Volume 14, Issue 11
CUSTOMIZING LIFE INSURANCE WITH POLICY RIDERS
When most people think of life insurance, the first question that usually comes to mind is, “How much do I need?” However, there are other aspects of life insurance policies that provide important benefits and are also worthy of consideration.
A rider is a provision that can be added to an insurance policy, at an additional cost, in order to alter or expand the policy’s conditions or terms of coverage. Riders essentially allow policyowners to obtain extra protection in certain situations for themselves and their beneficiaries. Some examples of life insurance riders include the option to purchase additional insurance without having to provide evidence of insurability; the accelerated death benefit, which allows the insured, under certain circumstances, to receive the policy proceeds before death; and the accidental death benefit, which provides an additional benefit if the insured is killed in an accident.
Another frequently utilized option among the large number of riders that life insurance companies offer is the waiver of premium rider. This option provides protection in the event that you become disabled and can no longer afford to pay your insurance premiums. With this provision added to your policy, not only does the insurance company pay your premiums according to the terms of the contract if you suffer a disability, but if you own a whole life policy, the policy’s cash values and dividends also generally continue to grow. These increasing policy values can be a ready source of income to help pay your expenses if you can no longer work. You could access these values through loans or surrenders. However, you should be aware that loans and withdrawals may result in adverse tax consequences and may carry interest. Cash values and death benefits may also be affected.
Like an applicant’s insurability, the availability of the waiver of premium rider may also be based on certain risk factors, such as general health and medical history. Once issued, most policies contain important eligibility requirements before the waiver of premium rider will take effect. Policies generally contain a specific waiting period (e.g., six months) before premiums begin to be paid under the rider. Some policies also apply waiver of premium coverage differently for a disability occurring prior to age 60, compared to one occurring between the ages of 60 and 65. Under many policies, the waiver of premium provision terminates at age 65. While the waiver of premium rider on term and whole life policies will generally cover the entire premium, the waiver may work a little differently on other types of policies, separating the premium waiver for the cost of insurance from that associated with the cash value or investment fund.
The definition of “disability” in your policy is also crucial when considering a waiver of premium rider because it determines when your obligation to pay premiums ends. The key is usually whether you are “totally disabled” under your policy’s definition. While some policies consider total disability to mean that you are no longer able to work in your profession due to illness or injury, other policies may contain a clause that states you must be unable to perform any type of work.
Policy riders tend to take a “back seat” when planning insurance needs because so much of the initial focus is on how much coverage is necessary to provide adequate protection. However, part of the process of determining adequate protection should also involve taking advantage of the opportunities to customize your life insurance policy so it fully meets your needs.
MAINTAIN A HEALTHY CREDIT REPORT
Your credit report is an accumulation of information about your bills and loans, your repayment history, your available credit, and your outstanding debts. These reports are typically used by lenders when deciding whether or not to accept a loan or credit application. A healthy credit report can help you secure the funding you need to purchase a new home or car, fund a child’s education, or start your own business. The following guide-lines can help you maintain a healthy credit report.
Establish and Maintain History: A rich history about your ability to pay off debt over time will paint a more complete picture for a lender inquiring about your financial habits. Therefore, consider maintaining your oldest credit card. Credit companies often suggest that you also maintain four to six accounts to showcase your commitment to managing multiple debt sources.
Close Extra Accounts: We’ve all been tempted by the free t-shirts, duffle bags, and contest giveaways offered by credit card companies to attract new customers. However, after we’ve received the gifts, we often forget about the accounts we’ve just opened. Many open accounts on a credit report may be a red flag to a lender, indicating that you could easily get into financial danger due to the large amount of readily available credit. Consider closing any accounts that you do not use. This strategy may also minimize your risk for identity theft.
Note: Cutting up the credit card itself or just not using it does not mean the account is closed. To properly close an account, you must call or write to the company with your request.
Make the Minimum Payments: Delinquencies on payments remain on your credit report for seven years, even if you’ve since settled the account balance and paid the debt. Therefore, you should always try to make at least the minimum payments by the due date requested by the creditor or lender.
If you are in a financial bind and decide to ignore an account for a period of time, be aware that accounts sent to collection agencies or charged off by creditors, meaning they have written the debt off as a loss, will also remain on your credit report for seven years. If you find yourself in this situation, consider contacting your creditor, rather than just ignoring this serious problem.
Pay Down Your Debt and Keep Debt in Line with Income: Deter-mine your debt-to-income ratio by adding the balances of all your loans and credit cards, and comparing that with the amount of income you receive annually. If your total debt exceeds more than 20% of your annual income, lenders may be hesitant to consider allowing you more credit. If you have a large amount of debt, develop a strategy to pay it off gradually and within your budget. One strategy may be to consolidate your payments under a home equity loan, which offers tax-deductible interest payments. In the meantime, curb excess spending and avoid further debt.
