The Prosperity Blog

Life Is Getting Better (and Longer): The Impact on Life Insurance

LIFE IS GETTING BETTER:
The disappearance of traditional “death markers” in life insurance underwriting.

One of the critical factors in obtaining life insurance is the health of the proposed insured. One’s current physical condition and past health history play a significant role in determining the cost of life insurance. In some instances, a poor health report may result in the insurance company declining to offer coverage, as the company’s underwriters deem the applicant a risk not worth taking.

Underwriting issues concerning the health of an applicant can result in a tragic irony: By the time someone recognizes the value of life insurance, his/her poor health may preclude them from getting it. For this reason, many financial experts recommend obtaining some form of life insurance (as term, whole life, or a blend of the two) simply to secure insurability for the future.

In the life insurance industry, certain conditions or incidents in one’s medical history have historically been considered by actuaries as “death markers,” i.e., these were preexisting conditions that typically made applicants uninsurable. Some of the more prominent death markers have been issues relating to heart disease, several forms of cancer, or some psychological afflictions, such as severe depression or schizophrenia.

However, as modern medical treatments for these conditions have evolved, the growing track record of success is changing the underwriting paradigm. As Charles Passy reports in a February 12, 2012, Wall Street Journal Sunday article:

Ever so quietly, insurance industry number crunchers are tossing aside the old statistical models and life tables.
They’re recasting tired stereotypes about the ‘fatal’ diseases of yesteryear. They’re rethinking that most ancient of questions: How long will we live? And they’re coming up with what many would say is a radical answer: much longer than we think.

Passy leads off the article with the example of a 78-year-old woman applying for life insurance, with the following health history: She is a breast cancer survivor, and on medication for a bipolar disorder. Her father died of a heart attack in his 60s. In the past this applicant’s combination of advanced age, cancer, family history of heart disease and the bipolar condition would have resulted in a highly-rated policy (one with a premium much higher than standard guidelines) or an outright decline. Instead, it took the underwriting team at the insurance company a “mere 30 minutes” to review the file and issue a policy.

Why? According to one of the company’s assistant vice-presidents, the woman’s bout with cancer happened in her late 50s, and after two decades, current evidence shows there is a slim chance of a recurrence. As for the family history of heart disease, “The woman has already outlived the danger marker.” In fact, the company estimated the woman’s life expectancy to be 92½!

These underwriting adjustments, while just beginning to move through the industry, are significant. Passy noted that “As recently as 1995, for instance, a man with advanced coronary disease was uninsurable. Now it’s expected that an arterial blockage can be repaired relatively simply and new plaque buildups can often be controlled with medication.” In several companies where underwriting guidelines have changed, Passy reports the results “have been immediate – with hundreds of formerly uninsurable applicants now getting coverage (or better classes of coverage) each year.”

The Flip Side to Disappearing Death Markers

The phasing out of old death markers is without question a positive development for both individuals and life insurance companies. But the advances in medical treatments are also effecting changes in other areas where finances and longevity are connected.

Brian Anderson, the Editor-in-Chief of Life Insurance Selling magazine, wrote a February 20, 2012, commentary online at www.lifehealthpro.com regarding Passy’s WSJ article. While applauding the adjustment in underwriting practices, Anderson also remarked:

On the flip side, many people are now living much longer than they would have before advances in modern medicine, but they are not necessarily saving the additional money that will allow them to live out these extended years in the lifestyle to which they are accustomed.

The essence of Anderson’s comments is that many of the metrics in personal financial planning have changed. Longer life expectancy and better health care not only affect life insurance decisions, but these factors also change the variables in retirement accumulation, long-term care decisions, and estate planning.

The Census Bureau reports that 7,671 Americans turned 65 years old on average each day during calendar year 2011. That’s almost 2.8 million people who will probably be living longer – and healthier – than their ancestors. And surprisingly, a lot of those people may still be eligible for life insurance.

