With regards to life insurance coverage, the operative term when it comes to naming a same sex partner as a beneficiary is known as “insurable interest.”   The idea of insurable interest with life insurance coverage is that a person or organization can buy life insurance coverage on the life of another person if the person or organization purchasing the life insurance coverage values the the insured more than the amount of the policy.  Basically, this is a long winded way of saying that if the beneficiary will suffer financial loss in the event of the proposed insured’s death, then insurable interest exists.  The caveat is that with life insurance coverage there generally must be a business or family relationship for insurable interest to exist.

In order for insurable interest to exist in a business environment, an owner or employee must have special knowledge or skills that pose a significant risk to the company if that owner or employee dies.  Credit card companies can be be the beneficiary of a cardholders policy based on the financial risk they would incur if the cardholder died.  Outside of the business environment, traditionally, there needs to be a direct blood relationship between the proposed insured and the beneficiary.  Commonly accepted “relationships” include spouse, parent, grandparent, child, or grandchild.  Distant relatives such as cousins, uncles and aunts, step-parents, and the like, cannot buy life insurance coverage on the lives of others based solely on these relationships.  So that brings up the question, what about in the case of a same sex couple or domestic partnership?

The underwriting process can be very subjective.  Although it is not uncommon for underwriters to find an insurable interest with a heterosexual couple who live together, it is rare for them to approve life insurance coverage with a homosexual couple in the same situation.  Therefore, homosexual couples are commonly advised to name their estate as the beneficiary when they apply for insurance and later change the beneficiary.  The insurable interest issue only exists during the underwriting process prior to approval of the policy.  Once the policy is approved, it is very simple to change the beneficiary to the person of their choice.  Changing the beneficiary designation after approval of the policy is a commonly accepted practice, and is a logical strategy to obtain life insurance coverage for heterosexual couples.  Enjoy life!

The most common method of obtaining free life insurance is through your employer sponsored group insurance plan.  Many employees aren’t aware that their employer actually may provide free life insurance for them as a benefit within their employer sponsored plan.  Most commonly, the employer based plan will provide the first $50,000 of life insurance at no charge, and if the employee wishes to increase their coverage, the difference in premium is considered income to the employee on their paycheck.  The reason for this is due to the employer’s limits on tax deductibility of life insurance premiums for policies over $50,000.  Just suffice to say that it’s worth taking a closer look at your employee benefit paperwork to see if in fact you enjoy the benefit of free life insurance within your company plan.

Another way of obtaining free life insurance, or perhaps relatively inexpensive, comes in the form of AD&D.  No, AD&D in this case is NOT Advanced Dungeons and Dragons!  AD&D stands for Accidental Death and Dismemberment.  In other words, the life insurance component only pays if the insured dies from an accident and not from causes such as sickness or disease.  Believe it or not, odds are, you’re not going to die from an accident, but it does happen.  Again, review your employer based plan since it may actually include AD&D.

Also, credit cards, credit unions, and financial institutions sometimes include free AD&D with other offers, or they may offer a very inexpensive AD&D policy.  The question is, are these plans worth it?  Of course if it’s free it’s worth it, but paying for an AD&D policy rarely pays off.  Again, the chance of dying in an accident are pretty slim.  In fact, In the USA there are about 40000 deaths in car crashes every year. That suggests that if you drive the average amount for 50 years, your chances of dying in a car are roughly 1 in 100.  What about flying?  Well, if you fly on one of the top 25 airlines in the world, your chances of dying in an airline accident are about 1 in 10.5 million! According to my math, those are pretty favorable odds that all point to the fact that there’s a good chance you won’t die in an accident.

The most interesting way to obtain free life insurance that I’ve heard of recently is a program whereby Mass Mutual gives back to their community by paying premiums for a term life policy to fund college for kids.  The program is available to people who are in need financially.  Here’s what Mass Mutual says about their program:

LifeBridgeSM – Free Life Insurance Program
Our unique LifeBridge Free Life Insurance Program provides $50,000 term life insurance policies free-of-charge to eligible parents or guardians. We pay the premiums and our agents drive the program in their communities. If an insured parent or guardian dies during the 10-year term, a $50,000 benefit funds a trust serviced by our trust company to help pay their children’s educational expenses (trust services are provided by the MassMutual Trust Company, FSB). Our goal is to give away $1 billion in coverage. As of March 1, 2012, we are well over halfway to our goal, having provided almost $615 million in free life insurance coverage across the country.

