Estate Planning In Your 20s…

• Name beneficiaries: As you start your first “real job” and open bank, retirement and other financial accounts, you will almost always have the opportunity to designate a beneficiary to receive the assets in the event of your death. If you don’t name one or more beneficiaries, the assets in these accounts will be frozen until your estate is sorted out in probate court after your death. Naming a beneficiary will enable your heirs to access the funds sooner.
• Consider a simple will: If your assets and liabilities are both minimal, your estate won’t be difficult to sort out. Even still, you should consider a very simple will as part of estate planning basics. If you are unmarried with no children and die without a will, your assets will most likely revert to your parents. If your parents are divorced and you would want only one to inherit your assets, you need to state that in a legally binding document. Ditto if you want to leave items to a significant other or a relative or friend who is not your parent, spouse or child. A financial planner and/or attorney can help you identify when you need a will and help you write one.
• Create a living will and designate a medical power of attorney: Unmarried people are at risk of having their wishes fall through the cracks should a medical emergency happen. And even married people might want to state their wishes in writing so that there are no doubts. Have an attorney draw up documents stating who can make medical decisions in the event of your incapacitation, and stating whether you would want to be kept alive using artificial means in the case of an accident or illness. Make sure that the person you designate as your power of attorney is aware of your wishes. If you would want the decision to be made by multiple people (say your significant other and your parents), state that too but understand that it still makes sense to designate one person to have the final say so. Finally, if you want to allow non-relatives to have access to your medical information and to visit you in the hospital, state that as well.
• Research life insurance options: If you’re single with no debt, you don’t really need to purchase life insurance. Many employers offer a minimal amount for free or at a very low cost as part of your benefits package, and that amount should be enough to cover final expenses such as funeral costs if your loved ones are unable to do so. If you have outstanding debt, you might consider a very small policy that can pay off the debt in the case of your death. And of course if you have a spouse or children who need your income, you will need a larger policy. Make sure to research the different types of policies, and get several quotes to get the lowest premiums.

Estate Planning In Your 30s…

• Update life insurance: By your 30s, you will probably have accumulated more assets (like a house) and also more debts (such as the corresponding mortgage). You may have also had children who are now dependent on your income for everyday living expenses as well as bigger items like college. Make sure that you purchase enough life insurance to provide for them in the event of your death for income you will need beyond social security survivor benefits, and that the policy can also pay off any debts that your spouse would need paid off to continue living a reasonably similar lifestyle – mortgages and car notes are the big items here.
• Revise your will: Make sure that your children have a designated guardian, who has consented to raise them in the event of you and your spouse’s death. Make sure that you and your spouse have talked about the assets you each brought into the marriage as well as any that you accumulated together. If you would want to make sure your parents are provided for even in the event of your early death, have that written into your will. If you want assets to go to anyone besides your spouse and/or children, make sure that is reflected as well.
• Update beneficiaries: Recognize that your beneficiaries will probably change over time. If you initially designated your parents as beneficiaries of accounts such as your 401(k), you may need to update that to your spouse. If you get a divorce and/or remarry you will also need to update your beneficiaries. Recognize that named beneficiaries on specific accounts take precedence over a will – so if your will leaves “everything” to your spouse but your 401(k) names your parents as beneficiaries, your spouse will have no legal claim to your 401(k).

Estate Planning In Your 40s…

• Update life insurance: Once again, make sure that your life insurance policy reflects the needs of your family at the given time. Also recognize that if you own the policy its face value is considered part of your estate at death, and could ultimately be taxable to your heirs. So your spouse or children should actually purchase and benefit from the policy, even if you give them the money to pay the premiums.
• Create a gifting strategy: By the time you’ve reached your 40s, you’ve been accumulating wealth for close to twenty years. If you’ve been judicious with your savings and/or made some good investments, you could be sitting on a nice nest egg by this point. Your assets may be subject to tax at death, so start creating a plan to give some of them away. You should take advantage of “annual exclusion” gifts each year, which allow you to give up to $26,000 per couple to an individual each year. You should also make strategic gifts to charities and non-profits.

Estate Planning In Your 50s…

• Reevaluate life insurance: Up until this point, you have probably needed to add to your life insurance policy over time. By your 50s, you may be able to decrease the value of your policy or get rid of it altogether. If you have paid off your major debts or have the money to do so, and have saved enough to send your children to college, your spouse may be able to maintain a perfectly acceptable lifestyle using only retirement savings amassed to this point. Since premiums also will increase with age, you should do a careful analysis to see if paying them is still necessary. You can also check out these options for using life insurance during life.
• Look into Long Term Care insurance: Nursing homes or long hospital stays can cost hundreds or even thousands of dollars per day, and Medicare only goes so far. Long term care insurance will pay for skilled nursing care and/or a nursing home for a long period of time. The best policies will increase their payout over time to keep pace with inflation. If you have serious assets you may think you can afford your own long term care. In reality, you may be able to afford it – but it will suck up all your assets if you end up with a truly chronic condition that keeps you in a hospital or nursing home for months or years. If you want to leave assets for your spouse and/or children, long-term care premiums may be worth it. If you wait too long, premiums really skyrocket. Experts seem to agree that your 50s are the optimal time to begin thinking about this.

Estate Planning In Your 60s and Beyond…

• Expand your giving: As you need less money, you can afford to give more of it away – this has the added benefit of  reducing your estate taxes later and possible giving you a charitable deduction now.
• Maximize tax planning: A financial planner and attorney can help you set up trusts that benefit your spouse and/or children to shield your assets from estate taxes. This is a concern for fewer people as the minimum for a taxable estate has increased over time – but as Congress looks for more and more ways to plug rising deficits, you can’t count on any tax-related laws to stay the same.
• Look into other trust options: A Charitable Remainder Trust allows you to donate a large sum of money to a charity, take a deduction for that amount up front AND get a stream of income during your life, with the remainder amount at your death staying with the charity. You might also consider setting up trusts for you children or grandchildren, especially if any of them have special needs.

What other things are you considering as part of your estate plan? Tell us in the comments!

