MAKING CENTS: Is life insurance a good deal for everyone?

When I hear people refer to life insurance as a bet against themselves, I just cringe. The truth is that life insurance is a bet in favor of your family, one that may help them get through some challenging times following the death of a loved one.

Think of a properly structured and funded life insurance policy as an investment that will someday pay a benefit to your beneficiaries. Not all insurance contracts are guaranteed for life, so perhaps your first order of business is to see whether your policy is on a track to last as long as you do.

The next important criteria would be the internal rate of return (IRR) on death benefit. The IRR tells you what the equivalent annual rate of return you are expected to earn for your heirs because of the continued premium payments and the ultimate death benefit that gets paid out.

Naturally, if one dies sooner into the contract, the internal rate of return is quite high. If one lives to life expectancy, many companies are currently illustrating about a 4 to 5 percent IRR. For those who live well past age 90, that IRR may drop to 2 – 4 percent.

Given today’s low interest rate environment, even the most pessimistic life insurance pundit may agree that the IRR forecast is fairly attractive. It looks even more attractive when you consider that these proceeds are received income tax free, and if structured properly, can also avoid all death and transfer taxes.

The risk of a life insurance policy not meeting expectations lies in the assumptions used in the insurance illustration. Companies assume an ongoing rate of return for the premium dollars that they receive.

Typically premium dollars are invested in very secure fixed income vehicles, and are not earning too much in today’s market. They forecast an interest rate that will be credited to any cash value accumulated in the contract. These rates will change over time.

Similar to the interest crediting rates, some companies build anticipated dividends into the forecasts. These dividend scales have been under pressure during this low interest rate cycle.

The last assumption is the mortality costs of the insurer. Some contracts come with a fixed mortality charge; these are the most costly in the early years. Other contracts continue to raise the mortality costs each year and then have a cushion built into the contract allowing them to increase.

If you are comparing apples to apples in terms of assumptions, your IRR on death benefit is one of the best ways to truly evaluate the cost of a life insurance policy.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

MAKING CENTS: In case something happens to Mom

It’s when, not what if, something happens to mom

In the ordinary course of meeting with clients, we routinely see situations where elderly parents and adult children do things in case something happens to mom. In case? What’s that about? There is no in case; it is more about when and how something happens to mom and then what are the consequences of your moves in anticipation of the undesired but inevitable outcomes.

Among the more common “in case” moves are to have a child as a joint owner on financial accounts.

As a joint owner, there are several unintended consequences and possibilities that may occur. Either joint owner would have full access and control of the property and can do what they please with the money without consulting the other. Of course, we trust our children, but it may not be wise to leave your nest egg subject to the liabilities and vulnerabilities of another person.

The next consideration is gift taxes. When you add someone other than a spouse as a joint owner of an account, you have made a gift in the eyes of the taxing authorities. If that account is worth less than $14,000, there is no worry. This exemption is called the annual gift tax exclusion.

A further consideration is the ultimate disposition of the property. If we can assume that the elderly mom will pre-decease her joint owner in the account, the younger child will become the sole owner of the account. This is fine if that joint owner is your only child or intended beneficiary, otherwise it could become a disaster. As the new sole owner, your child is not required to fork over any part of that money to their brothers or sisters, regardless of what your will says. And if that child later finds that it is their moral obligation to split the assets with their siblings, it will create gift tax issues.

What could be even worse is changing title to the home to one or more of your children. This poses problems for several reasons. First, you do not own you home anymore and are a tenant of your children. As a tenant, the IRS requires that you pay a fair market rate of rent to the landlord or else they can impute rental income under audit. Imputed rental income means that they’ll require your children to report rental income showing the income and expenses of the rental property.

It is also safe to assume that mom’s home was worth more than $14,000 at the time of the gift, and therefore a gift tax return is required.

In general, mom has the best intentions of protection and legacy for the assets. But unfortunately, this is one area where mom would have been well served to hire a professional to plan this properly.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

MAKING CENTS: Expanding your annual financial check up

As the calendar marches toward the start of another year, there are certain financial rituals that many astute investors embrace. They routinely scour their portfolios for gains or losses to harvest, look to see that their allocations are in line with their expectations and look around for ways to reduce the income taxes they’ll pay for the year.

These are all good practices, but this year I’m going to ask you to expand the scope of your year-end rituals to include matters frequently ignored.

Start with a re-cap of the past year. Look at income and expenses, and compare that with where you expected to be for the year. Did you save as planned, did you pay down debt and in general did your cash flow stay the path that you need to accomplish your objectives?

Now look at last year’s forecasts and compare that to where you stand today. Are you still on track to retire by age 68? What changes may you need to make in the upcoming year to get back on track?

An annual examination of assumptions versus actual in your financial forecasts can help alter courses to get you back on track.

