Monday, August 01, 2011

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LIFE INSURANCE
What I recommend: Term life insurance.
Any life insurance that builds cash value are ripoffs.

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Friday, July 08, 2011

Globe Life and Accident Insurance Co. ad


Look at this ripoff advertisement that was in my mail box:



From an average person, this looks like a great deal. Ok, lets break it down:

Lets start with the $3.49/month you see. As anyone know, rates is heavily dependent on your age among other factors such as health, height, weight, coverage amount, etc. Its says "$1 pays for the first month. Then the rates are based on your current age and are guarantee for the life of the policy." That means after the first month, expect your premiums to increase dramatically. So the $3.49/month is really the policy fee with $0 coverage.

"Death benefits are paid free of federal income tax." Life insurance death benefits are never taxable. It is taxable when it is put into an estate.

"Coverage is also available for your spouse and other family members." Instead of covering you and your spouse in one policy, they want to sell everyone an individual life insurance policy. Do you know that each policy has annual fees of around $50 or more (depends on the company)?

"Benefits will NEVER be canceled or reduce for the life of the policy if premiums are paid on time." Well duh. If you pay your premiums on time, you keep the benefits. Its when you are late or miss your payments in which this company can cancel your policy or lower your benefits.

"Give your children a financial head start right now. Your policy also builds CASH VALUE and you can use the cash for your family's needs." This should a red flag to anyone who thinks life insurance will build a financial future for your child. If your child ever wants to take money out from the cash value, he or she would have to borrow it and the insurance company will charge 8% interest. The cash value will grow at a very low rate of return. If you bought $50,000 coverage on the child, it will take until your child reaches the age of nearly 100 years old (which is when the policy will expire) in order to have $50,000 in cash value. If your child dies, the insurance company keeps the cash value, but they pay the death benefit to the beneficiary (which is most likely to be you, the parent). Your child is never going to see that $50,000 until he or she is about 100 years old. What financial head start is the child getting? Absolutely none! If you really want to build a financial future for your child, open an investment account such as UGMA/UTMA and invest in mutual funds. If you want to send your child to college, open a 529 plan. If you really want to put coverage on your child, add a child rider to your life insurance policy.

In case you are wondering, this advertisement is for a whole life policy. As any financial expert knows, whole life insurance is a total ripoff. True financial professionals with moral ethics will tell you to buy term and invest the difference. Get the right amount of coverage you really need that covers any debts you have such as a mortgage, your children, and so on. At the same time, invest your money in equities. As times goes on, your savings goes up, your financial obligations goes down, and your children will become adults. In 20 to 30 years, what need would you have for life insurance if there's no one dependent on your income?
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Thursday, May 26, 2011

An ideal life insurance policy

Here are characteristics of an ideal life insurance policy

1) It does not build cash value.
2) You are able to exchange or convert it into another term policy
3) It includes terminal illness death benefit. If you are diagnosed to be terminally ill, you can use some of the face amount for whatever purpose and when you die, the remaining balance of face amount is paid to your beneficiary.
4) It does not contain "no war" clause in it. If you died by war or terrorist attack, the insurance company can deny paying death claim. I strongly believe this no war clause should be banned. It serves an injustice to all the men and women who are serving in the military.
5) Family banding coverage. Similar to where you can cover all your cars in one auto policy, you can cover your whole family, or at least you and your spouse, in one single life insurance policy. Every policy has annual fees included in your premium and it makes no sense to have multiple life insurance policies. You only need one life insurance policy.
6) Option of adding Disability Waiver of Premium rider to it. In case you do become disabled, the insurance company can pay your life insurance policy for the rest of your life.
7) Option of adding Child insurance rider to it. If you want to cover your kids, add this rider. You only want coverage that is just enough to cover funeral expense.
8) Option of increasing your coverage every year for 10 years or longer and that rates are based on issued age, not the age you increase your coverage.
9) It comes with a financial needs analysis that is able to tell you exactly how much coverage you really need and for how long.
10) The insurance company has a strong financial rating of A+ or better.
11) If its term, it must be guaranteed renewable. As you get older, your health is not as great as you were 25 years old. With guaranteed renewable, you can renew the term without having to go through medical testing or physical exam. If you renew, rates should go up every 5 years or longer. It should not go up every time you renew.
12) It guarantees coverage until you are 95 or 100 years old.


