may seem very low (about $216/year for $25,000 coverage), a 35 year old man that is healthy can purchase a 20 year term policy with $250,000 for about the same price! In the first 2 years of the policy, no cash value is accumulated. After that, you will get 1 to 3% interest on the cash value. I'm not sure how they determine how much of your premiums goes into the cash value. At age 18, the coverage doubles and premiums stay the same. So that means you were paying lots of premiums before the coverage doubled. When your child reach age 21, ownership of the policy is transferred from you to your child and your child can get ten times the coverage.
If you (or your child at age 21 or older) wanted take money out of the policy, you can borrow from the cash value. You will be charged 8% annual interest. When you pay this loan back, the interest goes to the insurance company. It's similar to you withdrawing money from your savings account, but the bank giong to charge you daily interest until you put the money back. If you or your child cancels the policy while there's a loan balance due, you will be responsible for income tax on the loan balance if the child is under 21. If the child is 21 years old or older, your child will be responsible for income tax on the loan balance. Surrender charge will apply on the cash value if you or your child cancels the policy. If the child dies and there is a loan balance, this amount plus interest plus missed premiums will be deducted from the face amount of the policy. All the cash value is kept by the insurance company.
In summary:
1) Its very expensive.
2) It gets a very low rate of return
3) No withdrawals allowed. You either borrow and pay 8% interest OR cancel the policy and pay surrender charges.
4) Lose cash value upon death of the child, but at least they pay the death benefit to you.
5) One policy per child
My recommendation:
Get a term policy on yourself. Most people only need 20 years. Some need 10 or 30 years. Financial experts say you should get coverage of ten times of your gross income. But every situation is different, so I would go with a company that can find the exact amount of coverage you really need or determine the amount of coverage you need by yourself. A good start would add all your debts. If you have $300,000 in total debts, then you going to need at least $300,000 in coverage. A 35 year old who is healthy and gets a 20 year level term with $300,000 coverage will cost about $20 to $25 per month. I used to own a 20 year level term with $250,000 coverage at age 23 and pay about $18/month. I now own a 30 year level term with $500k coverage at age 30 and pay $475/year for it.
If you are married, add a spouse rider to your policy. If you really want to put coverage on your child, you can add a child rider with a minimum of $5000 coverage to a maximum of $25,000 coverage. A child rider covers all children from 14 days old to age 25. At age 25, the child can get his or her own life insurance, regardless of health status. By adding these riders, your entire family can be protected in one life insurance policy. If you were to get individual life insurance policy for each member of your household, it will cost you lots of money.
I don't know your other goals, but I'm guessing retirement and funding your child's higher education (college) are 2 of the things you want to accomplish. Its kind of impossible for me to tell how much you need to save every month to accomplish both these goals. But I can give you some pointers. For retirement, you want to open a Roth IRA. You want to invest in mutual funds because mutual funds has historically out-perform the stock market in the long run. I invest $400/month in 4 different mutual funds. If the average annual return on my investment is 10%, in 20 years I will have about $306,000 saved. I would be 43 years old and plan to retire at age 60. So at age 60, I will have about $1.8 million. I'm being conservative with 10% because the mutual funds I have done 14% average annual return from 1980 to 2009.
I don't have any kids, but if I did, I would open a 529 plan for my child to fund his or her higher education. There are other plans that can accomplish this goal such as Coverdell and UGMA/UTMA accounts. A Roth or Traditional IRA can even fund for your child's higher education, but I would only use an IRA for retirement.
Gerber Life Insurance also sells Gerber Life College Plan, another life insurance ripoff and should really be called Gerber Endowment Life Insurance. This is an endowment policy. How this works is that you select a coverage of up to $150,000 and you pay the agreed premiums. If you live through the term, the policy will pay you the coverage amount and you can use the money for whatever purpose. If you die during the term it will pay the coverage amount to your beneficiary. In endowment policies, the cash value grows very rapidly than a whole life policy and you will lose tax advantages. You will owe income taxes every year because the cash value will be greater than the face amount of the policy at age 95. Also death benefit will be taxable as well. Withdrawals of cash value before age 59 1/2 may result in income taxes and 10% penalty IF AND ONLY IF the cash value grows faster than a 7-pay whole life policy. Bottom line: THIS PRODUCT IS GARBAGE! Why pay so much money and income taxes to build a college fund for your kids in a life insurance policy when your money can grow tax-deferred in 529 plans?
