January 31, 2012 04:34PM

The latest hot product in Life insurance is the “Return of Premium” Term Life product. This is where the policy holder gets all their premium payments back if they live through the term of the policy. While this may seem an attractive feature, it does not come without an added cost. These policies are more expensive than a traditional term policy and when you compare the true costs of buying traditional term versus the “Return of Premium” term they don’t seem as attractive as they do at first.
Let’s use some actual numbers I obtained by calling one of those 1-800 CHEAP INSURANCE companies you always hear on the radio and TV. For a healthy 40 year old male, in the Bay Area, a traditional $200,000 30 Year Level Term Policy would run you about $30.63 per month, or $11,026.80 over the 30 years of the policy. For the same amount of coverage in a “Return of Premium” Policy it would run you $61.93 per month, or $22,294.80 over the 30 years. The traditional Term Policy leaves you with no residual value after the term is over, while the “Return of Premium policy would return the $22,294.80 back at the end of the 30 years, assuming you have lived up to the contract and haven’t given them any wiggle room in the contractual terms. Both purchasers in this example have enjoyed the security of knowing that if they had died their family would have had some protection to start over.
The “Return of Premium” would receive back their payments so they could argue that they actually enjoyed that protection for free. But, was it really free? They paid $11,268 more for the privilege of getting their money back after the 30 years, or roughly an additional 98% in cost. This can be called a “forced savings”, but it only equals about a 1.6% return if you were to consider the extra cost recovered was a return on the total cost. The real question is: Could you do better by buying a traditional term policy and investing the difference rather than buying the more expensive “Return of Premium” Policy.
Historically, large cap, blue chip stocks have averaged a little over 9% per year since the Great Depression, including the market performance since the recession that started in 2008. If you were to simply buy a traditional Term policy, and put the premium difference into an Index Fund of the S&P, you would do clearly do better than paying the extra premium incurred in the “Return of Premium” policy. Also, what if the additional cost of the "Return of Premium" policy makes only a smaller, insufficient policy affordable to you? Is that the point of this whole exercise? Sometimes names can be deceiving.

I have to give credit where credit is due! I got most of this information from in an article I read in the Franklin Prosperity Report (Jan. 2012), titled "Return of Premium Life Insurance: Worth the price?" by Joseph Dercole.

January 31, 2012 04:33PM

The possibility that our children will turn out to be as entrepreneurially brilliant as Bill Gates is over 6 Billion to 1. So, for the rest of us, we had better start planning on how we can help our child achieve success in whatever endeavor they choose to pursue. A good start is universally recognized as having them graduate from College. College graduates generally make more, and have more opportunities available to them than those who just finish high school. But, the cost of sending you child to college has been growing rapidly! If parents want to assist their children with this goal they must start planning for it today, or risk limiting the opportunities for their children.

Paying for a child’s education will be a considerable burden for most families.  Luckily, the government has recognized the importance of this goal, and has provided us with several tools to assist in that effort. You can now put up to $2000 away, every year, in a Coverdell Educational Savings Account. While not tax deductible, the earnings accumulate tax free when used for educational expenses, including grade school and high school, as well as College. Their eligibility is phased out for single taxpayers making between $95,000 to $110,000, and married taxpayers (filing jointly) from $190,000 to $220,000. Contributions must be made before April 15^th of 2008, for the 2007 contribution.  

In addition, an even more attractive savings vehicle is the 529 College Savings Plan (named after the IRS section in the code that establishes it). There are two types of 529 Plans available in many states, including California:

1) Prepaid tuition plans - allow an individual to prepay a student’s future tuition and fees at today’s rates, and

2) College savings plans - allow individuals to contribute to an account established to pay a student’s qualified higher education expenses at any eligible educational institution.  Mutual Funds are the most commonly used investment vehicle for these plans

529 Plans have several key features that you should be aware of:

First, while contributions to 529 plans are not tax deductible in California, some states do allow tax deductions.  However, in every state, the earnings from 529 plans accumulate, and can be used, tax-free at the federal level, to pay for qualified higher education expenses and programs of any eligible higher education institution.

