Welcome to The Shaw Atlas, the monthly newsletter from Shaw & Associates, CPAs & Financial Advisors. We look forward to keeping you abreast of ever-changing tax codes, providing you with money saving accounting tips and illustrating proactive strategies to help you achieve the financial life you envision.
September is National Life Insurance Awareness Month. I know right now many of you are saying, “Ugh, life insurance, I don’t care/can’t afford it/don’t need it.” But, you need to hear this. Last week as I was working on writing this article, one of my co-workers lost a loved one who was in their early 30’s, seemingly in great health, with a young family, and no life insurance. Let me summarize: unexpected death, young child, no life insurance. What is going to happen to this family?
Since life insurance can sometimes be confusing and frustrating and because it is so important, I thought it would be informative to discuss five of the most common myths we run into about life insurance.
- Life insurance is expensive.
- If I’m young I don’t need life insurance.
- Why should I worry about life insurance? I have coverage through my employer.
- I only need twice my salary in coverage, right?
- Buy term insurance and invest the difference.
Life insurance is expensive– Expensive is a relative term. Ask anyone that has unexpectedly lost a loved one. If they did not have life insurance, there is suddenly a significant burden on the survivors. How does a surviving spouse replace the lost income of the deceased? If children are involved, how do you ensure that they will be able to maintain the lifestyle that you intended for them before you died? If they did have life insurance they will most likely use terms like “lifesaving” or “godsend.” That family will definitely tell you it was not expensive, but worth it.
There is obviously a cost for life insurance. And these costs do increase with age, amount of coverage, and health or other underwriting issues.
However, life insurance is also very customizable to your individual needs. As a young family starting out, you can most likely build a life insurance program to cover some of your basic needs starting from as little as $15 to $50 a month. This is very important to remember: a good life insurance plan is tailored to the specific needs and budget of each family and is not a one-size-fits-all solution.
If I’m young I don’t need life insurance– You may be correct. If you are single, young and you don’t have children, a spouse or a home, you may not have a large insurable need. However, chances are good you probably will need coverage down the road. Buying insurance when you are young and insurable (no preexisting medical conditions) will allow you to participate in much lower rates. Thus, when your need for insurance kicks in, you have already started your life insurance program at lower rates.
Why should I worry about life insurance? I have coverage through my employer– Are you sure about this one? According to a 2008 United States Department of Labor study, most people change jobs every four years, or about 10 to 11 times over their working lifetime. Just because you leave your employer doesn’t mean your life insurance will move with you. In a few instances, you can take it with you; consider yourself one of the lucky ones if your coverage is “portable.” You might want to check with your Human Resources department to see if your coverage is indeed portable.
In addition to the portability issues, here are three more reasons why you shouldn’t rely solely on your employer.
a) Does your employer’s policy provide enough coverage to meet your needs? Most likely not. Typically you will get $50,000 or 1 x annual salary. Some employers may offer additional coverage of some multiple of your salary but it still might not cover your desired goals.
b) Insurability- If you develop a condition that prevents you from getting additional coverage you better hope you don’t lose your job or that your employer doesn’t change coverage programs. If you have your own individual policy it doesn’t matter where you work or how often you change jobs, your family always has protection.
c) Typically costs go up as you get older with employer plans because they are based on term insurance. You can lock in your monthly costs with an individual policy.
Don’t get me wrong, employer plans are a great way to supplement your individual coverage and can also be a cost effective avenue for individuals that have a tough time getting coverage but you shouldn’t rely on it for 100% of your coverage.
I only need twice my salary in coverage, right? – That depends. What are you attempting to accomplish with your life insurance? If your goals are basic, you may be able to accomplish this with two times salary coverage. However, if you have more involved goals such as paying off the mortgage or other debt, paying funeral and final expenses, paying for your children to go to college and building an emergency fund for a surviving spouse you may not be able to do that at twice your salary. Oops, let’s not forget to mention replacing your income to cover the household expenses you were paying and any additional amounts you were contributing to your family’s financial plans to make for a comfortable retirement. The coverage amount isn’t a magical 2,3,5,7 or 10 times your salary. It is what you want your coverage to accomplish if you die early. This varies dramatically for each individual but should be customized to meet your needs.
Buy term insurance and invest the difference– Not necessarily. Term insurance can be a very effective low-cost way to provide coverage for a very specific time period. However, since there are differences between permanent and term life insurance, it is once again important to understand your goals and objectives. If you know you need or want some coverage later in life, the premiums paid on term policies get increasingly higher and more cost prohibitive as you age. In addition to cost you have to deal with insurability. As you get older you are more likely to develop a condition that may prevent you from getting coverage. Finally, as you cross certain age brackets, say 75 or 80, most insurance companies stop issuing new policies. You may have been better off getting a permanent policy at a younger age and a much lower price. Again each case is different.
To end, I want to share a very personal experience. When I was a freshman in college, my dad passed away at the young age of 53. He was always a very good planner and did have adequate life insurance. Because of that, my mom was able to remain in our family home, and my sister and I were able to emerge from college without being saddled by debt. Also my mom is now living a comfortable retirement and is able to travel to Colorado several times a year to enjoy her grandchildren. My family never lived lavishly and we still do not, that is not the intention of life insurance. Losing my dad shook up our lives big-time; however, because we were financially prepared for this, we were able to spend time grieving rather than worrying about how to make ends meet.
