How Much Life Insurance Do You Need?

In a recent study, 40% of consumers responded that they don’t have enough life insurance to meet their families’ long-term needs.¹ This concern raises an obvious question: How much life insurance is enough? What might be appropriate for a family with two young children and a stay-at-home spouse could be significantly different from the needs of a working couple whose children are grown.

Do the Math

Rather than using the oft-recommended formula of replacing eight to ten times your annual income, a better tactic might be to calculate the life insurance benefit amount that could provide the income to meet your family’s long-term needs and goals.

In the hypothetical example below, the family’s living expenses were $70,000 and the surviving spouse would have access to $40,000 of income, leaving $30,000 of annual income to replace. The next step is to determine the life insurance death benefit that could replace this annual income.

In order to do this, you estimate an average annual rate of return that might be achieved if the death benefit amount were invested in income-producing financial vehicles, without reducing the principal. For this example, a 5% rate of return is used. Of course, this rate of return is not representative of any specific investment; actual circumstances and results will vary.

Dividing $30,000 by 5% (.05) equals $600,000. A $600,000 life insurance benefit earning a 5% average annual rate of return could yield a $30,000 annual income.

Although this worksheet is a good starting point, for a more accurate result you should include all the potential expenses that might enable your family to live the way you want them to live. For example, you could include funds for your child’s college education. If health insurance is paid for by your employer, your family may need replacement coverage. And don’t forget final expenses such as funeral and burial costs.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable.

As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. If a policy is surrendered prematurely, there may be surrender charges and income tax implications.

Life insurance could be a key step toward providing security for your loved ones. It’s important to review your coverage regularly to make sure you have sufficient protection for your family’s situation.

1) financial-planning.com, September 26, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek Naperville Accounting and Naperville Insurance advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2012 Emerald Connect, Inc.

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Landmark Decision: The Supreme Court and the Affordable Care Act

On June 28, 2012 — two years and two months after passage of the Patient Protection and Affordable Care Act (ACA) — the U.S. Supreme Court upheld the constitutionality of the law by a vote of five to four.¹ Unless Congress takes further action, the provisions of the act currently in effect will remain so, and most others will become effective as planned in 2013 or 2014. As a consumer, taxpayer, and investor, you may want to consider the potential ramifications of this landmark decision.

The Individual Mandate — Commerce or Tax?

A primary issue under consideration was the individual mandate, which requires that most U.S. citizens have or buy health insurance beginning in 2014 or pay a penalty. The government had argued that the mandate was within Congress’s power to regulate interstate commerce as well as its power to levy taxes.²

The court’s majority opinion, written by Chief Justice John Roberts, rejected the interstate commerce argument on the grounds that failing to buy health insurance is actually a lack of commerce and thus there is nothing to regulate. However, the majority upheld the individual mandate as a tax, pointing out that no one is forced to purchase health insurance under the law; rather, people can choose not to do so and instead pay a penalty (tax).³

The annual penalty is $95 per adult (up to $285 for a family) or 1% of adjusted gross income (AGI), whichever is greater, in 2014; $325 per adult (up to $975 for a family) or 2% of AGI in 2015; and $695 per adult (up to $2,085 for a family) or 2.5% of AGI in 2016. After 2016, there will be annual adjustments for inflation.

The Congressional Budget Office estimated that the law would extend health coverage to an additional 30 million Americans by 2016, leaving about 26 million without insurance.⁴ A private study suggested that about 7.3 million people would have to obtain unsubsidized coverage or pay the penalty.⁵

Benefits, Cost Controls, & Funding

The individual mandate is intended to provide insurance companies with a larger pool of consumers to help reduce individual costs.⁶ The ACA requires insurers to spend at least 80% of annual premiums on health care or activities that could help improve health-care quality.

Other key provisions:

• Individuals with pre-existing medical conditions cannot be rejected or charged higher premiums (currently in effect for children under 19; effective for adults starting in 2014).
• Lifetime benefit limits are prohibited for all new or reissued policies. Annual benefit limits will be prohibited beginning in 2014.
• Young adults up to age 26 can be covered under their parents’ policies.
• State-based insurance exchanges can offer coverage to individuals and small businesses with up to 100 employees beginning in 2014.

To help pay for the law, an additional 0.9% Medicare tax will apply to earned income exceeding $200,000 ($250,000 for joint filers) in 2013, and a 3.8% Medicare tax on net investment income will apply for people with AGIs exceeding $200,000 ($250,000 for joint filers).

Other funding comes from fees and taxes on drug makers, health insurance providers, tanning salons, and certain medical devices.

Investment and Business Impact

After the court’s decision, insurance company stock prices fell and hospital stock prices rose.⁷ Although this is no guarantee of future performance, it probably reflects concern over the cap on insurance company earnings and the potential for more insured consumers of hospital services.

Starting in 2014, employers with 50 or more employees will face a penalty if they don’t offer employee health coverage. Businesses with 25 or fewer employees may be eligible for a tax credit based on the amount they contribute to employee health insurance premiums.

Expansion of States’ Rights

The Supreme Court struck down a provision that requires states to expand their Medicaid programs or lose all existing federal funding. States that choose to opt out of the expansion would lose only the additional federal funding earmarked for the expansion. The ruling, along with the limitation on federal control over interstate commerce, seems to strengthen the states’ autonomy in their relationship with the federal government. Ultimately, this decision could limit the expansion of Medicaid coverage to many low-income families.⁸

The fate of the Affordable Care Act may depend on the outcome of the 2012 elections, and the impact of the law might not come into focus until the individual mandate takes effect in 2014. It’s likely that the debate on health-care reform will continue.