Of hundreds of life insurance companies in America, I find that only one company meets all twelve criteria. That is Primerica.
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Friday, March 25, 2011

Suze Orman on Life Insurance

*BEFORE CANCELING YOUR WHOLE LIFE, UNIVERSAL LIFE, OR VARIABLE LIFE INSURANCE INSURANCE, FIRST FIND OUT IF THERE IS STILL A NEED FOR LIFE INSURANCE. IF YOU DO, THEN GET TERM LIFE INSURANCE. AFTER THE TERM POLICY IS ISSUED TO YOU, THEN CANCEL YOUR WHOLE LIFE, UNIVERSAL LIFE OR VARIABLE LIFE INSURANCE.*

Cash value life insurance vs Term Insurance
PART 1: A husband (age 36) and wife both own whole life insurance with $50k coverage on each. They claim to have 3 years left to pay off the whole life insurance. They been paying $270 every 3 months for the past 12 years (a total of $1080/year). The cash value amount is unknown, but it should be around $9000 to $10000. If they invested $270 every 3 months and got 8% return, in 12 years they would have about $21,000 today. If they invest it for the next 50 years, they would have about $638,000.

He also has 2 kids ages 6 and 9 bought whole life insurance on them. Both policies have $25,000 coverage and pay $150/year on each (a total of $300/year).

What I recommend: If he and his wife both get a 20 year level term policy with $500,000 coverage on each, it would cost about $800/year, saving them about $500/year. If they invest the difference of $500/year, with 8% return they would have around $25,500 in 20 years.

PART 2: Husband and wife both age 29. Husband have $500k whole life policy and pays $350/month for it. With a 20 year level term, it would cost about $30/month. If they invest the difference of $320/month, with 8% return, they would have about $190,000 in savings.


Be Aware of Your Friend recommending Whole Life Insurance as "Investment"
A 31 yr old man buys $500,000 coverage for $14000/year from his friend and thought it was an investment. His friend got a nice paycheck of over $10,000. With 20 year level term, it would cost $25/year to $30/month or $300/year to $360/year. If he invested the difference of $13600/year in equity mutual funds for the next 20 years, with a 10% return he would have over $900,000 in savings. Even if the fund performed at 5%, he would have about $480,000 in savings.



Be Aware of Financial Advisor recommending Variable Life Insurance
A wife with 2 kids has a husband that own a variable life insurance for 6 years. They pay $650/month with death benefit of $750,000. A 30 year old can buy 20 year level term for about $50/month. If they invest the difference of $600/month for the next 20 years, with a 10% return they would have about $460k.

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Saturday, December 11, 2010

Ways to lower your estate taxes

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.
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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?
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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:

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!

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.


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!

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.
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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%.
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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:
  • 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.
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Sunday, January 10, 2010

United States Senate Report on Life Insurance

Move your mouse over each page and click to see a larger view of the scanned image.

page 1

page 2


page 3


page 4

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Sunday, August 17, 2008

Term Insurance

Term insurance is designed to provide death protection for a definite and limited period of time such as One Year Term, Five Year Term, 30 year Term, or Term to 65. If the insured dies during the term, the policy matures and the insurance company pays the face amount of the policy to the beneficiary. If the insured doesn't die during the term, the policy expires.

The second most important characteristic of Term insurance is that it is pure insurance. You pay premiums only for the coverage. Since there are no forced savings or cash value attached to Term insurance, it is designed to provide the greatest possible protection for the lowest possible cost. Therefore, the two key points to remember about Term insurance are that if offers (1) protection only for a (2) a specified period of time.