IF YOU (OR SOMEONE YOU KNOW) HAS EITHER BEEN DECLINED LIFE INSURANCE COVERAGE, OR BEEN CHARGED A HIGHER PREMIUM, NOW MIGHT BE A GOOD TIME TO RE-EVALUATE INSURABILITY. No doubt about it, longer life spans and modern medicine are having a positive impact on insurability.

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Anticipating ABUNDANCE in a Changing World

ANTICIPATING ABUNDANCE IN A CHANGING WORLD
“The best way to predict the future is to create it yourself.” from Abundance, by Peter Diamandis and Steven Kotler

Maybe it’s the current political climate, including the national election process, which seems to emphasize how politicians have supposedly ruined the economy and oppressed all but the one percent. Or maybe it’s the tendency of the news media to highlight stories about unemployment, foreclosures, European national economies on the brink, armed conflict and terrorism in the Middle East, and the nuclear threat from a destabilized Korea. If you pay attention to the headlines, you can’t help but think the general trend is downward, and that the economic and social prospects for the future are decidedly bleak. In this context, the discussion isn’t if the glass if half-full or half-empty; it’s whether there’s even a glass.

But all this pessimism may be obscuring a greater reality: Especially in the past 50 years, things have been getting better – for everyone – at a rapidly-increasing pace. Furthermore, considering the trajectory of past progress, as well as certain factors already in place, it is very likely that the next 10-20 years will be even better.

This is the message of Abundance, a new book by Peter Diamandis and Steven Kotler, who argue that “humanity is now entering a period of radical transformation in which technology has the potential to significantly raise the basic standards of living for every man, woman, and child on the planet.” Diamandis, a self-described “serial entrepreneur” who is the chairman/CEO of the X PRIZE foundation, and Kotler, a prominent science writer, believe that the coming together of several technological and social factors has put humankind on the cusp of unprecedented peace, prosperity and well-being.

While Diamandis and Kotler may seem to be viewing the future through rose-colored glasses, their long view both of past history and future possibilities merits serious consideration. Writing a commentary for the Huffington Post, Diamandis makes the following observations:

We are richer than ever: Poverty has declined more in the past 50 years than in the previous 500. During that time, as the population of the Earth has doubled, the average per capita income (adjusted for inflation) has tripled.
We are healthier than ever: In the past century, the number of mothers dying in childbirth has decreased by 90 percent, infant mortality has dropped by 99 percent, and life expectancy has more than doubled.
We are safer than ever: Violence has been in decline since the Middle Ages; the homicide rates today are a hundred-fold less compared to their peak 500 years ago.

And it’s not just the basic conditions of life that have improved. Diamandis declares:

“Even the poorest Americans today (those below the poverty line) have access to phones, toilets, running water, air conditioning and even a car. Go back 150 years and the wealthiest robber barons couldn’t have hoped for such wealth.”

He adds:
“Right now, a Masai warrior on a mobile phone has better mobile communications than the president did 25 years ago; and if they’re on Google, they have access to more information than the president did just 15 years ago. We are effectively living in a world of communication and information abundance.”

Citing several recent technological advances, Diamandis states that this communication and information abundance makes it possible for “small teams of dedicated individuals to take on the kinds of challenges that were once the sole province of governments.” This means “Today, the average citizen is more empowered to change the world than ever before.”

Are these guys nuts?
It would be easy to dismiss Diamandis and Kotler’s sunny perspectives as either detached from reality, or at the very least, conveniently ignoring the troublesome and tragic challenges of life. In fact, some people get quite aggravated by the authors’ optimism. As one respondent put it in the comments section of a blog touting the book, Abundance is just…

More utopian garbage. All that information doesn’t amount to #@2!& when the world’s financial system is collapsing into a black hole and we’ll soon be forced to hunt animals to survive. Things are not getting better, they are getting worse.

