Crime Insurance Reminder
A common area I find lacking in the insurance plans I review is employee dishonesty coverage. Often, it's missing. Other times, the limits of coverage are too low.
It's estimated that half of all theft is committed by employees. For many employers, the idea of an employee stealing is not imaginable. However, a common theme that runs through all newspaper stories about embezzlement is someone saying, "Mary was a great employee. I never thought she would do this to us."
Most employee dishonesty insurance coverage sections include an exclusion for theft caused by someone who is known to have committed a past dishonest act. So, if you become aware that Joe in accounting admitted to shoplifting ten years ago, you have no coverage for dishonest acts by Joe. True even if the act was while he was a minor and was not working for you at the time.
Talk with your insurance adviser.
It's estimated that half of all theft is committed by employees. For many employers, the idea of an employee stealing is not imaginable. However, a common theme that runs through all newspaper stories about embezzlement is someone saying, "Mary was a great employee. I never thought she would do this to us."
Most employee dishonesty insurance coverage sections include an exclusion for theft caused by someone who is known to have committed a past dishonest act. So, if you become aware that Joe in accounting admitted to shoplifting ten years ago, you have no coverage for dishonest acts by Joe. True even if the act was while he was a minor and was not working for you at the time.
Talk with your insurance adviser.
Who Needs Liquor Liability Insurance?
The general liability insurance policy that protects most businesses includes an exclusion for all losses arising out of the sale, manufacturing, distribution, serving, or furnishing of liquor.
True to the confusing nature of insurance policies, there is an exception to the exclusion for those not in the business of selling, manufacturing, distributing, serving, or furnishing liquor.
Effectively, this means that coverage is only excluded for those who are in the business of furnishing alcohol.
Many insurance advisers call this "host liquor liability coverage." The idea that coverage is available for hosts and not businesses who serve alcohol.
It is generally held that the purpose of the host liquor liability coverage is to take care of the incidental exposures that exist in the general business environment. For example, holiday parties, business dinners, and celebrations where alcohol is served.
So, if you're a restaurant, or tavern, the general liability policy will clearly not provide you with any protection. Likewise, if your convenience store or a grocery store sells beer, wine, and alcohol, you have no protection under the general liability policy. Those who manufacture, blend, or distill alcoholic beverages also have no coverage under the general liability policy for suits brought by customers for the sale of alcohol.
Confusion comes to organizations who are in a gray area. For example, a bed and breakfast, or hotel that serves its guests a complimentary glass of champagne. Are they in the business of serving alcohol?
It's a question you shouldn't ignore. It's better to have a conversation with your attorney and insurance adviser to make sure that you have the proper insurance protection.
The solution for any business that sells or serves alcohol is a separate liquor liability insurance policy. The specialized liability contract provide specific protection for the exposure that is presented by your business.
Another issue is the umbrella liability policy which, in most cases, has the same liquor exclusion as the general liability policy. Does your umbrella provide excess coverage over your liquor liability?
Again, talk to your insurance adviser.
True to the confusing nature of insurance policies, there is an exception to the exclusion for those not in the business of selling, manufacturing, distributing, serving, or furnishing liquor.
Effectively, this means that coverage is only excluded for those who are in the business of furnishing alcohol.
Many insurance advisers call this "host liquor liability coverage." The idea that coverage is available for hosts and not businesses who serve alcohol.
It is generally held that the purpose of the host liquor liability coverage is to take care of the incidental exposures that exist in the general business environment. For example, holiday parties, business dinners, and celebrations where alcohol is served.
So, if you're a restaurant, or tavern, the general liability policy will clearly not provide you with any protection. Likewise, if your convenience store or a grocery store sells beer, wine, and alcohol, you have no protection under the general liability policy. Those who manufacture, blend, or distill alcoholic beverages also have no coverage under the general liability policy for suits brought by customers for the sale of alcohol.
Confusion comes to organizations who are in a gray area. For example, a bed and breakfast, or hotel that serves its guests a complimentary glass of champagne. Are they in the business of serving alcohol?
It's a question you shouldn't ignore. It's better to have a conversation with your attorney and insurance adviser to make sure that you have the proper insurance protection.
The solution for any business that sells or serves alcohol is a separate liquor liability insurance policy. The specialized liability contract provide specific protection for the exposure that is presented by your business.
Another issue is the umbrella liability policy which, in most cases, has the same liquor exclusion as the general liability policy. Does your umbrella provide excess coverage over your liquor liability?
Again, talk to your insurance adviser.
Generating Interest
Insurance companies frequently have two or more interest rates that kick in at different levels. For example, the guaranteed interest rate may be 4 percent on the first $500 and 7 percent on balances over $500. With a balance of almost $8,000, the total interest is just under 7 percent. When you’re choosing a policy or company from which to buy your universal life policy, pick the one with the highest guaranteed interest so that your cash value grows most quickly.
The interest earned continues to increase and eventually will equal and then exceed the amount you contribute. At this point, the money you pay is, in effect, going directly into your own account.
The interest rate is calculated daily, so you get compounded interest (interest on your interest). For a policy with an interest rate of 7 percent, the annual percentage rate (APR) is actually more than 8 percent.
The interest earned continues to increase and eventually will equal and then exceed the amount you contribute. At this point, the money you pay is, in effect, going directly into your own account.
The interest rate is calculated daily, so you get compounded interest (interest on your interest). For a policy with an interest rate of 7 percent, the annual percentage rate (APR) is actually more than 8 percent.
How Universal Life Insurance Works
Universal life insurance is a form of whole life insurance —but with much greater flexibility. Like whole life, you have two components: a term insurance policy and an investment account from which the term insurance premiums are paid. But with universal life, you get to choose your options, and the choices are generally laid out in front of you. You know how the premiums may change the death benefit and cash value, and it’s much clearer how much of the premiums go toward your insurance protection, how much toward your cash value, and how much toward administrative expense (including commissions).
