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Volume 15, Issue 6

Strengthen Your Ability against Disability

Of course, you value your assets. But how much do you spend to protect them? Most of us have automobile insurance, homeowners insurance, and possibly, additional coverage for particularly valuable items or collections. While your assets may be worth a great deal, their liquidity and income-producing value may be negligible.

Your true wealth, and perhaps your greatest asset, is your ability to earn an income. Your income pays for all of your living expenses including housing, transportation, food, clothing, and recreation. Your income also pays for property insurance and premiums on liability
and life insurance policies. A closer look at your monthly expenditures will likely reveal
other expenses.

What if your income suddenly ceased? How would you pay your expenses? While no one likes to consider the possibility of becoming disabled due to an illness or accident, the risk of disability does exist and should be given full consideration as you plan for your future.

Should you sustain a disability, you need to know how you will continue to meet your financial needs and obligations. Would you have sufficient funds to support yourself and
your loved ones during a six-month period of disability? How might such a situation affect your ability to borrow money? How quickly could you liquidate a portion of your assets to provide needed cash? Perhaps your spouse could provide the necessary income to support your family, but the combined responsibilities of spouse, parent, caregiver, and breadwinner can be overwhelming.

Social Security will most likely not replace all of your lost wages should you experience a serious illness or accident. In addition, you must meet very specific criteria to qualify for Social Security disability benefits, and it may be months before payments begin.

Alternative sources of income may, at best, be limited. Therefore, you need a dependable source of income. That’s the bottom line. If you lose your ability to earn an income, you jeopardize your financial future.

Some employers offer group disability income insurance coverage. However, most group plans have an upper limit or “cap” on the benefit amount. Consequently, the percent age of pre-disability income covered under a group plan may be insufficient to meet your needs. Moreover, since only base salary is covered in many plans, income in the form of pension and profit-sharing contributions may be left unprotected in the event of disability. Also, with a group plan, you are not the owner of the policy, which leaves your coverage vulnerable to termination should you change employers. Finally, if the benefits are provided under an employer-paid group plan, they are taxed as ordinary income, which further reduces the actual amount available to cover your living expenses.

One solution to these limitations may be to supplement your group disability insurance plan with a disability income insurance policy that you own and is tailored to meet your needs. An individual disability income insurance policy can help close the gap between your pre-disability level of income and the benefits provided under your group plan. In some cases, pension contributions may be included as insurable income. If premium payments are made with after-tax dollars, which is usually the case, the disability benefits would be free of income taxes, further enhancing the value of the benefits.

While no one likes to ponder the what-ifs in life, it is prudent to consider protecting your greatest asset—your ability to earn an income. An individual disability income insurance policy can help provide the financial support you need should you be faced with a major accident or long-term illness.

Are Two Incomes Better Than One?

In today’s economy, many families rely on two incomes. While this trend may be due to the difficulty of achieving an acceptable standard of living on a single income, it also happens when both spouses wish to pursue individual careers. Regardless of the motivation, the actual benefit of two incomes may not equal the combined dollars that are earned. How can you determine the true economic benefit of a second income?

A cost-benefit analysis can help you arrive at the answer. This type of analysis compares the marginal income of the second earner with the marginal costs associated with his or her job. By definition, marginal income and expenses are the additional income and expenses that would be eliminated if the second earner stopped working.

The following worksheet can help you run the numbers. Perform your own analysis in the column on the right by following the “Example” column to the left.

Is that second income worth the expense? Unfortunately, there’s no easy answer. It all depends on your situation. For some people, the net benefit of working, even if small, may be necessary to maintain the family finances. For others, who can live more comfortably on one salary, the additional benefits may not outweigh the additional costs. When looking at the figures on the example, the gross benefit per hour of $21.39 may make that second income seem worthwhile. However, when you see that the net benefit per hour is only $8.67, it may cause you to question whether that second income is really worth it.

Bear in mind that a hidden cost of an additional income is the possibility of being pushed into a higher tax bracket. Some families with high incomes are subject to phase-outs of itemized deductions and a portion of their exemption amounts. Thus, when performing an analysis, it’s also important to do a thorough tax projection.


In the end, only you can decide if the benefits of a second income are worth the costs. Reducing work to its purely financial aspects may also discount other nontangible benefits. Some people prefer to work to develop their skills or to be involved in a fulfilling activity. Nevertheless, an understanding of the cost/benefit trade-offs of working is important and can help determine if that second income is worth the expense.

Protect Your Estate with an ILIT

Many estate planning practitioners view the irrevocable life insurance trust (ILIT) as one of the most flexible and useful tools they can employ on behalf of their clients. While the question of where the ILIT fits into the overall estate planning process can be somewhat confusing, a closer look at its potential advantages may prove helpful.