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Then a really good friend of mine told me that her boyfriend had had the foresight to sign up for a catastrophic (high-deductible) short-term plan just in time to have his appendix burst. She shuddered as she thought of how horrific his financial future might have been had he not signed onto that plan. The story was enough to send me to the nearest insurance agent’s office.

The form for a high-deductible plan covered all of the basics: my personal information, height, weight, whether or not I smoked or had had major surgery. But then something caught my eye: was I pregnant?

I took the clipboard up to the insurance agent and asked what that had to do with anything (for the record, I was not pregnant). She said that it counted as a Preexisting Condition, and that I could be denied coverage for it.

My mind started racing. Pre-existing Condition? Of course pregnancy is a Pre-existing Condition, as well as a pretty normal state of life. Why on earth would that exclude you from finding health insurance? Up until that moment, I thought that Pre-Existing Conditions were only for the most terminal of illnesses, such as cancer or incurable diseases, and I was horrified to say the least.

Pre-existing Conditions and Health Insurance

Working for a company that offers health insurance is a sure fire way to get you and your family covered no matter what conditions or genes you bear. However, many jobs have cut health benefits substantially and lots of people are trying out their entrepreneurial skills by starting their own companies, so it is more common now that Americans need to apply for their own health insurance policies.

Before an insurance agent will insure your home, they inspect it to see what defects it has, and what potential calamities could occur in the future.

Health Insurance companies do the same thing, but with people. This is why they are concerned with your height, whether or not you smoke and could develop lung cancer in the future, whether or not your weight indicates you could turn obese and end up costing them catastrophic amounts of money down the road.

And then, they either disqualify you from their insurance plan, put you on an exclusion period of time in which no claims for your Preexisting Condition will be accepted of between 6-18 months (perhaps it would have been 9 months if your Pre-existing Condition is pregnancy—how convenient), or they charge you a higher premium based on the information.

Other conditions that typically disqualify a person from health insurance include: Type 2 diabetes, heart disease, cancer, high blood pressure, asthma, etc.

When you or Your Child Will No Longer Be Excluded due to Pre-Existing Conditions

The Patient Protection and Affordable Care Act, signed into law in March 2010, should eliminate the Pre-existing Condition conundrum many Americans find themselves in.

Since September 2010, healthcare insurance could no longer deny claims or coverage under their parent’s healthcare plan for children under 19 years of age because of preexisting conditions. Insurance companies will also no longer be able to insure that child under their parents’ plan, but not accept claims for their Pre-existing Condition.

In 2014, the same will be true of adults (19 years and older). 

Preexisting Condition Insurance Plan (PCIP)

What can you do if you find yourself in the Pre-Existing Bermuda Triangle right now?

For those of you finding it difficult to get insurance because you are pregnant, in-between work and have Pre-existing Conditions, are self-employed and have been denied coverage, etc., this new act has a plan B to offer you that began last year. Every state must now have a PCIP for high risk people.

The following must be true for you to qualify: you have been uninsured for six months or more, you have been denied coverage or denied coverage for your specific Pre-existing Condition, you have a Pre-existing Condition, and you are a US citizen or national, or you are lawfully present in the United States. 

Check out the healthcare.gov website and go through the questions to see what is offered in your individual state, and whether or not you qualify. While this covers you for right now, in the near future you will be able to sign up for normal healthcare without being denied thanks to this new legislation.

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Remember that due to the Healthcare Reform Bill, your benefits selections might need a little tweaking this year. I wrote last year about how to navigate the often-overwhelming Open Enrollment process, but want to add a few more thoughts to help you take this year’s changes into effect.

Things to Look For During Open Enrollment 2010

• Free Preventative Care: Insurers are now required to offer all in-network preventative care without any out-of-pocket cost beyond premiums – that means no copays or deductibles. If you primarily use your health insurance for preventative care, you might want to revisit your past selection to see if it still works best for you – it might make sense to select a High Deductible Health Plan since the premiums will be lower and you will have few if any expenses subject to the deductible.
• Pre-existing conditions: Insurance companies can no longer deny coverage for children under 19 due to pre-existing conditions. If you have not been able to cover your child due to a pre-existing condition, you may be able to add your child now. Check with your benefits contact for more details.
• Lifetime limits: Insurance policies can no longer contain lifetime limits. If you have a chronic health condition and maintain private insurance in addition to your employer-sponsored benefits, you may be able to drop the outside policy. Check with your benefits contact for more details.
• Adult children: Adult children under age 26 can be covered on a parent’s plan as long as they do not have the option of coverage at their own workplace. However, the parent will most likely need to select (and pay for) this coverage – it will not happen automatically, even if the child was covered in the past. If your child needs coverage make sure to make this election. Check with your employer to see if you can also add these children to existing vision or dental plans.
• Flexible Spending and Health Spending Account changes: As mentioned before, the new healthcare law limited the use of FSAs and HSAs for over-the-counter drugs, and imposed limits where they didn’t exist before. If you have contributed in the past, make sure your contribution is appropriate for the spending you will actually do this year – especially for FSAs where you lose the funds at the end of the year.

If you’ve already selected your benefits and saw something here that made you second-guess your choices, check with HR to see if you can make adjustments. At my office you can make adjustments through the end of the year, even though selections are initially due in mid-November.

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High Risk customers may have been categorized as such because they have a pre-existing health condition, or they are young and live near many dangerous driving intersections, or they filed a large homeowner’s insurance claim and the company has chosen to not renew their policy.

If you are one of these people with an uninsurable risk, what are you supposed to do? Fortunately, each state has a high risk insurance net to catch many of the people who fall through the cracks.  

Auto High Risk Policies

Most states make auto insurance mandatory, and many have a high risk auto insurance plan or high risk pool to cover licensed drivers that commercial insurance companies deem uninsurable. The best way to start this process is by contacting an insurance agent or getting an online quote. Most plans stipulate that you need to have been rejected by a certain number of insurance companies in order to qualify for the high risk insurance, and so your agent can exhaust all possibilities. After three or so rejections, the insurance agent can fill out the necessary paperwork to submit to your state motor department. You can do this yourself, but first you should contact your Department of Motor Vehicles to understand the process and get the proper paperwork.