Start with a planned death benefit that you work out with your agent. You determine your planned premium, based on how much you can afford and the cost of the insurance. The company subtracts an expense charge based on its fees, usually a fixed percentage of the premiums. You’re left with a cash value that generates interest.
But understanding universal life insurance doesn’t end there. From the cash value, the company subtracts the current cost of insurance (the mortality charge), including the charges for any options (or riders), and monthly administrative expenses. Then the company adds in interest that your investment money earns. Your ending cash value is the accumulated value that belongs to you when you cash out (or to your beneficiary when you die).
Often, companies charge you a surrender charge to cash out, leaving you with the surrender value. The surrender charge is usually a small percentage of the total cash value.
Other aspects of universal life to consider include:
Start with a planned death benefit that you work out with your agent. You determine your planned premium, based on how much you can afford and the cost of the insurance. The company subtracts an expense charge based on its fees, usually a fixed percentage of the premiums. You’re left with a cash value that generates interest.
But understanding universal life insurance doesn’t end there. From the cash value, the company subtracts the current cost of insurance (the mortality charge), including the charges for any options (or riders), and monthly administrative expenses. Then the company adds in interest that your investment money earns. Your ending cash value is the accumulated value that belongs to you when you cash out (or to your beneficiary when you die).
Often, companies charge you a surrender charge to cash out, leaving you with the surrender value. The surrender charge is usually a small percentage of the total cash value.
Other aspects of universal life to consider include:
- All the earnings in your investment account are taxdeferred.
- If you stop paying premiums, the company continues to pay the premium for you by deducting from your policy’s cash value. The company does so until no cash value is left. This is one way to continue coverage without paying premiums.
- The interest rate is a fixed rate, although it may be a tiered interest rate, in which part is paid at one rate while the balance is paid at a higher rate. For example, your interest rate may be 4 percent for the first $500 and 7 percent for the balance.
- You can withdraw money that has accumulated in your cash value. If you do, your death benefit decreases because it depends partially upon the accumulated cash value.
- You can borrow against the cash value of your policy at a fixed rate, generally below market rates.
- If you increase your coverage, you may have to requalify by taking a medical exam.
- You probably have to pay a termination fee or surrender charge (backloading). This fee decreases each year you have the policy, but it does lower the amount of your cash value.
Single-Premium Whole Life Insurance
Some insurance companies offer single-premium whole life for people who have a large sum of money available to spend on insurance and who are looking for some tax benefits. You purchase the policy by plunking down one large sum for a specified death benefit. You don’t pay any annual premiums, and the death benefit either remains constant or increases, depending on the kind of policy you purchase. The insurance company takes your money up front, invests it, and pays you a small return, similar to what you get with other whole life policies.
Like other whole life policies, a cash value does accrue, usually with a guaranteed minimum return. When the insured dies, the death benefit plus any accrued cash value goes to the beneficiaries.
If you’re sitting on some cash and you want to buy life insurance, consider this option. In essence, you pay all your premiums up front with single-premium whole life and then let the company have use of your money for the entire period. In exchange, you get a few benefits that may be important to you:
Like other whole life policies, a cash value does accrue, usually with a guaranteed minimum return. When the insured dies, the death benefit plus any accrued cash value goes to the beneficiaries.
If you’re sitting on some cash and you want to buy life insurance, consider this option. In essence, you pay all your premiums up front with single-premium whole life and then let the company have use of your money for the entire period. In exchange, you get a few benefits that may be important to you:
- You get a substantial discount on the cost of the insurance itself. Your lump-sum payment is less than the accumulated cost of annual premiums on comparable whole life policies.
- You get a significant tax savings. The tax savings may be the primary reason that people purchase this kind of life insurance. All the money you earn on your single premium whole life policy is tax-deferred.
- You can immediately borrow against the cash value in your account. And if you only borrow against what the cash value itself earns, then you will likely pay approximately the same interest the cash value earns, as well. Thus, by storing some money in the company’s coffers, you give yourself the opportunity to take out a loan virtually interest-free.
Data Backup Services
Having backups of your computer data files is critical to any disaster recovery plan. They keys are:
Timely Backup - The backup must be of your current data.
Simple - Human nature being what it is, you must have a simple system that requires minimal interaction.
Off Site Storage - Off site means that you have access even when your computer is destroyed and your building is inaccessible.
Easy Retrieval - If you lose your data you need it back fast. Having data stored at your in-laws 3 hours away means its safe. However, it will take you 6 hours to get it back.
Regular Tests - I test my backup system every other month. I want to be sure I can retrieve my lost data when I need it. Create a word processing document. Call it "test." Save it. Allow the backup to occur. Delete the file from your computer and restore it from your backup.
For three months I have been using Carbonite, a service available over the internet - www.carbonite.com. I find the service performs well over my cable modem connection. They offer a 30 day free trial and the actual service is only $50 a year.
Simple protection for a buck a week.
Timely Backup - The backup must be of your current data.
Simple - Human nature being what it is, you must have a simple system that requires minimal interaction.
Off Site Storage - Off site means that you have access even when your computer is destroyed and your building is inaccessible.
Easy Retrieval - If you lose your data you need it back fast. Having data stored at your in-laws 3 hours away means its safe. However, it will take you 6 hours to get it back.
Regular Tests - I test my backup system every other month. I want to be sure I can retrieve my lost data when I need it. Create a word processing document. Call it "test." Save it. Allow the backup to occur. Delete the file from your computer and restore it from your backup.
For three months I have been using Carbonite, a service available over the internet - www.carbonite.com. I find the service performs well over my cable modem connection. They offer a 30 day free trial and the actual service is only $50 a year.
Simple protection for a buck a week.
Data Compromise Insurance
Several insurers are offering special coverage for liability arising out of the loss of personal information that was in the insured's care, custody, and control.