We’ve all heard the saying, “you can’t get something for nothing” however, that’s not always the case.  In the case of how to get free life insurance the caveat is that you have to die first to collect.  Nonetheless, it’s certainly worth being aware of what free life insurance may be available to you via your employer, credit cards, financial institutions, or even innovative programs to help fund college with life insurance proceeds such as the one Mass Mutual offers.  Enjoy life!

The 5 major ratings agencies in the life insurance industry are; Standard & Poor’s, A.M. Best, Moody’s, Fitch, and TheStreet.com.  In a 2009 article by Consumer Reports it was revealed that Fitch, Moody’s, and Standard & Poor’s “have damaged credibility because they earned billions in fees rating mortgage-backed securities that started as “investment grade” but later were downgraded to “speculative”.” We’ve also discovered that most of the agencies are paid by insurers for their ratings creating a potential conflict of interest.  Nonetheless, research has demonstrated that the basic validity of the system and the use of the system by consumers is useful.

The basic idea of the rating system with all ratings agencies is that the insurers with the highest grades are the least likely to become insolvent.  As an insurer ranks lower, it’s chances of becoming insolvent are greater.  Part of the difficulty in interpreting these ratings lies in the fact that the ratings scales and definitions vary so greatly between ratings agencies making it next to impossible to cross reference amongst them.  Furthermore, only one agency, TheStreet.com, is funded exclusively from sources outside of the insurers interest.  TheStreet.com ratings research is funded through sales of guidebooks and reports to investment advisers and libraries.  On the other side of the coin, according to Consumer Reports, a majority if not all of Best’s, Moody’s, and S&P’s ratings are paid for by insurers, and Fitch’s ratings fall somewhere in the middle with less than 50% of their funding provided by insurers.  Does this mean the life insurance ratings system cannot be trusted?  Not at all.  We again fall back on the fact that research has demonstrated the basic validity of the system.  However, amidst all the confusion, we do suggest only utilizing companies with high marks when it comes to buying life insurance.

So how do these companies derive their ratings?  Most companies rely on a system of analyzing financial data including but not limited to the insurer’s balance sheet, reserves, capital ratio, and other financials.  Most of this data comes from reports filed with the state regulators but includes independent market data.  All of the ratings companies with the exception of TheStreet.com also use meetings with the insurer’s management to discover more about the company’s plans that they may use to adjust their ratings.  TheStreet.com’s reasoning for bowing out on utilizing such meetings in their analysis?  They feel the subjectiveness of the relationship factor with management may skew their analytics.

Regardless of the company you use when evaluating life insurance companies, the higher the ratings the better.  My personal favorite ratings company is A.M. Best and during my tenure as a Certified Financial Planner I relied almost exclusively on ratings from A.M. Best and never had an issue.  Regarding what ratings to require of an insurer for your own insurance, If It were up to me and I had the choice of spending a few bucks more on a higher rated insurer, I certainly feel it’s money well spent.  Enjoy Life!

Here are some valuable links to the ratings companies:

A.M. Best – www.ambest.com
Standard and Poor’s – www.standardandpoors.com
Moody’s – www.moodys.com
Fitch – www.fitchratings.com
TheStreet.com – TheStreet.com

Life insurance calculators come in many shapes and sizes, and some are much more helpful than others when it comes to calculating your needs.  Many agents will simply give you their rule of thumb.  One such rule of thumb is that the average person needs 10 times their income when calculating income replacement for a spouse.  As a former Certified Financial Planner, I tend to take a more comprehensive approach to a needs based analysis regarding how much one needs in term of life insurance.  Here are some steps to get you started:

Step 1:  Determine what purpose exactly the money will be used for. 

Is the policy being used to generate income, cover college, pay off a mortgage, a combination of the above, or some other purpose?  This will not only help determine how much insurance you need, but what type of policy will fit that need.  Your biggest priority should be purchasing the adequate amount of insurance to fit that need.  If you can afford a term insurance policy to fund your need, but you can’t afford a whole life policy without sacrificing the amount of insurance you can get, your decision on the type of insurance you should buy will be clear.  Determine how much you need, and focus on funding that amount for that specific purpose.

