Wealth Management Blog

Six Disability Facts to Consider

By JJ Burns

March 21, 2012

You probably already understand the importance of having life insurance. The proceeds from a life policy can help cover your family’s current expenses and may provide a cushion for the future if you die prematurely. But another kind of coverage—disability income (DI) insurance—is often ignored or neglected. And that’s a mistake, because DI insurance can be even more vital than life insurance in maintaining a family’s financial well-being. A new white paper from the Council for Disability Awareness, an independent nonprofit group, provides these six startling facts.

1. More than one in four of today’s 20-year-olds will become disabled before they retire. (Source: Social Security Administration, Fact Sheet, March 18, 2011)

2. Some 8.5 million disabled U.S. wage earners were receiving Social Security Disability Insurance (SSDI) benefits at the end of September 2011. (Source: Social Security Administration, Office of Disability and Income Security Programs)

3. Ninety percent of new long-term disability claims are the result of an illness, not an accident, and fewer than 5% of claims are work-related. (Source: 2011 Council for Disability Awareness Long-Term Disability Claims Study)

4. The average long-term disability claim lasts 31.2 months. (Source: 2010 GenRe Disability Fact Book)

5. New applications for Social Security Disability Insurance (SSDI) benefits increased 27% from 2008 to 2010. (Source: Social Security Administration, Office of Disability and Income Security Programs)

6. About 100 million workers lack private disability income insurance. (Source: Social Security Administration, Fact Sheet, March 18, 2011)

If you don’t have DI insurance, either through a policy from your employer or one you’ve bought on your own, you can choose from among a wide array of products whose costs and benefits vary widely. Here are several factors you’ll need to take into account.

  • How a policy defines “disability” is crucial. The best policies pay benefits if you can’t work in your chosen profession, and they don’t consider the nature of an injury.
  • DI insurance policies generally require a waiting period before paying benefits, and a shorter waiting period normally translates into higher premiums.
  • Typically, a policy will state how long and under what circumstances it will pay disability income benefits. It could, for example, provide benefits only until you qualify to receive Social Security retirement benefits.
  • If you opt for a noncancellable policy, the insurer can’t drop you off its rolls if your health declines.

Finally, don’t be seduced by the low costs of a fly-by-night operation. You’ll be better off opting for an experienced company with a good reputation.

Tips on Long-Term Care Insurance

By JJ Burns

March 21, 2012

The cost of an extended nursing home stay can be frightening. In some parts of the country, annual expenses may run to $100,000 or even more. At that rate, it doesn’t take long for a lifetime’s savings to be depleted. That’s why most long-term care ends up on the tab of Medicaid, the joint federal-state health plan for the poor. But your family will qualify for help only after you’ve exhausted most of your assets.

Advance planning can help you avoid dire financial consequences. For instance, you could purchase a long-term care insurance (LTCI) policy for yourself or a relative to defray some or all of the nursing home costs. That can help preserve family funds and put off panic sales of investments. Still, premiums for LTCI are based on several factors, including the health of the person who’s being insured, and can be pricey. And the older you are when you get this insurance, the more you’ll pay.

What do you know about long-term care insurance? This brief quiz can test your knowledge.

1) Benefits under an LTCI policy will begin to be paid:

  1. Once the insured becomes ill or disabled.
  2. Once the insured applies for benefits.
  3. When the policy’s lifetime amount is fully paid up.
  4. After a waiting period has been satisfied.

2) Which of the following does NOT affect premium cost?

  1. The age of the insured
  2. The value of the insured’s retirement assets 
  3. The length of the benefit period
  4. The amount of the daily benefit

3) To qualify to receive LTCI benefits:

  1. The insured must sell any primary residence.
  2. The insured must need assistance with basic daily activities.
  3. The family must elect to begin coverage.
  4. The family must obtain permission from a nursing home.  

4) What is the tax treatment of LTCI policies?

  1. Premiums are fully tax-deductible.
  2. Premiums are tax-deductible only by retirees.
  3. Premiums may be partly tax-deductible.
  4. Premiums are never tax-deductible.

5) The amount that can be used to defray nursing home costs:

  1. Depends on the daily benefit.
  2. Depends on the insured’s age.
  3. Depends on the retirement assets owned by the insured.
  4. Is limited by state law.

6) A policy that is “guaranteed renewable” for life means that:

  1. It can’t be voided if the insured’s health changes.
  2. It can’t be voided whether or not the premiums are paid.
  3. It will still pay benefits after the lifetime limit has been exceeded.
  4. Premiums can never increase.

7) LTCI policies are generally offered by:

  1. Banks.
  2. Estate planning attorneys.
  3. Medical practitioners.
  4. Financial services firms.

Answers: 1-d; 2-b; 3-b; 4-c; 5-a; 6-a; 7-d

Knowhow on Year-End Tax Planning

By JJ Burns

March 12, 2012

There’s no time like the end of the year for tax planning. By making a few small adjustments, you may be able to cut your tax bill for the current year by hundreds or even thousands of dollars. Sometimes, simply pushing up a payment or postponing income by just a few days could make all the difference.

Of course, every situation is different and there are no right or wrong strategies to use across the board. For instance, if you expect to be in a higher tax bracket in 2012 than you are in 2011, you might defy conventional wisdom and accelerate taxable income into the current year.