I recently saw a TV ad from Gerber Life Insurance about Gerber Grow-Up plan. They advertise as if its a great savings plan for college. They don't say its a savings plan, but instead they said "With $10,000, that money double to $20,000 when your child becomes 18 years old at NO EXTRA COST." That money is the death benefit. Then they go on to say, "Your child can get 10 times the coverage of up to $100,000." It then ends in a quick ending, "Your child may borrow from the cash value."
Let me break it down on how this Gerber Grow-Up plan really works:
Basically its a whole life policy where your premiums are paid for two things: The insurance and the cash value. While premiums may seem very low (about $216/year for $25,000 coverage), a 35 year old man that is healthy can purchase a 20 year term policy with $250,000 for about the same price! In the first 2 years of the policy, no cash value is accumulated. After that, you will get 1 to 3% interest on the cash value. I'm not sure how they determine how much of your premiums goes into the cash value. At age 18, the coverage doubles and premiums stay the same. So that means you were paying lots of premiums before the coverage doubled. When your child reach age 21, ownership of the policy is transferred from you to your child and your child can get ten times the coverage.
If you (or your child at age 21 or older) wanted take money out of the policy, you can borrow from the cash value. You will be charged 8% annual interest. When you pay this loan back, the interest goes to the insurance company. It's similar to you withdrawing money from your savings account, but the bank giong to charge you daily interest until you put the money back. If you or your child cancels the policy while there's a loan balance due, you will be responsible for income tax on the loan balance if the child is under 21. If the child is 21 years old or older, your child will be responsible for income tax on the loan balance. Surrender charge will apply on the cash value if you or your child cancels the policy. If the child dies and there is a loan balance, this amount plus interest plus missed premiums will be deducted from the face amount of the policy. All the cash value is kept by the insurance company.
In summary:
1) Its very expensive.
2) It gets a very low rate of return
3) No withdrawals allowed. You either borrow and pay 8% interest OR cancel the policy and pay surrender charges.
4) Lose cash value upon death of the child, but at least they pay the death benefit to you.
5) One policy per child
My recommendation:
Get a term policy on yourself. Most people only need 20 years. Some need 10 or 30 years. Financial experts say you should get coverage of ten times of your gross income. But every situation is different, so I would go with a company that can find the exact amount of coverage you really need or determine the amount of coverage you need by yourself. A good start would add all your debts. If you have $300,000 in total debts, then you going to need at least $300,000 in coverage. A 35 year old who is healthy and gets a 20 year level term with $300,000 coverage will cost about $20 to $25 per month. I used to own a 20 year level term with $250,000 coverage at age 23 and pay about $18/month. I now own a 30 year level term with $500k coverage at age 30 and pay $475/year for it.
If you are married, add a spouse rider to your policy. If you really want to put coverage on your child, you can add a child rider with a minimum of $5000 coverage to a maximum of $25,000 coverage. A child rider covers all children from 14 days old to age 25. At age 25, the child can get his or her own life insurance, regardless of health status. By adding these riders, your entire family can be protected in one life insurance policy. If you were to get individual life insurance policy for each member of your household, it will cost you lots of money.
I don't know your other goals, but I'm guessing retirement and funding your child's higher education (college) are 2 of the things you want to accomplish. Its kind of impossible for me to tell how much you need to save every month to accomplish both these goals. But I can give you some pointers. For retirement, you want to open a Roth IRA. You want to invest in mutual funds because mutual funds has historically out-perform the stock market in the long run. I invest $400/month in 4 different mutual funds. If the average annual return on my investment is 10%, in 20 years I will have about $306,000 saved. I would be 43 years old and plan to retire at age 60. So at age 60, I will have about $1.8 million. I'm being conservative with 10% because the mutual funds I have done 14% average annual return from 1980 to 2009.
I don't have any kids, but if I did, I would open a 529 plan for my child to fund his or her higher education. There are other plans that can accomplish this goal such as Coverdell and UGMA/UTMA accounts. A Roth or Traditional IRA can even fund for your child's higher education, but I would only use an IRA for retirement.
Gerber Life Insurance also sells Gerber Life College Plan, another life insurance ripoff and should really be called Gerber Endowment Life Insurance. This is an endowment policy. How this works is that you select a coverage of up to $150,000 and you pay the agreed premiums. If you live through the term, the policy will pay you the coverage amount and you can use the money for whatever purpose. If you die during the term it will pay the coverage amount to your beneficiary. In endowment policies, the cash value grows very rapidly than a whole life policy and you will lose tax advantages. You will owe income taxes every year because the cash value will be greater than the face amount of the policy at age 95. Also death benefit will be taxable as well. Withdrawals of cash value before age 59 1/2 may result in income taxes and 10% penalty IF AND ONLY IF the cash value grows faster than a 7-pay whole life policy. Bottom line: THIS PRODUCT IS GARBAGE! Why pay so much money and income taxes to build a college fund for your kids in a life insurance policy when your money can grow tax-deferred in 529 plans?
