This estate planning newsletter is presented
with the hope that it will provide
valuable information for your use in planning
and protecting your estate. We will present
useful ideas and strategies, changes in laws,
and interpretations of existing regulations
so that you can maximize your earnings and investments
while minimizing your vulnerabilities.
We will also select questions from the volume of
E-mail we receive and clarify existing misconceptions
about tax code. This newsletter is for your
benefit and we would like to hear from you and
receive your suggestions on what you would like
to read.
You may contact the newsletter editor by Emailing
contact@heritagelivingtrust.com.
|
|
| |
HOW TO CHECK UP ON A LIFE
INSURANCE COMPANY |
| |
 Research Policys
If you’ve spent
more time planning your vacation than
you have researching your insurance portfolio,
you could be in for an unpleasant surprise.
By JJ MacNab
Insurance company failures
are on the rise. The number of insurers
who went under in 2000 increased by 30%
over the prior year as a result of increased
competition and the slowing economy. To
make matters worse, some of the leading
industry analysts are predicting rocky
times ahead for life and annuity companies.
And, if the new Administration’s
tax plan succeeds, the repeal of the estate
tax combined with a reduced capital gains
tax rate could effectively knock the feet
out from under those companies who rely
too heavily on the tax aspects of insurance
products to make their sales.
If you think you might need your insurance
coverage for more than 10 or 15 years,
it is imperative that you choose your
insurance carriers carefully and continue
to monitor those companies on a regular
basis. While no one can accurately predict
a company’s viability twenty, thirty,
or forty years down the line, you should
do everything you can to avoid the time
and expense of watching your carrier struggle
through receivership and sale. Just ask
the policyholders at Mid-Continent Life,
an Oklahoma-based life insurance company
who was taken over by the state Insurance
Department in 1997. Almost four years
later, the fate of the 130,000 policyowners
is murky at best.
While those who are making a substantial
commitment to invest in a large portfolio
may want to consider the services of an
insurance analyst or independent consultant,
a growing number of consumers are turning
to the Internet for their information.
Many ‘net-savy consumers are pros
when it comes to looking up and analyzing
financial data on stocks, bonds, and mutual
funds. Performing insurance company due
diligence, however, presents a new challenge.
Fortunately, many of the leading sources
of information have recently made their
ratings and analysis available to the
online public and almost all of it is
free.
Due Diligence Basics
Whether you are researching a prospective
company or are performing a periodic review
of the policies in your portfolio, the
most important thing you can do is accurately
identify the insurance company in question.
For example, your agent has recommended
a policy with Security Life. Is that Security
Life of Denver, Security Life and Trust,
or Security Life of America? Find out
for sure.
Secondly, don’t get caught in the
trap of simply comparing two companies
and choosing the better one. Instead,
hold each company up to a pre-determined
set of benchmarks. If an insurance agent
wants to sell a particular company or
product, it is not uncommon for them to
offer two or three alternatives that look
worse than the one they want to sell.
And finally, don’t assume that
it costs more to purchase insurance from
a top-rated company. Remember, product
illustrations are poor indicators of how
a policy will perform. Since insurance
companies generally have comparable expenses,
reserve requirements, and overall investment
strategies, buying from the best does
not necessarily result in higher premiums.
Third Party Ratings and Financial
Data
There are five major rating firms that
analyze life insurance companies on a
regular basis, and four of these offer
their ratings and analysis online for
free:
-
AM Best - Simply enter
the name of your company under the “Search
Ratings” category and in addition
to providing you with an up-to-date
rating, under the various folder tabs
you will find the following: 1) the
age of the company (a minimum of 50
years’ experience is recommended);
2) the corporate address; 3) the company
ownership structure (stock or mutual);
4) the Financial Size Category (recommended
minimum is IX); 5) the business overview,
and 6) the history of the company including
any mergers and acquisitions. In addition
to this free data, AM Best also offers
a complete company report for $19.95
which provides financial statistics
for the past five years. But unless
you’re proficient at interpreting
insurance company financials, this report
may prove overwhelming.
- Standard
& Poors - To access the
Insurer Financial Strength Ratings, click
on the “Ratings Lists” link,
and then choose the “Insurance”
category. When you have located your company,
the resulting report is quite detailed.
In particular, pay attention to the following
data: 1) total assets for five years (goal
is moderate growth over this period with
a recommended minimum of $2 billion in
assets); 2) total liabilities (should
experience roughly the same growth rate
as total assets); 3) net income (should
remain relatively stable); 4) business
review and history; and 5) a pie chart
indicating the company’s product
sales. This last category is particularly
important in times of change. If a company
sells too much of any one product type
(individual annuities, or permanent life
insurance, for example) a sudden shock
to the marketplace such as a change in
the economy or tax system, could result
in a sharp decline in the company’s
business. Lack of product diversification
was a leading factor behind the failure
of Mid-Continent Life. The company primarily
marketed one policy type and when that
product proved to be underpriced, the
entire company was at risk.