Expect that your coverage for high risk drivers will only meet the state minimum policy coverage, and that your premium will be higher than normal due to your higher risk. If you have a clean driving record for three years or so, you can normally find coverage again from a commercial insurance company.  

Homeowner High Risk Policies

Losing your homeowner insurance can be a result of a claim you have made, or because you are in a high risk area, or a weather-related incident. But in order to keep your mortgage and stay out of default, you must have insurance. Talk about being stuck between a rock and a hard place.

If your insurance company does not want to renew your policy, they are forced by law to give you a 30 day notice (and if they don’t, they must renew). In that 30 days, you need to find yourself new insurance or your bank/lending institution will purchase a forced-placed policy. The good news is that you will most likely find insurance because it is in your lending institutions best interest. The bad news is that your premium will be much higher.

If you don’t have a mortgage, or if your premium is astronomical under the forced-placed policy, you have a third option. Fair Access to Insurance Requirements (FAIR) is offered in each state to people who are uninsurable. Once again, these plans will cost you more in premium and will offer less coverage, but they could be less than the forced-plan policy. You should contact your state’s Department of Insurance for more information on how to apply for this policy.

Health High Risk Policies

If you have certain pre-existing conditions such as diabetes, asthma, heart conditions, etc., then you may find yourself uninsurable, or insurable but with a list of uninsurable conditions and exemptions that reads like a phone book.

Fortunately, each state must now offer health insurance through a Pre-Existing Condition Insurance Plan (PCIP) for high risk people. The following must be true for you to qualify: you have been uninsured for six months or more, you have been denied coverage or denied coverage for your specific Pre-existing Condition, you have a Pre-existing Condition, and you are a US citizen or national, or you are lawfully present in the United States. 

This coverage is now available due to the new Health Care Reform Bill.

Check out the healthcare.gov website and go through the questions to see what is offered in your individual state, and whether or not you qualify.

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Health Insurance for Young Adults

A few days ago, we talked about the new individual mandate for health insurance. This might have the largest impact on those in their 20s. According to one source, forty-five percent of those ages 19 to 29 were uninsured for at least part of last year.

If you or your children are under 26 and currently uninsured, you may be interested in the coverage options provided by the new healthcare bill, some of which have already started.

This is especially important for recent or soon-to-be graduates, many of whom may be facing life without certain employment and/or benefits and may have previously been dropped from mom and dad’s plan after life as a student ended.

The options

• Your own plan: The health care bill does not force you give up the insurance you have now. If you are offered health insurance at work, you can keep your existing policy or sign up for a new one. If you prefer and can afford a traditional private policy, you are also welcome to begin or continue to go that route. Coverage and premiums vary drastically.
• Your parents’ plan: This is perhaps the most sweeping change. If your parents’ policy covers dependents, the insurer must extend that coverage to children 26 or under. This applies to both employer-sponsored AND private insurance plans. The insurer cannot charge any more than it currently charges for dependents, and cannot offer different levels of coverage. This applies regardless of the child’s residency, financial or marital status and regardless of being in school and/or a dependent for tax purposes. Until 2014, this does not apply to a child offered insurance through his/her own employer. After 2014, this applies to ALL children under 26, even if insurance is offered elsewhere. Keep in mind that while this does extend to married children, it does not require coverage for that child’s spouse or children. This provision officially becomes law in September of this year, but many insurers have agreed to start coverage immediately (scroll to bottom of linked page for names). This is excellent news for recent graduates who were previously looking at a coverage gap between now and September. The government currently estimates this option to cost close to $3,400 per year for each added young adult dependent. But if your plan is simply “employee plus family” and you currently cover other dependents, your costs actually may not go up at all.
• The government plan (under-30): CNN discusses a provision of the bill that calls for a new plan administered by state-sponsored exchanges and targeted at those under 30 who do not have employer-sponsored insurance or qualify for Medicare. Details are still fuzzy, and this would likely not be enacted until 2012. The plan looks to be structured as a high-deductible plan, and experts are currently predicting monthly premiums at between $100 and $140.
• The other government plan (Medicaid): Medicaid has previously been targeted at children, pregnant women, the elderly and the disabled. As a result of the new healthcare law, Medicaid benefits will now extend to anyone who makes less than 133% of the poverty level, including childless adults. That currently amounts to $14,400 for a single adult or $29,300 for a family of four. This provision is not currently scheduled to be enacted until 2014.
• No plan: Of course there’s always the option of forgoing health insurance altogether. If you get sick or hurt, you’ll have to shoulder all costs yourself, but if you don’t, you save the money on insurance premiums. Starting in 2014, this option will come at a cost.

Making the choice

In the short-term, there aren’t many options – the Medicaid expansion hasn’t started yet and neither has the government-run under-30 plan. The biggest current change is a parent’s ability to add coverage for children under 26. If the child is not offered his own employer-sponsored plan, that option is likely to be the most cost effective for the family unit, except for forgoing coverage altogether since there is currently no penalty. But if you can afford even a basic plan, purchasing it is a pretty effective risk management strategy as few people can cover astronomical hospital bills should an emergency strike.

In the end, you will have to run the numbers on each option to see what works best for you and your family. As the years go by, more pieces of the bill will be enacted and the options will expand. And of course there’s always the possibility that the whole thing could be repealed or massively changed. But for now, take the information you have and make the best of it. Remember that medical expenses are one of the leading causes of bankruptcy, and do your best to find a policy that works for you!

Be sure to check out the entire health care series:

• Part 1: Individual Mandate
• Part 2: $250 Medicare Donut Hole Checks
• Part 3: Health Insurance for Young Adults
• Part 4: 1099 Changes in Health Care Bill
• Part 5: Flexible Spending Account Changes
• Part 6: Health Savings Account Changes
• Part 7: Student Loan Forgiveness Program

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My grandparents are part of the 31% of seniors living only on social security in their retirement (defined as 90% of income coming from social security alone, study by National Academy of Social Insurance). They don’t have a pension, they didn’t save for retirement, and unfortunately they have all ready spent the little inheritance they were given by my grandmother’s first generation Hungarian immigrant mother.