Control the Number of Inquiries about Your Credit: A large number of inquiries on your report may signal to a lender that you are in need of a lot of credit or preparing to take on a large debt. Neither situation bodes well for your ability to take on additional debt. Be aware that each time you apply for a new credit card, even if it is only to receive a free gift, an inquiry will appear on your report. Inquiries remain on your report for two years.
OPT-OUT of Inclusion on Marketing Lists: While soft inquiries, those made by marketers and others wishing to sell you something, do not usually appear on the version of your credit report shown to lenders, these inquiries indicate that your personal information may be available and used by the companies listed, increasing your exposure to identity theft. Many marketers receive lists of potential customers directly from credit bureaus. You can“opt out” of being included on lists sold to these companies by either writing to each of the three credit bureaus or calling (888) 5OPTOUT. This action will remove your name from marketing lists for two years.
According to the Fair Credit Reporting Act (FCRA), you can request a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once a year. For your convenience, you can access the agencies through the website www.annualcreditreport.com. To maintain healthy credit, monitor your credit report regularly and take actions that build and maintain good credit.
EVALUATING THE COSTS OF HOME OWNERSHIP
The decision to own or rent a home is generally based on three factors: cost, investment, and personal preference. Initially, home ownership may be more expensive, due to the up front costs associated with buying a home, such as closing costs and a down payment. But in the long run, homeowners build equity and save on taxes.
Homeowners can deduct mortgage interest and property taxes, which may represent considerable savings in regions where property taxes are high. While renters miss out on these tax savings, they generally need less cash on hand for emergency repairs or general maintenance, which can be expensive for today’s homeowner. Renting also offers more flexibility for those who anticipate relocating for work or other reasons.
The following calculations may help you decide whether you should rent or own:
- Write down the purchase price and financing terms for the house or condominium. Include the down payment, closing costs, and any points.
- Estimate your “gross monthly” costs as a homeowner, including utilities, maintenance, and repairs.
- Calculate your “net monthly” outlay. This is computed by taking into consideration any tax savings received by deducting mortgage interest and property taxes.
- Project what the proceeds would be after selling the property in five, ten, or twenty years.
- Calculate your total rent for the same period.
- And last, compare the two sets of figures. What would your financial results be if you saved the money you would spend on a down payment, closing costs, and points (assuming a reasonable growth rate)? What is the difference between your rent and the “net outlay” as a homeowner?
While the above method offers a rough comparison, you also need to determine all of the other non-financial advantages that home or condominium ownership provides. Analyzing your short- and long-term goals can help you determine whether renting or owning best suits your lifestyle and your financial situation.
EDUCATION: YESTERDAY, TODAY, AND TOMORROW
It wasn’t long ago when an individual went to school, got an education, and embarked on one career that usually lasted a lifetime. Many companies provided on-the-job training, and little thought was given to “going back to school.” During a job interview, it was common to be asked where you saw yourself in five or ten years. Many new graduates could see a fairly predictable career track ahead.
In contrast, today’s working world is far different. Trying to keep up with continual change is challenging enough, let alone trying to project job circumstances five or ten years into the future. Technological changes are redefining some jobs and may eventually make others obsolete. On the other hand, ten years from now, an individual may find him or herself in a job that doesn’t yet exist! To maintain employment and improve employability, many workers and independent contractors will need to enhance and upgrade their skills regularly.
In this rapidly changing, information- based economy, the better your skills are, the more attractive you will be to prospective employers. However, personal growth and development carry a price tag. While some companies might provide certain forms of training, it may be unrealistic to think employers will bear the entire cost of skill development. Just as more and more workers are being called upon to assume responsibility for funding their own retirements (through the shift away from defined benefit plans toward defined contribution plans), more workers may also have to contribute to their own long-term career development.
Changing the Mindset
The first step toward your long-term career development is to change your current mindset about education. Rather than thinking of education as something finished after college graduation, it is becoming necessary to view education as an ongoing process. Professional success in the 21st century work world may require workers to think of themselves as sponges with the unlimited ability to “soak up” new information.
It may help to think of “investing” in personal growth and development as analogous to the business practice of investing in research and development (R&D). Just as businesses set aside a portion of their revenues to fund R&D that will lead to new products and more customers, consider setting aside a portion of your income to pursue activities (e.g., course work, advanced degrees,professional or trade meetings, or relocation for a better work opportunity) that will enhance your job skills and expand your earning capacity.
Consequently, the best investment you might ever make is to begin setting aside funds for your continuing education. In the process, you’ll be reinforcing the sense of responsibility required to control your own destiny and developing the resources necessary to carry out that responsibility. You’ll also be showing others, including your employer or other potential employers, that you are committed to improving your skills, receptive to change, and willing “to go the extra mile” to pursue professional success.