- Fitch
- The Financial Strength Ratings Reports
can be found under the “Insurance”
category. In addition to a letter rating,
the Fitch website will providse you with
a detailed business review and overall
outlook for the company. In particular,
you should pay attention to the following:
1) the product mix (life, annuities, group
insurance); 2) the company’s marketing
focus (upscale and advanced marketing
is usually a sign that much of the company’s
business is tax-oriented; 3) the primary
states where the company sells insurance
(diversification between several states
is advised); 4) the company’s reinsurance
practices, and 5) the quality of the assets
in which the company invests. High-risk
investments (junk bonds and defaulted
mortgages, for example) have caused the
downfall of several large insurance companies
such as Executive Life, First Capital
Life, and Monarch Life, and a company’s
exposure to such investments should be
very limited.
- Moodys
- Insurance Financial Strength Ratings
can be found under the “Insurance”
category.
- Weiss
- Weiss is the only major rating service
that charges for its current ratings.
The cost is currently $7.95 per company
and the only information you will receive
for that price is the letter rating. To
purchase a rating, click on the “Ratings
Online” button.
As a good rule of thumb, only companies
who have received one of the top two ratings
from at least three independent rating
companies should be considered. For further
information on the differences between
these five services, in 1994, the US General
Accounting Office issued a report entitled
“Insurance Ratings: Comparison of
Private Agency Ratings for Life/Health
Insurers” which can be found on
their website (www.gao.gov).
Other Important Research
In addition to third party ratings and
basic financial data, there are a number
of other websites that provide valuable
information:
-
Demutualization:
Many mutual insurance companies have
chosen to convert to either a stock
company or a mutual holding company.
This process can be extremely costly
and, depending on the structure chosen,
can be either a favorable experience
for policyholders or quite disappointing.
For an detailed review of the various
demutualization issues and to check
whether the company you are researching
is planning for or has completed this
process, fee-only insurance consultant
Glenn
Daily’s website is an excellent
resource. ( www.glenndaily.com/mhc.htm)
-
Pending Class Action Lawsuits:
The last ten years have witnessed numerous
lawsuits against insurance companies,
with settlements as high as a $1.2 billion.
In addition to the financial stress
this places on the insurance companies
involved, such suits may also give an
indication of the company’s philosophy
and marketing practices. The Insure.com
website offers an up-to-date summary
of the major suits and settlements.
( www.insure.com/lawsuits)
-
Complaints Filed:
Insure.com also maintains data on
the number of consumer complaints filed
against each insurance company in each
state. Compare this data with the primary
states where the company does business
as outlined in the Fitch report above.
If your company sells most of their
policies in Colorado and Texas, for
example, and in those two states, the
carrier had an unusually high number
of complaints, this may be a red flag
that business practices are problematic.
( www.insure.com/complaints)
Be choosy. There are more than 1,600
life insurance companies in the US, and
there’s no rule that says you have
to limit yourself to those carriers recommended
by your insurance agent. If he brings you
choices that don’t match your long-term
insurance objectives, tell him what you
do want, or try another agent.
|
|
|
|
|
|
| LINKS
YOU CAN USE... |
| |
|
- Self Help Law:
www.nolo.com
- Securities and Exchange Commission:
www.sec.gov
- TaxWire:
www.tax.org/TaxWire/taxwire.htm
- Supreme Court:
www.findlaw.com/casecode/supreme.html
|
|
| |
| HERITAGE JOINS THE BETTER BUSINESS
BUREAU ONLINE PROJECT |
| |
|
This
year Heritage joined the Better Business Bureau
BBBOnline project making it possible for clients
and friends to inquire about Heritage directly
from the Better Business Bureau. The BBB Online
project links their service directly to websites
allowing visitors to inquire by clicking on the
BBB logo on the Heritage site. If unresolved problems
exist between Heritage and clients and a complaint
is entered with the BBB, it will show up on the
BBB Online inquiry. This service is free to clients
and friends who use the link from the Heritage
site.
|
| |
| NEW
ESTATE TAX LIMIT |
| |
Are you
aware that new Estate Tax limits have been
instituted by legislators in an effort to
mollify the proponents of Estate Tax abolishment?
A new nine year exemption schedule has been
passed into law and it benefits most people
who would ordinarily fall into the category
of Estate Tax payers. At the time the new
law was passed the prevailing tax exemption
was $725,000 at a 37% beginning tax rate.
The new law bumped that figure to an even
Million dollars per estate with a schedule
circuitously rising to $3,500,000 in the
ninth year and the Estate Tax falling to
zero in 2010. But look out! In 2011 it goes
back down to $1,000,000 with a 55% tax rate.
What the tax legislators giveth, the tax
legislators taketh away. If you die in 2010
you’re in luck! You have no Estate
Tax to pay at all!
