Mac’s Blog

In my 26 plus years of Retirement Planning, Life Insurance has been very important to facilitate desired results.  The early 80’s, the product was Whole Life or Dividend Paying Life, later I added Standard Universal Life.   The inside tax protected growth of life insurance is and has been very useful when the product is designed correctly and life insurance is necessary.  Over the years, each life insurance policy has performed as designed and made significant difference in the lives of my clients or their heirs. 

On the other hand, Term Insurance has not been a factor in Retirement Planning.  The value of Term Insurance has and is short term.  Term Life Insurance provides the most coverage for the cost and at younger ages is very affordable.   The best Term products remain Level Death Benefit with Level Premium policies, with premium remaining fixed for a number of years.  Generally, these policies are obtained for level periods of 5 to 30 years.  The problem with Term Insurance is its design to eventually price an insured out because of increasing premium after the level premium period, requiring the policy to be dropped prior to payout of death benefit.  With Term Insurance you are actually renting rather than owning insurance coverage.  However, recently another factor, Life Settlements, has entered the insurance picture and may make holding a Term Life insurance policy longer more acceptable and usable in the retirement plan. 

Life Settlement is when another party buys a life insurance policy from an insured based on present value and life expectancy of the insured.  The buyer then pays the premium until death of the insured or the policy matures.  At death of the insured or maturity of the policy the new owner is paid the death benefit.  This concept may strike you as ghoulish or even dangerous, but if you are struggling to pay premiums or no longer need the policy it can be useful.  Like all new things this concept has and is being abused but the various State Insurance Departments are and have been taking steps to correct the problems, but that is another posting. 

How does Life Settlement and Term Insurance affect a retirement plan as a value?  

At age 50 or 60 a Term Plan is obtained providing level premium to age 80, but prior to age 80 or later, there is no longer an absolute need for the coverage.  If the policy is dropped there is no return of value, you have been renting insurance to fill a need that may no longer exist or be affordable, similar to renting an apartment.  Enter Life Settlement; a 75 year old man with a million dollars in coverage might sell the policy for $250,000 or more depending on health.  

Is this good planning; no, but late in life or given certain situations it could be.  The problem; actual value of a Life Settlement cannot be assigned prior to actually committing to the settlement.  However, prior to the advent of Life Settlement Buy Outs, Term Life Insurance had no value when no longer required or could no be afforded. 

Life Settlement buy out of life insurance policies no longer required or affordable has, in certain cases, changed life insurance policies with no current value to the living into a valuable living asset. 

The Life Settlement transaction is one that should ONLY be made with advice from a trusted agent or financial representative.  The use of a Life Settlement sale can develop unsuspected tax, estate or family problems.  In no case should any insured deal directly with a Life Settlement company and honorable companies will only work through the insured’s financial representative.  Making the decision to sell an individuals life insurance policy must evolve more consideration than a “Strangers” offer to buy the policy.  

Before making a decision such as this you must understand; what you’re being advised to do, how you benefit from the transaction, how it fits with your retirement or estate plan and your long term goals and objectives.

Hubert W. McMinn Jr.

Hubert McMinn is a retirement planning specialist working within Texas, USA and located in the Houston area. To better understand how to better protect your family and develop a better retirement foundation, contact Hubert McMinn by email at  hmcminn@plannedassets.com  or  for retirement planning ideas and concepts, visit him at: www.plannedassets.com.

Mr. Jason Zweig in his by line,  Wall Street Journal 10/17/09 Page B-1; the Intelligent Investor, states that very often investors forget to consider/remember cost of fees and their effect on investments.  His illustration provides that the average cost of owning Taxable Bond Funds due to fees runs 1.03% to 2.98% of invested assets, with actual yield currently at an average of 3% to 4%.  Thus,  what is real return on investment? 

So far this year investors have invested more than $200 billion in bond funds not the relative cheap “index funds, but the far more expensive actively managed portfolios”.  Bonds and bond funds are not without risk of loss and currently are at historical low interest rates but if (when) interest rates raise those fees could have serious impact on return on investment.

 Mr. Zweig speaking of fee blindness, points out that fees are also overlooked or forgotten by Mutual Funds investors.  The key, awarness   of real investment cost and your real cost to play.  Most investors have a problem correlating fee percentage points, Mr. Zweig recommends “dollarizing” your expenses to get a better handle on actual investment cost.  “Look up the annual expense ratio of your fund and multiply it by the total amount of your investment.  The result; an estimate of your annual cost, in dollars, of owning the fund.  That is roughly what will be deducted automatically from your account over the year.”    The fee is required regardless of how the fund does and can add insult to injury in a down market.  The question is; is the expense a good value for the performance and risk of the investment? 

Fee blindness is prevalent with institutional investors just as it is with individuals and perhaps more.  But concerning retirement assets in a market were 30 or 40% has been lost, are we indulging in “myside bias”, are we doing our homework and is risk worth possible gain?  In making investments there are often other funds with the same portfolio, or investment products with lower cost to play and/or much lower risk.  Some of these products, indexed annuities are one, provide lower fee cost, less risk with possible better than good return on investment.  The question then; is the sales agent looking out for your interest or his, doing his homework and  providing the best cost product for value based on performance, risk and fees?  Do you understand what you’er being advised to obtain, how it fits in you retirement assets and the potential risk?

 As January 2010 approaches Financial, Retirement and Estate planners extol the benefits (there are many) of converting qualified money to Roth IRAs.  The tax bite of a conversion should be well understood before embarking down this path as well as Roth’s five year rule on interest distributions.  But, another bite not often mentioned; impact of conversion of assets to a Roth IRA on Medicare part B premium.

