Don't forget charity this year, and life insurance can help

TIM CESTNICK

Tim Cestnick is managing director at WaterStreet Family Wealth Counsel and author of 101 Tax Secrets for Canadians. tcestnick@waterstreet.ca

Ah yes, a recession must be around the corner. My friend Rob is a leading indicator. That's right. You see, Rob is notoriously frugal. I visited Rob last week, and we sat in a cold, dark living room chatting.

"Recession is coming," Rob said. "We've got to cut back now. My electrical bill for October will be one-third what it was in September," he said proudly.

"Rob, pass me those infrared goggles so I can see you," I replied.

Some people are cutting back their spending, and many charities today are concerned whether donors will be as generous this fall as they have been in the recent past. The fact is, those needs that are met by these charities don't just disappear in tough economic times. So, let's all make an effort to be generous this fall.

THE IDEAS

How can you be more generous when you may not have the cash to give? There are a few ideas. Today, let's talk about donating life insurance.

Donate life insurance today. Like many Canadians, maybe you've got an old life insurance policy that you don't need any longer. Consider assigning (that is, transferring) the policy to a Canadian registered charity. There are a couple of tax implications to this.

First, you'll be deemed to have disposed of the policy at its "value," which under Canadian tax law means the cash surrender value of the policy. So, there could be a gain on the transfer of the policy to the charity. By the way, this gain is taxed as regular income, not as a capital gain.

But don't fret. You'll also be entitled to a donation tax credit for the "fair market value" of the policy. This donation tax credit should fully eliminate the tax that might otherwise result from that gain I just spoke about. You'll also be entitled to a tax credit for any premiums you continue to pay on the policy after assigning it to the charity.

As an aside, there's a mismatch between two provisions in our tax law that could work to your advantage here.

First, any gain from the transfer of the policy to a charity is calculated using the cash surrender value of the policy as the definition of the "value" of the policy.

Second, your donation receipt will be calculated based on the "fair market value" of the policy, which the Canada Revenue Agency has said may be different than the cash surrender value (by the way, this is a relatively new position taken by CRA). In fact, that fair market value could be much higher than the cash surrender value in some cases since it will be based on a number of factors, including the health of the insured person.

So, if your policy has no cash surrender value, there won't be a taxable gain on the transfer of the policy to a registered charity, but there may still be a value for purposes of calculating the donation tax credit, so you could win from a tax perspective. Follow me?

Donate life insurance upon death. Another way to donate life insurance is to keep ownership of your policy and simply name your favourite Canadian registered charity as the beneficiary of the policy. You'll be entitled to a donation tax credit in the year of your death for the death benefit that is paid out to the charity. This could result in a much higher tax credit than what you might get by donating the policy today. The only catch is that you won't get the tax credit until the year of death, and you won't be entitled to a tax credit for the premiums you pay on the policy between now and your date of death. Prior to the year 2000, you wouldn't have received a tax credit for the death benefit left to the charity as the beneficiary of a policy, but thank goodness common sense prevailed and that tax relief is now available.

THE CHOICE

Which approach to donating life insurance is better? Well, that depends on whether you want a smaller amount of tax relief today, or greater tax relief on death. You'll want to make sure that you have sufficient income in the year of death, and the immediately prior year, to absorb the full donation tax credits you'll be able to claim if you opt for the second approach. If the insurance policy is big enough, and your income is low enough, you may not get the full tax relief in the year of death.

insurance a vital part of your financial plan

You have created a budget, reduced your expenses, eliminated your credit card debt and, have started saving for retirement, so you are all set, right? While you have certainly come a long way, there is one more important aspect of your finances that you need to consider.

You have worked very hard to build a solid financial footing for you and your family, so it needs to be protected. Accidents and disasters can and do happen and if you are not adequately insured it could leave you in financial ruin. You need insurance to protect your life, your ability to earn income, and to keep a roof over your head.

Insurance is often the most overlooked aspect in the personal financial planning process. There is an old saying in the industry that when all the other expenses are paid then whatever is left, if any, goes to insurance. The truth is that insurance should be the first one paid simply because if one is having financial problems now imagine what it would be like when disaster or tragedy strikes.

Unfortunately, insurance is still one of the least understood areas of personal financial planning. Therefore in the spirit of Financial Literacy Month and the theme: “manage your money” “live your dreams” we will make the case for insurance as a fundamental part of any strategic financial plan. First we will look very briefly at how insurance works and how it is employed to cover financial assets. We will also study how life insurance can be used to reach savings, investments and retirement goals. Finally, we will show that it is financially prudent to pay an affordable insurance premium today to insure against huge losses in the future.