One of the most widely marketed forms of Term insurance is Annually Renewable Term (ART). The insurance company grants the insured the right to renew the policy each year to a stated date or age. The cost to renew the policy goes up each year because the rates are based on the insured's attained or current age.

The increasing in premiums can present a real problem for the insuring public. One Term product that provides a partial solution to the rising costs is Level Premium Term. With a policy of long duration, the payment may be leveled out over the life of the policy to create Level Premium Term. The cost of Level Premium Term is calculated by price of the early years by the price of the later years. So in the beginning, you are making an overpayment of what the actual cost of insurance is. But in the later years, you are making an underpayment of what the actual cost of the insurance is. Why? Because the cost to insure someone is young is low compare to the cost of insuring someone who is old.

Term insurance, then, in any of its many forms, is the most affordable protection available for the premium dollar. It is particularly suitable for a person who only need temporary need for protection (See Theory of Decreasing Responsibility), for a person who may want permanent insurance in the future, or for the person who has the discipline to buy Term and really invest the rest.

There are 5 types of Term insurance you should know about:
1) Level Term
2) Decreasing Term
3) Increasing Term
4) Renewable Term
5) Convertible Term

LEVEL TERM: Coverage remains constant throughout life of the policy. Premiums remain constant for the stated period of time.

DECREASING TERM: This is where coverage decreases over time, but premiums usually remain constant. This is suitable for someone who has decreasing financially responsibilities over time such as a mortgage payment. If you purchase life insurance from a mortgage company, it is most likely a decreasing term insurance.

INCREASING TERM: Death benefit increases each year and premiums goes up as well. This is suitable for someone who see that he/she will have increasing financial responsibilities over time (such as having kids or buying a new home).

RENEWABLE TERM: In addition to normal benefits found in a Term policy, you can make a Term policy renewable without having to provide proof of insurability. The most common forms of Renewable Term are Five Year Renewable Term or Annually Renewable term. The premium will remain level during the policy period, but will increase at renewal due to the insured's newly attained age.

CONVERTIBLE TERM: With this form of Term insurance, you have the right to convert a Term policy to any form of permanent protection (such as Whole Life) without having to show proof of insurability. Most companies stipulate the length of the period in which this privilege may be exercised. If the insured fails to convert before the deadline, the right to convert is lost forever, but the term insurance coverage can be continued. When conversion is made, the premiums will increase significantly because permanent forms of insurance are more expensive than term insurance and also because the new premium will be based on attained age.
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Saturday, August 09, 2008

Whole life insurance

Whole life insurance is a form of life insurance which has a guaranteed level death benefit until death or age 100, which ever comes first. It also builds a guaranteed cash value which will equal the face amount of the policy at age 100. So if you have coverage of $100,000 and you are still alive at age 100, the insurance company will void your life insurance policy and pay you $100,000.

Premiums remain level and there are 3 ways you can pay your premiums. The most common way is called "Straight Life" or "Continuous Premium Whole Life." This is where you premiums continuously until you die or when you reach age 100.

The second way is called "Limited Pay." This is where you pay a higher amount of premiums than Straight Life for a certain amount of time. Examples of this are "20-Pay Life" or "Life Paid at 60." With "20-Pay Life" you pay your premiums for 20 years. "Life paid at 60" means you pay your premiums until you reach 60 years old. The shorter the payment period, the higher the premiums and vice versa.

The third way is called "Single Premium Whole Life." This is where you pay one lump of premium and never have to pay it again.

As I mentioned earlier, Whole life insurance builds cash value. You can borrow it anytime and use it for any purpose. The question is "what is this borrowing part all about?" Isn't the savings suppose to be your money? The answer is no. The premiums you pay belongs to the insurance company.

