Insurance Articles

Cheat Sheet / Updated 07-03-2023

Assess your personal situation and follow some basic guidelines for determining if an annuity is right for you. After you decide to buy an annuity, figure out how to shop for annuity contracts and how to use one to make your retirement years financially safer.

Cheat Sheet / Updated 02-18-2022

Health insurance, car insurance, and life insurance are a part of everyday life. Making a list of all your insurance policies helps you keep track of them, and also serves an important purpose for your loved ones if the day comes when your life insurance policy is activated. You may also want to review your umbrella policy and fix any gaps in your coverage. And if you’re in a car accident, remembering all the information your insurance company wants you to get is easier if you carry a list in your glove compartment.

Article / Updated 06-27-2016

The single-year guarantee fixed annuity is like an adjustable rate mortgage in reverse. With this annuity, the insurance company promises to pay you a certain rate of interest for one year. But each year until the contract expires, the insurance company can raise or (more commonly) reduce that interest rate. The new rates are called renewal rates. At the end of the surrender period, the contract expires. You have to buy a new contract or roll over to it. Be sure you understand your actual rate; an agent or broker may throw a lot of different terms at you, including all or most of the following: The base rate: The interest rate the company pays you the first year The bonus rate: The bonus the company adds to the interest rate in the first year The current rate: The base rate plus the bonus rate The current yield: The interest rate your money will earn over the entire term of the contract if the company does not lower its base rate The guaranteed yield: The lowest possible interest rate you can earn Renewal rates: The rates after the first year A table of renewal rates can tell you whether the company has a history of raising, lowering, or maintaining the base interest rates of its single-year guarantee contracts after the first year. Ask your agent or broker for a renewal rate table, or look up the contract’s interest rate history online. The following figure shows a sample rate table from the Annuity Advantage Web site. (Rate histories are routinely provided to annuity salesmen, but not necessarily to customers.) A table of fixed annuity rates from the Annuity Advantage Web site.

Article / Updated 06-27-2016

Fixed deferred annuities offer safe, but low, returns and tax deferral. Risk-averse investors buy them when they offer higher interest rates than CDs, when the stock market is declining or appears headed for a fall, and when they’ve already parked as much money as possible into other savings vehicles, like employer-sponsored retirement plans. Here are some of the reasons why people buy fixed annuities: Safety: Buying a fixed annuity with a multi-year guarantee (MYG) fixed annuity and holding it for the entire term is a safe, conservative way to grow your money. It’s even safer than a bond or shares in a bond fund because a bond’s price or the share prices of a bond fund can fall in response to rising interest rates. Tax deferral: Annuities, like IRAs and 401(k) plans, grow tax-deferred. You earn interest each year, but you don’t pay taxes on it. The advantage? Your savings grow faster than they would if your gains were taxed every year. The longer you defer taxes, the better — especially if you expect to be in a lower tax bracket in retirement. Stable rates: When you buy an MYG fixed annuity, you know its annual interest rate and the exact worth of your investment at the end of the term. As long as you don’t make withdrawals, the result is entirely predictable. Higher returns when bond-yield curve is steep: A steep bond-yield curve occurs when bonds of longer maturities (like a ten-year Treasury bond) pay higher rates of interest than bonds of shorter maturities (like a three-month Treasury bill). At such times, fixed annuities often pay higher interest rates than CDs. If the owner dies, the assets avoid probate: It’s hard to get excited about a benefit triggered by your own demise, but annuities are famous for them. If you die while owning a fixed annuity, your money goes straight to the beneficiaries on your contract. Because the money doesn’t become part of your estate, it doesn’t go through probate (the legal process), where creditors and relatives can lay claim to it. The option to annuitize: Like all annuity contracts, a fixed annuity can be converted to a retirement income stream. Although this option is the defining feature of annuities, few people know about it or care about it and even fewer use it.