Diamandis doesn’t gloss over the challenges to peace, progress and prosperity. In an FAQ section of his website (diamandis.com/abundance), he says “We are not so naïve as to think that there won’t be bumps along the way. Some of those will be big bumps: economic meltdowns; natural disasters; terrorist attacks. During these times, the concept of abundance will seem far-off, even nonsensical, but a quick look at history shows that progress continues through the good times and bad.” This confidence in the pattern of history is why “I can say that the future, much like the present, is going to be a whole lot better than you think.”

If “Abundance” is a correct long-term view, why don’t most people see it?

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Preparing for Your “Base Income Year”

PREPARING FOR YOUR “BASE INCOME YEAR”

For parents who anticipate their child/children will attend college, part of the process will usually include compiling personal financial documentation to apply for grants, loans and scholarships. While much merit-based financial assistance exists to help students pay for college, the greater percentage of aid is needs-based; in general, those with lower incomes and fewer eligible assets will receive more funds.

However, there are several determining factors in the financial aid application process which can be preemptively adjusted to improve your household’s financial eligibility. For example, home equity, retirement accounts and life insurance cash values are not counted as family assets when calculating eligibility. This means some households may benefit from repositioning existing funds by making extra principal payments on a mortgage, increasing contributions to retirement accounts, or adding to cash values. Another big planning opportunity is preparing for your household’s base income year.

Beginning on January 1 of a student’s junior year in high school, this base income year is the one that counts most in determining a family’s eligibility for aid. Since income and assets acquired during this year set a baseline for subsequent years, there is strong incentive (from a financial aid standpoint) to depress income. This can be accomplished through several avenues, including:

  • Postponing retirement distributions to the next year
  • Avoiding the sale of any assets (such as real estate, stocks or bonds) that would trigger capital gains
  • Incurring as many deductible expenses as possible (applicable primarily to self-employed or business owners)
  • Pre-paying property taxes
  • Properly titling accounts (20% of the balance in an account with the student’s name is considered available for college expenses, while only 5.64% is considered from parents’ accounts)

A bit of prudent asset re-positioning might pay dividends in increased financial aid.

IF COLLEGE IS IN THE FUTURE FOR YOUR CHILD, YOUR FINANCIAL PROFESSIONALS SHOULD KNOW ABOUT YOUR PLANS.

HAVE YOU PREPPED FOR YOUR BASE INCOME YEAR?

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Gurus, Newsletters & “FINANCIAL ENLIGHTENMENT”

GURUS, NEWSLETTERS & “FINANCIAL ENLIGHTENMENT”

Because everyone uses money, we all think we know something about it, and it’s easy to have an opinion. We can tell our friends why it was smart to buy this house, how we figured out it was better to lease that car, and maybe offer a “special formula” for 401(k) allocations. But get a little beyond the specifics of our personal finances, and most of us are far from being experts, and we know it. So when someone else comes along and tells us they can make money “simple,” and make us profitable, the attraction is strong. As long as there has been money, there have been gurus who offer “financial enlightenment” for the masses.

Today’s financial gurus have TV shows, newsletters, DVDs and do-it-yourself money makeovers. They are smart enough to get your respect, entertaining enough to keep your attention, and down-to-earth enough to make you say, “hey, he/she is one of us! I can relate to this guy/gal!” Usually there’s a hint of outsider to them, implying that they know the “inside scoop” and want to educate us so we can beat the big boys at their own game.

But while a guru might make personal finance simple and entertaining, their “objective advice” is sometimes a thinly-disguised reach for your wallet. Besides educational materials for sale, many gurus have business affiliations with select brokers and agents. Not surprisingly, the guru’s “recommendations” often include investments with some of these same brokers and agents. Are these coincidences or conflicts of interest?

Every situation has to be evaluated on its own merits, but because of the nature of the financial guru business, skepticism is prudent. Consider the opening statement from Jason Zweig’s January 21, 2012, “Intelligent Investor” column in the Wall Street Journal:

What business has an estimated one million clients, operates on the fringe of securities law and can say just anything without immediate consequence?