Insurance premiums go into a pool

Insurance is an arrangement by which one party (the insurer) promises to pay another party (the insured) a sum of money if something happens which causes the insured to suffer a financial loss. While it may seem complex, insurance is really quite simple: the payments, called premiums, of the many pay for the losses of a few. Your premiums go into a large pool, if you will, at your insurance company. The claims of the few are paid from that pool. Because there are more people contributing to the pool than there are making claims, there is always enough to pay the claims – even large single claims like when someone is permanently disabled as a result of a car collision, or many smaller claims like those resulting from a natural disaster.

Insurance as asset protection

Most of us already recognize the value of insurance in asset protection. Mortgage banks and credit companies mandate that the prospective homeowner acquire life insurance to guarantee future income in the event of untimely death and property insurance to guard against perils such as hurricane, flood and fire. Building contractors must use Contractor’s All-risk policies to insure against physical damage to works, plant and equipment and materials during the course of construction. And of course there is compulsory motor insurance which protects against the financial losses and liability that result from traffic accidents. There are very few financial assets that are not backed by insurance of some sort. In this case, insurance is the foundation of wealth creation and wealth preservation.

Life insurance as savings and investment vehicles

We have seen how insurance protects our major assets and investments—be it the dream home, a college education, or a business enterprise. Term life insurance covers the life of the insured for a fixed period of time. If the insured within that period of time the sum assured is paid to the named beneficiary. Whole life insurance provides income protection, i.e. your earning potential, for your entire lifetime or up to a certain age in some instances. Unlike term insurance, part of the whole life premium goes into building up an accumulated cash value. This cash value can be borrowed or in some cases even withdrawn to help meet future long-term goals such as paying for a child’s college education, or retirement.

Popular life insurances like the whole life and endowment plans are a must have for any comprehensive personal financial plan. They are the right products to have when it’s important to have both protection and cash value accumulation. Additionally, some endowment plans pay 25% of the sum assured every five years and the total face value of the policy at the end of the endowment period. As cost effectiveness go, they offer guaranteed premiums, i.e. they never increase; guaranteed death benefit and guaranteed cash value.

Other life insurances such as universal life, variable life and variable universal life are termed as interest-sensitive insurance. The universal life is a more flexible, investment –linked plan that allows for a designated amount of the premium to be invested in bonds, mortgages and low-risk securities funds at guaranteed interest rates. Variable life allows the policyholder to allocate a portion of the premium to separate account comprised of various investments funds within the company’s portfolio. With variable universal life the policyholder can direct the investments themselves from a pool of options given in the policy. However, the risk is, where the investment perform well the cash value grows faster and if they under perform premiums may have to be increased to keep the policy in force. These policies, with greater element of risks, allow for the cash values to grow much faster thus accelerating savings, investments and retirement goals.

Insurance and retirement planning

The best way to plan for retirement is to start as early as possible. Without adequate long term planning, the retirement dream can become a nightmare. Financial risks, health issues, increased longevity, rising cost of living and uncertain retirement benefits obligations can cause living expenses to greatly exceed your retirement income.

Cash value life insurance is one of the ways to offset the risks of reduced income in your golden years. The guaranteed accumulated cash value in your whole life policy can now be used as supplementation for your Social Security benefit and your employer’s pension.

With practical financial planning the cash values in your life insurance can be customized to help fund your retirement in the following ways. The cash value can be paid out every month like a pension. A lump sum payment can be used to buy an immediate annuity for pension income or for emergencies, vacation, education, long-term and health care or any other unforeseen expenses during retirement.

Insurance and financial prudence

What is essential about protection insurance and most overlooked is its direct and indirect cost saving features. Remember, your affordable premiums go into a pool which pays out relatively large claims to the unfortunate few. This pooling feature brings the cost of protection within the means of most people, especially those who can not readily source funds to handle the huge financial losses resulting from accidents, poor health or natural disasters.

Since insurance covers unforeseen events many people do not view payments on insurance today as saving for a rainy day or as receiving any significant cost savings. In fact, they believe that it is more prudent to manage their own money through their own savings and investments. This is not ideal, as many people are seldom able to reach their own savings goals. Investments have their place but they are prone to the fluctuation of the markets and are not guaranteed. The insurance contract, on the other hand, provides cash guarantees for just when you need it.

Few people are able to pay out of pocket for major medical care. With an affordable medical insurance plan, the buyer can be assured of access to quality healthcare especially in the event of an emergency or major illness. In a time of astronomical medical and health care costs this can be the difference between financial ruin and the peace of mind that comes with knowing that you have access to quality healthcare.