Medical problems and perhaps lack of financial knowledge meant that they applied for social security benefits as soon as they were eligible instead of holding off in order to maximize their retirement savings. I don’t know if they did not have the money to save (although I would always argue that no matter what, you can save something), or if they thought that social security would be enough to take care of them. But let me tell you, they are spending their retirement sitting at home, in front of a television, and stressing when property tax, income tax, and other large expenses come in the mail. 

Seniors who find themselves on a social security fixed income suffer through medical conditions as well, and they need prescription drugs just like others; however, paying for the prescription medications sometimes leads to deciding between food and medication. As such, I am always happy to hear when my grandparents will be getting a letter in the mail that is not a bill, but rather a check! I am also particularly excited to report that the new healthcare reform means slowly eliminating the current “doughnut hole” many Medicare enrollees face.

Read on to see if you will be one of the recipients of the $250 Medicare donut hole check.

Why a $250 Donut Hole Check Could be Coming Your Way

There are two dollar limits in the Medicare Part D (effective in 2006) that people care about: the first is the prescription drug coverage limit, and the second is the catastrophic coverage threshold. In between these two limits is what is known as the Medicare Doughnut Hole, which is basically a no-man’s land for drug coverage. If you are stuck in this hole, meaning you have spent your prescription coverage limit for the year, but have not spent enough money on prescription drugs to be at the catastrophic level yet, then you are on your own to pay for the entire cost of your prescription drugs. This can be particularly troublesome for senior citizens who tend to take more drugs than the rest of the population, and especially maintenance-type drugs that are permanent for ailments such as blood pressure, arthritis, diabetes, etc. This chart shows the breakdown of what you pay versus what Medicare pays, the doughnut hole, and the catastrophic coverage.  

With the passage of the Patient Protection and Affordable Care Act of 2010, this doughnut hole will be phased out beginning in 2011 when people stuck in the doughnut hole will receive a 50% discount on brand name drugs and a 7% discount on generic drugs (this discount in the doughnut hole will rise over the years until a 75% threshold is met with a complete phaseout by 2020). In the meantime, people on Medicare who fall into this doughnut hole will be given a $250 rebate check in order to help costs.

The first batch of checks was sent on June 10, 2010 to about 80,000 people.

Who Will Get a $250 Check?

Roughly 26% of people on Medicare reach their prescription limits and fall within the doughnut hole, without ever reaching the catastrophic coverage threshold.

According to the chart in the link above, this means these enrollees have paid a $310 deductible, 25% of the first $2,830 on prescription drugs, and then a varying amount of $3,610 before the $6,440 catastrophic limit is met. The Department of Health and Human Services estimates that this equates to 4 million people who will be eligible to receive this checks this year.

How to Get Your Medicare Donut Hole Check

As Medicare people reach the doughnut hole throughout 2010, they will be mailed this $250 rebate check from the Centers for Medicare and Medicaid Services (CMS). CMS will automatically send you a check. No forms are needed in order to receive the rebate.

Stay tuned for a closer look in our entire health care series, including:

• Part 1: Individual Mandate
• Part 2: $250 Medicare Donut Hole Checks
• Part 3: Health Insurance for Young Adults
• Part 4: 1099 Changes in Health Care Bill
• Part 5: Flexible Spending Account Changes
• Part 6: Health Savings Account Changes
• Part 7: Student Loan Forgiveness Program

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Health Care Bill Individual Insurance Mandate

One of the most controversial provisions of the new healthcare bill is also the one that will have the largest impact on the state of the insurance industry. It could also have a financial impact on you if you do not currently carry insurance. It’s the healthcare mandate.

Beginning in 2014, all Americans will be required to carry some form of health insurance or pay a penalty for not doing so.

Health Insurance Mandate Penalties

• Beginning in 2014, those without insurance will pay the greater of $95 or 1% of income.
• Starting in 2016, the penalties rise drastically, to the greater of $695 or 2.5% of income. These penalties apply to EACH family member without coverage, including children, to a maximum of $2085 per family – this basically means that you will pay the penalty for the first three uncovered family members.

Health Insurance Mandate Exceptions

You will be exempt from the individual mandate if one of the following applies to you:

• Your income is below the poverty line.
• The cheapest insurance policy you can purchase (on the open market or through an employer) would cost more than 8% of your income. This means that an American making $30,000 would be exempt if their insurance plan was more than $2400 per year, or $200 per month.

Individual Mandate Impacts

First and foremost, the Obama healthcare mandate provision is obviously meant to increase insurance coverage across the country. But there is a larger financial impact too: The healthcare bill forbids insurers from denying coverage based on pre-existing coverage, meaning their costs will likely increase. The individual mandate attempts to balance out those costs by adding people to the covered pool –namely the young and healthy, who are more likely to forgo insurance currently. By doing this, insurers should be able to keep their premiums at or near current levels.

If you currently have insurance, the health care reform bill individual mandate provision does not affect you at all. But if you or a family member has chosen or been forced to go without insurance, you will now face a penalty for the right to continue that choice. If you have been unable to afford insurance, you may be eligible for assistance or be able to find an affordable plan through the new health insurance exchanges.

Stay tuned for a closer look in our entire health care series, including:

• Part 1: Individual Mandate
• Part 2: $250 Medicare Donut Hole Checks
• Part 3: Health Insurance for Young Adults
• Part 4: 1099 Changes in Health Care Bill
• Part 5: Flexible Spending Account Changes
• Part 6: Health Savings Account Changes
• Part 7: Student Loan Forgiveness Program

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Life insurance is an absolute must for anyone with dependents, as well as for anyone with large debts (such as a mortgage) that exceed personal assets. Life insurance provides your family with a means of paying off your debts and replacing your income, if only temporarily, in the event of your untimely death.

At some point, though, your family may end up in a situation where they don’t really need the money after death – maybe you’ve paid off all your debts and left healthy savings/retirement accounts for your heirs.

Alternatively, you might need the money while you’re still living to pay for long term care or other large, unexpected expenses. Or, you might just find that your current policy is not the best for you, so you want to get out before you sink anymore money into it. In some cases, using life insurance while you are still living is both possible AND the best financial choice for you and your family.