Claims can come at you from two events. First there is the loss of data caused by a hacking event; a failure in your security allows an outside party to access your customer/employee data. Second, there is the physical theft or loss of a computer or disc that contains data.
In both cases the suit is brought by persons who's information was included in the hacking or theft - your employee or customer, for example.
The product is not widely used as of now and there may be coverage under some general liability policies - under the personal injury coverage for violation of privacy. Insurers are adding coverage limiting endorsements to existing policies and the courts will interpret the current policy language.
Another reason to review your insurance and have a frank conversation with your insurance adviser about exposures to loss.
Claims can come at you from two events. First there is the loss of data caused by a hacking event; a failure in your security allows an outside party to access your customer/employee data. Second, there is the physical theft or loss of a computer or disc that contains data.
In both cases the suit is brought by persons who's information was included in the hacking or theft - your employee or customer, for example.
The product is not widely used as of now and there may be coverage under some general liability policies - under the personal injury coverage for violation of privacy. Insurers are adding coverage limiting endorsements to existing policies and the courts will interpret the current policy language.
Another reason to review your insurance and have a frank conversation with your insurance adviser about exposures to loss.
Employee v. Contractor
In most states employers must buy workers' compensation insurance to protect their employees.
Contractors are not employees and therefore you don't need to buy workers' compensation coverage for them. Beware of trying to call an employee a contractor. If they look like employees and act like employees, they are employees.
Here is a common definition:
"Independent contractor means a person who performs services for another under contract, but who is not under the essential control or superintendence of the other person while performing those services."
Here are some benchmarks:
-Does a contract exist for the person to perform a certain piece or kind of work at a fixed price?
-Does the person employ assistants with the right to supervise their activities?
-Does the person furnish any necessary tools, supplies, or materials?
-Does the person have the right to control the progress of the work, except as to final results?
-Is the work a part of the regular business of the employer?
-Is the person's business or occupation typically of an independent nature?
-The amount of time for which the person is employed.
-The method of payment, whether by time or by job.
-Does the person receive a paycheck or do they make a profit / loss from the job?
-Does the person receive benefits similar to those of employees?
-Does the person accumulate vacation time or paid time off?
-Does the person purchase his own liability and/or workers' compensation insurance?
The above are used as a whole to determine an individual's status. Most state workers' compensation laws include definitions or tests similar to the above. Talk with your insurance agent.
If you hire independent contractors, get a certificate of insurance showing that they have their own workers' compensation so you don't get hit with additional premiums at audit.
Last note on this topic. Falsely classifying an employee as an independent contractor is insurance fraud in many states. It can also land you in claim trouble if there is an injury. I can't tell you how many times in twenty plus years that small company owners have winked and told me that they have no employees. It's a dumb tactic that is more likely to land you in hot water.
Contractors are not employees and therefore you don't need to buy workers' compensation coverage for them. Beware of trying to call an employee a contractor. If they look like employees and act like employees, they are employees.
Here is a common definition:
"Independent contractor means a person who performs services for another under contract, but who is not under the essential control or superintendence of the other person while performing those services."
Here are some benchmarks:
-Does a contract exist for the person to perform a certain piece or kind of work at a fixed price?
-Does the person employ assistants with the right to supervise their activities?
-Does the person furnish any necessary tools, supplies, or materials?
-Does the person have the right to control the progress of the work, except as to final results?
-Is the work a part of the regular business of the employer?
-Is the person's business or occupation typically of an independent nature?
-The amount of time for which the person is employed.
-The method of payment, whether by time or by job.
-Does the person receive a paycheck or do they make a profit / loss from the job?
-Does the person receive benefits similar to those of employees?
-Does the person accumulate vacation time or paid time off?
-Does the person purchase his own liability and/or workers' compensation insurance?
The above are used as a whole to determine an individual's status. Most state workers' compensation laws include definitions or tests similar to the above. Talk with your insurance agent.
If you hire independent contractors, get a certificate of insurance showing that they have their own workers' compensation so you don't get hit with additional premiums at audit.
Last note on this topic. Falsely classifying an employee as an independent contractor is insurance fraud in many states. It can also land you in claim trouble if there is an injury. I can't tell you how many times in twenty plus years that small company owners have winked and told me that they have no employees. It's a dumb tactic that is more likely to land you in hot water.
Identity Theft Recovery Insurance
Many insurance companies are starting to offer coverage for the victims of identity theft. Insurers offer this protection as part of homeowners insurance or business owners coverage. Some are also offering the insurance to be included in employee assistance programs.
Check with your home and business insurance agent to see if your carrier offers the coverage.
Review the protection carefully. Some offer relatively small limits of coverage. Some offer access to consultants who can assist with rebuilding stolen identities.
Check with your home and business insurance agent to see if your carrier offers the coverage.
Review the protection carefully. Some offer relatively small limits of coverage. Some offer access to consultants who can assist with rebuilding stolen identities.
Interest-Sensitive Whole Life Insurance
Interest-sensitive whole life insurance is a whole life policy in which you are paid an adjustable, variable interest, rather than a guaranteed rate. Like an adjustable rate mortgage, the rate you are paid is often tied into an economic indicator such as the Treasury Bill rate.
Premiums, death benefits, and cash value are all aligned with the variable interest rate so that policyholders have various options. When interest rates rise, you can maintain the same death benefit and percentage that goes toward your cash value but lower your premiums. Or you can hold the premium and death benefit steady while increasing your cash value. In some policies you can increase your death benefit while keeping the premium and cash value rate of return steady. Naturally, the opposite options are also available when interest rates are on the decline: cash-value return decreases while premiums and death benefit are constant; premiums rise so that cash-value return and death benefit remain the same; or death benefit decreases while cash-value return and premiums stay at the same levels.