Just in strict money terms, the actual average cost of retail air ambulance service to Miami, USA is US$15,000. That is what someone without coverage will have to pay before they can access this service. So if you are ever in need of an air ambulance service think of how much you will save in the future by paying a reasonably priced air ambulance premium today.

Term life insurance is the most affordable life insurance because the premium is designed to cover the cost of protection and therefore it has no cash value built in. However, term life is very useful for anyone who is cash-strapped like new some homeowners, or college students but absolutely must have life protection. Such persons are usually advised to upgrade their coverage to whole life as soon as their situation improves since term policies have no cash value and, particularly as the insured gets older, coverage becomes more and more expensive upon renewal.

With cash value insurance, owners have access to a ready cash reserve that they can either borrow or withdraw from to use as a down payment on real estate or take care of contingencies such as accidents, family crisis, and overseas travel. This is essentially a hassle-free loan at the time when you need it most. Additionally, in terms of cost-effectiveness, holders of multiple policies in the same company may qualify for discounts and bonuses which help to stretch their disposable incomes.

In the case of life insurance, the cost of protection increases as one gets older. Hence younger persons can buy larger amounts of insurance at lower rates. For whole life insurance these premiums are guaranteed, i.e. they do not change at all throughout the life of the policy. Hence early starters can lock in a relatively inexpensive premium with a substantial amount of insurance cover that can be used for later on for education, mortgage protection and retirement.

If you want to save for retirement, send a child to college or buy your dream house then insurance must be a central feature of your own personal financial plan. Cash value insurances are also savings and investments vehicles with guaranteed accumulated funds that grow to fit your day to day financial needs. Insurance protects our most cherished financial assets and brings peace of mind and a sense of well-being in the golden years.

A well-known fact in the industry is that insurance coverage is usually one of the first things that people will forego during financially tough times. There is plenty of evidence as to how quickly catastrophes like the loss of the breadwinner, a major illness or natural disasters can deplete financial resources where there is no insurance. With better public education about insurance, this kind of attitude is sure to change for the better with more and more people actively seeking out the essential insurance coverage. That is why the dedication of at least one month a year to financial literacy is so important.

Faking it - it's big business these days.

Whether a burnt body, a nicked car, a stolen iPod, a king's ransom in jeweller or designer sunglasses, all are being eyed by the crafty.

The life insurance industry has prevented some 21 000 fraudulent insurance claims over the past five years, according to the Cape Town-based Life Offices Association (LOA), an umbrella body for life assurance companies.

Had these claims not been identified and prevented, losses would have amounted to R1,3-billion, according to chief executive Gerhard Joubert.

The short-term insurance industry, on the other hand, received more than R22-billion in claims in 2006 and industry insiders fear a significant portion constituted fake claims.

So worried is the security industry about the rampant fraud that next week, it will launch the SA Insurance Crime Bureau (SAICB).

The bureau, it is hoped, will breathe new life into the fight against this type of crime once it starts operating on November 1.

Recently, KwaZulu-Natal has seen increasingly inventive insurance fraud scams aimed at defrauding insurance companies out of millions of rands.

These include:

* The sensational "resurrection" of a prominent Durban businessman who had allegedly led his relatives to believe he'd been burnt beyond recognition in his bakkie.

* A scam uncovered by police earlier this year in which the bodies of 21 "vulnerable" people, most of them hobos and prostitutes, were used to claim from life insurance.

Undetected

The SAICB believes the current approach to insurance fraud is fragmented and ineffective.

"Insurance fraud is a difficult thing," said Vivienne Pearson, image and reputation manager at the SA Insurance Association (SAIA), which has facilitated the formation of the SAICB.

"We know it is rife, but a lot of it remains undetected. If one imagines that 10 percent of those claims are fraudulent, we are talking about R2,2-billion that could have been used in a better way. We believe it's much higher than that, but we can't prove it," she said.

Many fraudulent claims were the work of organised criminals who enticed innocent people to get involved, with the prospect of making quick, easy money.

"They'll tell them where to leave the car so it can be 'stolen' or what to do to burn a house, hide its contents and claim from insurance," Pearson said.

High on the list of fraudulent short-term insurance claims, said Pearson, were those for expensive items such as cars, cellphones, big screen plasma television sets, jewellery and laptop computers.

One of the most common examples of insurance fraud involves an insured person staging a house burglary, hiding the goods, and then reporting them stolen, says Bradley Du Chenne, spokesperson for Dial Direct.

