News & Views
by Dennis Jaffe
The year 1997 has been as eventful as 1996 was quiescent in terms of the world of taxation and insurance. The two major events which affect you most are the Taxpayer Relief Act of 1997 and the Health Insurance Act.
HIPAA
The Health Insurance Portability & Accountability Act is now law, and we now better know how the group carriers are implementing the law than we did last year. Here are the salient issues as they relate to group and individual coverage.
Group Health Insurance
Group health plans may not establish premiums or eligibility solely on the basis of an individual's health status. The coverage must be renewable at the discretion of the employer with the exceptions of nonpayment of premiums, fraud, or movement away from the service area. The pre-existing condition exclusions are limited to: 12 month limit except for late enrollees and individuals without continuous coverage who then would have an 18 month limit. There is a 6 month look-back (medical advice, diagnosis, care or treatment) and month for month credit for qualifying prior coverage with a maximum lapse of 63 days.
Individual Health Policies
Carriers must provide for guaranteed issue, as described below: Have at least 18 months of prior group coverage; have exhausted COBRA benefits, if available; and are not eligible for Medicare or Medicaid. Please be in touch with us for assistance as we also offer specialty health coverage such as temporary health insurance and visitor coverage.
TRA '97
The Tax Relief Act of 1997 contains bells & whistles, but also has so many strings attached, that many of us are left pulling our hair out (such as there is hair!) trying to figure out how it will affect us. We will endeavor to offer a concise summation of the effects relative to estate and insurance. The most important tax reductions were the estate tax cuts over a 10-year period. On a graduated basis, the $600,000 estate & gift tax exemption is now scheduled to reach $1,000,000 by 2006. A family owned business could shield up to $1.3 million from estate tax liability starting next year. However, there are 5 separate tests that must be met.
Essentially, it must be a non-publicly traded, US business that is owned by one family by at least 50% or 70% by two families or 90% by 3 families. The decedent and his/her family must hold at least a 30% interest. The tax writers wanted to prevent taxpayers from shifting passive assets to an active business so they will use a working capital test. The value of the qualified FOB interest passed to "qualified heirs" must exceed 50 percent of the decedent's adjusted gross estate. "Qualified heirs" include family members or anyone who has been an active employee of the business for at least 10 years prior to the decedent's death. And, the decedent (or member of the family) must have owned and materially participated in the business for at least 5 of any 8 year period within 10 year preceding death. There are other rules such as recapture & post death rules of which one must be aware.
Other changes include indexing for inflation on the $10,000 annual gift tax exclusion rounded to the next lowest multiple of $1,000. Also indexed is the $1 million Generation Skipping Tax.
Retirement Planning
Many economists have lamented the dismal national saving rate, so Congress has created new/expanded tax favored retirement benefits. TRA '97 expands IRA accounts both in deductible IRAs and by the creation of new "backloaded" IRAs named "Roth IRAs (for Chairman Bill Roth{R-Del.}). The expanded IRA remains available on a restricted basis to taxpayers below specified income levels. The deduction for the spousal IRA is phased out for couples with an adjusted gross income between $150,000 and $160,000.
The Roth IRA is a nondeductible IRA where you may contribute up to $2,000 annually. It is coordinated with all of a taxpayer's deductible & non-deductible IRAs so one's total annual IRA contributions cannot exceed $2,000. The real news is that distributions from a Roth IRA are generally tax-free and penalty-free if a saver has maintained the Roth IRA for at least 5 years and the person is at least 59 ½, disabled, using up to $10,000 for purchase of a first home, or the distribution is made to a beneficiary after the person dies. The Roth IRA maximum $2,000 contribution phases out for singles with AGI between $95,000 and $110,000 or between $150,000 and $160,000 for joint filers. Taxpayers with AGI below $100,000 may roll over a deductible existing IRA to a Roth.
You must pay tax on the old IRA earnings, and thus, as a general rule, the further away one is from retirement, the more one should consider a rollover to a Roth IRA. We anticipate software soon to gauge the efficacy of the rollover.
Perhaps the most important new part of the TRA '97 is the repeal of the Excess Distribution and Accumulations in a qualified plan. Therefore, without the additional 15% excise tax on excess accumulations, there is no need to accelerate withdrawals or decrease plan contributions to avoid the excessive tax burden.