Conversion to a Roth has direct impact on Modified Adjusted Gross Income (MAGI) or your taxable Income and Medicare part B premium is based on MAGI.  Conversion will increase AGI each year a conversion is made.  In considering a Roth conversion; impact of conversion on MAGI must be balanced against long term benefits, including impact on Medicare part B premium.

Depending on MAGI, higher income individuals or married couples have to pay higher premiums for Medicare part B.  Standard premium 2009 and 2010 [if the bill before congress to freeze part B rates at 2009 levels passes] is $96.40 per month per person.  Individuals with MAGI higher than $85,000 and couples filing jointly with MAGI higher than $170,000 will find part B premiums increased from $134.90 up to $308.30 per insured.

The Social Security Administration reviews your tax returns each year and considers your MAGI [AGI + certain tax-exempt interest income] and appoints a premium for your part B coverage for the rest of the year.  Normally, impact on your part B premium starts the year after completing and filing you tax return.  If you file your 2010 tax return in 2011, your premium should not go up until 2012.

Roth IRAs have incredible benefits, long term, but Roth IRAs are not right for everyone’s planning for retirement!  Making the right decision to convert or not convert requires knowledge and understanding concerning tax ramifications compared to long term benefits. The key word here is LONG TERM; in a short term situation a Roth IRA conversion will have little or no worth while benefit.  Conversion of some are all retirement assets to a Roth IRA can provide benefits with Social Security tax requirements, qualified plan Required Minimum Distributions, Medicare part B premiums, as well as other benefits including Estate planning and distribution.  But making the wrong decision for a Roth conversion is not repairable and damaging to your retirement plan.  In the final analysis this decision must be treated like any other dealing with retirement planning, if you don’t understand the process, cost and benefit don’t do it until you do. 

As I have written many times, obtaining and maintaining successful retirement requires planning (a written plan) and to formulate this plan you’ll need knowledge about available options, dedication to stay current on the many changes that will occur during your decades of retirement, and the foresight to steer clear of risks you can’t afford. The smart retirees learn as much as they can about retirement investments, realistically assess their ability to shoulder risks and engage the services of a retirement professional to help them design a plan and monitor it in motion. 

Hubert McMinn                                                                                                      October 12, 2009 

www.plannedassets.retirerx.com

The greatest fear most individual have in planning for retirement is outliving their money. This fear starts with “will I have enough to retire”, followed by “what about inflation”.  Another fear/worry has become more pronounced with investment loss factors of 2000 and again in 2008-2009, “will the money be there when I am ready to retire”.   Once you get pass these worries the next worry is “longevity risk” meaning if you spend too fast you realize your worst fear but if you use your money too slowly you deprive yourself and your loved ones of an optimum retirement. Just knowing the risks you face in retirement can help prepare for these new challenges.

The only approach to allay these fears is to prepare a written retirement plan that provides the guide to effective retirement planning.  A well designed plan structures your money to safeguard your principal with investment risks you can afford, establishes an emergency fund to insure you have enough liquidity in the event of an emergency, provides options in the event of bad health, minimizes your tax burden, and provides a lifetime income plan you can’t outlive. Of course, to formulate this plan you’ll need knowledge about available options, dedication to stay current on the many changes that will occur during your decades of retirement, and the foresight to steer clear of risks you can’t afford. The smart retirees learn as much as they can about retirement investments, realistically assess their ability to shoulder risks and then engage the services of a retirement professional to help them design a plan and monitor it in motion.

As of October 5, 2009 I have put in place a new web site at www.plannedassets.retirerx.com that will provide retirement planning help, with up todate information.

Health-Care “public option” was defeated in the Senate Finance Committee Tuesday and hopefully it will be defeated in the House but this is not and will not be the end of debate or push to move the United States toward national health care as long as Liberal Democrats have the majority they do in both houses and Republicans fail their electorate. 

Without a doubt America has the best health care available in the world, but not the best health care system.  In fact when it comes to actual care for our nation we rank fairly low, just ahead of the UK.  Our system is broken and congress (both parties) will not fix it.  The reasons for this are numerous, but we could start with our legal system and then move on to the liberal agenda and Unions. 

Regardless of what nation you consider, none can afford their national health care system except possibly Japan.  Canada’s system is often held up as being the system of choice, as a health insurance provider I often hear this from my far north transplant clients.  However, all is not well in Canada and movement is afoot for change. 

It’s no secret when Canadians of age need care they often must wait sometimes for years before they give up and come south.  WSJ, 9/30/09 issue, page A22 “Escape to Montana” again points the Canadian health care problem out.  Stories like this are written but our leaders (both parties) are not interested.  Does national health care work better than our system or cheaper, I believe the answer is no.  Those who do, fail to consider actual cost due to Tax, which the supposed wealthy will pay.  But what of cost for loss due to death, long term pain or disability and the cost of more aggressive care because it took so long.  This is well pointed out by the WHO report concerning the UK and it’s quality of care in 2005 published last year.  What’s happening in Canada?  Though private health clinics and surgical centers are illegal, they are starting to spring up all over British Columbia and Quebec.  Service is paid for without insurance it’s quick and good, but not affordable to everyone. 

My point; our system is broken and becoming more expensive and unaffordable every day.  Insurance is expensive and the real problem is not address, Insurance Companies are just easy targets.  Insurance companies reflect the high cost of our system and until congress and the states (both parties) look at all the parts and fix them, we rise up to demand special interest groups be shut out of the process and we take real interest in how health insurance works and buying accordingly our system will remain broken and more and more people will not be able to afford health care.

Is that what we really want?