If you want to take money out from your life insurance, you have to borrow it. The insurance company will charge you a loan interest of anywhere between 5-8%. But in the first 2 years of the policy, no cash value is accumulated. So there's nothing you can borrow during that time. After the first 2 years, you are guaranteed an interest rate between 1-3%. When you borrow money from the cash value, your death benefit is reduced by the amount you borrowed until you pay it all back, but the premiums remain the same. Interest charged on the amount you borrowed does not go back into your cash value. It goes directly to the insurance company.

If you die someday, the insurance company keeps your cash value and pays the death benefit only.

If someday, you decide you want to cancel your whole life policy, you will get most of your cash value. When you cancel your life policy, the insurance company may charge you a surrender charge on your cash value. If you borrowed money from your cash value, it is important that you pay this loan back before canceling the policy. Failure to do so will result in income tax on the loan amount.

In summary, here are the pros and cons of whole life insurance:
PROS
1) You are guaranteed coverage until you die or reach age 100, whichever is first.
2) Premiums remain level.
3) It builds cash value.

CONS
1) It builds cash value, which makes this type of life policy very expensive.
2) Cash value grows at a low rate of return
3) If you want to use the cash value, you have to borrow it and pay loan interest of 5-8%
4) If you die, the insurance company keeps your cash value.
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What is life insurance?

First of all, lets discuss what "insurance" means. Insurance is the transfer of risk of financial loss from an individual to a company which, for consideration, assumes that risk for a stated period of time against a stated peril(s) up to a stated amount. In other words, insurance is where the policyowner trade for a small loss (the premiums) for the insurance company's promise to pay for a large, unknown loss. All the policyowners lose a little, but no one has to take the risk of losing everything. All insurance policies are contracts, which means nothing more than an agreement between two or more individuals or parties.

If you ask yourself, what is your greatest asset? Without much thought, you would say that it is your bank, your car, or your house. If you answer anything besides "yourself," your answer is wrong. Your earning ability is your greatest asset. Your ability to go to work and bring home a paycheck is your greatest asset. But you can't go on with life without being exposed to risk. In insurance, risk is defined as "uncertainty of financial loss." You have to live with the risk that you (or your spouse or partner) could lose the ability to bring home a paycheck. This is where life insurance comes into play.

What is life insurance? Life insurance is a contract under which the insurance company agrees to pay a stated amount to a beneficiary upon death of the insured. If something were to happen to you tomorrow, how would your family live? Would their life style change for the worse, be the same, or be better? In most cases, your family would be worser off because the flow of income from you has stopped. Your spouse may need to sell the home, use your kid's college funds to pay off bills, and so on. Without adequate protection, your family will not be able to maintain the same life style that they are currently in.

Life insurance can't protect you from dying, but it can protect your income. Financial experts say you should have coverage of 8-12 times of your annual gross income. If you earn $40,000/year, then you would need coverage of around $400,000. The question is: Do you have life insurance and if you do, do you have adequate coverage on yourself?

If you are single, you are probably wondering why you need life insurance. For most singles, they really don't need life insurance. There's no one really dependent on his/her income. He/she has no financial obligations that will be passed on to other family members (unless the debt is a joint account such as a mortgage or credit cards). But there are some reasons why a person who is single may need life insurance. He or she may want to leave money to their loved ones such as parents, brothers or sisters. He or she don't want to pay higher premiums in the future. He or she don't want to be un-insurable because of the possibility of declining health. In any case, a person being single has to determine whether he or she needs life insurance.

There are two main types of life insurance you should know about. One type of life insurance builds savings, which is called "cash value life insurance." The other type is known as pure insurance because its just insurance without any savings. This is called "term insurance." It is important to know that all life insurance policies are term insurance because all policies expires at a certain age (usually at age 100).