Step 2:  Factor in other assets that are available to fit the need. 

There’s no need to purchase more life insurance than necessary.  Not only could buying too much life insurance coverage put a strain on your finances, but in tough times it may cause you to drop your insurance all together wasting valuable resources and defeating it’s purpose in the first place.  With that said, be sure to deduct other available assets when considering what you need.  This becomes especially important if you are purchasing life insurance coverage for income replacement purposes.  Take into consideration work policies, retirement accounts and other assets that will be available in the event of the insured’s death.  Using a retirement needs analysis calculator in conjunction with an insurance needs analysis calculator when calculating income replacement is always a good idea.  Most of all, look at the big picture.

Step 3:  Take into consideration inflation at 3%. 

If you need $40,000 today to fund a child’s college education, in 18 years, taking into considering inflation, you will need quite a bit more.  For example, using real historical inflationary numbers, 18 years ago $40,000 would have had the same purchasing power as $61,913 today.  During that period the average rate of inflation was 2.46%.  Imagine protecting a college fund for a child with the assumption it will cost $40,000, but then when the time comes it actually costs over $60,000.  In other words, inflation can make a huge difference in your life insurance needs calculation.  Generally speaking, using 3% for inflation is a good place to start.

Step 4:  Use a reasonable assumption for interest. 

Gone are the days of using 12% as a reasonable long term assumption of what you can expect to earn over the long haul.  A more conservative estimate of 6% may be more appropriate.  Furthermore, if you take into consideration your risk tolerance, using a rate lower than 6% may be more appropriate for years when you are less risk tolerant – i.e. during your retirement years.  Where this is especially important is when you are purchasing life insurance for income replacement.  For example, if you died next year, that lump sum of money will be invested to produce a return, but at the same time your beneficiary may be drawing funds out of the account to pay daily expenses.  Good calculators will show each year over the entire term of your policy factoring in interest, inflation, and exactly how much the survivor will draw as well as how much money is left in the account to produce the ongoing support.  Using a reasonable assumption for interest will increase accuracy in your predictions for future needs.

Step 5:  Use a good calculator and look at the big picture. 

Realize that if we knew exactly what our life expectancies were, the need for life insurance may be vastly different.  Since we don’t know, we have to plan accordingly.  Looking at the big picture can help put things in perspective when planning to purchase life insurance.  A conservative approach is always prudent – in other words, plan for the worst case scenario and stay within your budget to give yourself the best opportunity to follow through with your plan.  If you are using a life insurance agent to help in this process, have them explain exactly why they suggest the amount of insurance they are recommending.  If you don’t get a good answer, seek the help of a qualified professional such as a Certified Financial Planner.

In conclusion, good planning when it comes to protecting your loved ones in the form of life insurance can greatly impact how your surviving family and even generations to come can carry on without you.  Using a good life insurance needs analysis calculator, retirement needs calculator, assumptions regarding inflation and interest rates, and even soliciting the help of a qualified professional can make all the difference in the world.  Enjoy life!

A life insurance annuity falls into one of two categories, immediate or deferred, depending on when they are “annuitized”.  “Annuitizing” your annuity means giving up control of your money in exchange for a guaranteed periodic payment (often for the remainder of your life).  Immediate annuities are annuitized when the contract is purchased, whereas deferred annuities are annuitized at a later date.  Many investors choose to never annuitize and simply use a deferred annuity to defer taxes.

There are two basic types of annuities, fixed and variable.  A fixed life insurance annuity has a fixed interest rate, whereas a variable life insurance annuity allows you the freedom to choose between various “mutual fund like” sub accounts.  A popular variation of the fixed annuity is called an “indexed” annuity.  For many people the fixed annuity can offer the best of both worlds.  The indexed annuity allows you to partially participate in the upside performance of an index (such as the S&P 500) without risk of losing money if the index is negative for a particular time period.  The type of annuity you choose should be determined by your risk tolerance, time horizon, and objectives.  Often times you can change from one type of annuity to another without taxes or penalties.

Annuities have many optional features (for an additional charge) that can get expensive if not used sparingly.  Since they have various options, restrictions, and possible penalties for early distributions, you should review your needs carefully with your financial adviser or insurance agent before purchasing an annuity. In addition, it is advisable to periodically review old annuities.  In summary, annuities aren’t for everyone, but they can be a wonderful tool for the right situation.  Enjoy Life!