Second, anyone can contribute to your child’s 529 Plan.  So, Grandparents or any well off family member can contribute. This can be very helpful as they have more disposable income! They can take advantage of up to $12,000 in annual gifting limits without any tax consequences to them.

Third, you can put away up to $320,000 per child here in California, which is good considering that some colleges/universities are charging close to that today for a four year ride, and those born today will face even higher costs for their College education.

And fourth, the Donor maintains control over how the funds are spent. If for some reason the child ends up not going to college, the funds can be spent on someone else’s education, or even withdrawn by the Donor themselves (subject to income tax and a 10% penalty fee on earnings)

Additional considerations in whether to take advantage of a 529 Plan include the possibility that they also may not be the best use of your resources at this moment in time. While everyone is eligible to invest in a 529 Plan, an argument can be made that you should save for retirement first. You do not want to support your children through college only to become a burden to them in your later years.  Your children may be able to get loans, grants or some other kind of student aid to assist them, whereas your retirement will not have that luxury when it comes time. If your child applies for financial aid, the 529 Plan can be used to calculate eligibility, but you can also use Roth, and Traditional IRA’s, to fund college education (income taxes may apply). And finally, there is a school of thought that some children will not appreciate the money spent on an education unless they are required to contribute to it also, by working their way through college.

But, all that being said, if your retirement plan is in place, this could be an important and efficient use of your investment capital in meeting this goal for your children.  And remember, generally, something is better than nothing.  Some plans can be started with as little as $50 a month.  Planning for this expense, will benefit your children, and subsequently your grandchildren

January 31, 2012 04:31PM

We buy our kids toys and clothes, and they use them up and wear them out. But, my Dad bought something for me that I did not appreciate until I was married with a family. It turns out that gift has more meaning to me than all the toys and clothes my parents ever bought me! When I was 20, he bought me a permanent Life Insurance policy!

The policy on my life protects the financial future of my daughter, or his granddaughter, and it was in place before she was even born. It is truly a gift that transcends the generations! As I can personally attest, this is a gift that will be forever appreciated when your child/grandchild begins their own family. There are no medical requirements, and it can be started very easily. For $25-$35 per month, you could provide them with a lifetime of protection. Not only is it inexpensive when the child is young, but it puts a permanent policy in place so that, god forbid, if your child should come down with a serious illness, they will have some life insurance already in force, and cannot be declined for health reasons.

Having it paid up relieves me of the burden many adults face when they realize that they want to have this protection but its an expense that must compete with everyday expenses for your financial resources.. I now only have to consider the less expensive term coverage when looking at the amount needed to adequately protect my family should something happen to me. One of my favorite phrases is “We don’t plan to fail, we fail to plan…” and this is a great step to make sure your child/grandchild is not living that reality.

Please consider the gift of Life Insurance for your children, or grandchildren, and how it can benefit them throughout their lifetimes. Especially when they start their own families and are working hard to make ends meet.

January 31, 2012 04:29PM

HEY YOU, SNAP OUT OF IT! I can see your eyes glazing over and you stifling a yawn! BUT, this is a necessary expense, and if you DON’T HAVE ENOUGH COVERAGE AND REALLY NEED YOUR INSURANCE THAT CAN REALLY COME BACK TO BITE YOU! SO WAKE UP, AND PAY ATTENTION!  As many of my clients have heard me say, “Insurance is a necessary expense until you need it, then it is a godsend!” But, what I want to share with you here is how to get the most from this necessary expense. That is, how to get the best value for the money you have to spend on it.