See also:
Cash value life insurance
Term insurance
Comparing cash value life insurance and term insurance in numbers.
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Saturday, February 16, 2008

Certificate of Deposit (CD)

A Certificate of Deposit or a CD is a promissory note issued by a bank. When you open a CD account and deposit money into it, you are restricted from withdrawing money from it during the term of the CD. If you do need to withdraw money, the bank will charge a fee. The term of a CD is between 1 month to 5 years. Your savings will earn a fixed interest rate that is generally higher than a regular savings account. At the end of the term, your CD will enter a phase called a maturity date. Only then can you withdraw money from the CD without penalty. If you do not do anything to your CD, the CD will automatically enter another term.

Personally, I have never open a CD account. I found banks that earns higher interest rates on the savings account than a CD. I also invest my money in the market. CDs are good for short term goals, but for long term goals, you are better off investing into mutual funds.
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Sunday, November 11, 2007

Subprime Mortgage

What is a subprime mortgage? This is where the lender approves the loan for someone who has a credit rating below 620. Interest rate is also higher than conventional mortgages because the borrower is deemed high risk on defaulting on the loan. How high the interest goes depends on the size of the down payment, how often the borrower missed his/her payments in the past, and the credit score.

Many subprime mortgages comes with a prepayment penalty. If the homeowner pays off the loan faster than predicted or he/she refinances, he/she will pay a prepayment penalty. Some subprime mortgages are balloon mortgages. This is where the borrower will have to pay the full remaining balance at the end of loan term (usually in 5 to 10 years).

In the year 2007, many homeowners with subprime mortgage were force to foreclose on their home because of rising interest rates, which leads to higher monthly payments. In fact, some mortgage companies went into bankruptcy because of all the foreclosures.
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Monday, September 10, 2007

ROP Term Insurance

As I thought the life insurance industry can't screw people up more than they already have with the cash value life insurance, a new type of term insurance called Return of Premium (ROP) Term Insurance been showing up these days.

ROP Term Insurance is nothing more than screwed up version of whole life insurance. While its less expensive than Whole Life insurance, its more expensive than term insurance. If you don't know this fact, whole life insurance builds cash value which you can borrow at anytime (don't that sound awesome to borrow your own money?). In ROP Term Insurance, it doesn't build cash value. Instead, the insurance company takes the extra money and invest it into their own accounts. You maybe able to borrow the money, but that will cost you more money. At the end of the term, they will return all premiums back to you and keep the gains for themselves.

Does that mean this type of life insurance is free? Absolutely not. Take a look at this example:

Lets say you are in perfect health and you are 30 year old. You purchase a 30 year term policy with $500,000 coverage. With a level term policy, it will cost you around $45/month. With ROP Term policy, it will cost you around $80/month. The insurance company will invest the difference of $35/month in their own account. At a 12% rate of return, they will accumulate about $124,000 in 30 years. The total amount you paid in for those 30 years is $16,200. How excited are you to get back the $16,200 you paid for while the insurance company made a profit of $107,800?

As you can see, insurance is never free. The cost of you buying a ROP term policy in that example is $107,800. You could of made $124,000 in your own investment account. How excited are you about getting a 0% return on your money?

What if you die during the term? If you died during the term, then you have overpaid your premiums. No one knows when they are going to die, which makes ROP term insurance more costly to the consumer. Most people think they will live well beyond the 20 year or 30 year term, but anything can happen. Are you willing to take that bet by paying more on ROP term insurance than a regular term insurance? I wouldn't. I would rather get more coverage and pay less money on a regular term insurance than to get ROP term insurance. At least I know I won't be overpaying my premiums if I die. I would also invest my own money somewhere else than to bundle them together with life insurance. If I live beyond the term, I would have a nice nest egg built up.

In closing, no matter what crazy idea that the life insurance industry may come up with, traditional level term policies are always the best type of life insurance for the consumer. Its inexpensive and it enables you to put your savings where ever you want such as CDs, money markets, mutual funds, IRAs, 401(k), etc.

SOME ADDITIONAL FACTS:

-The shorter the term on ROP term insurance, the more costly it is. A 20 year ROP term will cost 3 to 5 times more than 30 year ROP term because there is less time for the additional funds to grow (the additional funds is the difference between ROP term insurance and the regular term insurance).