Monday, November 08, 2010
Life Insurance questions from readers like you
Q1) Here is a question that was ask to the public on Yahoo Answers:
Q2) If all the beneficiaries die before the insured does, what happens to the life insurance death benefit?
A2) The death benefit will go the insured's estate.
Q3) How is life insurance taxed?
A3) If you live in the United States, life insurance proceeds are generally not taxable. If your life insurance builds cash value and you want to cancel it, you are very likely that you won't owe any income tax on it. The reason why is that the total premiums you paid in is far greater than the value of the cash value. If you have taken a loan from the cash value and didn't pay it back and someday you cancel the policy, you will owe income taxes on the loan balance. If you die and the death benefit goes to your beneficiary, your beneficiary will not pay any taxes on the death benefit.
Q4) Buy Term Invest Difference vs Whole Life?
A4) By buying term insurance, you will be saving $2367/year. If you invest the difference in mutual funds for the next 20 years, with 8% return you will have about $121,280. I'm being conservative with 8% because the S&P 500 in the last 20 years has about 11% return. If your investment has 10% return, you will have about $150,000. With 12% return, you will have about $208,000. If you open a Roth IRA, your money will grow tax deferred and when you are 59 1/2 years old, you can take money out and pay no income taxes. There are many mutual fund companies out there and I can't tell you which ones are the best, but I can tell you what I own. I invest in a mixture of Van Kampen mutual funds and Legg Mason Partners mutual funds. I have a total of 5 mutual funds that I own.
If you die during the term, at least your beneficiary gets both the death benefit and whatever money you have saved. With whole life, if you die, your beneficiary only gets death benefit and the insurance company keeps the cash value. Even if you die after the term, at least you will be leaving money behind to your beneficiary. In 20 years, you probably won't need life insurance. You should have very little or no debts at all and if you have kids right now, they will be adults.
Q5) I'm thinking about stop paying for my life insurance. What should I be aware of?
A5) If its term insurance, your policy will lapse and you will no longer be covered. If its whole life or universal life, the cash value (if any) will be used as a loan to pay for the premiums. If there is insufficient cash value to pay the premiums, then the policy will lapse. Also, if there is any loan balance on the cash value, then you will be liable for income tax on the loan balance.
Q6) Why does my life insurance policy have surrender charge?
A6) It is in case if you were to cancel the policy early, the company can recover its loss of paying commissions and initial policy fees by imposing surrender charge on the cash value, if any. Its another reason why you shouldn't get life insurance that builds cash value. You are better off getting term life insurance, which will cost significantly less, and investing the difference.
Q7) If I commit suicide, will the life insurance company pay?
A7) If you commit suicide during the first two years of the policy, the life insurance will not pay death claim. They may or may not refund the premiums to your beneficiary. After the first two years, the insurance company will pay no matter how you die. Read your life insurance policy for exact information.
I can no longer afford the 325 a month for whole life insurance. I have approximately 25K cash value. I can get a term policy for around 225 a month. Do I lose the 25K value? Can I have my dividends on the 25K pay my premium? It seems to have a pretty decent return. It says guaranteed rate of 4% return. Last years return
$15,017.03
Additions
PremiumPayments $3,900.00
Total Additions $3,900.00
Withdrawals
Cost of Insurance -$1,731.26
Total Withdrawals -$1,731.26
Change in Value
Fixed/ Variable Account Results $4,522.01
PremiumExpense Charges -$195.00
Total Change in Value $4,327.01
Ending Value $21,512.78
I need some serious help. I don't know what to do!
$15,017.03
Additions
PremiumPayments $3,900.00
Total Additions $3,900.00
Withdrawals
Cost of Insurance -$1,731.26
Total Withdrawals -$1,731.26
Change in Value
Fixed/ Variable Account Results $4,522.01
PremiumExpense Charges -$195.00
Total Change in Value $4,327.01
Ending Value $21,512.78
I need some serious help. I don't know what to do!
The policy is about 12 years old. My husband was the bread winner at the time this is no longer the case. The policy is for 350K he is 44 and a smoker. I get 3 times my annual income from my work for about 15 bucks a month (approximately 216K all together) . The 350K policy has a rider that covers me as well. I am 42 non smoker and pretty darn healthy.