Estate exemptions:
The lifetime $600,000 estate/gift tax exemption per person will be gradually
increased over the next 10-year period to $1,000,000. In truth, this really
does little more than somewhat offsets inflation. Your financial planning
should be based on various levels of need which, in turn, are predicated
on the value of the estate upon death.
Every one of our clients would benefit from level 1 planning which includes pour-over wills, revocable living trusts that allocate the Unified Credit to a Bypass Trust and the balance to a Marital Trust (the so-called A-B Trust), general powers of attorney, and durable powers of attorney for health care and living wills. There is every advantage in doing level 1 plans.
Should your estate exceed $600,000/$1,200,000 for married you should proceed with level 2 planning. The strategy for level two planning is for the client to use his/her $10,000/20,000 annual gift tax exclusion to make cash gifts to an irrevocable life insurance trust.
Moreover, by allocating a portion of your $1 million/$2 million generation-skipping
tax exemption to those gifts, the trust can provide benefits to children,
grandchildren, etc. for periods of 90 years or longer without estate taxes.
The advantages of the irrevocable life insurance trust are as follows:
- Nothing will increase more on the date of their death than their life insurance policies.
- Gifts to an irrevocable life insurance trust can easily be funded with the grantor's annual gift tax exclusion; and
- The insurance proceeds can eventually be used to pay the grantor's estate taxes thereby using "discounted" dollars to pay for those taxes. Our survivorship policies can now be offered either in the traditional whole life mode or in a variable life* utilizing a variety of mutual funds* as the funding vehicle. We urge you to act on this fine tool.
Long Term Care Policies
This is a product that fills a critical niche in retirement planning. The Long-Term Care product fills the gap that Medicare leaves and thus avoids a serious depletion of your assets should you require home or nursing home care. This policy really extends one's disability policy to retirement at a very reasonable cost. The average cost for long-term care is about $42,000 per year and rising by about 5% annually. The average length of stay is three years after someone is in care for 90 days. For example, a 65 year old and up has a 43% chance of needing care and a 75 year old has a 60% chance of needing care.
What are your options to pay these costs? Essentially, you can rely on Medicaid if you have few assets; (Medicare does not cover custodial care); you can buy long-term care insurance; or you can self insure. The last option is fine should you have a large estate, which could support the large outflow of one or both spouses needing this care.
By limiting the outflow of dollars while under nursing care either at home or in a nursing home, your net worth can be protected. There are many pitfalls one can encounter in the purchase of this policy so here are some issues to address when you search for this coverage.
Is there a combined benefit for Home and Nursing home care or are they separate? The combined policy, while rarer, offers more flexibility as you can opt for 50%, 75% or 100% of the Nursing home benefit for home use. While this next option is more expensive, you might decide to include home care for services regardless of who provides the care. Does the policy provide a bed reservation provision, which allows you to reserve your spot in a nursing home should the stay be interrupted because you are hospitalized. What kind, if any, inflation coverage does the policy contain: simple, compound or either with a cap. What is the benefit period, 2, 3, 4, 6 years, or life? What triggers the benefit, that is, how many ADLs (Activities of Daily Living) must be lost before the policy kicks in? Do you want an indemnity policy, which simply pays a monthly dollar figure, or a reimbursement policy that pays your costs. The latter tends to be less expensive, a bit less flexible, but also might pay over a longer period of time should your daily/monthly expenses be less costly than the policy allows.
Annuities for retirement
There are several annuity products of which you should be aware that could greatly enhance your retirement income. There is the Equity Index Annuity and the Variable Annuity.
The EIA is an annuity that offers the combination of minimum guaranteed interest and the potential to earn excess interest. Most EIAs are linked to the performance of the S&P 500. If the index performs well during the life of the annuity, then excess interest is credited to your retirement income, but even if the S&P Index nose-dives, you lose neither sleep nor money. Unlike a variable annuity the principal is safe, however, for that safety, there is a cap on the performance of the annuity. But, for a safe product with the possibility of significant returns, you would do well to call us to explore whether this vehicle matches your needs.