Why this
is called tax reform is beyond all rational
thinking. Perhaps this administration believes
that this will pass for legitimate concern
about seniors and the unfair death tax.
Any legislative body that feels Americans
owe the tax man half their hard earned life
savings at their death…especially
when it has already been taxed once, should
be summarily voted from office. We urge
you to keep this in mind when asked to vote
for your senators and representatives.
Here is
the schedule for Estate Tax exemption presently
in force:
| ESTATE |
TAX
PHASE OUT |
CHART |
| 2001 |
$650,000 |
55% |
| 2002 |
$1,000,000 |
50% |
| 2003 |
$1,000,000 |
49% |
| 2004 |
$1,500,000 |
48% |
| 2005 |
$1,500,000 |
47% |
| 2006 |
$2,000,000 |
46% |
| 2007 |
$2,000,000 |
45% |
| 2008 |
$2,000,000 |
45% |
| 2009 |
$3,500,000 |
45% |
|
2010 |
$0 |
n/a |
| 2011 |
$1,000,000 |
55% |
|
|
| |
| DO THE RIGHT THING FOR YOUR FAMILY |
| |
 Our
world has changed and we will never
again live with the peace we once
felt about our daily lives. The terror
of war has occurred on American soil
for the first time since the Civil
War and the realization that it can
happen here, in America, has become
a part of our reality. The fear that
it could and probably will happen
again lives with us and we are forced
to look at our lives and our families
in a way we never did before.
It is more important now, than
ever before, to turn our attention
to those preparations that will
make it easier for our families
to recoup and carry on should something
happen to us. This wisdom has always
been appropriate but it seems somehow
more important now than it ever
has before.
One of the preparations you can
make immediately is the formation
of a Living Trust. Its greatest
benefit is the ease with which it
can be used at your death to preserve
and transfer estate assets. It will
save your family thousands of dollars
as compared to a Will which must
go through Probate at great cost
and long delays in releasing assets.
Don’t handicap your family
at the most difficult time of their
lives. Be prepared for every eventuality
and prepare a Living Trust now while
you are thinking about it.
|
|
|
| |
| BEWARE OF MEDICAID TAKING YOUR IRA |
| |
 Medicaid
brings shivers to the spine of most seniors
or children whose parents are seniors. Understanding
the policy of impoverishment taken by Medicaid against
individuals who need long-term medical care
should be one of your most urgent estate planning
concerns. If your IRA assets are accessible
to you they will be considered in the calculation
for Medicaid qualification, and the same is
true of most pension funds. We strongly urge
you to inform yourself on the regulations
dictating application for medical benefits
under Medicaid.
|
|
| |
| A
NEW TWIST ON THE IRA |
| |
If you have a hefty IRA, you have probably
already given some thought to converting it
to the new Roth IRA format. In this maneuver,
you declare all or part of the account to
be taxable income and pay the income tax.
The tax takes a hefty bite from your assets,
but every tax dollar you pay now could save
you or your heirs many tax dollars down the
road.
Once you've paid that tax, what remains,
and every penny it earns from dividends,
interest, and appreciation is yours to keep,
income tax-free when you take money out-—unless
Congress changes the law.
|
| |
| IRS UNDER INVESTIGATION
By James W. Harris
(Source: New York Times, 11/18/99) |
| |
|
 The number of IRS inspectors
under investigation will soon nearly equal
the number of Americans suspected of tax
crimes, according to the New York Times.
The Treasury Department's new inspector
general for tax affairs, David Williams,
plans to investigate 4,000 workers for the
2000 fiscal year, which began in October.
That number means that
almost one out of every 28 IRS employees
will be probed in the next fiscal year for
suspected misconduct. Among front-line workers--such
as auditors and collectors--1 in 9 will
be investigated. This unprecedented number
of investigations is one reason for IRS
plans to reduce audit rates by one-third
next year.
Charges being investigated
range from harassing taxpayers to theft.
By comparison, notes the
Times, fewer than 1 in 2,000 workers at
the Departments of Agriculture and Health
and Human Services will be investigated
in fiscal year 2000.
|
|
| |
| A
COMMON MISCONCEPTION ABOUT LIFE INSURANCE AND ESTATE TAXES |
| |
|
 Most
people know that death benefits from life
insurance are not taxable for income, and
they are right. What they seldom know is
that life insurance death benefits are included
in the calculation for Estate Taxes. For
example: If your current net assets total
$3,000,000 you will have no Estate Tax obligation
since the federal exemption is currently
$3,5000,000. However, if you have $3,625,000
of life insurance and you own that life
insurance, your estate will be $125,000
over your exemption and you will owe an
estate tax of $125,000 starting at a base
of 37%, or about $46,000 in estate tax.
This is easily corrected by removing your
insurance from your estate and placing it
in an Irrevocable Life Insurance Trust.
The cost involved should be no more than
$600, and you saved $46,000 in the process.
|
|
|