Surrender Your Life Insurance Policy

Perhaps the most straightforward way of tapping life insurance during life is by surrendering the policy. This simply means that you inform the insurer that you no longer wish to pay the premiums (if you are still paying) and/or that you wish to “cash out” of the policy now.

This option is available on life insurance with cash value – most permanent insurance policies – you will simply receive the cash value component of the policy. Be aware that the cash value will be far less than the face value of the policy (the amount your family would receive at death). In some cases, it will actually be less than the amount you paid in premiums, particularly if the policy is fairly new. You will owe taxes on the proceeds to the extent your receipts exceed the premiums you paid in. Surrendering your cash value life insurance policy is probably the best option if you want to get out of a policy you feel is no longer beneficial to your family – you can cut your losses and move on.

Life Insurance Settlement

If the surrender value of your policy is lower than you’d like, or surrendering is not an option (as in the case of term policies), you may instead consider a life insurance settlement. Life insurance settlements are essentially selling your policy to an investment company. The company will pay a certain amount to you while you are alive, continue paying premiums as long as they are owed, and then receive the face value when the insured dies. Once again, you will not receive anywhere near the face value of the policy, but you may end up receiving more than the surrender value that the policy. As with a surrender, you will owe taxes on the proceeds of the sale to the extent they exceed your premiums.

Life Insurance Viatical Settlements

Viatical settlements are similar to life settlements, but they are designed for a certain type of insured, and specifically defined and governed by the IRS. A life insurance viatical settlement happens when the insured is terminally ill (expected to die within 24 months) or chronically ill (unable to perform certain activities of daily living). Viatical settlement payments involving the terminally ill are not taxable. Payments for policies covering the chronically ill are not taxable as long as the proceeds are used for the care of the insured. Viatical settlements may be good if a terminally ill person is not leaving behind beneficiaries or debts and wants to use the money to either enjoy the last few months or life or pay for final expenses.

Things to Consider

First and foremost, you should not use your life insurance policy during life unless a) you absolutely have to or b) your family absolutely does not need the proceeds after death. It may be tempting to cash out to take nice vacation or pay off debts, but you could leave your family in a huge lurch later on. That being said, if you are facing large medical bills, long-term care expenses, or other unexpected situations, you may not have a choice. If you think life insurance settlement is for you, talk to an estate planning attorney and accountant before making a decision. Remember that you will have tax consequences that your family would otherwise avoid (life insurance proceeds at death are usually tax-free).

Finally, realize that for most people, cashing in a life insurance policy should be a last resort. If you are young and healthy, take plans to save and invest now, so that you don’t find yourself facing this decision later!

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Since we’re focused on personal finance, I looked through the bills for all the financial impacts for readers. In addition to the health care bill highlights we’ll take a look at the tax credits, tax increases, and fines.

Here is a summary of the health care reform bill, including the reconciliation bill:

Health Care Bill Summary

• $940 billion plan.
• Extends insurance coverage to 32 million uninsured people.
• Insurance companies cannot drop you when you get sick.
• No more lifetime limits.
• State health insurance exchanges for small businesses and individuals to purchase coverage.
• Insurers cannot deny coverage to people with pre-existing conditions.
• Children can stay on their parent’s health plan until age 26.

Tax Credits

• Tax credits for individuals and families with incomes up to 400 percent of poverty (which is just over $88,000 for a family of four).
• Tax credits up to 35% – 50% of costs for some small businesses.

Tax Increases

• Raise Medicare payroll tax to 2.35% from 1.45% for individuals earning more than $200,000 ($250,000 for married couples).
• Expand Medicare tax to include unearned income of 3.8% on investment income making more than $200,000 ($250,000 for families).
• Increase tax on distributions from HSAs and Archer MSAs not used for qualified medical expenses to 20%.
• Raise 7.5% AGI floor on medical expenses deduction to 10%.
• Limit health flexible spending arrangements in cafeteria plans to $2,500.

Excise Taxes and Fines

• 10% excise tax on indoor tanning services.
• Excise tax or fine for individuals who do not obtain health insurance; $695 annual fine ($2,085 for families).
• Excise tax or fine for employers (with 50 or more workers) who do not provide health insurance to employees; fine of $2000 per worker each year if any worker receives federal subsidies to purchase health insurance.

Money for Seniors

In addition to the taxes and fines, the health care reform bill includes some financial benefits for seniors:

• $250 drug rebate for Medicare “doughnut hole” coverage gap.
• Free annual wellness visit and prevention plan including preventive services with little or no cost.

Cadillac Tax

Finally, there’s a new “Cadillac tax”, which is a 40% excise tax for high cost employer plans. High cost plans are defined as those that cost $10,200 for individuals and $27,500 for families. Levels for retirees and high risk professions are increased $1,650 ($3,450 for families).

Health Care Reform Finances

That’s a lot of money getting shifted around. As the bill is passed, and the amendments are straightened out, I’m sure there will be a lot of discussion on how this will change our personal finances.

We’ll each have more tax planning to do, to make sure that we’re optimizing what’s available to us and at what cost.

Sources: Tax Foundation, Reuters, CNN, and Kaiser Health News.

Check out our entire series covering the new health care reform laws:

• Part 1: Individual Mandate
• Part 2: $250 Medicare Donut Hole Checks
• Part 3: Health Insurance for Young Adults
• Part 4: 1099 Changes in Health Care Bill
• Part 5: Flexible Spending Account Changes
• Part 6: Health Savings Account Changes
• Part 7: Student Loan Forgiveness Program