When a house robbery does, in fact, take place, the insured will often inflate the loss or claim for goods they did not own.

But claims for fake car thefts were just as rife, he said.

"Only once the car is safely out of the country, or its identity is sufficiently disguised, the insured submits a claim for a stolen car," said Du Chenne.

In such cases, the insured would benefit from a double whammy.

"(They) get a payout from the insurance company as well as the money they received for selling the car."

But it doesn't always work.

According to senior Durban prosecutor Blackie Swart, two local men were recently tried in court after making an insurance claim of R46 000.

This was for a BMW sedan that was reported stolen from the parking lot of a Durban casino when, in fact, CCTV footage subsequently revealed it was driven out of the casino by a person known to the owner.

Thief

The police traced the owner of the bakkie that had dropped off the "thief" at the casino. After questioning, the owner admitted that he had handed the car keys to the so-called thief, said Swart.

In the past, insurance companies had acceded to fraudsters using fake information to make multiple claims on one item.

"Money is tighter these days and people get up to all sorts of shenanigans. And insurance fraud is one of the easier ones," said Swart.

In an effort to curb this, most insurance companies now had their own investigators, Swart added.

Johan Burger, of the Institute for Security Studies, believes that a marked increase in commercial crime may be linked to the jump in insurance fraud.

The latest police statistics show that commercial crime rose from 53 941 reported incidents in 2004/5 to 65 286 in 2007/8.

"Commercial crime, under which insurance fraud falls, has increased sharply. But it goes unnoticed by many people. The focus is on armed robbery because it is something that touches on people's feelings," said Burger.

But some are confident that significant gains are being made in the fight against insurance fraud.

In the life assurance sector, the work of highly organised syndicates had prompted the industry to do more to detect and prevent fraud, said Johann van Rensburg, head of forensic risk at Metropolitan Holdings.

Meanwhile, the modus operandi employed by the gang involved in the mass insurance fraud killings first emerged in the media in July.

This followed an anonymous tip-off to police.

The syndicate, whose three members are awaiting trial in prison, would take life insurance policies at random. Once the victims were identified, they would then be killed.

They acted in collusion with Home Affairs officials who issued death certificates in these names.

Matching identity documents would be placed on the corpse, ostensibly solving the identity puzzle. And then the claims would be made.

Police spokesperson Superintendent Jay Naicker said this week that investigations into this case were continuing.

http://www.iol.co.za/index.php?set_id=1&click_id=15&art_id=vn20081026090447926C525813

The Right Insurance Rules

As lawmakers and regulators contemplate the staggering costs of the credit crisis, policymakers are seeking ways to ensure that Wall Street is never again in a position to gamble with America's fundamental financial stability. Among the issues being debated, reportedly, is whether the Treasury should expand its rescue program to include insurance companies. And looking beyond the immediate situation, debate is brewing over whether the federal government or the states can do a better job of regulating insurance companies.

Arguments over which jurisdiction should take the lead run the risk of obscuring the most important factor determining the efficacy of financial regulation. Today's crisis proves that strong capital requirements are critical for safeguarding consumers and the financial system, whatever level of government oversees insurers.

Even the most knowledgeable and assiduous regulators have limited capacity to halt irresponsible risk-taking and speculation. Booms, manias and bubbles, such as the one that led to the collapse of the subprime mortgage market, are as old as markets themselves. Cycles of excessive market exuberance and greed pose a grave risk to the general economic well-being when market players have a nearly unlimited capacity to leverage their risks -- that is, to take on financial obligations far greater than their capacity to make good on their promises if their bets go bad.

Capital requirements are like speed limits. The police, of course, cannot guarantee that every driver on the road is alert and acting cautiously. But if authorities post and enforce prudent speed limits, every driver and pedestrian is safer.

Effective regulation built around sound capital standards will limit leverage and risk. For example, the investment banks that are reconfiguring to become bank holding companies will become subject to capital standards that reduce the magnitude of the risk they are allowed to take. The capital standards they were subject to previously allowed them to leverage their balance sheets 30 to 1 and higher, meaning that for every dollar in their coffers, they could place bets of $30. In contrast, the rigorous capital requirements and standards to which insurance companies are subject have effectively limited the risks that insurers can take.

Insurance companies must set aside reserves using a formula that calculates future obligations based on conservative risk and interest-rate assumptions. A further layer of protection comes from the requirement to set aside additional "risk-based capital" for other contingencies. Insurance regulations also prescribe a prudent and diverse mix of investments whose expected cash flows reasonably match future obligations.