As you may know, an indexed annuity offers limited upside potential of a particular market index without downside market risk.  This basically means that the underlying life insurance annuity company guarantees your principal AND gives you part of that index’s return.  Generally, there are three components involved with premiums that are invested in indexed annuities.  First of all, fixed rate investments such as bonds are used to provide the long term guarantees promised by the contract.  Therefore, on a $100,000 premium with fixed interest rates of 7% during the term of the contract, $93,000 would be needed to satisfy the contractual guarantees at the end of the contract term (assuming the only guarantee was that of principal).  Operating expenses and profit margin of the insurance company make up the second component.  If these costs represent 2% then an additional $2,000 of the premium would be used for this purpose.  In this example there would be $5,000 remaining for the last component.  Normally, this money would be used to purchase call options to support the growth in the underlying index.  The price of these options will affect the participation rates and/or margin/spread that the life insurance annuity company can offer.  Sounds complicated?  It is!  However, this should give you a general overview of the mechanics of an indexed annuity.  Enjoy Life!

Answer:  Congratulations are in order since you’ve quit smoking!  Not only will you save on cigarettes, but you may be able to save a substantial amount on your insurance premiums as well.  However, I have to caution you that there may be other factors in changing from a smoker to a non-smoker with your cash value life insurance policy.  The process is relatively simple, but sometimes underwriters can be strict on their underwriting guidelines in a case such as yours.  To change, you will need to answer a set of medical related questions and possibly have new blood and urine samples taken.  Your insurance company will schedule and pay for these tests. Theoretically, since you’ve quit smoking for greater than 1-2 years, you should be able to get better rates.  In the real world, the underwriters may take other influencing risk factors into consideration.  In other words, if you have any health related issues that have changed since you first purchased your insurance, even if you have stopped smoking, they may deny your request.  At first this may seem unfair, but you have to understand that underwriting is a judgment of risk.  Although your life may be healthier because of your non-smoking status, you may have greater health risks because of newly found factors such as heart disease, cancer, or any other issues that may influence your health.  If they do approve you as a non-smoker, your cost of insurance will decrease.  Since you have a cash value life insurance policy, you will have the choice to decrease your premiums or have the additional cash applied towards accumulating more cash value.  Even if the insurance company does not decrease your premiums, assuming the cost of cigarettes never increases and you used to smoke a pack a day, you will save approximately $50,000 over the next 30 years!  Now that’s some serious savings!  Enjoy Life!

Answer:  My condolences regarding your mother.  The good news is that you don’t have to pay income taxes on life insurance proceeds.  Therefore, your concern about April 15 approaching really shouldn’t be a factor at all as it relates to money received from your mother’s life insurance policy.   However, there is a circumstance that I occasionally run across with clients that could cause money received from a life insurance policy to be taxed.  When the insured surrenders a cash value policy (cancels it before death), they could potentially trigger a taxable event.  If the policy’s cash surrender value exceeds the premium paid into the policy, the policy must remain in force to avoid being taxed.  In other words, if you paid $75,000 into a permanent cash value policy and the surrender value is now $500,000, you would be responsible for taxes on the $425,000 in earnings upon surrendering the policy.  One way to avoid getting taxed in this situation would be to take cash out of the policy in the form of a loan and never pay it back.  Although you would pay interest on the loan, many insurers actually credit back part or even all of the interest paid.  With the right insurance company, this could translate into no interest AND no taxes for the insured.  Another technique to effectively cancel a policy and avoid current taxes would be to execute a 1035 exchange into another insurance product such as an annuity.  In this case, the cash value would actually transfer tax free to the annuity and grow tax deferred until withdrawn.  Enjoy life!

Answer:  The plans you are referring to are generally reserved for specific types of employers including many hospitals, public schools, and non-profit organizations (501(c)(3)).  These plans are a form of life insurance annuity commonly referred to as Tax Sheltered Annuities (TSAs) or Tax Deferred Annuities (TDAs), and these plans allow employees to defer a portion of their salary and deposit it into a tax-deferred account until retirement.  As long as the employer agrees to deduct a specific portion of the employee’s paycheck pre-tax and send it to the proper institution, then any number of employees can participate.  One of the most attractive features of this type of plan is that it doesn’t have to be formally administered for the employees to participate.  This is important because the reason many employers don’t offer a retirement plan to their employees is due to the high cost of administration.  Although retirement plans have become much less expensive than in years past, cost still seems to be a deterring factor for many employers who decide not to offer a corporate retirement plan.

