Estate Planning

Newsweek Publication Noting Steve and Bonnie Kaufmann the founder of A Better Choice Foundations - as educators practicing in Virginia to help people protect their assets.

"Are You Covered"
"A Plan for Life"
"Start Thinking Long-Term"

"Home Security"

Printed, April 27th, 1998

When Steve Kaufmann went to serve in Vietnam, he left behind happy, prosperous and healthy parents. Upon his return, he discovered the once sturdy couple, who had been looking forward to a comfortable retirement, had been devastated by Illness, economic adversity and a bleak future. While Steve was away, his father had been stricken with Alzheimer’s disease, and the family’s home and summer cottage were lost to foreclosure. His mother was left with a life of heartache and financial ruin. His parents had never purchased health or life insurance, and they didn’t have a will. *

Years later, Steve recalls the painful memory of watching helplessly as his family fell apart. Those same memories have shaped his resolve to help people prepare for the unexpected. As a successful attorney in Luray, VA., and member of the American Society of Chartered Life Underwriters (CLU) & Chartered Life Financial Consultant (ChFC), Steve travels the nation with his wife and legal partner, Founder. Their mission: To help families protect their, assets from the devastation of illness, disability and sudden death.

Steve Kaufmann’s family experience, though tragic, is not unusual. Far too many American families work hard to accumulate assets and plan for a comfortable retirement, only to see their efforts unravel in years later. While most people see the need to buy insurance coverage for their home, car and health, they don’t view coverage that protects their income and livelihood as a necessity. This special section takes a look at these important issues and provides helpful information about protecting your financial security in years ahead.

“Think of life insurance as a plan for your life, not your death, ”says David Woods, CLU, ChFC, president of the Life and Health Insurance Foundation for Education (LIFE) in Washington, D.C. Along with disability income coverage, life insurance is the cornerstone of a sound financial plan. So, be sure you have enough coverage t protect your family and/or business from financial ruin- before you begin to save an invest for the future.

More than half of Americans are underinsured, and 24 percent of all households have no life insurance, according to the American Council of Life Insurance.

Who are America's underinsured? Predominantly, they're women married working women, single working mothers and women who stay at home to care for children. In 1997, men accounted for 63 percent of the new life insurance policies compared to just 37 percent for women. Moreover, the average size policy for a man was $306,900 versus $165,00 for a women for a woman, reports LIMRA International, an insurance marketing and research association in Windsor, Conn.
Demystifying Life Insurance

The wide variety of life insurance products available today can be confusing and may even prevent some people from buying the protection they need. The two most frequently asked life insurance questions are: How much coverage do I need? And, what type of policy best meets this need?

“To help you select the best life insurance policy for your family’s financial needs, work with a professional life insurance agent,” advises Edward H. Miller, III, CLU, ChFC of Indianapolis, Ind., president of the American Society of CLU & ChFC. “An agent will carefully and thoroughly review your financial situation, goals and objectives. An agent should also review your insurance coverage periodically, and certainly as your circumstances change, such as with a child’s birth, divorce, remarriage or job change.”

How much coverage you need depends on why you’re buying insurance—or continuing to pay premiums for a policy you already own. For most people, life insurance's primary purpose is to make sure there's enough income for the family in the event of a wage earner’s premature death. Other practical uses for life insurance include paying debts and estate taxes, funding a child’s college education or supplementing other retirement income sources.

Insurance Illustrations

To assist consumers in selecting the life insurance policy that meets their individual needs, insurance companies have developed policy illustrations that are estimates of future policy performance. Illustrations are used with life insurance policies that provide cash value, such as whole life, variable life and variable universal life. Agents use these illustrations to develop the best combination of policy specifications that achieve their clients’ financial objectives. If properly interpreted, life insurance illustrations contain useful information about how the insurance policy is expected to perform in years to come. An insurance illustration is not a legal contract, but it’s merely an estimate of future policy performance. There are three main elements in an insurance illustration:

• Guaranteed, called “guaranteed basis” or “guaranteed cash and surrender values.’ Pay attention to these values because they represent the worst-case scenario. The insurance company is contractually obligated to make sure your policy performs at the guaranteed level. Be aware: Some insurance companies provide better guarantees than others.

