Publication Noting Steve and Bonnie Kaufmann the
founder of A Better Choice Foundations - as educators practicing in
Virginia to help people protect their assets.
"A Plan for Life"
"Start Thinking Long-Term"
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.
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
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
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
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
$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
• 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.
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
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
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
Q:As a single person, do I
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
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
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
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
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
• 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
• 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
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
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
*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
“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.
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:
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.
Product Information Guide
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DELOITTE & TOUCHE CONSULTING http://www.dtcg.com
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For a print of this article,
call 1 800 326 4179.