As you are looking through your portfolio, ask yourself if you have significant concentration risk. Concentration risk is when one or more investments occupy too much space in your overall portfolio. How much is too much is open for discussion, but many experts feel that any more than 10 percent of your portfolio in one holding may be too much.

For married taxpayers with taxable incomes less than $75,000, the capital gains tax rate will be zero. All too often I see people with concentrated positions because they are afraid of paying taxes on the gain. If that position later suffers dramatic losses, most investors wish they had sold and paid the tax to salvage some of the value.

Take a look at your insurance policies. Are you adequately covered for any perils? Perhaps there are new issues in your life such as an underage driver or an inherited house that you now own with your two siblings. Also take a look at your life insurance. Some types of extended term life insurance, for example, have consequences including the termination of coverage at the end of the stated term.

Look at your wills and trusts. Do the executors, guardians and inheritance provisions still make sense?

For most, the guidance of a skilled professional is beneficial. If you always do it yourself, you may be consistently overlooking the same things.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

MAKING CENTS: Decoding alphabet soup when it comes to financial advisors

Earlier last week, a friend poked fun of my email signature because of all the initials after my name. 

Lots of professionals use designations in their signature; some recognizable and some not. The question you need to ask is whether the initials, (AKA credentials or designations) are necessary and would a credentialed professional deliver better service and results than a non-credentialed professional?

Of course, the answer is maybe.

I know professionals within every area of personal finance, law and accounting. Some are great at what they do and others are not. Some have advanced designations and credentials, and some do not. While I am a big fan of credentials and designations, the lack thereof are not grounds for divorce from your current professional service providers.

Bottom line is that even the professionals with designations, degrees or credentials that you recognize often specialize within their broad profession – so learn about their areas of expertise before you blindly hire one because of the credential.

In the financial world, there are way too many designations for anyone to know what each one of them means. Some, while not widely known are very rigorous and demanding. Others, however, are simple course work with no continuing requirements to stay current and no ethics requirements. In fact, many states even prohibit the use of certain designations because of their lack of rigor. Rigor is generally determined by the quality of the educational institution, and evaluated by any continuing education requirements and/or ethical standards of conduct that must be followed.

Designations that showcase one as a specialist in the area of assisting senior citizens has generated a lot of attention amongst regulators and compliance officers of larger firms. Elder financial abuse is high on the list of regulators, and alerting the public about designations that lack merit is a good step in avoiding abuses.

For advisors with no designations or credentials, ask why not? Dig a little deeper and ask how they stay current on new trends and laws, and what guides their ethical behavior.

For advisors who do have designations, ask for a detailed explanation of each one. Find out about the examination requirements and learn about the experience requirement. Ask who provides the training. Ask about the continuation educational requirements. Ask about the ethics and policing. Any credential worth touting should have a rigorous code of ethics and standards of conduct and the authority to enforce the rules.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

MAKING CENTS: For some, the better the rate, the worse the time to borrow

In general, you would think that a period of sustained lower interest rates would be a good thing for borrower

 

image source: englishbloggroup27.com

And in general, it is. But for many, this period of low rates has caused frustration and not materially changed their lives for the positive. Many have been locked into older, more expensive loans and not been able to refinance or sell their existing home to buy a smaller, lower-cost home.

Credit scores are a big cause for not being able to secure a great rate. If your score is too low, forget about it. If you have a score over 675 or so, you may get an offer but it will not be at the lowest rate published. For scores above 725, you may qualify for a great rate that you see advertised. I applaud the industry for coming up with an objective standard, but it too has problems. According to a recent report released from The Federal Trade Commission, as many as 25% of all FICO scores may contain an error that negatively impacts their personal score.

Even worse, good luck fixing it! There are reported methods for correcting a problem, but getting it done and properly reflected on your credit report is probably harder than getting an appointment with Ben Bernanke.

Mortgage underwriting has also changed. Since the days of liar loans, it is a good thing that mortgage underwriting has tightened up. But it has tightened so much, that even a great credit score may not qualify you for a new loan. I’ve seen two families declined for a new mortgage that would have qualified quite easily at just about any other time in history. One is retired, and regardless of their cash balance or equity in real estate, the lack of a job and a weekly pay check caused them to receive a declination. Similarly, a wealthy business owner client with no debt and several million of investable assets was declined because his company showed a loss in the prior year.

As tough as mortgage underwriting is today – it may be getting even tougher. The plan is to let the market dictate rates and underwriting standards as opposed to the government backed entities of Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan mortgage Corporation). As these entities’ role diminishes, and the private sector takes over, the mortgage market will change again. Underwriting will stay tough, and maybe even get tougher. Rates may rise for all borrowers, but especially for those with less than stellar credit.

For those where a new loan would be helpful, seek advice and clean up your credit situation before you run out of options.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.