Policy loan of Whole Life Insurance
An additional benefit of whole life policies is the fact that you can borrow against your cash value, usually at interest rates significantly
lower than market rates — between 6 and 8 percent. The rates are so low because the lender is assuming absolutely no risk — if you don’t pay back the loan, it can take the money from your account. When you borrow against your policy, you don’t have to pay any fees, and you can usually get the money in just a few days. If you die before you pay back the loan, the outstanding amount is deducted from the death benefit. If you terminate the policy, the outstanding loan balance is deducted from the cash surrender value.
lower than market rates — between 6 and 8 percent. The rates are so low because the lender is assuming absolutely no risk — if you don’t pay back the loan, it can take the money from your account. When you borrow against your policy, you don’t have to pay any fees, and you can usually get the money in just a few days. If you die before you pay back the loan, the outstanding amount is deducted from the death benefit. If you terminate the policy, the outstanding loan balance is deducted from the cash surrender value.
Rates of return of Whole Life Insurance
The rate of return you get from an investment in whole life insurance is based on the insurance company’s ability to invest wisely. The company combines all the cash-value money it gets from all its policyholders and invests this sum, usually in low-risk investments, which naturally pay lower profits than many other investments. Regardless of what return the company gets on its investment, though, most whole life policies guarantee at least a minimum rate of return. Anything the company makes over that (and over and above its costs) goes toward your cash value. In this example, the insured — a 38-year-old married man — insures himself for $50,000, for which he pays $51 per month ($612 per year). He also begins the policy with an initial investment of $1,596. The company guarantees him a rate of return of 4 percent but shows projections of double and almost triple the return (8 percent and 10.75 percent respectively).
The projections that insurance agents give you are often little more than high hopes, and you shouldn’t count on getting anything more than what is guaranteed. If you look at the actual return, you can see that it’s just a bit higher than the minimum guaranty. But it’s also significantly lower than either of the more optimistic projections the agent presented. Note that the cash value never exceeds the amount of the premiums paid with the 4 percent guaranteed return (which is just over the minimum). On the other hand — in part because of the initial investment — somewhere around the 10th year, all of the premium paid goes toward the cash value, meaning that the interest on the reserve amount actually covers the cost of the insurance itself. As you age, the cash value increases at a slower rate because your insurance costs more. From the 20th to the 25th year, for example, this policyholder pays over $4,000 in premiums, but his cash value increases only $1,200. That lower yield reflects the very high cost of purchasing insurance at age 60, indicating that unless you still want a death benefit at that age, you may want to cash out the policy.
The projections that insurance agents give you are often little more than high hopes, and you shouldn’t count on getting anything more than what is guaranteed. If you look at the actual return, you can see that it’s just a bit higher than the minimum guaranty. But it’s also significantly lower than either of the more optimistic projections the agent presented. Note that the cash value never exceeds the amount of the premiums paid with the 4 percent guaranteed return (which is just over the minimum). On the other hand — in part because of the initial investment — somewhere around the 10th year, all of the premium paid goes toward the cash value, meaning that the interest on the reserve amount actually covers the cost of the insurance itself. As you age, the cash value increases at a slower rate because your insurance costs more. From the 20th to the 25th year, for example, this policyholder pays over $4,000 in premiums, but his cash value increases only $1,200. That lower yield reflects the very high cost of purchasing insurance at age 60, indicating that unless you still want a death benefit at that age, you may want to cash out the policy.
Uninteruptable Power Source
After 8 years, my UPS died.
As I ordered a replacement it dawned on me that I could not recall many conversations about this tool. Perhaps it's so common that nobody even talks about it.
An uninterruptable power source (UPS) is a power strip with a built in battery. If the electricity in your office goes out, the UPS gives you enough juice to power down your computer. Even better, if the power is only off for a minute or two, you just work on, uninterrupted.
I just ordered one from Staples for $70. It will give me 15 minutes to save info I'm working on. Many models are available - some will give you an hour or more of power.
We frequently lose power for a minute or two. Sometimes its just a few seconds - enough to mess up all the digital clocks and mess up my computer. The UPS has saved me a great deal of grief over the years.
Again, perhaps I'm telling everyone something they already know...
As I ordered a replacement it dawned on me that I could not recall many conversations about this tool. Perhaps it's so common that nobody even talks about it.
An uninterruptable power source (UPS) is a power strip with a built in battery. If the electricity in your office goes out, the UPS gives you enough juice to power down your computer. Even better, if the power is only off for a minute or two, you just work on, uninterrupted.
I just ordered one from Staples for $70. It will give me 15 minutes to save info I'm working on. Many models are available - some will give you an hour or more of power.
We frequently lose power for a minute or two. Sometimes its just a few seconds - enough to mess up all the digital clocks and mess up my computer. The UPS has saved me a great deal of grief over the years.
Again, perhaps I'm telling everyone something they already know...
Tax benefits of Whole Life Insurance
One of the biggest differences between this investment and many others is that all of the return on your investment is tax-deferred. You don’t have to pay any taxes on this gain until you withdraw it, unlike other investments for which you must pay a capital gains tax. An investment in whole life insurance becomes even more attractive when you consider the following:
For example, if you get a 5 percent return on a savings account of $10,000, at the end of the year you have $500. But you also have to pay 20 percent of that return in income taxes. In effect, you only gain $400 (20 percent of $500 is $100, which, subtracted from $500, equals $400). In contrast, if the $10,000 is in a tax-deferred account, such as a whole life insurance policy, with an interest of 5 percent, you gain all of the $500.
If you’re considering whole life insurance as a good way to invest, keep in mind that the rate of return you receive historically has been pitifully low, even adding the tax savings back in. Use the protection you’re buying, not the rate of return you get, as your basis for judging any type of life insurance as an investment.
- The portion of your premiums that goes toward purchasing your actual insurance reduces the amount of gain you realize.
- You pay taxes only on the difference between the total
For example, if you get a 5 percent return on a savings account of $10,000, at the end of the year you have $500. But you also have to pay 20 percent of that return in income taxes. In effect, you only gain $400 (20 percent of $500 is $100, which, subtracted from $500, equals $400). In contrast, if the $10,000 is in a tax-deferred account, such as a whole life insurance policy, with an interest of 5 percent, you gain all of the $500.