-Insurers tend to promote policies of 30 years as financially most sensible. But that's a lengthy commitment many people may have trouble keeping. People are notorious for letting their coverage lapse because of changed family conditions, budget constraints, or the lure of a better rate at a different firm. Drop out early with a return-of-premium policy, and at best you'll get back only a portion of your premiums--perhaps 10 percent after 10 years on a 30-year policy, building to about 35 percent or so by year 20. In the unkindest cut, if you do die your heirs will get the policy's face value just as if you had bought the cheaper regular term.
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Sunday, August 26, 2007

Life insurance medical exam

Depending on how much coverage you purchase, your life insurance company may required you to do a medical exam on you. They will check your weight, height, urine, and blood to figure out whether you qualify for life insurance or not. If you do qualify for life insurance, they will categorize you with the appropriate rate. For example, if your weight matches with your height and you are in perfect health, you are very likely to be rated as "preferred" or "preferred plus". If your weight doesn't match with your height or if you have high blood pressure, you will be rated as "non-tobacco user." If you smoke or had smoke in the past 12 months, you are automatically rated "tobacco user."

Usually, if you purchased $100,000 coverage or more, a medical exam is required. Some life insurance companies advertise that no medical exam is required. I would be very careful when you buy life insurance from companies that doesn't required a medical exam. First, their rates are usually higher than the industry's average. Second, they rarely pay out their death claims. Why? You have to be in perfect health when you die, which means you have to die naturally and not by any other factors such as cancer or heart attack or from an accident.

I don't know why some people have a big deal with the medical exam. Its standard procedure and all the information collected is kept strictly private. If you take illegal drugs and it shows up in the urine exam, the medical examiner is not going to call the police. The life insurance company will just deny coverage on you. So, there's no harm done. Also, they might find something about you that you don't know about such as cancer or HIV. So there's no reason to not get a medical exam. Best of all: this medical exam is free!
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Thursday, July 12, 2007

Life insurance: What is a dividend?

When a life insurance agent says your life policy will pay dividends, you have to know that dividends are never guaranteed. There are three reasons why your life policy may pay dividends:

1) You have overpaid your premiums, so the insurance company refunds the excess premiums to you as a "dividend."

2) Many life insurance companies during the 1990s were fined by individual states for lying and deceiving consumers about cash value life insurance. Many companies were able to pay the fines and many were not able to. Some companies opted to sell stocks to its customers to recoup the loss. Of course, the company will have a sales charge and have high annual expenses. You will never get a good rate of return if you have investments in life insurance policy. It's just not physically possible.

3) Your life policy is a "participating policy." The dividends represent the favorable experience of the company and result from excess investment earnings, favorable mortality and expense savings.

In all cases, you must know that dividends are never guaranteed. Any agent that says otherwise would be subjected to fines set by the SEC.
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Thursday, June 28, 2007

Checking account & How to write a check

Similar to a savings account, its an account in which you can write checks. When you open a checking account, you will get a check book. Many banks charge a fee, others give the first check book for free. Instead of using cash to pay for things, you can now write a check. Its convenient and somewhat easy to use. I say somewhat easy because at the beginning, you may make mistakes when you write a check. You have to be more financially responsible with your checking account than your savings account. If you write a bad check (meaning there is insufficient funds in your checking), the bank will charge a fee and the check may either bounce back or the bank will cover it.

Here's one thing you should take from my experience: "ALWAYS BALANCE YOUR CHECKING ACCOUNT." If you put money in, record it and add it to the current balance. If you take money out or wrote a check, record it and make the deductions from the balance. If you get lazy and you don't do this, you are going to throw yourself off and you are going to wonder how much money you have in your checking account. I personally use Microsoft Money software to track my checking account (I also use it for other purposes such as tracking my investments and other money stuff).