• Non-guaranteed or current interest.
This is the interest rate the company is currently paying on this particular policy. Midpoint rate, also called the “illustrated rate” or “non-guaranteed rate.” This rate of return falls in the middle between the company’s worst-case scenario that’s guaranteed and the non-guaranteed current interest rate, which will fluctuate.
A policy’s performance also is based on the following non-guaranteed risk elements: mortality experience, which is based on statistical tables; investment performance earned by the insurance company; policy lapse rates, or the number of policyholders who drop their insurance; and company expenses, which include the cost of keeping the policy in effect. Insurance illustrations should not be used to compare two or more life insurance policies.

Variable Life and Variable Universal Life

If you are willing to assume more risk in return for earning higher interest, says Joseph Ramenda, JD, CPA CLU, ChFC, of Tampa, Fla., you may be in the market for variable life or variable universal life insurance. Both these policy types build cash value over the years. Here’s how they work. Variable life insurance not only provides all the benefits of its traditional counterpart, whole life insurance, but also offers an investment component. As with whole life, variable life gives you the tax-deferred build-up of the policy’s cash value, as well as an income tax-free death benefit for your family. As an added benefit, a variable policy allows you to select where your premium dollars are invested. The insurance company has separate investment accounts with varying rates of return,* Some variable policies guarantee that death benefits cannot fall below a certain minimum, but investment performance will raise and lower the policy’s cash value and benefits. In addition, you may add a policy provision or rider that gives the option to purchase more insurance without a medical exam or evidence of insurability. Variable universal life (VUL) policies combine the best features of several different policy types, according to Ben Baldwin, CLU, ChFC, CFP, of North-brook,111. With a VUL policy you get: (1)the death-benefit value of term insurance; (2) flexible premium payments that fluctuate according to market conditions and are subject to certain minimums and maximums; and (3) investment-account flexibility of variable life. Be sure to keep putting enough money into the policy so it doesn’t lapse.
Should / Replace an Existing Life Insurance Policy? Policy replacement may sound attractive as a way to save money on the life insurance coverage you already have or to get more coverage for what you’re already paying, And while sometimes it may be to your advantage, most of the time it isn’t.

Term insurance and long-term care insurance are two types of insurance policies issued by life insurance companies that can sometimes be improved. However, when replacing a policy, watch out for important “incontestability” provisions that you may lose for as long as two years with a new policy.

If your agent suggests replacement coverage, ask the agent to complete the American Society of CLU & ChFC’s Replacement Questionnaire (RQ). For a free copy, call toll-free1-888-243-2258. Have the agent review the RQ responses with you, and ask for clarification if something doesn’t make sense.

“President Clinton’s proposed 1999 budget includes a tax provision affecting variable life insurance and variable annuities. For more information, consult your insurance and tax professionals

Income Objective Chart

How much would your family need? Th e following are typical income objectives taht may permit a family to retain their current lifestyle after a wage earner’s death. * Assumptions: The home mortgage is paid or a rent fund has been establisheed, and educational expenses are provvided for separately.
Annul Gross Income Percentage of Gross Income required Up to $48,000 70%
$48,001 to $53,000 66%
$53,001 ro $59,000 63%
$59,001 to $65,000 60%
Over $65,000 57%

* Bases on a study by the Bureau of Labor Statistics

For a free insurance needs worksheet, visit the American Society of CLU & ChFC’s Web site: Http://www.asclu.org Or write to: Life insurance Needs Worksheet, American Society of CLU & ChFC, 270 S. Bryn Mawr Ave., Bryn Mawr, PA 19010 - 2195

A Plan for Ljfe cont’d

Other Considerations
• If your health status has changed over the years, you may no longer be insurable at the less expensive, standard rates.

• Your present policy will usually have a lower premium rate than is required on a new policy of the same type—if for no other reason than you have grown older,

• You’ll pay acquisition costs on two policies and end up owning only one.

• Even if both policies pay “dividends,” it may be years before the new policy’s dividends equal those of your present policy,

• If you replace one cash value policy with another, the new policy’s cash value may be relatively small for several years and may never be as large as that of the original one. You should ask insurance agents for a detailed listing of cost breakdowns of both policies, including premiums, cash surrender value and death benefits. Compare these as well as the features offered by both policies.