Regarding the difference between a 403(b) and a 403(b)(7), they are simply two tax codes that designate different investment vehicles within the same type of plan.  While this type of life insurance annuity plan was first created in 1958, participants could only invest in them via a 403(b).  Since the inception of the Employee Retirement Income Security Act of 1974, participants can defer a portion of their salary into mutual funds utilizing a 403(b)(7).  Your choice is this; do you want to invest in annuities or mutual funds?  Each choice has unique characteristics.  Since annuities are insurance contracts, they often have specific guarantees that are not available with mutual funds.  However, you pay for these guarantees in the form of fees.  According to Morningstar, the average annuity charges more than 2% in annual fees compared to the typical 1.5% fees associated with a mutual fund.  Some mutual funds even charge substantially less.  Does this mean that mutual funds are always better?  Not necessarily!  It really depends on the needs and objectives of the individual investor.

With respect to enrolling in the existing life insurance annuity plan with your employer, the human resources or payroll department should have all the information necessary to get you started.  Begin by locating a list of approved vendors.  This list should include annuity sponsors and mutual funds that are pre-approved for your particular plan.  You may want to seek professional advice to help you through the process.  If you choose to do it yourself, you might find it difficult to get investment advice from your employer since this places them in a position of liability if they are not properly licensed.  Most employers will not offer specific advice for this reason.   In either event, two sets of paperwork will need to be completed.  The first will be paperwork that authorizes and specifies the amounts that you will defer from each paycheck.  This paperwork will be returned to your employer.  The second set will be the application for the annuities or mutual funds that you have selected.  This set of paperwork will be returned to the life insurance annuity or mutual fund company.  Although it may take some effort, enrolling in your salary deferral plan can be tremendously rewarding.  Enjoy life!

In the event someone has passed away and you suspect they may have one or multiple policies, there are a number of steps you can take to determine if they had a life insurance policy, and how to find it.  Here are some tips on where to start:

1. Look for evidence that they paid premiums for a life insurance policy.  You can scour old checkbooks, look at bank statements, credit card statements, and perhaps any receipts that they may have.  This will give you a good clue that they were actually paying premiums into a policy, but beware, they may have paid a lump sum for a life insurance policy and that may be harder to track down.
2. Look for life insurance documents in safe deposit boxes, files, and any place where important documents may have been kept.
3. Look through their address book for insurance companies or insurance agents.  They may have had a life insurance policy through a company that carried their auto or homeowners, or even health insurance as well.
4. Review any estate planning or trust documentation for references to life insurance.
5. Contact any financial advisors, estate planning attorneys, CPAs, or insurance professionals that they may have worked with in the past.
6. Review income tax statements for interest income paid or interest expenses paid to life insurance companies.  Generally, life insurance will not produce interest income, but in some cases this may be relevant.
7. Contact old employers to see if they may have had company or group life insurance.
8. Check the mail for at least a year following the deceased’s death.  If they have the correct address, insurance companies will mail out annual statements summarizing any life insurance policy that the deceased may have.
9. Contact public organizations that provide information on life insurance policies:
1. State Insurance Departments – To access this service, go to the NAIC’s Life Insurance Company Location System.
2. State Unclaimed Property Offices – National Association of Unclaimed Property Administration.
3. The MIB Database – This is a database of applications for individual life insurance over the past 12 years.  This search will set you back $75 but can be money well spent.  For more information on the MIB Database, visit the MIB’s Consumer Protection page.
10. If all else fails, you can contract with a private service to locate a policy for you.  These companies will often contact hundreds of life insurance companies for you to determine if a policy exists in the name of the deceased.  These private companies can be found by doing a google search for “locating a lost life insurance policy.”

In summary, if you suspect that a life insurance policy exists when a person has recently been deceased, it would be prudent to do some research in effort to confirm your suspicion.  With today’s technology, locating a lost life insurance policy has never been easier.  Enjoy Life!