The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

1–3, 8) U.S. Supreme Court, 2012
4) Congressional Budget Office, 2012
5–6) Urban Institute, 2012
7) Yahoo! Finance, June 28, 2012

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville tax advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2012 Emerald Connect, Inc.

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Help Protect Your Assets

Lawsuits have become increasingly common in our society. From 1951 through 2009, the cost of torts (civil suits) rose at more than double the annual rate of general inflation and even surpassed the annual increase in medical expenses (see chart).

In this litigious environment, it is especially important to protect your assets and your future income. If you entertain often, have a dog or a swimming pool, or employ workers in your home, you may have additional exposure to a potential civil suit.

Standard homeowners and automobile insurance policies generally offer coverage in the event of a personal liability lawsuit. However, the policy limits may not be high enough to pay a substantial jury award. If you would like extra coverage at a relatively low cost, you might consider an umbrella insurance policy.

Typically, you can obtain $1 million in coverage for a few hundred dollars a year. However, you must usually purchase the maximum liability coverage on your homeowners and automobile policies; they serve as a deductible for the umbrella policy, which can provide additional coverage (up to the policy limits). Umbrella policies may also cover situations that are not included in standard policies, such as libel, slander, invasion of privacy, defamation of character, and other personal injuries.

Although umbrella policies have long been a staple for wealthy households, many middle-income households have substantial home equity, retirement savings, and current and future income that could be used to satisfy a large judgment. Qualified retirement plan assets may have some protection from creditors under federal and/or state law (depending on the type of plan and jurisdiction), but even if your retirement savings may be protected, you would still be liable for any judgments.

You’ve worked hard to establish a solid financial base. In a world where it sometimes seems to be raining lawsuits, it might be wise to carry an umbrella.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville Insurance advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2012 Emerald Connect, Inc.

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Lessons from a Perilous Year

In retrospect, 2011 was a formidable year for catastrophes. Some of the most newsworthy and costly events included a devastating tornado and widespread river flooding in the Midwest, several wildfires in the Southwest, and Hurricane Irene’s ravaging of the East Coast.

Small businesses can be hit hard when extreme weather comes to town. In fact, at least 30% of small businesses have been closed for 24 hours or longer in the last three years due to a natural disaster.¹
Small businesses with thoughtful disaster plans and adequate insurance protection may be in a better position to reopen their doors after the “storm” passes. Here are a few ways to help reduce uninsured losses if your business is affected by a disaster.

Filling Insurance Gaps

• When crafting your disaster plan, schedule annual insurance reviews to make sure your coverage is keeping up with company changes. Updating your policy is especially important if you have expanded or purchased new equipment.
• You may have a choice between a standard policy or special coverage that is more comprehensive albeit more expensive. For an extra cost, additional property coverage may provide for pricey exterior items such as fences, signage, or awnings, which may be vulnerable to wind damage.
• Keep in mind that floods are usually excluded from business owner policies, but coverage may be available from the government’s National Flood Insurance Program or some private insurers. There is a 30-day waiting period before a flood policy takes effect, so it’s not a good idea to wait until the threat is imminent to purchase one. (Earthquakes and terrorism are also typically excluded.)
• Finally, keep an accurate inventory and take photos of the premises and all of your business property, and store them online for an extra layer of protection. Good documentation may help speed up the claims process and reduce the risk of a dispute with your insurer.

1) Insurance Information Institute, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional Naperville Insurance advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2012 Emerald Connect, Inc.

Protection from a Range of Liability Claims

It’s estimated that American companies will face $183 billion in tort costs in 2011, $152 billion of which will land on small businesses.1

Accidents happen no matter how well a business is run, and the expenses involved in defending a lawsuit can prove to be devastating, whether the organization is found to be at fault or not. Fortunately, there are several forms of liability insurance that may help offset unforeseen costs (up to the policy limits) that could consume your business’s profits or ruin its longer-term prospects.

The commercial general liability coverage offered with a business owner’s policy helps protect against risks associated with property damage, bodily injury, and personal and advertising injury. However, different kinds of coverage may be warranted for businesses exposed to special risks that may not be included in a standard policy.

Professional liability insurance (or errors and omissions coverage) could help with legal costs and damages related to wrongful practices by professional service providers such as doctors, lawyers, and various types of consultants. Typically, it is necessary to obtain coverage that is specific to the company or industry.

Product liability insurance could help protect against financial loss resulting from a defective product that causes injury or harm. Companies that manufacture, distribute, or sell such products could potentially be held responsible for their safety.

Internet liability insurance could help protect firms that conduct business on the Web from risks related to computer hacking, spam, viruses, and other online perils.

Employee benefits liability endorsements could help pay costs that result from negligence related to the administration of employee benefits, even if they are managed by an outside professional benefits administrator.

As your business grows, you could encounter new risks and may want to expand coverage based on the size of your staff or the value of equipment and other assets. Reviewing your liability insurance on a regular basis could help protect you from the possibility of a lawsuit that could stifle your business or harm your personal financial situation.

1) U.S. Chamber Institute for Legal Reform, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville Insurance advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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