No regulatory regime can prevent all failures, particularly when the capital markets are dysfunctional. But these three layers of capital protection greatly limit the systemic risks and costs to taxpayers when something goes wrong.

A case in point for strong insurance capital standards is the collapse of AIG, the nation's largest insurer. The losses that necessitated a more than $100 billion, taxpayer-supported federal takeover occurred in the company's non-insurance subsidiaries, whose capital requirements were far less rigorous than those for its insurance subsidiaries. The insurance subsidiaries are solvent, and the controls in place limited the opportunities to use the capital inside these subsidiaries to pay off the bad bets accumulated elsewhere.

Just as changing police officers' uniforms would do nothing to make our roads safer if speed limits were not set appropriately and enforced, the rigorous enforcement of prudent capital requirements, not which layer of government is chosen to do the job, determines the quality of financial regulation. Rebuilding America's financial system will be challenging and costly. If a new regime were to ease the high capital standards enforced on insurance companies at the state level, we would be throwing the baby out with the bath water and creating a vast risk to the soundness of our financial system. Whatever shape the new U.S. financial and regulatory structure takes, we must build it on a foundation of solid capital requirements.

It's time to select your employment benefits

DES MOINES, Iowa — It’s decision time again for workers as many companies offer employees the annual opportunity to change insurance choices and make other benefit selections.

Open enrollment season can be stressful because it requires decisions to be made that can’t be changed for another year unless you have a major life change like a marriage, divorce or a child.

For many, it’s simply easier to leave things the way they are.

Benefits consultant Hewitt Associates says its research shows more than 60 percent of workers will simply default to the choice they made the previous year. That might be unwise. If you don’t choose, your employer may do it for you in a way that saves it the most money but might not be best for you.

Many companies are beginning the practice of moving employees who don’t make choices into default health care plans, which likely carry high deductibles, said Sara Taylor, head of open enrollment at Hewitt. In a few cases, companies have dropped coverage for workers who never look at their plan.

“The thinking is, this is an important and costly benefit and if you aren’t going to pay attention to it and at least look at it, you obviously don’t need it that much,” she said.

Workers should put as much thought into benefits choices as they would into buying a big-screen TV, a car or any other big-ticket item.

“They need to do their research, comparison shop and then select the options that will not only enable them to maximize their benefits dollars, but also best meet their needs and the needs of their families,” she said.

Hewitt says employees’ total health care costs — including employee contribution and out-of-pocket costs — are projected to be $3,826 in 2009, up 8.9 percent from $3,513 in 2008. The increase is more than double the rate of inflation and expected salary increases, which average about 3.7 percent.

When you’re starting to evaluate your coverage, you may want to look at your life insurance coverage, whether to increase it and who you’ve listed as beneficiaries. Also take a look at dental, vision and disability insurance coverage.

If nothing else, you should at least look at your health care coverage and consider starting a health savings account or a flexible spending account. Such plans can save you money on your taxes and can help control rising health care costs, Taylor said.

The accounts are set up with money taken out of your pay before taxes, which means you’ll face a lower tax bill. The money in the account may be used for a range of health expenses such as outpatient consultations, diagnostic tests and co-payments. In some cases expenses not covered by the primary health care plan such as chiropractic care or dental care may be paid for out of the accounts.

What’s more, you should start saving for retirement in a 401(k) account if you don’t already and assess your contribution level if you do.

Here are seven tips to help you face the decisions that come with open enrollment:

1. Do your homework and seriously evaluate all benefit options and weigh them against your specific needs. Carefully look over your benefits selections from last year and assess what worked and what didn’t. Did you put enough money in your flexible spending account, or did you tap that pool of cash well before the year’s end? Were the doctors you saw covered under your plan? How much did you spend in copays and other out-of-pocket costs? Most employers provide access to past medical and dental claims that can help you estimate what your future costs might look like.
2. Think about any life changes that may affect the benefits you select this year. Are any of your dependents no longer eligible for coverage?
3. Use the tools available to you. Many employers offer health care cost estimators that allow employees, to comparison shop for health insurance by evaluating two or more health care plans at a time. Users can compare monthly premiums, co-payments, deductibles and coinsurance payments. However, just 9 percent of employees used those tools in 2007, according to Hewitt.
4. Read the fine print. More employers are changing the rules of the annual enrollment process, and it’s up to you to make sure you fully understand if and how those rules may affect you.
5. Assess your family’s needs. More companies are requiring employees to pay a bigger portion of the cost of coverage for their dependents, either by increasing payroll contributions for dependent medical coverage or by charging higher contributions for spouses or partners. You should assess whether your spouse or partner can get coverage under an employer plan. It may be more cost-effective for each of you to take coverage under your own employer health plan if that option is available.
6. Consider participation in health and wellness programs like smoking cessation, weight management or physical fitness. It could improve your health and cut back on the amount you spend by potentially hundreds of dollars a year.
7. Take advantage of tax-free benefits like flexible spending accounts and dependent care spending accounts.