Article / Updated 06-27-2016

Although fixed deferred annuities are a relatively safe investment, there are also reasons why people tend to shy away from them. They include the following: Low liquidity: Generally, if you take more than 10 percent of your money out of your fixed annuity during any single year of the surrender period, you pay a charge. You can avoid charges by buying a fixed annuity with a short surrender period or by using other sources of cash for emergencies. Contracts with longer surrender periods typically pay higher rates, but don’t be lured into tying up your money for longer than you can afford to. Uncertain returns: With single-year guarantee fixed annuities, you don’t know the exact interest rate after the first year. Based on past renewal-rate histories, the rates on these contracts either stay the same or decline gradually after the first year. Rates are especially likely to fall if the annuity offers a first-year bonus. Lower returns when bond-yield curve is flat: When the yield curve is flat — that is, when long-term interest rates are the same or lower than short-term rates, as they were during the mid-2000s — you may get a better rate from a CD. (You can find an illustration of the yield curve in the business section of the Sunday New York Times.) Federal penalty for early withdrawal: If you withdraw money from a fixed annuity before age 59½, you may have to pay a penalty (10 percent of the amount withdrawn) to the IRS. Under certain circumstances such as illness, you can withdraw money from an annuity before this age without a penalty. You may also be able to withdraw the money penalty free by taking Substantially Equal Period Payments, or SEPPs, over a minimum of five years. The penalty is Uncle Sam’s way of discouraging Americans from using annuities and other tax-deferred investments for anything but saving for retirement.

Article / Updated 06-27-2016

A fixed deferred annuity is the insurance industry’s version of a savings account. The annuity helps you earn a modest rate of interest safely, and allows you to postpone the payment of income taxes on your earnings for as long as you want. When you buy a fixed deferred annuity, you’re indirectly lending money — without taking the risk that the borrower won’t pay you back. The process is fairly simple. In most cases, you hand a check to an agent, who sends it on to an insurance company. The insurer promises that your money will earn a certain rate of interest for at least the first year. When it receives your money, the insurance company adds it to its general account (where it pools most of its incoming premiums). It invests that money as it sees fit — usually in safe government securities or high-quality corporate bonds that pay a slightly higher rate of interest than the insurance company pays you. The difference between the rate the carrier earns and what it pays you is known as the spread. The wider the spread, the more money the carrier makes. If one of the carrier’s creditors defaults on its bonds, that’s the carrier’s problem, not yours. The carrier has to pay you back. It gave you a guarantee. The carrier pays you compound interest on your premium, which means that In the first year, you earn interest on your investment. In the second year, you earn interest on your investment plus your first year’s interest. In the third year, you earn interest on your investment plus your first year’s interest and your second year’s interest, and so on. It’s a snowball effect that’s often described as the magic of compound interest. At the end of the term (for example, one, three, five, seven, or ten years), you take your money out.

Article / Updated 06-27-2016

Although insurance companies usually assume your interest-rate risk when you buy a fixed annuity, that’s not always the case. With a market value-adjusted (MVA) fixed annuity, you assume the interest-rate risk. In return, the insurance company can afford to pay you a slightly higher interest rate than it pays on non-MVA annuities (book value annuities). If MVA annuities pay a higher rate, why buy anything else? Because, if interest rates go up and you decide to break an MVA contract to take advantage of a fixed annuity that offers the new rate, you’ll pay a bigger penalty than if you broke a book value contract. The MVA triggers two penalties when you withdraw too much money (over 10 percent, in most cases) from your annuity during the surrender period. Typically: You have to pay a surrender charge (for example, equal to the number of years left in the surrender period) Your account value is adjusted Downward if interest rates have risen since you bought your annuity Upward if rates have declined Keep in mind the effects of interest-rate risk. Suppose you buy a $10,000 bond that pays 5-percent interest per year. Your bond has a face value of $10,000 and a yield (rate of return) of 5 percent. But then calamity occurs. The Federal Reserve’s Board of Governors raises interest rates to 6 percent. Immediately, the market price of your bond drops. Why does your bond lose value when rates rise? Because no one wants to pay $10,000 for a bond with a 5-percent yield when he can buy a $10,000 bond with a 6-percent interest rate! Your 5-percent bond will fetch about $9,260 on the open market when 6-percent bonds are selling for $10,000. The important principle to remember is this: When interest rates rise, the market prices of existing bonds fall.

