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In 2013, on behalf of your client, you will face the challenges of volatile markets, ramped up regulations, increased need for capital preservation, and a general tendency towards risk aversion.  If lawmakers cannot agree on how to address the pending "fiscal cliff," $7 trillion worth of tax increases and spending cuts will begin to go into effect in January.  Uncertainty about just what Congress will do will weigh on the economy.

Here's a rundown on some of what could impact your clients if lawmakers fail to act before January 1, 2013.

  • Income tax rates:  Rise to 15%, 28%, 31%, 36% and 39.6%, up from 10%, 15%, 25%, 28%, 33% and 35%.
  • Capital gains rate:  Rises to 20% from 15% for most filers.
  • Qualified dividend rate:  Rises to one's top income tax rate, up from 15% for most filers.
  • PEP/Pease limitations:  Restored.  Households may not be able to take some itemized deductions and personal exemptions in full.
  • Child tax credit:  Falls to $500 per child from $1,000.  The refundable portion also reduced.
  • American Opportunity Tax Credit:  Expires.  The lesser value HOPE tax credit for college tuition is reinstated.  Several smaller education tax benefits also expire.
  • Marriage penalty relief:  Expires.  Effectively that means a low- or middle-income two-earner couple will owe more to the IRS than they would if they were single making the same income.
  • Estate tax:  Parameters revert to pre-2001 levels.  The exemption level falls to $1 million from $5.12 million; and the top tax rate on taxable estates rises to 55%, up from 35%.
  • AMT patch:  Won't be renewed.  Income exempt from the Alternative Minimum Tax in 2012 -- for which taxpayers will file returns next year -- falls to $33,750 for individuals and $45,000 for married couples.  That's down from $50,600 and $78,750, respectively, if the exemption amounts had been adjusted for inflation.  As a result more than 30 million people will be hit by the so-called "wealth" tax, up from 4 million to date.
  • Payroll tax holiday:  Expires.  The Social Security tax rate reverts to 6.2%, up from 4.2%, on the first $110,100 in wages.  [Effectively, someone making $50,000 will pay another $1,000 in payroll taxes next year.]
  • Medicare surtax:  While technically not part of the fiscal cliff, the onset of a new 3.8% Medicare surtax under health reform, should be included to reflect the magnitude of tax increases set to take effect simultaneously in 2013.

Think Alternative Products.

One way to plan is to consider reducing income subject to many of these increases by converting into income not subject to the tax, and making it non-taxable regardless of the amount received.

Exclusions from taxable income include, among others:

  • gain on the tax-free exchange of insurance policies;
  • the internal ‘build up’ of value inside a life insurance policy;
  • tax-free withdrawal/loans from life insurance policies;
  • death benefit paid to beneficiary of a life insurance policy;

With Index Universal Life, you can:

  • have the reassurance of a death benefit for your loved ones;
  • get potential tax-deferred  cash value accumulation;
  • maximize cash premium payments – within IRS limitations;
  • access your cash value through loans or withdrawals; and
  • customize your policy with riders and options.

And, because the cash accumulation value of an Index Life policy is not invested in any stocks, bonds, or equity investments, the interest rate credited to the policy’s index account value is linked to the performance of the index or indices chosen and will never be less than zero percent.  This gives greater cash accumulation potential than traditional universal life insurance, and the annual floor ensures that the cash value will not decrease due to market volatility.


Tags: Life Insurance


 
 
 
 

September is Life Insurance Awareness Month!  Buddy Valastro, also known as “The Cake Boss”, understands the needs that life insurance fulfills first hand.

Read his story to learn why he has partnered with the Life and Health Insurance Foundation for Education (LIFE) to become the spokesperson for Life Insurance Awareness Month.


Tags: Life Insurance


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Most of us have a “Patchwork of Assets” we’ve acquired one at a time over many years.  We acquired them to make our own lives better without worrying about passing them on at death. Despite all of the positive features life insurance policies have, some people have concerns about life insurance.  Many have trouble believing that life insurance really is an efficient financial tool.  Before they commit to using it, they want to be sure it makes financial sense.  They want to be confident that purchasing a policy and paying premiums is a good use of their money:  They want proof that life insurance is financially efficient.

There is a way to look at coverage that can give clients a way to incorporate life insurance into their portfolio allocation decisions:  the internal rate of return (IRR).

IRR here is the after-tax annual rate or return an insured would have to earn on his or her premium payments to outperform the death benefit value of the life insurance contract.  Under reasonable assumptions about life expectancies and no policy loans, insurance contracts do provide very competitive returns to an insured who keeps the policies until they die.