First, Let’s look at your Homeowners Insurance! It is designed for, and is best used as, protection from a “sudden and catastrophic” financial loss. It will prove very costly if you use it as a maintenance policy. That is because, and this is the dirty little secret about insurance, generally, when you use it for anything except a “sudden catastrophic financial loss” your policy will be “rated” up for the next three years and your premium will increase! If you use it again, for a loss that is less than catastrophic (maintenance loss) , it will be rated up even more, and suddenly will be an even more severe financial burden on your budget. The definition of catastrophic here is if the house burns down, versus your kid shifts into drive, instead of reverse, and plows into the kitchen from the garage.

Generally, you want to make sure your dwelling coverage is enough to replace your home if it were a total loss. Insurance companies used to offer “Guaranteed replacement”, but since the Oakland Hills fires in the early 90’s (when they discovered many policies did not carry sufficient coverage to replace the burned down homes) they only offer “Extended Replacement” coverage. The onus (read "responsibility") is on the policy holder to determine how much is needed to rebuild your home. Then the Carrier offers a fixed , or percentage amount over that Coverage to “take care of any discrepancies” (the Extended Replacement coverage). The best way to determine what is sufficient coverage for your policy  is to ask several builders in your area what a good approximate cost per square foot ($/p.s.f) would be to use as a guide. For instance, we have seen $300/p.s.f. here in the Bay Area for a 1950’s ranch home, to over $500 p.s.f. for a Victorian in San Francisco. For homes above 10,000 square feet I have heard of construction costs of $800-$1000 per square foot! Also, remember that quality of construction can have a profound effect on the replacement cost. Even with the financial uncertainty of the past few years reconstruction costs have not reduced much. If you take that $/p.s.f. and multiply it by the square feet of your home you have a good approximation of what sufficient Dwelling coverage should be for your policy.

Your Dwelling coverage is the main coverage in your Homeowners policy. The ancillary coverage’s of Separate Structures, Personal Property and Loss of Use are usually a percentage of that amount and are included in your policy. If they are separate you can simply quantify how much it would cost to replace those assets. Your Liability coverage is generally less expensive, because hopefully you will not have anyone over who would sue you, so make sure you have enough to cover all your assets, (including equity in real property, savings and investments and what can be your largest asset, your income). For good reason (I can get into in greater detail in person), we believe that Liability coverage amounts sufficient to protect your income, alone should be 4 X the annual income of the highest earner in the household. This figure, added to your Equity and Savings and investments,  may add up to more than the $1,000,000 maximum that is offered in many Homeowners policies, so look to adding an Umbrella Policy that will provide additional Liability protection over your property and auto policies.

You face most of your Liability exposure in your Autos so it is extremely important to maintain adequate coverage there! If you own a home you need at least $250,000 per person, $500,000 per accident, and then consider an Umbrella over and above that all.

OK, so assuming you now have sufficient coverage to protect you from a catastrophic loss, how can we make it more affordable! That is where your deductible comes in! The higher the deductible the lower the premium! And since you do not want to use it for the small losses (which again, I can explain in person) you want to maintain a deductible which recognizes that you are willing to self insure the smaller losses and use your insurance as efficiently as possible for the larger “catastrophic” losses.  For a home you want to have no less than $1000. I have $5000 on my home, knowing that if my bike is stolen out of the garage that will be my burden, but again, using it for its intended purpose, not as a maintenance policy.

 For your auto’s I use $500 for comprehensive, and $1000 for collision. Remember, Collision deductibles mainly come into play when you are fault in an accident, and if you are at fault I would be more concerned with my Liability exposure, than how much I have to come out-of-pocket to fix the car. And in today’s Litigious society sufficient Liability coverage is imperative!

 Many Homeonwer Policies have sub limits for "theft' as things like cash, jewelery, silverware, guns, and fine arts, can somehow disappear. Talk ot your broker/agent about this and if you have valuable pieces of jewelry, or paintings, or things that can get up and walk away, you should consider a "Rider" that will protect you from any cause of loss, anywhere in the world, for an amount supported by an appraisal.