If you’re considering whole life insurance as a good way to invest, keep in mind that the rate of return you receive historically has been pitifully low, even adding the tax savings back in. Use the protection you’re buying, not the rate of return you get, as your basis for judging any type of life insurance as an investment.
Whole Life Insurance investment concept
When you purchase a whole life policy, a portion of your premium goes toward the life insurance itself, another portion goes toward your cash value, and the rest goes toward administrative costs and your agent’s commission. The insurance company invests the cash-value portion, and in return, you get some of the profits. Your share goes into your cash value. In a sense, then, this portion is an investment. Like all investments, it has its rewards.
Cash Value
Building a cash value means that your life insurance policy has a value greater than just the death benefit — the face value of the insurance policy — that goes to your beneficiaries when you die. (With term insurance, the value is only the amount of death benefit you sign up for.) So what’s the catch? Why would anyone want term insurance instead of a policy with a value beyond the death benefit? To answer that question, you first need to examine how cashvalue whole life insurance works.
Employee Benefits in Term Insurance
Many companies offer term life insurance policies to their employees as a fringe benefit. The amount often ranges from the equivalent of your annual salary to triple your annual salary. The employer usually pays the entire premium. Only the cost of the first $50,000 in life insurance is tax-free. Any premium an employer pays on your behalf for an insurance policy over $50,000 is additional income that you must claim on your tax return. In addition, this benefit is available to you only while you are employed with the company. When you leave, you lose the protection. If having that insurance was part of your estate planning, you now have to reevaluate your position.
The Re-entry Term Provision
Renewable term insurance may have a provision called reentry, which means that the insurance company can ask you to undergo a medical exam before it will renew your policy after the term expires. If your health isn’t good and the reentry clause permits it, the company can cancel your insurance. In return, you can purchase renewed insurance at a reduced rate — basically, the rate a person who just passed an exam would pay.
The gamble here is that you will remain healthy. Then again, if the re-entry clause doesn’t permit the company to cancel your insurance but does allow it to charge you higher premiums, you’re gambling on money, not your health. Some re-entry policies spell out the maximum premium that can be charged. If you’re gambling, you ought to know how much you’re gambling on.
When purchasing re-entry term insurance, make sure that you keep the right to renew your insurance even if you don’t pass a medical exam. Although may have to pay higher premiums, at least the company won’t be able to cancel your policy.
The gamble here is that you will remain healthy. Then again, if the re-entry clause doesn’t permit the company to cancel your insurance but does allow it to charge you higher premiums, you’re gambling on money, not your health. Some re-entry policies spell out the maximum premium that can be charged. If you’re gambling, you ought to know how much you’re gambling on.
When purchasing re-entry term insurance, make sure that you keep the right to renew your insurance even if you don’t pass a medical exam. Although may have to pay higher premiums, at least the company won’t be able to cancel your policy.
The Decreasing Term Life Policy
For most term insurance policies, the death benefit remain constant and the premium increases over time. With a decreasing term life policy, the opposite is true: After the specified term, the face value of the policy decreases, while the amount you pay each year or month remains the same. In that way, the insurance company effectively increases its premium,
which it must do because, as you age, you’re at a greater risk for death. So the same premium purchases an increasingly lower amount of insurance. For many people, decreasing term life insurance allows them to be insured to the maximum when they most need it (when their beneficiaries are most dependent on them) but to be insured for lower amounts as their beneficiaries need less. Because the premiums remain locked in, budgeting is simple — you always pay the same amount. Mortgage insurance is an example of decreasing term insurance. When you buy mortgage insurance, you’re making sure that your home mortgage gets paid off if you die. But of course, while you’re alive, you’re paying off your mortgage principal, so the balance keeps declining.
which it must do because, as you age, you’re at a greater risk for death. So the same premium purchases an increasingly lower amount of insurance. For many people, decreasing term life insurance allows them to be insured to the maximum when they most need it (when their beneficiaries are most dependent on them) but to be insured for lower amounts as their beneficiaries need less. Because the premiums remain locked in, budgeting is simple — you always pay the same amount. Mortgage insurance is an example of decreasing term insurance. When you buy mortgage insurance, you’re making sure that your home mortgage gets paid off if you die. But of course, while you’re alive, you’re paying off your mortgage principal, so the balance keeps declining.
Time-Risk Management
I've studied risk for more than 25 years. Much of my work, obviously, involves the use of insurance products.
Financial risk directly impacts an organization's financial statements. The loss of a building due to fire or the impact of a lawsuit are both examples of financial risk. Most insurance products address financial risk.
Qualitative risks affect the quality of an asset, a business operation or your lifestyle. Qualitative risks are more difficult to address. They include such issues as the loss of the talented person or the loss of market share to a competitor.
Inefficiencies and wasted time are also a qualitative risk. Forcing your employees to use insufficient or antiquated technology reduces the quality of your operation as do ineffective people.
I see time as a risk issue. Time is extraordinarily valuable. There is in no way any of us can get more time. Therefore, the effective use of time presents, perhaps, the ultimate risk.
So, does working hard and using every second reduce time-risk? Certainly not. I spent time this morning snowshoeing in the woods. I could have been shoveling the walkways (certainly hard work) or I could have been writing this article (by most standards, a good use of time).
The key is valuable actions.
Snowshoeing this morning was valuable to me at that moment in time. Right now, writing this article is valuable to me - and ultimately, hopefully, to you.
In the past I mentored kids at our state youth detention facility. We often talked about the virtue of doing the right things, at the right time, in the right ways.
Peter Drucker said, "Efficiency is doing things right; effectiveness is doing the right things."