Typically, the amount of estate planning necessary is dictated by the size of your assets. For instance, if you are married, a properly drafted and executed will and inter vivos (living) trust for you and your spouse—coupled with proper asset ownership—will only ensure that the first $3.5 million (for 2009) of your estate will get passed to heirs free of estate taxes.

Thus, estates exceeding $7 million for married individuals in 2009 (or $3.5 million for single individuals) will incur estate taxes. For this reason, the ILIT has become a popular technique to help fund the payment of estate taxes and to ensure that assets are passed to your family in full. (Note: Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), estate taxes will be repealed in 2010 for one year. Unless Congress passes further legislation, estate taxes will be reinstated in 2011 at pre-EGTRRA levels.)

When properly implemented, the proceeds of an ILIT will not be included in your estate. They will be payable to the ILIT’s beneficiaries (generally, children and grandchildren) without incurring any estate tax consequences.

An ILIT can purchase a life insurance policy on your (the donor’s) life, with the policy premiums funded by annual gifts you make to the ILIT. Consequently, your annual gift tax exclusion ($13,000 annually per donee and $26,000 for gifts made by husband and wife) can be used to maximize gifts to the ILIT.

As a more advanced strategy, an ILIT can help ensure continuity in a closely held business. For instance, passing a family-owned business of substantial value to heirs may be hampered by potentially large estate taxes. These taxes, in some instances, may require a forced sale of the business to raise the necessary cash to pay them. However, an ILIT can purchase a life insurance policy on the owner, with the death benefit providing the cash needed to help meet estate tax obligations and keep the business in the family.

Estate planning is an ongoing process that requires a personal commitment to help ensure your desired intentions are fulfilled. Although an ILIT can be an integral part of your overall plan, it is important to understand that effective estate plans are usually the result of coordinated efforts by your insurance, legal, and tax professionals.

Credit Card Errors: Writing a Wrong

If you were to discover a billing error on your credit card statement, the first thing you would probably do is call to notify the creditor of the error. But, to ensure that you won’t be required to pay the maximum $50 liability (in the case of a stolen or lost card), you must write to the issuer restating what you said over the telephone.

If it is only a straight billing error, you should follow the same steps. To be covered by the Fair Credit Billing Act, you must report the error in writing within 60 days of the postmark on your statement.

Steps to Take

  1. Phone the creditor immediately.
  2. Write to the creditor and send the letter by certified mail to the address listed on your statement for billing inquiries with a return receipt requested.
  3. Include copies of sales slips or other documents of support.
  4. Keep a copy for yourself.
  5. In the letter, include your name, account number, the amount and date of the error, and the reason why you believe it to be an error.
  6. Request evidence of the charge (often just a photocopy of the charge slip).

The law requires the creditor to investigate your error claim, and inform you in writing that they are doing so, within 30 days. The creditor must resolve the matter within two billing cycles or a maximum of 90 days of receiving your notification of the error. While the investigation is in progress, you do not have to pay the amount in question or any interest on it. However, you may wish to continue paying the remaining charges. The amount in dispute cannot be reported to a credit agency as delinquent.

In Case of a Dispute

When the merchant who has billed the amount in question argues that it is a valid charge, you can continue to dispute the charge by requesting documents to support the merchant’s claim of validity and making your case to the issuer again. If the creditor rules that the merchant’s assertion is valid, they must provide a reason. The charge will then be put back onto the statement, at which time you will have 10 days (or your normal grace period) to either pay the charge or protest in a written statement.

At this point, if you haven’t paid the disputed amount, the charge will be reported to credit agencies as delinquent. However, you can request that a notation be added to your credit reports that there is an ongoing dispute. You have the right to request information about who has received notification of the delinquency. When the dispute is finally resolved, all who have been previously notified of the delinquency must be notified of the resolution.

The Federal Trade Commission (FTC) works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace. To file a complaint or to learn more about consumer issues, visit www.ftc.gov.

The information contained in this newsletter is not written or intended as tax, legal, or financial advice and may not be relied on for purposes of avoiding any Federal tax penalties. Entities or persons distributing this information are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.

The information contained in this newsletter is for general use and it is not intended to cover all aspects of a particular matter. While we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. Therefore, information should be relied upon only when coordinated with professional tax and financial advice. The publisher is not engaged in rendering legal, accounting, or financial advice. Neither the information presented nor any opinion expressed constitutes a representation by us or a solicitation of the purchase or sale of any securities. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA, COPYRIGHT 2009.



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