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HSA basics

• Definition: An HSA is a special type of savings account – a tax-advantaged way to pay for qualified medical expenses incurred while covered by an HDHP. HSAs can be held in simple interest-bearing savings accounts. Some plans will also allow you to invest in higher-earning instruments, allowing your contributions to grow significantly when invested properly.
• Eligibility: To be eligible to open and contribute to an HSA, you must be over 18 and covered by an HDHP that conforms to IRS standards. You may not have any other kind of medical insurance plan in addition to the HDHP, including Medicare. Finally, you cannot be claimed as a dependent on someone else’s tax return. Employers that offer an HDHP usually offer and manage an HSA as well. If you have individual health insurance you can sign up for an HSA through your insurance company or many banks/credit unions.
• Contributions: If you are an individual covered by an HDHP, you can contribute $3,050 in 2010 and 2011 ($3,100 in 2012). Covered families (including participant plus spouse, children, or both) can contribute $6,150 in 2010-2011 ($6,250 in 2012). Your employer may contribute, but total contributions cannot exceed the above limits. Individuals can also contribute an additional $1,000 per year if they are 55 or over. These amounts are reduced if you do not remain covered by the plan for the entire year. You cannot contribute once you stop being covered by an HDHP due to retirement, employer changes, or plan changes, but the accumulated contributions and earnings are yours to keep.
• Withdrawals: Withdrawals for qualified medical expenses are tax-free. Many HSAs will provide you with a debit card so that you can pay expenses directly. Others will require you to file paperwork for reimbursement. Withdrawals for non-medical expenses will be taxed as ordinary income. A 10% penalty will also apply unless you are over 65 or disabled.
• Qualified Expenses: All normal medical expenses, including anything that your HDHP deductible would apply to, such as prescriptions, are qualified expenses. You can also pay for dental or vision expenses as well as long term care insurance premiums or expenses. Finally, Medicare premiums and COBRA premiums are qualified expenses, as are other health insurance premiums if you are unemployed. Cosmetic surgery cannot be paid for out of an HSA.

How can an HSA work for you?

An HSA is tax-advantaged in three ways:

1. It provides an up-front tax deduction, reducing your taxable income by the amount of your contribution.
2. It allows for contributions to grow with no taxes on earnings.
3. You can make tax-free withdrawals for qualified medical expenses. The withdrawals can be made at any time, even if you are not covered by an HDHP at the time of the expense!

Choosing an HDHP will always save you money in premiums when compared to traditional medical plans. The only downside is meeting your higher deductible. An HSA helps you save to meet that deductible and spread medical expenses evenly throughout the year so that they do not have to impact your everyday budget. In addition, your employer may contribute to your HSA, thus paying a portion of your annual deductible. Employer contributions and tax savings are in addition to other savings you may realize by selecting an HDHP. If your employer does not offer an HDHP option, consider getting quotes on private health insurance- even without an employer subsidy, the HDHP/HSA combined savings might be enough to make it worth it!

Because there are no income limits for HSA eligibility, HSAs are a great way to plan for increased medical expenses in retirement. If you have an HDHP/HSA for multiple years, and choose to pay for medical expenses out-of-pocket instead of an HSA, you can even treat your HSA as a “super Roth” and make tax-free withdrawals later instead of in the year they are incurred – this strategy allows the money to grow tax-free as long as possible!

To open an HSA, select it during open enrollment with your employer or check with your private health insurance company, bank, or credit union. Be aware that non-employer sponsored HSAs may incur management fees. While those fees can be frustrating, they are almost certainly outweighted by the savings!

Final thoughts

If you have the option of choosing an HDHP at work, spend some time running the numbers to see how much the combination of an HDHP and HSA can save you. JP Morgan Chase provides three easy-to-use calculators, including a tax savings calculator. If you are already covered by an HDHP, there is no reason NOT to open and contribute to an HSA. HSA money never expires – the account and any incurred tax benefits are yours to keep throughout your life. Combined with HDHPs, they can save you thousands of dollars over the course of your lifetime.

For more on HSAs, check out this handy guide from The Department of the Treasury.

Update: Health Savings Account Changes are on the way. Check out the new rules and regulations.

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What is a High Deductible Health Plan?

A high deductible health plan is a health insurance plan with lower premiums and a higher deductible than traditional plans. The IRS sets the minimum deductibles for plans to be considered HDHPs. For 2010-2012, HDHP policies for individuals must have a deductible of at least $1,200. Policies for couples, individuals with children, or families must have deductibles of at least $2,400.

The IRS also limits the maximum amount that an HDHP can require you to spend out-of-pocket. In 2012 the maximum amount is $6,050 for individuals and $12,100 for all others.

An HDHP is usually offered in concert with a Health Savings Account, or HSA. I’ll talk more about these tomorrow, but the bottom line is that they allow you to save for and pay for health expenses tax-free.

How can an HDHP work for you?

High deductible health plans often cover 100% of preventative care such as annual physicals and screenings such as mammograms or prostate tests – that means you have no out of pocket costs. Your deductible will only apply to things like hospital/ER visits, prescriptions, and other physician visits. Even some percentage of these expenses may be covered by your insurer.

This means that if you stay relatively healthy over the course of the year, you could have little or no out-of-pocket expenses. Even if you have a few doctor visits and/or regular prescriptions, you could come out on top. As I said above, the HDHP limits your total out-of-pocket expenses, so the most you will pay in one year is your annual premiums plus that out-of-pocket limit. If your employer contributes to an HSA on your behalf, you will reap even more benefits from this plan!

HDHP Example

My HDHP at work this year will cost $50 less per month than a traditional in-network plan. That’s $600 per year! In addition, my employer will contribute $750 over the course of the year to my HSA. The $600 is mine to do whatever I want with. The $750 can go towards meeting my deductible.

All preventative care is 100% covered, so as long as my prescriptions, hospital visits, and other doctor visits cost less than $750, I make money by choosing an HDHP. My expenses can add up to $1350 ($750 from my HSA + $600 premium savings) and I’ll still break even with a traditional plan. Once my expenses hit the max out-of-pocket limit, all future expenses will be covered at 100% – compared to a traditional plan where I will have co-pays throughout the year, regardless of how much I spend out of pocket.

When should you avoid HDHPs?

A high deductible health plan is not right for everyone. The number one reason to avoid choosing an HDHP is if meeting the deductible places a huge burden on you. This may be the case if you do not benefit from HSA employer contributions. Depending on the terms of your HDHP and the other insurance options you might have, you also might want to avoid choosing an HDHP if:

• You have a chronic illness that requires frequent doctor visits and/or multiple prescriptions.
• You are older/in poor health.
• You are pregnant or plan to become pregnant during the insurance term.