Hard work by itself does not mean valuable work. It is also not a matter of working smarter. It's about working in a way that provides extraordinary value - value as perceived by a customer, by a boss, or by your organization. It's also actions that are valuable to you, your family, and your community.
Consider your time-risk.
Financial risk directly impacts an organization's financial statements. The loss of a building due to fire or the impact of a lawsuit are both examples of financial risk. Most insurance products address financial risk.
Qualitative risks affect the quality of an asset, a business operation or your lifestyle. Qualitative risks are more difficult to address. They include such issues as the loss of the talented person or the loss of market share to a competitor.
Inefficiencies and wasted time are also a qualitative risk. Forcing your employees to use insufficient or antiquated technology reduces the quality of your operation as do ineffective people.
I see time as a risk issue. Time is extraordinarily valuable. There is in no way any of us can get more time. Therefore, the effective use of time presents, perhaps, the ultimate risk.
So, does working hard and using every second reduce time-risk? Certainly not. I spent time this morning snowshoeing in the woods. I could have been shoveling the walkways (certainly hard work) or I could have been writing this article (by most standards, a good use of time).
The key is valuable actions.
Snowshoeing this morning was valuable to me at that moment in time. Right now, writing this article is valuable to me - and ultimately, hopefully, to you.
In the past I mentored kids at our state youth detention facility. We often talked about the virtue of doing the right things, at the right time, in the right ways.
Peter Drucker said, "Efficiency is doing things right; effectiveness is doing the right things."
Hard work by itself does not mean valuable work. It is also not a matter of working smarter. It's about working in a way that provides extraordinary value - value as perceived by a customer, by a boss, or by your organization. It's also actions that are valuable to you, your family, and your community.
Consider your time-risk.
Get Competitive Quotes Every Three Years
Another tip from my new book on worker's compensation insurance...
The single most important step you can take to control your premiums is competitive bids. Every three years put both your insurance agent and your insurance company in a spot where they may lose your business. The workers' compensation marketplace changes quickly. When times are good, many insurers will want to write your policy. When times are bad, insurers are hunting for the exceptional risk. Use more than one agent. Allowing competition is the best way to make sure you get the best rates.
The single most important step you can take to control your premiums is competitive bids. Every three years put both your insurance agent and your insurance company in a spot where they may lose your business. The workers' compensation marketplace changes quickly. When times are good, many insurers will want to write your policy. When times are bad, insurers are hunting for the exceptional risk. Use more than one agent. Allowing competition is the best way to make sure you get the best rates.
Convertible Term in Term Insurance
If you purchase a convertible policy, you are allowed to convert to a different type of policy — one that builds a cash value, such as whole life or universal life, without having to pass another medical exam. Again, because your health is more likely to deteriorate as you age, this feature may be important if you think that you may want to keep buying life insurance later in life. Most people don’t continue to insure themselves after they reach retirement age, usually because they no longer have anyone dependent upon them, but there are exceptions. For example, take a look at a family of four in which the father is 56, the mother is 43, and the two children are both under 10. The younger child won’t start college for another 15 years, and the parents want to make sure the children have sufficient money even if the father dies. These parents may want to keep insuring the father after he reaches the age of 70, the age at which his policy specifies that he can no longer renew his term insurance policy. To them, therefore, convertibility is an important option.
Another reason you may want to be able to convert your term insurance is if your family has a history of heart disease, cancer, or other serious illness. If your family history makes you more likely to become sick later in life, you may want to ensure that you don’t have to pass a medical exam later, even after term insurance is not available. Because buying life insurance is, basically, eliminating as much risk as possible, many people think that this provision is an important one. A third reason to keep the convertible option has to do with the price of term policies versus cash-value policies. Term policies generally cost considerably less than other types of life insurance because the others also build value while paying for the insurance. Convertibility may be important to you if you’re on a limited budget but want a cash-value policy.
You know that you can convert later, when you have greater financial strength
Keeping the option to convert means that your policy will likely cost you more.
Consider the following questions regarding convertibility:
- To what can you convert your policy? Whole life? Universal life? Either one? Any product the company offers later on?
- When can you convert? Some policies specify how many years you have to convert. Obviously, more time to decide gives you more options when you need them. Of course, the additional flexibility likely means a higher premium throughout the life of the term policy.
- When you do decide to convert, will the new premium be based on your age when you convert? Or will the company require you to make a lump sum payment to “catch up,” as though you had purchased the cash value policy to begin with?
Age limit in term insurance
Many term insurance policies have an age limit (specified in your contract) after which the company won’t allow you to renew your policy. This age can range from as low as 60 years old to 85, 90, or even older. Obviously, at the upper age ranges most people are extremely high risks, so the price of coverage would be so high that it wouldn’t pay for you to purchase coverage. But certainly 60 or 70 isn’t very old, and many people at that age want continued coverage. When looking at term insurance policies, make sure you give consideration to any age limits imposed in the policy.
Renewable term in Term Insurance
The primary purpose of life insurance is so that your beneficiaries receive a benefit if you die. If you buy life insurance,
not only do you want your policy to remain in effect during the specific period you designated, but you also want to be able to keep buying the insurance until you decide to stop —not when the company decides that you’ve become too great a risk.
Most term life policies are renewable — but your premium may not be the same for the renewed period. After each term (the one-, five-, or ten year period that you specified) ends, the amount you pay per year for the next term will increase.
A policy may be renewable only for a limited time (ten years, for example). So when shopping for a policy, be sure to check for how long it is renewable.
Without renewability, the insurance company can decide that it no longer wants to insure you when the term of your policy ends. Renewable term insurance insures that you can still buy life insurance regardless of the condition of your health later; after you qualify the first time, you don’t have to take any additional medical exams to maintain your policy. And because you become a bigger health risk as you age, not passing a medical exam is the danger of not purchasing a renewable policy.
Renewable doesn’t mean that you can change the face amount of your policy. If you decide that you want more insurance, the company will likely require that you pass a new medical exam to qualify.