We realize life insurance can be confusing and very unique for each family, as well as an uncomfortable topic. We would be happy to meet with you to discuss your specific needs, the types of coverage available and how to optimize the amount of coverage to fit your budget. Please feel free to contact us to answer any questions you might have or to schedule a free consultation. The important thing is to make sure your loved ones are not left both grieving and stressing financially when you pass away.
Life Insurance Calculator
Life, a non-profit organization provides a life insurance calculator on their website to help you determine an estimate of the capital needed to sustain the family at the time of your death. They also provide a human life value calculator to help you evaluate your financial value. Click on the links below to help you calculate and estimate.
Contact Dave Palm for a precise and thorough analysis at firstname.lastname@example.org
Its Déjà vu all over again! In 2010 the tax cuts implemented in 2003 were set to expire. At the last minute Congress extended these cuts for an additional two years. Well, the two years are up on December 31, 2012. Additionally, several new taxes that were part of the recent health care legislation are scheduled to begin in 2013. So, as the tax laws are currently written, significant changes will occur on January 1st, 2013 that could have a major impact on your personal financial situation. I will briefly discuss those that may have the biggest impact.
First, there will be the change in the tax brackets. In a nutshell, the 10% bracket will be eliminated and all brackets from 25% on up will increase at least 3 percentage points. The 25% tax bracket will become 28% and each succeeding tax bracket will increase a similar amount to the maximum amount of 39.6% (currently 35%). What does this mean? Since our tax system is tiered, this change will impact virtually every taxpayer. For example, a single person with taxable income of $50,000 will pay approximately $1,640 of additional tax in 2013 vs. 2012. The effect on married couples will be even more pronounced since, in addition to the change in the tax rates, the lower two tax brackets (15% and 25%) will actually shrink so that more of your income will be taxed at higher tax rates than before. This is commonly known as the “marriage penalty” which was eliminated when the 2003 tax cuts were implemented.
Second, for taxpayers in the 25% and higher tax brackets, the capital gains tax rate will increase from 15% to 20% for long-term (greater than one year) capital gains. This is an effective increase of 33%. Qualified dividends, which are now being taxed at the long-term capital gains rates of 15%, will be taxed as ordinary income based on your marginal tax bracket. Thus, a person in the 25% tax bracket will see a 67% increase in taxes on dividends while a taxpayer in the highest tax bracket will see a 164% increase. For those in the 15% or lower tax brackets the impact is even more significant. The tax rate on long-term capital gains and qualified dividends for these taxpayers is currently 0% (no that is not a typo). They will now pay taxes the same as those in the higher tax brackets discussed above.
The estate exemption, the amount of assets that is shielded from estate taxes, will decrease from its current level of $5 million per person to $1 million per person. This may still seem like a large number, but life insurance proceeds are considered assets for purposes of this tax. Thus, it is reasonable that a significant number of taxpayers will exceed this threshold and end up paying up to 55% tax on the estate value above the $1 million exemption.
The new taxes that are part of the health care legislation are primarily twofold and are assessed on any single person earning greater than $200,000 or any married couple earning greater than $250,000. For those that exceed those amounts, their wages will be assessed an additional .9% Medicare tax and their investment income, such as dividends and capital gains, will be assessed an additional 3.8%.
For our business clients, the ability to expense capital items such as equipment, furniture & fixtures in a current year will be severely curtailed. The first year bonus depreciation rules are set to expire. The maximum limits on Section 179 expensing, currently $250,000, are set to revert back to the 2003 level of $25,000. Although Congress has been willing in the past to reinstate these tax breaks, businesses should closely monitor this situation and make capital plans accordingly.
There are certainly others, but these are the major changes. What does this mean? Washington seems to be mired in partisan politics that are exacerbated by the November elections. The Republican side of the aisle wants to extend the 2003 tax cuts permanently for everyone. The Democrat side has proposed a one-year extension only for those that make under the thresholds mentioned above. Neither side wants to budge from their positions.
At the moment, the most important thing is to stay informed as things play out over the rest of the year. If the cuts do expire, taxpayers should take steps to mitigate the tax consequences as much as possible. The old adage of deferring income and accelerating deductions would most likely be reversed for 2012. Additionally, as we get closer to the end of the year and investors in the market realize that the capital gains rates are going to go up, there may be a run on the stock market, whereby sellers far exceed buyers, and that could depress stock prices. Staying up-to-date on all of this could eventually help you minimize any tax or market impacts in your own personal finances. We do our best to keep our clients informed as changes occur but it is especially important to consult with your CPA on how this will impact you as we get closer to year end.
SuperStars Sports Challenge
Shaw & Associates wants to thank Partners Mentoring Youth for another entertaining year at the SuperStars Sports Challenge. A gracious Thank You also goes out to the clients and friends who joined us in the event. We look forward to participating in this even in the years to come.