Article / Updated 04-25-2016

Opening a Health Savings Account (HSA) is one of the most important things you can do for yourself in the here and now. The benefits to you are both immediate and long term. Here are a few reasons for arranging your health insurance coverage to include this important tool. You can pay for healthcare expenditures with tax-free money. The money deposited in this account is tax-free! That’s right, no income tax! The government keeps its hands off it! When you use your HSA debit card to pay for your medical expenses and deductibles, you are paying for it in pre-tax dollars, which is like getting a 20–30% discount on services rendered, depending on your tax rate. Over your lifetime, that’s a huge savings. You will need to keep records of all of those expenditures with your annual tax filing in case you ever get audited by the IRS. Those receipts are the only acceptable proof to the IRS that you spent the tax-free funds on approved products and services. Interest earned on your HSA account is tax-free, too. The interest earned on the money in an HSA is tax-free. Unlike your other banking accounts that generate interest income, the HSA will never send you a 1099-INT. The interest stays in your account until you are ready to use it to pay for your healthcare expenses. You own your health savings account. You own the money in your HSA account. It doesn’t belong to the insurance company or your employer and can’t be raided for any other reason by anyone. And unlike Flex accounts, HSA accounts do not have to be used in the same year as the contributions. Benefits of the HSA account can’t be lost. Even if you lose your health insurance, the account stays with you. It can’t be taken away if you change employers. This is not a ‘Use it or Lose it’ benefit! The money just rolls over and stays with you for whenever you need it in the future. Even upon your demise, the money is yours and will be distributed to your beneficiary. A health savings account is a good strategy for retirement planning. Since the HSA rolls over year after year and there are no limits to how much you can accumulate in the account, the HSA account is a good tool for retirement. After the age of 65, you can withdraw funds from your HSA account penalty-free for any purpose. You will pay income tax on the withdrawal if it is not used to pay for health care, but that tax rate is likely to be lower in your retirement years when your income is lower. And, of course, you can continue to withdraw the money from your HSA account tax-free to pay for medically necessary expenses. That’s right. You don’t have to use the money for healthcare expenses after you reach retirement age. You can use it to fund that dream vacation that you never had time for while you were working. Funding it to the maximum allowed is why the HSA has been described as a "Medical IRA." You become a more informed healthcare consumer. The insurance plans that qualify you to get all the benefits of an HSA account are called High Deductible Health Plans (HDHPs), so you will be paying the full cost of your care (using the tax-free dollars in your HSA account) until your deductible is met. All of a sudden, you're looking at what is spent on your healthcare, and that’s a good thing. Most HDHPs have tools that will help you shop around for providers. Not only do they provide some pricing information, but also some measures of the quality of the service provided. An HSA can reduce stress. Just being in control of your healthcare can give you additional peace of mind. It reduces the uncertainty of future health expense planning because you know where the money will come from! Plus, knowing that the deductibles will be paid from pre-tax dollars has got to put a smile on your face. HSAs come with a significant premium savings over traditional health insurance plans. HSA plans have a higher deductible than other plans, but they come with much lower premiums. This savings is especially apparent to someone who pays the premiums all year long but doesn’t actually go to the doctor or use medical services very often. For this person, the premium can feel like money out the window. Based on premium savings alone, some HSA owners see 20–40% savings in the cost of maintaining insurance coverage each year. Over the years, a healthy person can save some serious money! An HSA can be used to pay for any medically necessary service. Use the HSA to pay for dental, vision, prescription drugs and non-drug over-the-counter medical items. Even if your health insurance coverage doesn’t cover these items, you can use your HSA debit card to pay for them with pre-tax dollars. Over the years, this savings is huge. Starting January 1, 2011, over-the-counter drugs were no longer considered eligible medical expenses. However, if you get a doctor's prescription for over-the-counter drugs, then you can still use your HSA to pay for the items tax-free and penalty-free. The rule against buying over-the-counter drugs with your HSA does not apply to non-drug over-the-counter items such as bandages or contact lenses cleaner. You can use it as an emergency savings account. Some HSA owners pay all their eligible medical expenses out-of-pocket and let the HSA account grow a tax-deferred emergency fund. Keep the receipts and if next year the owner needs emergency cash, he can reimburse himself for the previous year’s expenses up to the total of the receipts and owe no tax.