ANSWER to Q1: You should get a 20 year level term insurance and add your husband as the spouse rider. With the information you given, it would cost about $200/month with $350k coverage on both of you (for a total coverage of $700k). After the term policy is issued, there are 2 things you can do with your whole life policy: 1) You can cancel your whole life policy and take the cash surrender value, which is cash value minus the surrender charge, or 2) do a 1035 exchange and move the cash surrender value into an annuity.
Annuity can pay a death benefit if you never touch the money or pay lifetime income when you begin withdrawing money. The death benefit for an annuity will always be the minimum of what you put in or the maximum value of the annuity. For example, if you put in $20,000 into an annuity and the value is $15,000, your death benefit is $20,000. If the value of your annuity is $30,000, then your death benefit is $30,000. When you start withdrawing money from the annuity, you lose the death benefit, but the annuity will pay lifetime income to you.
Are annuities right for you? I don't know your entire financial situation, so you have to decide that for yourself. In my opinion, annuities are good for people who are getting near retirement and have no retirement plan at all.
Here are some interesting information about whole life insurance in general:
1) You know its more expensive than term. When you were 30 and your husband was 32, it would of cost about $122/month for a 20 year level term, saving you about $200/month.
2) You know it already has low interest rate of 4%. If you saved the $200/month during the 12 years and invest it in mutual funds, which has an average annual return of 10.99% since 1980, you will have about $59k right now. Or with 8% return, about $48k. Are these interest rates guaranteed? No, but that how's the US stock market has historically perform over the long run.
3) If you want to take money out from it, you will be borrowing and paying interest rate of around 8%. With mutual funds, the money is yours. There is no such thing as borrowing.
4) If you die someday, the company keeps the cash value and pays the death benefit (unless your death benefit option in your policy reads option 2 or option B, then death benefit will include cash value). With term insurance, if you die during the 20 year term, your beneficiary gets both the life insurance and savings. If you die after the term, at least you will be leaving lots of money behind to your spouse.
Annuity can pay a death benefit if you never touch the money or pay lifetime income when you begin withdrawing money. The death benefit for an annuity will always be the minimum of what you put in or the maximum value of the annuity. For example, if you put in $20,000 into an annuity and the value is $15,000, your death benefit is $20,000. If the value of your annuity is $30,000, then your death benefit is $30,000. When you start withdrawing money from the annuity, you lose the death benefit, but the annuity will pay lifetime income to you.
Are annuities right for you? I don't know your entire financial situation, so you have to decide that for yourself. In my opinion, annuities are good for people who are getting near retirement and have no retirement plan at all.
Here are some interesting information about whole life insurance in general:
1) You know its more expensive than term. When you were 30 and your husband was 32, it would of cost about $122/month for a 20 year level term, saving you about $200/month.
2) You know it already has low interest rate of 4%. If you saved the $200/month during the 12 years and invest it in mutual funds, which has an average annual return of 10.99% since 1980, you will have about $59k right now. Or with 8% return, about $48k. Are these interest rates guaranteed? No, but that how's the US stock market has historically perform over the long run.
3) If you want to take money out from it, you will be borrowing and paying interest rate of around 8%. With mutual funds, the money is yours. There is no such thing as borrowing.
4) If you die someday, the company keeps the cash value and pays the death benefit (unless your death benefit option in your policy reads option 2 or option B, then death benefit will include cash value). With term insurance, if you die during the 20 year term, your beneficiary gets both the life insurance and savings. If you die after the term, at least you will be leaving lots of money behind to your spouse.
Q2) If all the beneficiaries die before the insured does, what happens to the life insurance death benefit?
A2) The death benefit will go the insured's estate.
Q3) How is life insurance taxed?
A3) If you live in the United States, life insurance proceeds are generally not taxable. If your life insurance builds cash value and you want to cancel it, you are very likely that you won't owe any income tax on it. The reason why is that the total premiums you paid in is far greater than the value of the cash value. If you have taken a loan from the cash value and didn't pay it back and someday you cancel the policy, you will owe income taxes on the loan balance. If you die and the death benefit goes to your beneficiary, your beneficiary will not pay any taxes on the death benefit.
Q4) Buy Term Invest Difference vs Whole Life?
Its been decided that I'll need a total of $100,000 in life insurance. I am trying to pick between a 20 year term policy (TP) or a whole life policy (WL).
If I get the TP, the annual premium is going to be $133. If I get the WL policy,
the annual premium is going to be $2500 for 20 years.