• If you decide to surrender or reduce the value of the policy you now own and replace it with other insurance, be sure that (a) the agent making the proposal puts it in writing; (b) you pass any required medical examination; and (c) your new policy is in force before you cancel the old one.
Paycheck Protection

Gary Smith, CLU, ChFC, of Syracuse, N.Y., has seen the same scenario played out many times. As a financial adviser, he’s heard clients tell him that buying disability income (Dl) insurance is a waste of money. Clients often rationalize: “I’m healthy, I feel fine, I don’t need to spend the money.” One of Smith’s clients, Tony, a successful realtor, applied this same logic, but reluctantly purchased an individual Dl policy anyway. A few winters ago, Tony began power walking to lose some weight. He slipped and fell on a patch of ice, shattering his knee cap. His ability to work was severely limited and his recovery was slow and painful. When Tony called Gary Smith from the hospital the day after his emergency knee surgery, both men were relieved, knowing they had done the right thing. Tony’s Dl coverage provided $3,000 per month tax free, replacing his lost income. The coverage helped him focus on getting well, not on his finances.

The chances of suffering a disability— an illness or injury lasting more than three months—are three times greater than dying before age 65, according to Edward H. Miller, Ill, CLU, ChFC, the American Society’s president. Consider this: If you earn an income, you need Dl coverage. This type of insurance is paycheck protection in case you suffer an injury or illness that prevents you from working.

Many employers provide some group disability coverage, but it’s typically not enough to cover current living expenses. While Social Security might pay something, it’s prudent to buy an individual Dl policy that pays 70 percent of your current income.
Disability income insurance is paycheck protection in case you suffer an injury or illness that prevents you from working.
Helpful Answers to
Some Common Questions

Q: What’s the difference between whole life, term, and convertible term insurance?

A: Whole life insurance, the most traditional form of insurance, can be kept in force for as long as you live. The face amount (the death benefit) and the premium (the amount you pay for protection each year) are fixed at the time you buy your policy and stay the same even as you age. The policy’s “cash value” grows at a fixed rate of return specified ’in the policy and can be used as collateral to borrow against your policy. While permanent insurance is usually recommended as the core of an insurance program, term insurance is good for people who need coverage for short periods of time—younger families, say, who need large amounts of protection for one year, five years or more. Lower premiums at younger ages increase as policyholders age and renew their policies. Benefits are paid only if death occurs during the period covered. If you stop paying premiums, the insurance stops. Term policies generally have no cash value and no residual rights if the policy is canceled. “Convertible” term policies can be exchanged for permanent insurance without a medical examination, but with a higher premium.

Q: By using medical tests are insurers trying to eliminate any applicant likely to develop a serious health condition?

A: Because some health conditions are easily managed through proper medication, therapy or lifestyle changes, medical information sometimes makes it possible for insurers to cover applicants who might not otherwise be insurable. Overall, only 4 percent of individual life insurance applications are declined.

Q:As a single person, do I need insurance?

A: As a single wage person, you need to consider these options:(1) Disability income insurance—Especially Important for self-supporting singles without sizable assets, this can replace a good part of the income you would lose if you were unable to work because of accident or illness. If you don’t have long-term disability coverage at work, ask your life insurance agent about an individual policy designed to replace at least70 percent of your income. (2) Health insurance—If you don’t have on-the-job coverage, an individual policy is your first line of defense against ever-escalating medical and hospital costs. You can keep premium costs down by electing a large deductible, thereby “self-insuring” as much as you can afford. (3) Life insurance—Even if you have no dependents now, you may later. If you buy now when you are younger and healthier, you can “lock in” lowest-cost coverage, including guaranteed insurability.

Q. How do variable and fixed annuities work?*

A: Annuities are long-term investments that provide • retirement income to individuals without pensions, that supplement a pensioner’s income or build assets over a more limited period. With variable annuities, the value varies according to the worth of the insurer’s investments, such as bonds and common stock. Payments can be fixed or build assets over a more limited period. Under a fixed annuity (also called a fixed-dollar annuity), money is invested in assets with fixed rates of return and the owner is guaranteed a fixed payment every month. Because annuities are designed to be held for many years, the interest in an annuity builds up on a tax-deferred basis, and purchasers are not taxed until regular payments begin after retirement. Early withdrawals, however, result in substantial penalties in addition to federal taxes.

Q: How do accelerated death benefits work?

A: More than 200 insurers now offer this “living benefits” option to ease the financial burdens of the seriously ill or incapacitated. It allows policyholders to receive all Or part of the policy’s proceeds prior to death under certain circumstances, including the need for long-term care and confinement to a nursing home. Because payments may affect tax status and Medicare eligibility, and will be deducted from the overall benefits paid later to beneficiaries, policyholders should thoroughly investigate these options prior to needing them.