Article / Updated 04-25-2016

When you’re in a car accident, it’s easy to forget what information you need — you’re shaken up and rattled. But for your insurance company and that of any other people involved, carry a copy of the following list in your glove compartment so that you get all the information you need to protect yourself and expedite your insurance claim. Date and time of accident Accident location (take photos if you have a cellphone with a camera) Name, address, phone number, and driver’s license number of the driver of the other vehicle Injuries (for each person) Name, address, and phone number of each witness Police department responding, including phone number Police case number Police officer’s name Tickets issued (if any) Name, address, and phone number of each passenger in your vehicle Name, address, and phone number of each passenger in the other vehicle Name, address, phone number, and driver’s license number of the owner of the other vehicle (if different from driver) The year, make, model, license plate number, and vehicle identification number (VIN) of the other vehicle The insurance company, insurance agent (name and phone number), and policy number of the other vehicle’s driver The insurance company, insurance agent (name and phone number), and policy number of the other vehicle’s owner (if different from driver)

Article / Updated 04-25-2016

The majority of individuals and families have health insurance through their employers. You’re likely best off with your employer’s group plan than any other option available to you. Group coverage is easier and much less expensive to get than private insurance. Plus, your employer may pay most or all of the cost for you, and you can’t be denied coverage. However, if you change jobs, get laid off, or are fired, you can lose your group health insurance. If you find yourself without employer-sponsored health insurance, the following options may be available to you: Individual health insurance: Perhaps your employer doesn’t offer health insurance, or you’re self-employed, a student, or retired before age 65. If you’re relatively healthy, you should purchase an individual health insurance policy. Certain health conditions may be excluded from coverage for a period of time. In some circumstances, pre-existing health conditions will be covered; however, your cost for insurance can be substantially higher than it would be if the pre-existing health conditions weren’t covered. Each insurance company may treat pre-existing health conditions differently and can deny you coverage altogether. Paying the extra cost and obtaining full coverage is generally better than having a pre-existing condition excluded from your health insurance policy. COBRA: A provision in the law requires almost all employers to allow their terminated employees to continue group insurance coverage for a period of up to 18 months through a program called COBRA. However, you must pay 100 percent of the cost of the insurance. As your COBRA benefit period nears its end, or you get tired of paying those high premium rates, you need to search for group health insurance on your own. Generally, employer-sponsored plans (which is still who your COBRA coverage is through) have very low or no deductibles and minimal copayments. Simply by raising the deductible and copayments — bearing more of the risk yourself — you could dramatically reduce your insurance costs. HIPAA: The Health Insurance Portability and Accountability Act (HIPAA) of 1996 requires that states provide at least a minimal coverage after you exhaust COBRA benefits, as long as you haven’t had any extended lapse (generally a break of 63 days or more) in coverage. Premiums under HIPAA may be two to three times what they would be for a standard-rate policy. HIPAA policies are typically an option of last resort for many people without employer-provided health insurance; however, HIPAA is still better than no health insurance at all. Each state has its own HIPAA rules, so contact your state insurance department before dropping any current coverage. Your state’s high-risk health insurance pool: If you're medically uninsurable due to significant health problems, your best option may be to apply for coverage through the high-risk pool in your state, if it's available. Only 33 states have high-risk pools that provide coverage if traditional health insurance providers reject you. For more information about whether your state has a high-risk insurance pool and how it works, contact The National Association of State Comprehensive Health Insurance Plans or your state insurance commissioner’s office. Most states have their insurance premiums capped at 125 percent to 150 percent of the cost of a standard policy. Even if your state has a high-risk insurance pool, you might not be able to obtain insurance immediately because there may be a long waiting list. Medicaid and other state-based healthcare programs: If you’re financially destitute, Medicaid is the nation’s largest program providing healthcare services to low-income individuals and households. Each state’s Medicaid income, eligibility requirements, and benefits vary. Check with your state for the specifics on Medicaid as well as other state-based programs. State Children’s Health Insurance Program: This program provides healthcare coverage to children when their families don’t qualify for Medicaid because they make too much money. Federally funded community health centers: These provide healthcare assistance to the needy. You can call 800-ASK-HRSA (800-275-4772) for more info.