Actually, it is the insured’s heirs who will reap the benefits of the higher IRR — the client won’t receive any lifetime cash flow or realization of the policy values.  But as yields available to conservative investors continue to be historically low, consider life insurance as an asset class and not just as a product for risk management.

Current yields for generally acceptable savings and fixed income investments (average yields as of 08/24/2012, subject to change):

            Money Market Funds               0.20%                          10-Year U.S. Treasury             1.68%

            1-Year CD                               0.70%                          10-Year Corporate Bond         3.48%

            5-Year CD                               1.45%                          10-Year Municipal Bond         1.85%

What makes life insurance unique and different from, say, a bond, is that the cash flow is triggered by a particular event, not on the part of the issuer but on the part of the owner of the asset; in this case, the insured’s death.  This makes life insurance a unique asset and distinct enough to represent a different kind of an asset class.

From a financial planning and risk management perspective, a permanent life policy, such as a guaranteed fixed or indexed universal life policy should be used.  Term insurance stops at a certain point in time – you don’t know if you’re going to be alive or dead then.  You can guarantee a permanent policy until you are 120 years old if you’d like – and that’s beyond any reasonable expectation of longevity.


Tags: Life Insurance


 
 
 
 

Beginning in 2013, certain investment income will be subject to an additional 3.8% surtax, enacted as part of the Patient Protection and Affordable Care Act [P.L. 111-148], March 23, 2010, and the Health Care and Education Reconciliation Act of 2010 [P.L. 111-152].

This is sometimes referred to as the “Medicare” surtax because the legislation enacting this tax created a new section of the tax code:  Chapter 2A – Unearned Income Medicare Contribution.  However, this was simply a revenue-raiser enacted to offset the cost of health care legislation; there does not appear to be any reason this surtax must be used for Medicare.

For an individual, the 3.8% surtax is imposed on the lesser of:  (i) “net investment income” [NII], or (ii) the excess of “modified adjusted gross income” [MAGI] over a certain threshold amount.

"Net investment income” is defined to consist of three categories of gross income:

  1. Gross income from interest, dividends, royalties and rents.
  2. Gross income from a passive activity, or a trade or business of trading in financial instruments or commodities.
  3. Net gain ‘to the extent taken into account in computing taxable income’.

Why is the 3.8% Surtax important to affected clients?  Considering current income tax rates, which expire on 12/31/2012, if these rates are extended, then this surtax amounts to a 25% tax increase for both dividends and long-term capital gains.  If current rates are not extended, then the tax amounts to at least a 10% tax increase on dividends and a 19% tax increase on long-term capital gains.

One way to plan for the surtax is to consider reducing income subject to the surtax by converting into income not subject to the tax, and making it non-taxable regardless of the amount received.

Exclusions from taxable income include, among others:

  • gain on the tax-free exchange of insurance policies;
  • the internal ‘build up’ of value inside a life insurance policy;
  • tax-free withdrawal/loans from life insurance policies;
  • death benefit paid to beneficiary of a life insurance policy;

With Index Universal Life, you can

  • have the reassurance of a death benefit for your loved ones;
  • get potential tax-deferred  cash value accumulation;
  • maximize cash premium payments – within IRS limitations;
  • access your cash value through loans or withdrawals; and
  • customize your policy with riders and options.

And, because the cash accumulation value of an Index Life policy is not invested in any stocks, bonds, or equity investments, the interest rate credited to the policy’s index account value is linked to the performance of the index or indices chosen and will never be less than zero percent.  This gives greater cash accumulation potential than traditional universal life insurance, and the annual floor ensures that the cash value will not decrease due to market volatility.


Tags: Life Insurance


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A recent online article from Life Pro Health reports that nearly half of retirees and pre-retirees in the U.S underestimate their life expectancy.

Continue reading at:

http://www.lifehealthpro.com/2012/08/03/soa-study-nearly-half-of-retirees-pre-retirees-und

It is important for your clients to understand ways to prepare for their future, such as savings for retirement.


Tags: Life Insurance


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Inherited individual retirement accounts made news earlier this year when the Senate Finance Committee proposed to make heirs cash them out within five years of the benefactor's death.

The measure, which has been abandoned at this time, would have upended a system that is highly advantageous to families.  Under current rules, heirs get to stretch withdrawals from an inherited IRA across their own life expectancies, meaning the assets could potentially increase in value, tax-deferred, for decades.

Unknowingly, families sometime cash out the account, losing the possibility of a life-expectancy payout.  That is a problem because there is no way to get the money back into the IRA after it has been cashed out.

And, even when the heir is aware of the opportunity to keep the inherited IRA in tax-deferred investments, mistakes in the paperwork disqualify the inherited IRA.