Employment Practices Liablity - How to Buy It

My latest in the "How to Buy Insurance" series is, How To Buy Employment Practices Liability Insurance. It is a free 18 page whitepaper written for insurance buyers who want to know the ins and outs of the insurance protection they buy.

-Employment discrimination
-Wrongful discharge
-Failure to hire
-Harassment

I cover the coverage points, provide an issue comparison chart, and a glossary of terms.

For most companies it is not an issue of if you will have an employment practices suit, but when. Unfortunately, anytime you fire someone or you decide not to hire a specific job applicant, you may be moving into lawsuit land.

Download the whitepaper here.

Five steps to cheaper life insurance

More than half the UK population is overweight, around a quarter smoke and one third of men (and a fifth of women) drink more than their recommended weekly allowance.

The result is poorer health, huge outgoings on these bad habits and higher life insurance premiums. However, there are five simple steps you can take that will have a dramatic effect on all of these.

Step 1: stop smoking
This is tough, but will have the most profound effect on your premiums. It has been linked to diseases including lung cancer, heart disease, strokes and even type 2 diabetes.

The Continuous Mortality Investigation found it has more of an impact on your life expectancy than gender. Male smokers aged 60 have a 106 in 10,000 chance of dying at that age compared with non-smoking 60-year-old men, whose risk of dying at that age is 48 in 10,000. It also revealed that a 60-year old female smoker has an estimated 85 in 10,000 chance of dying, compared with a 35 in 10,000 chance for a non-smoking female.

Unsurprisingly, this has a big impact on life insurance premiums. Depending on the insurer, you could see premiums rise between 50% and 60% as a smoker; that's as much as £3,600, assuming you take out cover for 50 years.

The good news is that by giving up smoking, after a certain period, some life insurance providers will treat you as if you have never smoked. You will need to come clean about your status as an ex-smoker, but as long as you've been tobacco-free for the period your insurer insists on, you may not have your insurance premium loaded.

Step 2: reduce alcohol intake
The recommended maximum alcohol consumption levels are 28 units a week for a man or 21 for a woman. Matt Morris, PR manager for broker Lifesearch says: "As soon as you drink more than 30 units a week, your insurer will start to take an interest."

Alcohol can cause serious harm, including liver diseases, heart diseases, cancer throughout the gastro-intestinal tract, kidney problems and nervous disorders, as a result it will bump up your premiums. Morris says anyone drinking more than 40 units a week will face higher premiums, and while this will vary according to the insurer and other associated health factors, this could be between 25% and 50%, which will cost anywhere between £1,500 and £3,000 over the life of the policy.

Step 3: lose weight
According to the World Health Organisation, almost a quarter of people in the UK are obese, which is defined as anyone with a body mass index of over 30. At this point your body becomes a danger to your health. Obese people are at an increased risk from heart disease, type two diabetes, and cancer, of the colon, oesophagus and kidney.

If you are obese, insurers are likely to hike your lifeinsurance premium or may even refuse to cover you. Most won't load anything below 30 - although some start to charge more as soon as you hit a BMI of 27. As a rough rule of thumb, according to Lifesearch, a BMI of 30-37 could mean a 50% rise in your premium, and over 37 could be declined. This means that over 50 insured years you could pay an extra £3,000.

Dropping a bit of this weight can have a dramatic effect on your health. Losing 5% to 10% of your weight can lower a your chances of developing coronary heart disease or having a stroke. Add in some exercise and you could reduce your risk from diabetes and cancer too. To get a cut in premiums you may have to shop around for new insurance again, as your insurer may refuse to adjust your cover.

Step 4: take the safe route
Give up adrenaline-fuelled sports, such as bungee jumping, cliff jumping, jet boating, mountain boarding, paragliding, power kiting or quad biking. These have high risks associated with them. If you were to spend 100 hours gliding, for example, you would have a two in a thousand chance of dying from it. Ben Heffer, principal consultant, life and pensions, for Defaqto, says: "If your hobby is jumping out of aeroplanes it means you'll have an increased risk of premature death".