It is the investing-newsletter industry. And the public should approach newsletters with caution, even when they come with a celebrity endorsement.

It’s all true. Except for “typos,” and imaginary rankings.

Zweig goes on to delineate a tangled and somewhat sketchy relationship between a well-known money guru and the manager of a small mutual fund. In March 2011, the guru (who appears regularly on the cable TV business channels, has written several books, makes national speaking tours, and is described as a “personal-finance expert” by the Journal) and the fund manager launched a monthly newsletter featuring specific investment recommendations, typically adjusted for different age groups (20 years to retirement, 15 years to retirement, etc.). To jump-start this venture, the guru gave away 50,000 one-year subscriptions. On several occasions, the newsletter has recommended investing in the manager’s funds.

The rationale for encouraging investors to use the fund manager is a supposedly stellar track record. Except the outstanding results may have been inaccurately presented. In a 10-year comparison of the manager’s performance against the S & P 500 index, the Journal found that the newsletter understated the actual performance of the S & P in nine of ten years! In some instances, this meant the fund manager’s under performance compared to the S & P was erroneously reported as beating the index. When the Journal reporters confronted the manager about the anomalies, he responded, “I’m not perfect. We don’t claim to be.” A week later, the newsletter told readers the mistake was a “typographical error.”

The fund manager has been associated with other newsletters in the past, and claims one of his publications had been “ranked #1 by Hulbert Financial Digest for five years through 2006,” and that another was “ranked #1 and recommended by Hulbert Financial Digest!” When the Journal attempted to verify this claim, Hulbert, a publication that tracks investor newsletter performance, said it “doesn’t make recommendations.” Furthermore, the editor said that “No matter how I slice and dice the data, I cannot support the claim of being No. 1 for that five-year period.” When confronted with this rebuttal, the fund manager insisted he was No. 1, adding “I’ll say that to my grave.”

When presented the same information, the money guru e-mailed her continued support: “(The fund manager) is ethical, honest and achieves stellar results that consistently outperform the market. I’m proud to be able to provide our newsletter to people who are looking for solid financial advice.”

These types of interwoven business relationships create potential conflicts of interest and challenge the objectivity of the information presented in a newsletter. A newsletter’s “solid financial advice” may be heavily influenced by the profit motives of the guru and other associated parties.

But this is a newsletter, too…

Yeah, it is. However, there are several important distinctions between what you read here and something that comes from the money gurus.

  • First, unlike newsletters distributed by non-credentialed “experts” the content of this publication is regulated. Because the providers are licensed brokers and insurance professionals, every article is reviewed by a compliance department and edited for accuracy and proper attribution.
  • Because every personal finance situation is unique, there are no specific recommendations. The articles may be thought-provoking, opinionated (and hopefully worth reading), but any recommendations will be the result of your meeting with the financial professional and crafting a strategy or solution that matches your personal circumstances.
  • Following in the same vein, products or companies are not mentioned by name. This publication is not a marketing vehicle for an insurance company or an investment firm.

Listening to a money guru may give you a fundamental understanding of many financial issues. But when it comes to completing a transaction or executing a particular financial strategy, it should be obvious that personal communication and expert assistance offer substantial advantages for individuals who want to improve their financial performance and realize their long-term goals. Financial professionals may earn commissions or charge fees, but the compensation arrangement is usually transparent.

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Checking (and fixing) Your UNIVERSAL LIFE POLICIES…

CHECKING (and fixing) YOUR UNIVERSAL LIFE POLICIES… Before It’s Too Late
“The future ain’t what it used to be.” – Yogi Berra
(This article is a bit on the technical side, but understanding the concepts could be important.)

Universal life (UL) is a type of permanent life insurance policy introduced in the early 1980s. Some of the features of UL were quite innovative, but because of the economic climate in which UL was introduced, the true long-term impact of these UL innovations is only now becoming understood. Since many long-term owners of UL policies are just now coming to grips with these issues, it is important to

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Will Robots Make the 401(k) a Dinosaur?