Understanding Term Insurance
Term insurance is the most basic form of life insurance and, therefore, the easiest to understand. At its simplest level, term insurance provides life insurance for a defined period (usually a one-, five-, or ten-year term). For that insurance, you pay a monthly, quarterly, annual, or semiannual premium that remains constant during the specified term. But that’s pretty much the only constant. I can’t even say that the death benefit remains the same for the entire term of the policy because various options are available, such as decreasing term insurance and increasing term insurance, in which the death benefit changes each year (rarely more than 20 percent above or below the original policy amount). These two products are distinguished from level term insurance, in which the death benefit remains the same for a specified period. Term insurance provides a benefit for others if you die during the specified period. Term insurance is not an investment —you receive no benefits other than the security of knowing that if you die, the insurance proceeds go to your beneficiaries.
About Term Insurance
Some say that every type of life insurance is term insurance: For all forms of life insurance, you pay each year. The only difference between term insurance and all the others is whether you pay the premiums directly (as with term life insurance) or the payment comes out of the earnings from an investment that the insurance company holds (as with other types of life insurance). In this chapter I discuss the attributes of term life insurance that distinguish it from the other forms. I cover the various provisions that differentiate each attribute and each type of term life insurance.
Viatical Settlements
Life insurance offers a relatively new benefit called viatical settlements, which may affect your estate planning. With this program, terminally ill patients can, in effect, “sell” the proceeds of their life insurance death benefit to a third party and receive the cash they need while they’re alive. To qualify for this benefit, your doctor must certify that your life expectancy is no more than two years based on the fact that you have a terminal disease. The company then purchases your life insurance policy (including any cash value) for 60 percent of the face value. If your disease has progressed even further, and your doctors certify that you have less than six months, the viatical company will purchase your life insurance policy for up to 80 percent of the face value. The purpose of the settlement is to ensure that terminally ill patients have the bulk of their life insurance benefit available to pay for their medical and living costs. On the other hand, terminally ill people must decide whether the life insurance benefits are for them or for their survivors.
As you would expect, this issue is fairly controversial. You can learn more about this kind of policy by checking with an insurance company that offers viatical settlements. You should also check out the information made available by the Federal Trade Commission (FTC), which you can reach by writing Federal Trade Commission, P.O. Box P, Room 403,
Annuities in Life Insurance
Most people think of life insurance as the primary way of protecting survivors or heirs. However, some life insurance policies, called annuities, provide an income to the insured person later on in life. Annuities are basically investment vehicles in which you plop down a bunch of money, either as a lump sum or in years of payments, in exchange for a promise from an insurance company that it will pay you a monthly income, usually after a defined period. Of course, that period won’t arrive until well after the company has received enough money from you to make paying you financially viable for them. Two types of annuities are available:
As an investment opportunity, annuities aren’t the greatest options. You can usually do better in other funds and with other accounts. However, with an annuity, you’re investing and being insured at the same time, which may be an attractive benefit for you.
- Fixed annuities:With a fixed annuity, the company pays you a guaranteed rate of growth, based on the amount you have paid in premiums and the terms you have agreed upon beforehand. These payments can be either for a set number of years or until you die.
- Variable annuities: With variable annuities, you can direct how and where the money is invested. The amount you’re paid varies depending on how successful you and the company’s investment funds are. You can instruct the company to invest in any combination of funds that the company offers — stock funds, bond funds, fixed income funds, or other investment funds.
As an investment opportunity, annuities aren’t the greatest options. You can usually do better in other funds and with other accounts. However, with an annuity, you’re investing and being insured at the same time, which may be an attractive benefit for you.
The Dividend that Come With Life Insurance
Many insurance companies are mutual companies, meaning that the policy holders own the company’s stock. When the insurance company does well, the owners receive dividends. The amount of the dividend relates directly to how well the company performs.
Dividends from mutual insurance companies go directly to lowering the premiums. These dividends can be quite substantial, as high as 50 to 70 percent of the premium. You can’t count on getting this dividend each year. However, with term insurance, you buy only one term at a time. So if the insurance company doesn’t declare a dividend consistently, you can look elsewhere for a better rate from a company that does offer a dividend. On the other hand, you don’t want to constantly jump from one company to the next. For one thing, you can’t always be sure that you’ll qualify for the life insurance. So choosing the right company at the very beginning is one of the most important decisions you will make. Select a good life insurance company that you know will be around for a while.
Dividends from mutual insurance companies go directly to lowering the premiums. These dividends can be quite substantial, as high as 50 to 70 percent of the premium. You can’t count on getting this dividend each year. However, with term insurance, you buy only one term at a time. So if the insurance company doesn’t declare a dividend consistently, you can look elsewhere for a better rate from a company that does offer a dividend. On the other hand, you don’t want to constantly jump from one company to the next. For one thing, you can’t always be sure that you’ll qualify for the life insurance. So choosing the right company at the very beginning is one of the most important decisions you will make. Select a good life insurance company that you know will be around for a while.
Rates of return of life insurance
The two basic forms of life insurance policies are term life — in which you buy protection for a specified period of time (the term) — and cash-value. With cash-value insurance policies, you pay more than just the cost of the premium into an account that is yours and accrues interest. In effect, cash-value policies are like a savings plan.
For a life insurance policy to be part of your estate planning, you must know your rate of return — how much interest your money earns. When a company quotes you a price for a cash-value policy, it also quotes a guaranteed rate of return. At the same time, you will likely be given one or two other rates of return and will be shown charts and tables demonstrating how much your money will yield after just a few years.
Be very wary of these tactics. Don’t think you’ll make a killing! Assume your money will earn very close to the guaranteed minimum, and consider anything over the guaranteed minimum as a bonus.
The return you receive from your cash-value policy is to
For a life insurance policy to be part of your estate planning, you must know your rate of return — how much interest your money earns. When a company quotes you a price for a cash-value policy, it also quotes a guaranteed rate of return. At the same time, you will likely be given one or two other rates of return and will be shown charts and tables demonstrating how much your money will yield after just a few years.