The risk depends on the frequency with which you do the sport. Morris says: "If it's something you do relatively infrequently - such as scuba-diving on holiday - it's unlikely to affect your premiums. But if it's something you do very frequently then you could see your premiums loaded." Again a very regular paraglider could see premiums bumped up by 50%, which is a £3,000 cost over 50 years.

Step 5: get a check-up
The most simple step is to go to the doctor regularly. Early identification and, if necessary treatment, of a range of conditions mans you'll be healthier and that you can be honest with a new life insurance provider about existing conditions.

So, for example if you have high blood pressure, you could see premiums rise by up to 50%, which is around £3,000 over 50 years. However, if you are having treatment that has brought it down below that level, your premiums won't be so highly loaded.

In all, these five steps could save over £15,000 over your lifetime. You will also find yourself much better off, as your vices can be a tremendous drain on your resources. Stopping a 20-a-day habit, for example, will save you well over £100,000 in a lifetime.

Market turmoil hits life insurance industry

MUMBAI: The turmoil in the equity markets appears to be taking a toll on the life insurance industry as well. Growth rates for the industry have slowed down and initial estimates from companies show that companies are unlikely to fare better in the month of September. Upto end August '08 the life insurance industry recorded a premium income of Rs 26,451 crore marginally lower than Rs 27,491 crore in the corresponding period last year recording a growth of 56%. The decline was largely on account of 29% decline in business of Life Insurance Corporation of India to Rs 14,360 crore compared to Rs 20,206 crore last year.

The year-to-date figures show that the private life insurance industry is growing at a healthy pace and that it is the LIC which is dragging down growth. However, an analysis of monthly figures shows that there are signs of an incipient slowdown. Typically, the life insurance industry witnesses seasonal growth. The usual trend is for the industry to write 10% business in the first quarter, 20% in the second, 30% in the third and 40% in the fourth quarter. Also there is a progressive increase in premium income as the fiscal moves on. This year, however, some companies have actually shown a decline in August.

Most industry officials feel that there is a slowdown on account of the turmoil in the global markets. Insurers feel that policyholders may delay their decisions on channelling funds into the equity market through unit-linked insurance schemes until the crisis in the US market comes to an end. The flattening of the growth is also a sign that companies are seeing the law of diminishing returns come into play while expanding their agency force.

According to Shikha Sharma, managing director, ICICI Prudential Life Insurance: "The month on month growth has come off a bit. People still want to save money for retirement but they are waiting for the volatility in the stock markets to come to an end." She added that the growth potential for the industry continues to be there the industry may have to wait for a couple of months of stability in the equity markets. Vikram Mehmi, president and CEO of the fastest growing life company says that there is definitely a slowdown in overall industry growth. He points out that there is a liquidity issue among big buyers of insurance as well as they are now postponing their decisions. However, retail sales continue to remain powerful.

US Roy, managing director, SBI Life Insurance which has moved to the number two slot feels that it is not correct to term the lower growth rate as a slowdown. He points out that despite the crash in the stock market life companies has managed to post a growth over last year where premiums were driven by record growth in the stock markets.

According to Kamesh Goyal, CEO, Bajaj Allianz Life Insurance, the life industry would need to change its business model for the current environment. He points out that Bajaj Allianz has managed to record good month on month sequential growth in the last quarter. However, the company has managed to record a very small growth over the corresponding period last year.

Cashing In Your Life Insurance Policy

In tough economic times, people are sometimes left scrambling for cash to meet everyday expenses and lifestyle demands. Your life insurance policy is a possible source of funds - but should you tap into it?

There are certainly some drawbacks to using life insurance to meet immediate cash needs, especially if you're compromising your long-term goals or your family's financial future. Nevertheless, if other options are not available, life insurance, especially cash-value life insurance, can be a source of needed income.

Methods of Accessing Cash
Cash-value

life insurance, such as whole life and universal life, builds reserves through excess premiums plus earnings. These deposits are held in a cash-accumulation account within the policy.

Cash-value life insurance offers the opportunity to access cash accumulations within the policy either through withdrawals, policy loans, or partial or full surrender of the policy. Another alternative involves selling your policy for cash, a method known as a life settlement.

Be sure to bear in mind that although cash from the policy might be useful during stressful financial times, you could face unwanted consequences depending on the method you use to access the funds.

Withdrawals
Generally, it is possible to withdraw limited amounts of cash from a life insurance policy. The amount available differs based on the type of policy you own and the company issuing it. The main advantage of cash-value withdrawals is that they are not taxable up to your policy basis, as long as your policy is not classified as a modified endowment contract (MEC).