WILL ROBOTS MAKE THE 401(k) A DINOSAUR?

It happened so fast, some people still don’t recognize the shift that has taken place, but a technological trend four decades in the making has ushered in a new economic paradigm, seemingly overnight. And as a result, many financial ideas that were once seen as cutting-edge solutions may become economic dinosaurs, ill-prepared to survive the changing times.

Moore’s Law = More work for machines, less for people

Marshall Brain, the founder of the “edutainment” company How It Works, recently posted a commentary on his website titled “Robotic Nation.” In the article, he detailed the events of a recent Saturday morning with his kids:

  • I got money in the morning from the ATM.
  • I bought gas from an automated pump.
  • I bought groceries at (a warehouse club) using an extremely well-designed self-service check out line.
  • I bought some stuff for the house at (a do-it-yourself home maintenance store), using their not-as-well-designed-as-(the warehouse’s) self-service check-out line.
  • I bought my food at McDonald’s at the kiosk.
  • *(The kiosk “as described above” allowed Brain and his children to place their order remotely from the McDonald’s playspace.)

In 1965, Intel co-founder Gordon Moore noted that the number of transistors that could be placed inexpensively on an integrated circuit had doubled approximately every two years since the invention of the first integrated circuit in 1958. Moore postulated that this pace would continue, for at least the next 10 years. This statement, which became known as Moore’s Law, proved true, and not just through 1975, but for another 35 years. And while no one believes computing capacity will double forever, the latest projections are that Moore’s Law will continue well into the next decade.

Moore’s Law explains how digital technologies and devices have moved from science fiction fantasies to everyday necessities in every part of the world. It doesn’t matter if it’s agriculture, manufacturing, the retail and service industries, or various professional fields. The technologies that have come about as a result of Moore’s Law – fax machines, personal computers, digital cameras, cell phones, bar scanners, GPS systems – have redefined employment in every sector of the economy.

In theory, these new technologies benefit the consumer. They are faster, easy-to-use, and lower the cost of doing business, which usually translates to lower prices. But Brain, a technology advocate, also sees a downside:

“The problem is that these systems will also eliminate jobs in massive numbers. In fact, we are about to see a seismic shift in the American workforce. As a nation, we have no way to understand or handle the level of unemployment that we will see in our economy over the next several decades.”

Mr. Brain’s observations have been echoed in a number of commentaries describing a “Jobless Recovery” from the recent recession. In a January 17, 2012, Wall Street Journal article, W. Brian Arthur, an economist at Xerox Corp.’s Palo Alto Research Center, says businesses are “increasingly using computers and software in the place of people in the nation’s vast service sector. Many companies, for instance, use automation to process orders or send bills.”

“It’s not just machines replacing people, though there’s some of that,” Mr. Arthur says. “It’s much more the digitization of the whole economy.”

The article goes on to note that the United States is second only to Japan in the use of industrial robots, and that “orders for new robots were up 41% through September from a year earlier, according to the Robotics Industries Association trade group.”

What Happens Next?

If the history of technology holds true, increased productivity from technology eventually creates new jobs and raises living standards, and those whose jobs are replaced by automation will move on to other fields. The current challenge is that the technological rate of change is occurring so much faster than the creation of new job opportunities, with the obvious consequence of higher unemployment. Another ripple effect is under-employment – many people with jobs aren’t working full-time.

Charles Murray is the author of “Coming Apart”, a study of how income and employment has dramatically changed in America in the past 50 years. A key finding is a significant increase in what Murray calls “prime-age adults” (males ages 30-49) who work fewer than 40 hours a week. For men with only a high-school education (Murray’s “working class”), his research found that fully 20% of those working were not employed full-time.