In the above situations frequent medical care means you will almost certainly need to spend your whole deductible, possibly negating any premium savings.

Making the Choice

Before you decide on an HDHP or more traditional health plan, pull out a piece of paper and a calculator and follow these steps:

1. Write down all the medical expenses you expect to have over the course of the next year, including prescriptions. You can use this year’s expenses to estimate.
2. Calculate how much each event/expense would cost you under both a traditional plan and an HDHP, taking into account any co-pays, deductibles, and out-of-pocket limits. If the HDHP costs are less than the traditional plan costs, an HDHP is definitely for you. If not, continue to step 3.
3. If the HDHP costs are more than the traditional plan costs, subtract the traditional plan costs from the HDHP costs. This is the increased out-of-pocket cost with an HDHP.
4. Subtract HDHP premiums from traditional plan premiums. This is your savings from choosing an HDHP.
5. If your number from Step 3 is greater than the number from step 2, your savings outweigh additional expenses and you should choose an HDHP – this will be the case for most people who have limited health issues and use insurance sparingly. If not, stick to a traditional plan.

If an HDHP makes sense for you, it can be a great way to save money without compromising your health care! That’s money in your pocket that can be used for savings, dept payment, investing, or just a little breathing room in your budget.

Check back tomorrow for a more-detailed explanation of Health Savings Accounts. Employer and/or personal contributions can add even more savings when combined with an HDHP!

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If you find yourself in the same situation, it’s important that you take advantage of it. Barring a major life event like a marriage, birth, or death, this will be the only chance you have to elect benefits for your family for next year.

Depending on your employer and benefit providers, your benefits from last year may carry over if you skip open enrollment, but also could expire and leave you without benefits in the new year. Remember that different options are appropriate for different situations – that’s why you have choices!

Benefit Options

Your company may provide you with any or all of the following options: medical insurance, flexible spending accounts for dependent care, health care, or commuter spending, a health savings account, long- or short-term disability insurance, life insurance, dental or vision insurance, and more.

You also may have the option of a “cafeteria plan” where your employer gives you a certain amount of money to use to pick from various benefit options. If you haven’t used them in the past, watch for these options for next year:

• High Deductible Health Plans provide cheaper premiums in exchange for a higher deductible – you are responsible for a certain dollar amount of medical costs before insurance kicks in. The deductible may not apply for certain expenses — annual physicals or other “wellness” visits and routine screenings are often covered at 100%
• Health Savings Accounts (HSAs) allow you to save tax-free (up to certain limits) for qualified health care expenses. HSAs are only allowed for employees with high deductible health plans. They allow you to save for your portion of medical payments. As an added incentive, your employer may contribute part or all of your deductible to an HSA for you. Contributions roll over from year to year, and can be accessed for medical expenses at any time or after 59 ½ for any reason. Other withdrawals before 59 ½ will result in taxation plus a penalty.
• Flexible Spending Accounts (FSAs) allow you to save tax-free (up to certain limits) for dependent care expenses (such as child or elderly care), commuter spending (parking or public transportation), and medical expenses under any type of medical plan besides a high deductible plan. Funds in these accounts expire at the end of each year or a few months after, so be sure to only contribute the amount you will actually use! That said, these accounts are a great way to save on taxes.
• Disability Insurance replaces a certain percentage of your income if a disability prevents you from working. Disability is more likely than untimely death, but more people carry life insurance than disability insurance. If your employer offers short or long term policies and your family is dependent on your income, consider electing this benefit next year.

5 Steps to Picking Benefits

The five steps below will guide you through the open enrollment process and help you choose cost-effective benefits for you and your family.

1. Consider your benefit needs: Your biggest benefit election will focus around medical insurance. What are the major medical needs of your family next year? Are you anticipating any major surgeries, a pregnancy, or new prescriptions? Has your family grown, or has a child graduated from college and dropped off of your insurance? For benefits besides medical insurance, consider how your family needs differ from last year – a new child/stay-at-home parent might mean a greater need for disability or life insurance. A medical condition might necessitate greater savings in an HSA or FSA.  A teenage child in need of braces might steer you toward dental insurance even if you have not had it in the past.
2. Review current benefit selections: What benefits did you elect last year, and how have they worked for you? Are you going to end up losing money in an FSA, or struggling to spend it? Did you wish you had set aside more for commuter or dependent care expenses? Did your dental premiums exceed what dental care would have cost you?
3. Understand your options: If your employer sent an enrollment guide, read it cover to cover and then read it again. Understand every option completely – if you have questions, contact HR or the benefit provider. Pay special attention to benefits that would be a change for you, specifically those outlined above – just because you haven’t used them in the past doesn’t mean they don’t make sense for you. If you and a spouse both have benefit options, understand all of the choices through both employers – some might differ in coverage, cost, or both.
4. Break out the calculator: First, figure out what medical plan makes sense for you – calculate your estimated medical costs under multiple plans, including premiums, co-payments, prescription costs, and payments to meet your deductible. A higher premium might make sense if it staves off out-of-pocket expenses later. If your out-of-pocket expenses are generally low, a high-deductible plan probably makes sense. Next, decide how much to contribute to your HSA and/or any FSAs. Remember to figure in any tax breaks when calculating how those may affect you. If you are also considering benefits from your spouse’s employer, run through the same scenario. Where possible, pick and choose the benefits from each employer that provide the best coverage for the lowest cost. Next, add up the cost of all of your benefit elections and HSA/FSA contributions, and make sure you can still afford other expenses. If you have to, go back and reevaluate lower-cost options.  
5. Take action: Use your employer’s process to select your benefits for next year. If any circumstances change during the open-enrollment period, you can usually make changes before open enrollment ends.

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Since I used to work in the insurance industry, I actually didn’t shop our rates very often. Because of the state filings, I knew that we had some of the best coverage and premiums around.

Everything changed when we decided to enter the landlord business. We needed to secure insurance for our rentals and our current company wasn’t competitive in that area, so it was time to shop.