Here are 5 areas where problems can result:

1.Trusts:

One of the most common problems involves how they intersect with trusts.  Many people who set up plain-vanilla living trusts, name the trust as the IRA beneficiary.

But a trust isn't a person, and has no life expectancy, so it can't take advantage of the opportunity to stretch withdrawals.

There is a potential fix:  Demonstrating that a trust qualifies as a "conduit," or "see-through" trust, meaning its purpose is to get the IRA distributions to a trust's beneficiaries.  Doing so, however, could require winning a private-letter ruling from the Internal Revenue Service, which can cost $4,000 for filing (plus the accountant or attorney fees).

It is preferable to keep the IRA out of the trust unless your heir’s situation is so egregious that there isn't any alternative.

2.Titling problems:

When you inherit an IRA, you should re-title the account so it reads like this:

"John Doe, Deceased (date of death), IRA, FBO (for benefit of) James Doe, Beneficiary"

Check forms from the custodian of the account to be sure they spell out that your client had inherited the account.

3.Paying the tax twice:

If the benefactor's estate was large enough to be subject to federal estate tax, and a federal estate tax was paid, then the IRA beneficiary can get a tax deduction for the estate tax paid on the IRA's value.  That is the case even if someone else paid the tax.  Estates worth up to $5.12 million are exempt from estate tax this year, but the exemption reverts to $1 million in 2013 unless Congress acts.

For example:  a mother leaves a $1 million IRA to her son and the rest of the estate to her daughter.  The daughter ends up paying the federal estate tax on the entire estate, including the IRA, the taxes on which were $350,000.  The son cashes out the $1 million IRA.  He now has $1 million in gross income and a $350,000 deduction for the estate tax.

Heirs often don't realize they are entitled to this "income in respect of a decedent" deduction.  Estate administrators typically don't tell beneficiaries about their future tax situations.  And many times, the beneficiary's tax preparer might have no idea that estate tax has been paid on the IRA.

4.Failing to pass it on:

Many wealthier adult children forget they can disclaim an inherited IRA and pass it along to their children—possibly creating tax-deferred growth for decades.

There are two things to keep in mind:

A. The IRA owner has to fill out the beneficiary designation form in a way that will allow it.  The best way is to leave the account "to my then-living descendants, per stirpes," which means the account goes equally to your children, or, if they have died, to their children.

B. Disclaimers must be completed within nine months of the benefactor's date of death.

5.Failing to take RMDs:

The designated beneficiary takes RMDs based on their own single life expectancy and must begin by December 31 of the year following the IRA holder’s death.

The 10% penalty associated with IRA distributions to those under 59½ years of age is not applicable for inherited IRA distributions.

Failure to take an RMD from an inherited IRA will result in a 50% excise penalty tax on the undistributed amount.

Form 1099, which reports distributions, should include “Code 4” – the code used to show that it is a distribution on account of death.


Tags: Life Insurance


 
 
 
 

 

Many Americans rely on the 401K as a means, and often the only means, to save for retirement. While there are some advantages to the 401K, mainly the tax deferral aspect and the automatic nature of the deposits, there are many hidden issues. Many do not realize two important items: the fees on 401K plans and the alternative options.

US News and World Report published a very interesting article on the fees of 401K plans:

http://finance.yahoo.com/news/401-k-robbing-blind-151642010.html.

Once people understand the fees, people also need to understand the alternatives or additional ways to save for retirement.

One invaluable vehicle can be the index universal life policy (IUL). With the IUL, there are many advantages given to the person looking for supplemental ways to save for retirement:

  1. Remove market volatility from part, or all, of a person’s portfolio because IUL products can never lose money to market fluctuations.
  2. Provide tax-free income via loans on the policy. One important aspect many do not understand is that with regular 401K distributions, all of those distributions are taxable. With loans against IUL policies, they are income tax free (no 1099).
  3. If a person passes early, there can be tax consequences and issues with 401K plans because it is qualified money. With a properly structured IUL plan, if a person passes early, there will be leveraged, income tax free death benefit paid to the beneficiaries.

Therefore, IUL policies should be discussed as an addition or alternative to traditional 401K planning.


Tags: Life Insurance


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How to fund a college education and pay off student loans are the chief concerns of four in ten young people today, new research reveals.  

CLICK HERE to continue reading.

Imeriti’s FundCollege program provides a great opportunity to show your clients the powerful benefits of using life insurance to help fund their child’s college education; PLUS, you can offer them guaranteed FREE college scholarships.  Join us for a live 15-minute webinar this Thursday, June 28th at 11:00am PDT and find out how! 

Click on the following link to register: https://www1.gotomeeting.com/register/595696976

 


Tags: College Funding


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