Source: National Association of Life Underwriters, Washington, D.C.
*President Clinton’s proposed 1999 budget includes a tax provisions affecting variable life insurance and variable annuities. For more in formation, consult your insurance and tax professional Start Thinking LONG-TERM.

Nearly 43 percent of American who are currently age 65 and older will enter a nursing home, according to the U.S. Department of Health. and Human Services. If you are a woman, your chance of entering a nursing home after age 65 is 50 percent greater than a man’s.

Consider this fact: About one out of every four Americans will stay in a nursing home for more than a year, and one in 10 will stay five years or longer. And, long-term-care costs continue to rise at about 6 percent a year. A year in a nursing home is estimated to cost $46,000, according to the American Society of OLU & ChFC. In large metropolitan areas, the cost can easily be double this amount.

Caring for a parent or other relative at home is also costly, averaging more than $1 000 per month. A prolonged illness or the daily effects of Alzheimer’s disease, stroke and even arthritis could cause a lifetime of savings to disappear. Long-term care (LTC) insurance protects your assets during your retirement years, just as disability insurance protects your income during your working years. Don’t fall prey to this common misconception: You don’t have to worry about long term care costs because Medicare will pick up the tab. Wrong. Generally, neither Medicare, private Medicare supplement insurance, nor the major medical insurance you have on your own or though your employer will pay for long-term care.

Medicaid, for those who qualify, will pay for long-term care expenses, but only in Medicaid-approved facilities. Medicaid, which is administered by your state, requires its recipients to be impoverished; it’s a safety net for the poor. Families that used to manipulate finances or “spend down” assets in order to qualify their aged parents for Medicaid benefits are now barred from doing so. Criminal sanctions may even be imposed on those who attempt to transfer property to qualify, according to the Journal of the Amer/dan Society of CLU & ChFC.

It’s less expensive to buy a long-term care policy when you are younger, say before age 50 or 60.
How Not to Outlive Your Retirement Savings. With more people living well into their 80s and 90s these days, it’s no surprise that a common financial goal is not outliving savings and investments during retirement. Another major concern is the exorbitant long-term care expenses associated with aging. Many baby boomer families already find themselves uncomfortably “sandwiched” between the demanding health.

Are You Covered?

• Ask your agent if the policy is “qualified” under the Health and Portability and Accountability Act of 1996. In order for LTC premiums and benefits to be tax deductible, the policy must be “qualified” under the law.

• custodial and home health care?

• What are the set of conditions, called “benefit triggers,” under which the insured will be eligible f or benefits? Most policies do not require hospitalization prior to entering a nursing home.

• Does the policy explicitly cover Alzheimer’s disease and other senile dementia?

• What protection does the policy offer against the effects of inflation?

• What is the duration of policy benefits—from two to six years or a lifetime benefit for nursing home care?

• What is the policy’s elimination or waiting period before benefits begin?

• Selecting a longer waiting period will lower your premiums.

• Does the policy adequately cover the cost of long-term care where you live? LTC costs vary depending on geographic location.

• What is the term of the policy’s preexisting clause? There should be no more than a six-month exclusion for a preexisting condition.

Care, emotional and financial needs of their children and their aging parents.

Recognizing the unique retirement planning needs of an aging population, the insurance industry developed a product, called an annuity, which can have either a fixed or variable rate. Annuities offer investors both a death benefit and the ability to accumulate money for retirement, with taxes deferred until the money is withdrawn. Unlike insurance, which is a hedge against dying too soon, annuities are designed to provide investors with a lifetime income stream. Unlike fixed annuities, which pay regular amounts, the value of variable annuities fluctuates. A variable annuity allows you to put money in a variety of investment vehicles (sub-accounts), including stocks and bonds or a combination thereof. Variable annuities give you the option to move among the sub-accounts in the contract you buy.*

With both fixed and variable annuities, withdrawals prior to age 59 ½ may incur a 10 percent IRS penalty.
While it’s true that some expenses will decrease during retirement, perhaps even your tax rate, higher medical costs could offset these estimated savings. Expect to tap monies from employer-sponsored retirement plans and personal savings for as much as 85 percent of your total retirement income. Social Security, most experts predict, may provide only 15 percent to 25 percent of retirement income, if that.