Getting Quotes

I’m a fan of getting quotes from multiple carriers all at once. Before we got quotes, I checked our credit scores since most of the carriers in our area use credit scoring to determine insurance rates.

We got quotes from 3 of the top competitors in our area, and began the comparisons.

Comparing Coverages

It’s actually really hard to do an apples to apples comparison. Lots of insurance companies have special programs and extra coverages that others don’t. In addition, because of multiple policy discounts, it’s important to shop all your policies at once.

For example, our old homeowners policy had land coverage, which is why the digging was covered when the water pipe burst under our front lawn. However, that same claim also requires us to use a $6,000 deductible with Allstate.

Allstate doesn’t cover land, nor do they cover earthquakes in our area. So, a direct comparison of premium isn’t the best way to compare. I called my current insurer to get a comparable quote without the land and extra coverages we have, without earthquake coverage, and with the higher deductible.

Allstate Pros

Landlord Policies. When I mentioned the landlord policy, it’s where Allstate wins hands down. Allstate has the ability for our personal umbrella coverage to provide excess liability on our landlord’s policies. It enables us to buy a lower liability policy on the rental but still get the coverage we want through our umbrella policy, something many of the other companies, including our current insured, don’t offer. This will save us multiple times, every time we buy another rental property.

Low moving violation charges. Scott has a speeding ticket, and of course, now so will I. However, it only added $9 to our six month premium, which is a substantial difference from the 20% increase (about $50) we saw with our current insurer.

Shop ahead discount. Allstate has an interesting discount, one for purchasing your coverage a week before you need it. Since we still have coverage with our old insurer, it was a no brainer. It was a discount that I haven’t seen before.

Low premiums. Allstate had the lowest quote of the companies we shopped. For those wanting to save money, obviously, this is a big plus.

Allstate Cons

High Deductible. I had a hard time agreeing to a $6,000 deductible. I’m always in favor of carrying high deductibles, but when I think of high, I usually think of $1,000 or $2,500. I’ll probably lower it once the 3 years have passed from our digging claim.

Limited coverages. As I mentioned, getting rid of land coverage and earthquake coverage was a hard decision for me. Normally, I would never insure land, but since we actually needed that coverage last year, I was glad we had it.

In addition, I’ve always carried earthquake insurance, even in Wisconsin, because of the New Madrid Fault line. Think I’m crazy? Maybe, but the New Madrid Earthquake of 1812 paints a very interesting picture. In addition, because my background is in risk management, I’ve read way too many journals about Midwestern earthquake projections.

New Premiums

Our new premiums will be $1945 per year (for 2 cars, a house, and an umbrella). Comparable premiums at our old company were $2140. So it’s a “savings” of $195. Add in the $500 savings on the landlord policy and we came out ahead.

But, we had to be comfortable without coverage on earthquake, land, and having a $6,000 deductible instead of $1,000. We used to pay an additional $540 per year for those coverages, so instead I’ll put that money, plus the $195 in savings into a savings account earmarked for a loss.

We ended up moving our umbrella, homeowners, and auto policies to Allstate. We didn’t move the motorcycle, since we insure that separately, and the quote from Allstate didn’t come close.

Have you shopped your insurance policies lately?

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1. Asset allocation rebalancing. Have you rebalanced your portfolio lately? With the decline in the market lately you could be overweighted in bonds. With stock prices down, you will be forced to sell your bonds high and buy your stocks low, just like you are supposed to!

2. Adequate insurance coverage. Do you have enough insurance? (Health, Disability, Life, Car Homeowners, Umbrella, and Flood).

3. Long term goals. Have you set long term goals and put a plan together to achieve those goals? No time like the present to work on them!

4. Set aside money for the holidays. Now is a great time to start saving for the holidays. By December you’ll have money ready to go. If you are a bargain shopper, make your lists now and keep your eye out for sales.

5. Use your vacation time. Make sure that you are using vacation. Sometimes people get so wrapped up in work, they don’t take time off. Instead of being forced to use it all at the end of the year, spend some now while the weather is nice. (As I write this… I’m enjoying my 2+ week vacation!)

6. Read your social security statement. Depending on when your birthday is, you may or may not have received your statement this year. When you get it, did you review all the numbers?

7. Tax withholding. Are you making the amount of income you estimated when you set your withholding level? Now is a great time to make an adjustment using the IRS withholding calculator.

8. 2008 reduced capital gains tax. If you are planning on taking advantage of the 0% capital gains taxes in 2008, have you sold your stock yet?

9. Update your beneficiaries. Don’t get caught with an old beneficiary on your account. Make sure your retirement accounts and life insurance policies are up to date.

10. Backup your files. Have you made a backup of your important files?

Do you have additional tasks you’d like to add to the list? Feel free to add them in the comments.

This article is included in: Carnival of Personal Finance #161: The “Feeling Renewed” Edition

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My 3 month old Sprint Palm Centro Broke

I’m not exactly sure how it happened. It just kept trying to hot sync (a feature I don’t use) and then finally shut down for good. It may have had something to do with my 8 month old slobbering all over it… but I’m not really sure.

Warranty

Since the phone is under warranty you can have Palm replace it for free. However, when I called, after over an hour, I determined it would take longer than a month; I wasn’t sure if it would actually be replaced or not.

I decided to go to our local Sprint repair shop. They replaced it with a refurbished phone for $55. It took 3 business days. You can usually save money with refurbished electronics.

Insurance Plan

Of course, the upsell for the insurance plan was strong.

Here’s the math, $7 month on 2 lines would be $168 per year. So I could replace our phones 3 times during the year and come out ahead. I’m not seeing where the value is.

I explained my profession to him and reminded the salesman that insurance was for catastrophic losses only. He told me that “someone going without their cell phone for a couple days is catastrophic.” Wow!

I said thanks but I’ll take my chances. I see that I can buy a used one on eBay or craigslist for around $100 if the refurbished ones aren’t available after my one year warranty.

Lessons Learned

I will do a better job taking care of my phone. I’ve always had the cheap free phones until now. I’ll get a case and I will treat it more like our camera (which I am very careful with). Ironically, I have a blackberry too, with a hard case and I have never had a problem with it!

Do you take the cell phone insurance?

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