To further complicate matters, there is a possibility—admittedly remote—that Congress might reform the tax code by the end of 2011, and your best-laid plans could be thwarted. Still, you shouldn’t hesitate to implement fundamental tax strategies. Typically, individuals may benefit from shifting charitable deductions, medical expenses, and the like, while small business owners might purchase equipment or supplies at year-end to boost deductions for 2011.

Do you think you know the basics? Here’s a brief quiz to test your knowledge.

1) If you install qualified energy-saving improvements in your home in 2011:

  1. You may qualify for a 10% credit.
  2. You may qualify for a 30% credit.
  3. You may deduct the full cost.
  4. You may depreciate the cost over time.

2) For 2011, unreimbursed medical and dental expenses:

  1. Are completely deductible
  2. Are completely nondeductible
  3. Are deductible only in excess of 7.5% of adjusted gross income (AGI)
  4. Are deductible only in excess of 10% of AGI

3) If you donate used clothing to charity, you can generally deduct:

  1. The amount you paid for the clothing
  2. The amount that charity receives for selling the clothing
  3. The fair market value of the clothing
  4. Zero

4) If you charge a charitable gift of $100 in December 2011 and you pay the credit card bill in January 2012, how much can you deduct in 2011?

  1. Zero
  2. $25
  3. $50
  4. $100

5) The alternative minimum tax (AMT) may be triggered by:

  1. An overabundance of “tax preference” items
  2. Failure to pay sufficient estimated tax
  3. Filing separate tax returns, if married
  4. Excess expenses in the last quarter of the year

6) Which of the following is not deductible by individuals in 2011?

  1. State and local income taxes
  2. Credit card interest
  3. Miscellaneous expenses (subject to limits)     
  4. Casualty losses (subject to limits)

7) Which of the following is true about a holiday party for all employees?

  1. A small business can deduct none of the cost
  2. A small business can deduct 25% of the cost
  3. A small business can deduct 50% of the cost
  4. A small business can deduct 100% of the cost

Answers: 1-a; 2-c; 3-c; 4-d; 5-a; 6-b; 7-d

More Celebration: Congress Extends Payroll Tax Holiday

By JJ Burns

March 10, 2012

Get out the party hats and streamers: After an acrimonious debate in Congress, our nation’s lawmakers have extended the “payroll tax holiday” for the remainder of 2012.

The tax cut was first enacted as a one-shot deal for 2011. Under a provision in the 2010 Tax Relief Act, the usual 6.2% Social Security tax rate for employees was reduced by two percentage points to an effective?4.2% rate on wages up to the?Social Security ceiling ($106,800 in 2011). The self-employed got a comparable tax break. The usual 1.45% Medicare portion of the payroll tax (2.9% for the self-employed) continued to apply to all wages.

In a last-ditch effort at the end of 2011, Congress enacted compromise legislation that kept the payroll tax holiday in effect through February 2012. And now, after weeks of wrangling and political grandstanding, Congress has approved a further extension through the end of the year on amounts up to this year’s wage base of $110,100.

For example, if earn $100,000?in 2012, you will save $2,000 in payroll tax (2% of $100,000). The maximum tax savings is $2,202?(2% of $110,100).

Glad to have more money in your pocket? Don’t squander your tax savings on frivolities or extravagances you don’t really need. A better move is to use this extra cash for a sound investment or to bolster your retirement savings.

Stock Option Rules After Job Loss

By JJ Burns

March 2, 2012

It may not be the first thing you think about if you’re abruptly asked to clean out your desk, but deciding what to do about your stock grants or options could have major financial implications. And the rules are neither simple nor intuitive.

“When someone loses a job, the vesting on outstanding stock options usually stops,” says Bruce Brumberg, co-founder of myStockOptions.com, which provides information about stock grants and options. “For options that are already vested, you need to know how long you have to exercise them before they’re forfeited.”

Rules vary according to the type of stock grant or stock option involved. Some companies make grants of restricted stock or of restricted stock units, or RSUs—similar to restricted stock but with important differences. Other employers provide various kinds of options, with grants sometimes linked to length of employment or to meeting performance goals, that let you buy shares at a specified price, often during a stated time window. Vesting approaches may also vary, with some shares or options vesting gradually and others all at once (known as “cliff” vesting).

In the case of restricted stock and restricted stock units (RSUs), you generally forfeit stock that hasn’t vested when you leave the company, while you get to keep shares that have already vested. However, your employment agreement or stock plan may include a provision that protects you if you’re terminated after your company is acquired by another firm.

Performance stock or options grants are typically based on whether you achieve goals during a specified period, and if you have to leave before the period ends, you’ll lose the shares even if you would have met the objective. If shares or options vest gradually, you’ll get to keep only those that have already vested. So, for example, if you’re granted options to buy 1,000 shares of company stock that have a four-year vesting schedule, with 25% vesting each year, and you’re fired after 2½ years, you’ll get to exercise the options for 500 shares. With cliff vesting, you’ll forfeit the entire grant if you leave before vesting.

If you’re forced out, it’s crucial to review the rules about grants and options as soon as possible and to exercise options, if that makes financial sense, during a post-termination exercise period that typically lasts 90 days. If you fail to meet the deadline or to adhere to any special terms of a separation agreement, your options will expire.

Finally, if you participated in an employee stock purchase plan, you get to keep shares bought for you while you were employed, but your eligibility to participate ends with your job. The company will have to return any money withheld from your paycheck to purchase shares you didn’t receive.