Be very wary of these tactics. Don’t think you’ll make a killing! Assume your money will earn very close to the guaranteed minimum, and consider anything over the guaranteed minimum as a bonus.
The return you receive from your cash-value policy is to
- Increase your surrender value (the amount that you can expect to receive if you withdraw the funds)
- Increase your death benefit
- Pay the expected increase in the cost of your protection each year
Insurance Dating
Insurance agents and underwriters around the world are still cleaning up their January 1 renewals.
It happens every year.
By my estimate (not scientific) at least 30% of commercial insurance programs renew on January 1 or December 31.
Unless you are spending $2,000,000 a year on insurance, your insurance renewal is not getting the attention you deserve if your program renews at year end.
Don't pick July 1 or October 1 either. They are almost as busy.
Consider February 1 or April 22 as your renewal dates. Any date but 1/1, 7/1, or 10/1.
The ideas is to be a big fish in both your insurance agent's and your underwriter's pond when your insurance is renewing. You want to get the attention you deserve. You won't get it at year end, that's for sure.
Also, I'll restate my often repeated advice - the best way to get the best coverage and the best premium is to put your insurance out for competitive bid every three years or so.
It happens every year.
By my estimate (not scientific) at least 30% of commercial insurance programs renew on January 1 or December 31.
Unless you are spending $2,000,000 a year on insurance, your insurance renewal is not getting the attention you deserve if your program renews at year end.
Don't pick July 1 or October 1 either. They are almost as busy.
Consider February 1 or April 22 as your renewal dates. Any date but 1/1, 7/1, or 10/1.
The ideas is to be a big fish in both your insurance agent's and your underwriter's pond when your insurance is renewing. You want to get the attention you deserve. You won't get it at year end, that's for sure.
Also, I'll restate my often repeated advice - the best way to get the best coverage and the best premium is to put your insurance out for competitive bid every three years or so.
What is charitable remainder trust?
As its name implies, a charitable remainder trust fund is set up by people who want to give their property to a charity. The property can come in any form: cash, real estate, stocks, bonds, or the proceeds from a life insurance policy. The charitable remainder trust has two benefits:
- The charity or organization you choose gets the property.
- Your heirs aren’t responsible for any taxes on the appreciated value of the property, if the property value has increased (and it probably has). Of course, this benefit is only important if your estate is valued at over the $650,000 exemption.
What is Irrevocable trusts?
An irrevocable trust, as its name implies, means that you cannot amend, change, or alter the terms of the trust. The trust becomes a legal entity unto itself and, in that sense, has certain rights. People commonly use irrevocable trusts to make large gifts to children, grandchildren, and even great-grandchildren without creating any liability for estate taxes.
The tax law permits giving any one individual (or any one irrevocable trust) $10,000 per person per year without that individual having to pay taxes on the gift. When you die, the death benefit from an irrevocable trust goes directly to the trust, also with no tax liability. Because your spouse pays no estate tax on funds that go to him or her, you need to set up an irrevocable trust only for your children and/or grandchildren.
The tax law permits giving any one individual (or any one irrevocable trust) $10,000 per person per year without that individual having to pay taxes on the gift. When you die, the death benefit from an irrevocable trust goes directly to the trust, also with no tax liability. Because your spouse pays no estate tax on funds that go to him or her, you need to set up an irrevocable trust only for your children and/or grandchildren.
What is Revocable Trusts?
A revocable trust is a means by which you can allocate your property, including your life insurance death benefit, to another person. You can change the provisions of this trust fund any time during your life, making the trust “revocable.”
You still manage and have total control of the fund, and you can even abolish it if you choose. Your minor children can’t be the direct beneficiaries of your life insurance death benefit. You must set up a trust fund in their names.
Trusts serve to ensure that certain funds go directly to a beneficiary (your minor children, for example). But you can also use a trust to save on taxes. For example, you can set up a bypass trust, which allows you to pass some of your estate on to your grandchildren, thereby “bypassing” any tax consequence to your children.
Because of the legal and tax implications, consult an attorney if you are considering setting up any sort of trust.
You still manage and have total control of the fund, and you can even abolish it if you choose. Your minor children can’t be the direct beneficiaries of your life insurance death benefit. You must set up a trust fund in their names.
Trusts serve to ensure that certain funds go directly to a beneficiary (your minor children, for example). But you can also use a trust to save on taxes. For example, you can set up a bypass trust, which allows you to pass some of your estate on to your grandchildren, thereby “bypassing” any tax consequence to your children.
Because of the legal and tax implications, consult an attorney if you are considering setting up any sort of trust.
Don't Build Where It Floods Every 11 Years!
Beaumont Vance of Risk and Insurance Magazine has some great comments on New Orleans and the lunacy of building where you know it's going to flood - Go Here.
What is trust?
A trust is an account that you set up for someone else but for which you decide the terms. You can set up a trust from yourassets or from your life insurance policy, and you can continue to add to it or not. The following sections describe the three kinds of trusts that most affect life insurance policies.
Pets Covered by Your Car Insurance
I was minding my own business the other day, watching TV when a Progressive Insurance ad came on talking about insuring pets on the auto policy if they are injured in an accident.
Brilliant. What a great way to differentiate yourself from the competition. Bravo Progressive on a great marketing idea.
Details Here.
Brilliant. What a great way to differentiate yourself from the competition. Bravo Progressive on a great marketing idea.
Details Here.
Deciding beneficiaries for business owner
Owning a business may be another reason you choose beneficiaries other than family members. Some business owners who are in partnerships arrange to have the proceeds of their life insurance policy tied to the price of the business. When an owner dies and the death benefit goes to the family (the heirs), that death benefit becomes the payment for the deceased’s share of the business. In this way, the other partners can buy the business without having to negotiate the price.
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