HOW TO WRITE A CHECK
In the age of digital technology and internet, the art of writing a check may be lost. Most people pay their bills online than mailing their check and putting a stamp on the envelope. But there will be a time when you need to write a check out and so here, I will teach you how to write a check

Step 1) Very simple, write the date next to the "Date". You might want to use numbers instead of writing it out. You don't have much space to write the whole date out in letters and numbers.

Step 2) Find out who you are writing the check to and write the name on the line next to "Pay to the Order of"

Step 3) After that, write the correct amount in the box next to the "$"

Step 4) On the line under "Pay to the Order of", write out that amount from Step 3 in LETTERS. You can either print it or write in cursive. Most people tend to mess up here. If you are writing a check out for $1433.21, it should read "One Thousand Four Hundred Thirty Three and 21/100" MAKE SURE YOU WRITE THIS OUT CORRECTLY!!! Be careful where you put the word "and". ***If there's lots of space between your writing and the word "Dollars", draw a line in between them.***

Step 5) Sign (DON'T PRINT) your name on the line near the lower left hand corner.

Step 6) This is optional, but on the line next to your signature is the memo line. It may say "For" next to it. You don't have to put anything on there. Some companies ask you to write the account number or policy number on the memo line so that they can credit the right account. (There could be more than one person who has the same name as you).

Step 7) Note the check number, date, the payee and the amount on the check. You should record this in the check ledger, located near the front of the check book. Make the appropriate adjustments on the balance. In my example, if you had $5000 in the checking account and you wrote a $1433.21 check, the new balance would be $3566.79.

Step 8) When you get your monthly bank statement, you want to make sure everything is accurate. (even banks can make errors. Its rare, but it does happen).

Near the end of your check book are deposit tickets. If you want to deposit money into your checking account, you would use these ticket. I personally deposit money into my savings account and then go home and then transfer the money from my savings to my checking account online. You don't have to do it my way, I just find that way easier for me.

About those numbers on the bottom of your check:
1) The numbers on the bottom of your check includes your bank routing number, your checking account number, and the check number.
2) The first 9 digits is your bank routing number.
3) The next 9 digits is your checking account number.
4) The final 3 or 4 digits is your check number, which is also located on the top right hand corner of the check.
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Wednesday, June 27, 2007

Savings account

I don't know why I'm posting this. But it seems that there are people who don't have one and probably don't understand what it is.

Simply put, a savings account is a place to save your money and you will earn monthly interest on it. You can open a savings account at any bank. In the United States, almost all the banks are FDIC insured. That means, if something were to happen to your account, your account is insured up to $100,000. So if you had $20,000 in the savings account and someone stole it, you are insured up to $20,000.

Keep in mind, interest rate on your savings account are subject to change. I remember I was getting 5% on my savings account in the 1980s. In the late 1990s to the time I write this, I now get less than 1% on my savings. Then I came across online savings such as EmigrantDirect, HSBC Direct, Citibank e-savings, and so on that gives 4.50% to 5.10% on their savings accounts. These too are also FDIC insured.

So how you open a savings account? Go to a bank and ask to open one up. They will tell you what you need to open one. I would pay special attention to their fees (if any), the minimum balance requirement, and the interest rate they offer.

What can you do with your savings account? You can deposit and withdraw money from it at anytime. Though, you won't be able to pay your bills with cash (and no legit company is going to accept cash as a method of payment). You need a checking account to pay your bills.

How much should you have in there? I wouldn't keep too much in there since they don't have a great return on them. They are good for short-term uses such as going on vacation or buying a home or for emergencies. Though, I would recommend using money market funds as your emergency fund. They tend to perform slightly better than what you get in your savings account.

If you are going to save for long term such as retirement, you need to invest. This is how people become wealthy when they retire. They invest early and stick with it for the long term. I suggest investing into mutual funds. Some say you should invest in no load funds. I say, it doesn't matter if the fund is a no-load or load fund. Both will get the job done.
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