However, cash-value withdrawals can have unexpected or unrealized consequences:

1. Withdrawals that reduce your cash value could cause a reduction of your death benefit - a potential source of funds you might need for income replacement, business purposes or wealth preservation.

2. Cash-value withdrawals are not always received income-tax free. For example, if you take a withdrawal during in the first 15 years of the policy and the withdrawal causes a reduction in the policy's death benefit, some or all of the withdrawn cash could be subject to taxation.

3. Withdrawals are treated as taxable to the extent that they exceed your basis in the policy.

4. Withdrawals that reduce your cash surrender value could cause your premiums to increase in order to maintain the same death benefit; otherwise, the policy could lapse.

5. If your policy has been classified as an MEC, withdrawals generally are taxed according to the rules applicable to annuities - cash disbursements are considered to be made from interest first and are subject to income tax and possibly the 10% early-withdrawal penalty if you're under age 59.5 at the time of the withdrawal.

Loans
Most cash-value policies allow you to borrow money from the issuer using your cash-accumulation account as collateral. Depending on the terms of the policy, the loan might be subject to interest at varying rates; however, you are not obligated to financially "qualify" for the loan. The amount you can borrow is based on the value of the policy's cash-accumulation account and the contract's terms.

The good news is that borrowed amounts from non-MEC policies are not taxable, and you don't have to make payments on the loan, even though the outstanding loan balance might be accruing interest.

The bad news is that loan balances generally reduce your policy's death benefit, meaning your beneficiaries might receive less than you intended. Also, an unpaid loan that is accruing interest reduces your cash value, which can cause the policy to lapse if insufficient premiums are paid to maintain the death benefit. If the loan is still outstanding when the policy lapses or if you later surrender the insurance, the borrowed amount becomes taxable to the extent the cash value (without reduction for the outstanding loan balance) exceeds your basis in the contract.

Policy loans from a policy that is considered an MEC are treated as distributions, meaning the amount of the loan up to the earnings in the policy will be taxable and could also be subject to the pre-59.5 early-withdrawal penalty.

Surrender
In addition to withdrawals and policy loans, you can surrender (cancel) your policy and use the cash any way you see fit. However, if you surrender the policy during the early years of ownership, surrender fees will likely be charged by the company, reducing your cash value. These charges vary depending on how long you've had the policy. In addition, when you surrender your policy for cash, the gain on the policy is subject to income tax, and if you have an outstanding loan balance against the policy, additional taxes could be incurred.

Although surrendering the policy can get you the cash you need, you're obviously relinquishing the right to the death-benefit protection afforded by the insurance. If you want to replace the lost death benefit later, it might be harder or more expensive to get the same coverage.

Life Settlement
This concept is fairly simple. As the policy owner, you sell your life insurance policy to an individual or a life-settlement company in exchange for cash. The new owner will keep the policy in force (by paying the premiums) and reap a return on the investment by receiving the death benefit when you die.

Most types of insurance are eligible for sale, including policies with little or no cash value, such as term insurance. Generally, to qualify for a life settlement, you (the insured) must be at least age 65 years old, have a life expectancy of 10 to 15 years or less, and a policy death benefit of at least $100,000 (in most cases).

The primary advantage to a life settlement is that you can potentially get more for the policy than by cashing it in (surrendering the policy). Although there is little definitive information on the taxation of life settlements, the general treatment is that gain in excess of your basis in the policy is taxed to you as ordinary income.

Although life settlements can be a valuable source of liquidity, consider the following issues:

1. You're giving up control of the death benefit.

2. The new policy owner(s) will have access to your past medical records and usually the right to request updates on your current health.

3. The life-settlement industry is very marginally regulated, so there's no guidance as to your policy's value - it's hard to determine whether you're getting a fair price for your policy.

4. Aside from the tax liability you could face, life settlements usually come with a cost - as much as 30% of your proceeds could be paid in commissions and fees, which reduces the net amount you receive.

Conclusion
Poor economic times can prompt you to contemplate liquidating assets for cash. Sometimes you might have no other choice, but when it comes to life insurance, think about why you purchased the policy in the first place. Do you still need the coverage? Are the policy's beneficiaries depending on the death benefit if something happens to you?

You should also consider other alternatives before using your life insurance policy for cash. Some options might include borrowing against your 401(k) plan, or taking out a home-equity loan. Short of hitting the lottery, none of these options comes without mitigating issues, but based on your current needs and financial circumstances, some choices might be better than others.