Here is the WL option, Choosing to show only 5 years is for simplicity but premiums are annual.
year of policy is 5 10 15 and 20
age is 34 39 44 49
premium paid 2500 2500 2500 2500
cash surrender value is 6000 28000 66000 100000
death benefit 100000 100000 100000 100000
for term 20 yrs:
year of policy is 5 10 15 and 20
age is 34 39 44 49
premium paid 133 133 133 133
cash surrender value is 0 0 0 0
death benefit 100000 100000 100000 100000
What annual rate of return should I get so that I can indifferent between these two policies when
the term policy lapses in 20 years?
Thank you for the help in advance. I greatly appreciate it!
If I get the TP, the annual premium is going to be $133. If I get the WL policy,
the annual premium is going to be $2500 for 20 years.
Here is the WL option, Choosing to show only 5 years is for simplicity but premiums are annual.
year of policy is 5 10 15 and 20
age is 34 39 44 49
premium paid 2500 2500 2500 2500
cash surrender value is 6000 28000 66000 100000
death benefit 100000 100000 100000 100000
for term 20 yrs:
year of policy is 5 10 15 and 20
age is 34 39 44 49
premium paid 133 133 133 133
cash surrender value is 0 0 0 0
death benefit 100000 100000 100000 100000
What annual rate of return should I get so that I can indifferent between these two policies when
the term policy lapses in 20 years?
Thank you for the help in advance. I greatly appreciate it!
A4) By buying term insurance, you will be saving $2367/year. If you invest the difference in mutual funds for the next 20 years, with 8% return you will have about $121,280. I'm being conservative with 8% because the S&P 500 in the last 20 years has about 11% return. If your investment has 10% return, you will have about $150,000. With 12% return, you will have about $208,000. If you open a Roth IRA, your money will grow tax deferred and when you are 59 1/2 years old, you can take money out and pay no income taxes. There are many mutual fund companies out there and I can't tell you which ones are the best, but I can tell you what I own. I invest in a mixture of Van Kampen mutual funds and Legg Mason Partners mutual funds. I have a total of 5 mutual funds that I own.
If you die during the term, at least your beneficiary gets both the death benefit and whatever money you have saved. With whole life, if you die, your beneficiary only gets death benefit and the insurance company keeps the cash value. Even if you die after the term, at least you will be leaving money behind to your beneficiary. In 20 years, you probably won't need life insurance. You should have very little or no debts at all and if you have kids right now, they will be adults.
Q5) I'm thinking about stop paying for my life insurance. What should I be aware of?
A5) If its term insurance, your policy will lapse and you will no longer be covered. If its whole life or universal life, the cash value (if any) will be used as a loan to pay for the premiums. If there is insufficient cash value to pay the premiums, then the policy will lapse. Also, if there is any loan balance on the cash value, then you will be liable for income tax on the loan balance.
Q6) Why does my life insurance policy have surrender charge?
A6) It is in case if you were to cancel the policy early, the company can recover its loss of paying commissions and initial policy fees by imposing surrender charge on the cash value, if any. Its another reason why you shouldn't get life insurance that builds cash value. You are better off getting term life insurance, which will cost significantly less, and investing the difference.
Q7) If I commit suicide, will the life insurance company pay?
A7) If you commit suicide during the first two years of the policy, the life insurance will not pay death claim. They may or may not refund the premiums to your beneficiary. After the first two years, the insurance company will pay no matter how you die. Read your life insurance policy for exact information.
Private Mortgage Insurance (PMI)
What is PMI or Private Mortgage Insurance? If you are looking to buy a new home and unable to make a down payment of 20% of the home value, the lender will add PMI to your mortgage payment. PMI protects the lender in case you default on the loan. Under Homeowner's Protection Act of 1998, lenders are required to cancel PMI when your principal amount reaches 77% (for high risk loans) or 78% (all other loans) of the original purchase price. You have the right to cancel PMI when the principal amount reaches 80% of original purchase price, but certain restrictions apply such as you have never been late on payments or the value of your home has not fallen or there is no 2nd mortgage on the home.
Please note that loans obtained before July 29, 1999 are not protected by this act, but some lenders follow this law whether the loan is obtained before or after this act. In either case, if you want to cancel PMI early, send a request immediately when the principal amount reaches 80% of the original purchase price. Just remember that restrictions apply if you want to cancel at 80%.