Leave More to Heirs, Less to Uncle Sam

In the next 15 to 20 years, more than 30 million seniors will be looking for ways to pass a combined generational estate of $10 trillion to the next generation—the 77 million baby boomers. “As we approach the 21st century, the importance of estate planning and asset protection has never been greater,” says Stephen J. Kaufmann, JD, CLU, ChFC, QPCU, of A Better Choice Law, Retirement and Estate Planning, in Luray, Va.

Today, it is almost commonplace for seniors’ assets to surpass the $625,000 estate tax threshold through lRAs, rising home values and conservative but consistent savings, according to Kaufmann. “It’s a sad fact of life that one-third to 100 percent of assets that took decades to accumulate can be lost quickly when little or no estate planning has been done.” Some significant reasons why estates erode include: federal estate taxes, which can reach as high as 60 percent; probate costs; attorney’s fees; long-term care expenses; and improper ownership of assets.

The government tried to ease the burden by gradually increasing the federal estate tax threshold from $625000 in 1998 to $650,000 in 1999, to $675,000 in 2000, and so on, until 2006 when it will reach $1 million. The ravages of inflation on your estate, however, could more than offset this relatively minor tax relief.

*President Clinton’s proposed 1999 budget includes a tax provision affecting variable life insurance and variable annuities. Consult your insurance and tax professionals.

One of the more important considerations when buying long-term care insurance is the insurance company’s financial strength. Policies also have a variety of contractual definitions that may expand or limit your coverage. Here’s a checklist to help you select a LTC policy: Property and casualty insurance offers consumers protection from financial losses caused by damage to personal and business property, as well as legal liabilities from property damage or personal injury for which an insured is responsible.

“When it comes to buying insurance, the best consumer is an informed consumer,” says Marsha D. Egan, CPCU, CPIW, of Reading, Pa., and vice president of the CPCU Society. “As a policyholder, your behavior patterns and actions can help directly control insurance costs.”

To be sure that you have the right amount and types of homeowner’s coverage, consider these tips from the QPCU Society: Establish the value and calculate the cost of rebuilding your home. What you paid for your home or what you could sell it for in today’s market can differ substantially from what it would cost to replace it. Some companies offer a guaranteed replacement cost coverage option that will pay you what it costs to rebuild your house at the time of a loss. There is usually an additional premium charge with this option. Be sure to have replacement cost coverage on your b~Iongings, such as furniture and clothing. A typical homeowner’s policy insures contents at actual cash value, which reflects physical article depreciation just prior to the loss. An inflation guard endorsement will automatically increase your coverage as the value of your home increases.

The homeowners’ policy contains limitations on certain types of high-valued items such as jewelry, fine arts, stamp
Are You Covered?

collections, furs and precious metals. These items should be separately scheduled on Personal Articles Floaters. If you make significant home improvements, such as an addition, or incorporate special architectural features after you purchase your policy, notify your agent or broker in order to increase your property limits.
Maintain an up-to-date inventory of your belongings. Keep the inventory or a copy of it in a safe location. Video cameras are excellent tools for documenting your belongings.

If you work out of your home, be aware that the typical homeowner’s insurance policy does not cover business contents or liabilities.

Flood Insurance
Standard homeowners’ insurance does not cover flood damage. Flood insurance policies are available to cover these risks for homeowners, renters and businesses. When you purchase flood insurance there is a 30-day waiting period before coverage goes into effect. If you think you have a flood exposure where you live, contact your insurance agent or broker. To find out more about flood insurance, visit the Federal Emergency 14 Management Agency’s (FEMA) Web site at: http:/A~w.fema.gov.

For a free consumer education brochure about property and casualty insurance, contact the CPCU Society at 1 -800-932-2728. Or, visit its Web site:www.cpcusociety.org.

Peace of Mind
Life is hectic enough these days. You work hard and your time is valuable, Taking time to review your family’s insurance needs—before something happens—is time well spent. For help, consult an insurance and financial services professional. After all, you and your family deserve the peace of mind proper insurance coverage provides.

This special section is sponsored as a public service by the American Society of CLU & ChFC, a national organization of llfe insurance and financial service professionals headquartered in Bryn Mawr, Pa. The Society’s 33,000 members are dedicated to providing financial security for individuals, families and business.

Written by Susan J. Farmer; Technical consulting by Richard M. Weber, CLU.
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