The variable annuity takes a different tack. They are a hybrid product that offers balance to an investment portfolio. They defer taxes on the earnings until withdrawal yet they have the death benefit and guaranteed income features that other annuities provide. Withdrawals prior to age 59 may be subject to a 10% tax penalty. Moreover, the variable annuity (VA) combines the growth potential of its investment sub-accounts with the protection and tax deferral features of an annuity. The VA premiums can be allocated to a number of managed portfolios, including stocks, bonds and other securities, and earns a rate of return based on the performance of these portfolios. YOU decide what the allocation should be, that is, you determine the level of risk by dividing the investment account between the various funds. Withdrawals prior to age 59 1/2 may be subject to a 10% tax penalty. The Sentinal Advantage* offers a choice of 18 different portfolios. Perhaps one of the most attractive features of the VA is their "death benefit" - a provision that ensures that beneficiaries will receive at least the full amount of money that has been paid into the contract should death occur during the accumulation period. The Sentinel Advantage* VA has two death benefit possibilities: a standard benefit that pays a client's beneficiary the greater of all premiums paid in (less withdrawals) or the contract's value; the Enhanced death benefit guarantees to pay not less than the highest anniversary contract value on a "look back" basis. The systematic withdrawal plan allows you to continue to participate in Sentinel Advantage's* portfolios while also receiving steady income - the best of both worlds.
VA's are not without risks. Contract values can rise and fall as the underlying portfolios advance and decline so it's important that you understand that this is a long-term investment. The VA has tax deferred gains and you can re-allocate your fund values even between fund families without recognizing taxable gains or paying a new commission.
EL NIÑO
It may come as a major surprise, but one of the great causes of an uninsured loss is from a flood or running surface water. While we are not adjacent to the mighty Mississippi, many communities are imperiled by flood and thus exposed to a loss that is not and cannot be covered by your home policy. The only source to protect your valuable home is to secure flood coverage from the Federal Flood Program that we service through our office. Rates are predicated on your proximity to surface water and the perceived danger of the flood plain where you live. While your lender may demand this coverage, you should consider its purchase based on your needs. Bear in mind, it takes 30 days to secure coverage after we receive mapping information. More importantly, please prepare for heavy rains by checking your drain gutters and storm drain and learn how to drain your pool. Also, verify that the roof on your home is secure.
EARTHQUAKE NEWS
We wrote last year about the CEA and the new limitations on earthquake coverage; as we write this article, new supplements have become available to augment or supplant the mandated policy through the CEA or your homeowner's carrier.
Pacific Select Insurance Company, an admitted "A" rated carrier in California will underwrite the coverage in 5 variations:
- Premier EQ Protector - offers comprehensive coverage with a 10% deductible and broad coverage with high limits.
- EQuity Protector - designed to protect the equity in your home. You select a fixed amount of blanket coverage to protect dwelling & personal property. 5%, 7.5%, or 10% deductibles available.
- Security EQ Protector - basic policy to protect dwelling; similar to CEA policy with 15% deductible.
- Security Supplement - policy provides supplemental coverage for the "mini policies". Extended limits for personal property & loss of use in 4 options from: $25,000Personal Property $5,000 Loss of Use to $200,000/ $50,000.
- Security Gap - this policy is a deductible "buy-down" and allows property owners to select a lower deductible than offered in their "mini-policy". Should you need any of the above or simply desire more information about cost and availability for your house, please call our office.
Employer Practice Policy
This newer policy can be extremely useful in protecting your business from a variety of lawsuits stemming from employer employee disagreements. These include wrongful dismissal and sexual harassment. While the premium for such coverage used to be quite expensive, a softer market has developed which has resulted in an affordable policy. The minimum premium now is only $2,500 per year.
We wanted to keep you informed about the myriad of events that occurred this year, and as a result, the news-letter took 4 pages this year. We hope the forthcoming year brings joy and , a healthy and happy new year to all of you.
*Securities offered solely through Equity Services, Inc., Broker Dealer Subsidiary of National Life Insurance Company, Monpelier, VT 05604 (802)229-3900.
Jaffe-Schlossberg, Inc. is independent of Equity Services, Inc. Dennis C. Jaffe Lic.#0313380; Norman Schlossberg Lic.#0397292; Telephone: 415-221-5340
For more information about The Sentinel Advantage Variable Annuity including charges and expense, call for a prospectus. Read it carefully before you invest or send money. The Sentinel Advantage Variable Annuity is issued by National Life of Vermont, policy form #7400 & 7401.