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Extended Family Issue: Special Needs Planning

Extended Family Issue: Special Needs Planning

Raising a family is challenging under any circumstances, but for parents with special needs children the stakes are dramatically higher because the parenting responsibilities may last the child’s entire life. This reality can be overwhelming, both emotionally and financially. One of the best ways to face these long-term challenges is to systematically establish a long-term plan, one that considers both the emotional and financial issues likely to be encountered.

Immediate Concerns
Many special needs children may qualify for government assistance through the Social Security Administration, from either the Supplemental Security Income program (SSI), or the Social Security Disability Income program (SSDI). Eligibility for either of these programs can be complex, as both involve some means-testing to determine the extent of aid; financial decisions by the parents (such as investing in a tax-qualified retirement account or buying a home) can impact the amount of assistance received. This factor means parents must consistently monitor and review their financial plans.

Long-term Issues
In addition to handling the details that every-day parenting requires, parents who have special needs children usually have two primary long-term concerns:

  • Who will be around to ensure the welfare of their children or make decisions for them if they are unable to care for themselves?
  • How will they pay for it?

Answering these two questions is usually an interconnected process. If there is no money set aside for care, even the most qualified and trustworthy guardians (such as siblings) may not be up to the task. A good special needs care plan addresses both questions. Typically, this is accomplished through the establishment of a trust.

The trust will specify guardians, trustees and beneficiaries, as well as defining which assets should be placed in the trust. Two common types are Support Trusts and Special Needs Trusts. Support Trusts require the trustee to make distributions for the child’s support in areas like food, shelter, clothing, medical care, and educational services. It is important to note that beneficiaries of Support Trusts may not be eligible for SSI or Medicaid. If the special needs child will rely on government benefits for a significant portion of care, it may be best to avoid a Support Trust.

For many parents, a Special Needs Trust is the most effective way to help their child with a disability. A Special Needs Trust manages resources while also maintaining the child’s eligibility for public assistance benefits. When the trust is funded by the parents’ assets, it is called a Third-Party Special Needs Trust*. In some instances, the trust may be funded by the child’s assets (for example, when the receives a settlement from a personal injury lawsuit). This arrangement is called a Self-Settled Special Needs Trust.

Funding the Trust
Parents of a special needs child face some daunting financial challenges. From the moment the special need is recognized, all the financial metrics change. Not only is there a compelling desire for the parents to provide an estate at their deaths, but there is also the consideration that other aspects of their financial life must be altered, such as:

  • If the parents’ diminishing health affects their ability to provide care, someone else must take their place.
  • With continuing parental duties, the dynamics (and costs) of retirement will be different.
  • Besides providing immediate protection, a life insurance program might be constructed to provide guaranteed funding for a special needs trust.

Extended Family Considerations
The time and financial resources devoted to a special needs child can create imbalance and stress for other family members, particularly siblings. Because brothers and sisters will be a part of a special needs child’s life longer than anyone, the Sibling Support Project (siblingsupport.org) states that “Early in life, many brothers and sisters worry about what obligations they will have toward their sibling in the days to come.” And in many instances, one or more of the siblings will assume guardian and care responsibilities after the parents have passed away.

The immediate realities of receiving less attention and the future possibility of having to care for a special needs child – perhaps at significant emotional and financial cost – can lead to resentment. Extended family planning can mitigate these feelings and help reshape the discussion. Experts in special needs care recommend that parents involve other children in the decision-making process as early as possible, because in the long run, this is not just a nuclear family issue. In addition, establishing an estate plan that provides an equitable inheritance for the rest of the family can help the extended family members support the special needs program, because it is seen as part of a larger financial plan made for the purpose of benefiting all children.

Don’t Go It Alone
These plans, and the details they involve, require expert assistance. Integrating government regulations, legal designations and funding combinations is not a do-it-yourself project. Finding competent financial professionals and maintaining regular communication with them will go a long way toward maximizing the benefits of a special needs plan.

NEED ASSISTANCE?
If you have children or grand-children with special needs, planning is essential to their long-term well-being. We can provide products, resources, and financial knowledge. Call us at 877-889-3981, ext 120.

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