Please note that loans obtained before July 29, 1999 are not protected by this act, but some lenders follow this law whether the loan is obtained before or after this act. In either case, if you want to cancel PMI early, send a request immediately when the principal amount reaches 80% of the original purchase price. Just remember that restrictions apply if you want to cancel at 80%.
Thursday, January 14, 2010
UGMA or UTMA
For tax and other reasons, parents and grandparents and others may want to transfer their money or assets to children who are too young to handle these assets. One such way is to establish a trust. With the Uniform Transfers to Minor Act (UTMA) or Uniformed Gifts to Minors Act (UGMA), it provides a simpler and cheaper way to give a trust to child. Keep in mind UTMA and UGMA are both the same and there is no difference between the two, other than the name and the age stated in those acts. With UGMA, the child has full control of the account at age 18. With UTMA, which supersedes the UGMA, the age of majority can be 21 or as high as 25. I don't know which states adopted which act, so you have to do that research on your own.
With a UGMA/UTMA, no attorney is needed and you can establish an account for your child without having to establish a trust or name a legal guardian. Of course, a custodian must be named, which should be you or your spouse, and the custodian will be responsible for managing the assets in the best interest of the child. However, these assets cannot be used by the custodian for any personal purposes. That means, if you are the custodian, you can't withdraw money to buy a new home or put the money into your own investments UNLESS the withdrawal benefits the child.
When the child reach age of majority in his or her state, which could be age 18 or 21 or as late as 25, the child has full control of his or her assets. At that age, the child (which I should say an adult) can do anything he or she wants with the money.
Q1: How much are you are allowed to contribute into UGMA or UTMA accounts? There is no limit. However, someone setting aside money in one of these accounts needs to be aware of how larger gifts affect their annual gift tax and lifetime estate tax exclusions.
Q2: Who pay income taxes on the account? This part gets a little tricky. Every child under 19 years old (or 24 if a full-time student), who files as part of their parents’ tax return, is allowed a certain amount of “unearned income” at a reduced tax rate. Currently, the first $850 is considered tax-free, and the next $850 is taxed at the child’s bracket (10% for Federal income tax). Anything above those amounts is taxed at the parents’ rate, which may be as high as 35%.
Q3: Will this account affect the child's eligibility for financial aid? Establishing a UGMA or UTMA account will lessen the chances of your child qualifying for financial aid since all assets in the account belongs to the child. However, this website has more information to reduce that risk: http://www.finaid.org/savings/ugma.phtml
Q4: So who should open a UGMA or UTMA account?
A custodial account is ideal for a parent or grandparent who:
With a UGMA/UTMA, no attorney is needed and you can establish an account for your child without having to establish a trust or name a legal guardian. Of course, a custodian must be named, which should be you or your spouse, and the custodian will be responsible for managing the assets in the best interest of the child. However, these assets cannot be used by the custodian for any personal purposes. That means, if you are the custodian, you can't withdraw money to buy a new home or put the money into your own investments UNLESS the withdrawal benefits the child.
When the child reach age of majority in his or her state, which could be age 18 or 21 or as late as 25, the child has full control of his or her assets. At that age, the child (which I should say an adult) can do anything he or she wants with the money.
Q1: How much are you are allowed to contribute into UGMA or UTMA accounts? There is no limit. However, someone setting aside money in one of these accounts needs to be aware of how larger gifts affect their annual gift tax and lifetime estate tax exclusions.
Q2: Who pay income taxes on the account? This part gets a little tricky. Every child under 19 years old (or 24 if a full-time student), who files as part of their parents’ tax return, is allowed a certain amount of “unearned income” at a reduced tax rate. Currently, the first $850 is considered tax-free, and the next $850 is taxed at the child’s bracket (10% for Federal income tax). Anything above those amounts is taxed at the parents’ rate, which may be as high as 35%.
Q3: Will this account affect the child's eligibility for financial aid? Establishing a UGMA or UTMA account will lessen the chances of your child qualifying for financial aid since all assets in the account belongs to the child. However, this website has more information to reduce that risk: http://www.finaid.org/savings/ugma.phtml
Q4: So who should open a UGMA or UTMA account?
A custodial account is ideal for a parent or grandparent who:
- Isn’t worried about the assets going to the child if unused.
- May want to use the money for pre-college education or expenses.
- Wants greater investment options than a Section 529 account.
- Isn’t worried about getting “needs” based financial aid.
- Wants to lower their taxes on a couple thousand dollars in annual investment income.
- Wants to lower their eventual estate by using their annual gift tax exclusion.
Sunday, January 10, 2010
United States Senate Report on Life Insurance
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