Hill's Personal Finance

The Importance of a Life Insurance Audit

Is it time to review your policy?

Life insurance is hard.

 

It’s hard to know if you have the right kind.

 

It’s hard to know if you have enough.

 

And it’s hard to know if you need any at all.

 

The insurance companies have made it even harder by coming up with bewildering names: whole life, term life, universal life. Some life insurance policies have a cash value while others don’t. Some invest that cash value in the stock market while others pay a fixed rate of interest.  Some insurance policies combine all of these ideas.

 

This may be one reason why a recent study by the National Association of Insurance Commissioners found that about 40% of people don’t review their life insurance annually.¹ In my experience, that number seems to be even higher. But no matter what the exact number, a large portion of Americans may simply be paying for insurance that’s not right for them.

 

That is why it’s important for you to sit down annually with an insurance professional to review how your policy works and how it will help you to protect your family.

 

When you’re young, a certain type of policy is needed. As you raise a family and take on more responsibilities, your needs change again. At some point - when the nest is empty or other life changes occur - there may come a time where you don’t need life insurance at all or you may desperately need it to protect your estate. Reviewing your life insurance policies is one way to make sure you have the coverage that is right for you and your family now, today – not when you bought it.

 

When is the last time you thought about your life insurance?

 

Is it time to take another look?

 

 

1 http://www.pregnancytoday.com/articles/life-insurance/the-facts-of-life-insurance-4315/ [02/18/10]

 

 

Small Business' Need A Plan

A retirement plan, that is. Without one, business owners
may miss out on attracting the most qualified employees.

 Do you own a small business? If so, what do you think of your staff? Do you have the best and the brightest working for you? A good rule of thumb is this … take good care of your employees, and they’ll take good care of you. If you value your employees, you should give some thought to their futures. Have you considered their retirement needs? And on the flip side, if you DON’T feel you have a superior staff, have you thought about why that might be?

 Often, it comes down to benefits. Today’s employees are more conscientious than ever about their retirements, and how today’s decisions could affect their future. Many Americans begin planning their retirement as soon as they graduate college (or even sooner!). That means if you aren’t offering a retirement plan, you may be missing out on the kind of highly motivated, self-directed employees you’ve been looking for. That’s right, your 401(k) can be used as a recruiting tool!

 What about taxes? Well, a 401(k) can provide tax benefits. You can get a tax deduction based on salary deferral and employer contributions; your employees get tax-deferred growth of their assets. Many other retirement plans also offer significant tax breaks.

 So you want to offer a 401(k). Now what? The first thing to consider is how much current interest there would be at work in having a 401(k) plan. Poll your current employees and find out two things: 1) how interested they are, and 2) what (if anything) would be a deciding factor for them that would make them enroll or not enroll. Next, you’ll want to determine the cost (both in terms of money and time) to implement your 401(k) retirement plan. And finally, with any plan you’ll want to carefully consider what investment options are available.

 How do you compare? If you’re hoping to use your 401(k) as a recruiting tool, be sure to consider the total benefits package you’re offering to your employees, and how the 401(k) will fit into that package. It may be worthwhile to try and find out what your competition is offering.

 Getting started. The first step toward offering great retirement benefits is learning all you can about what options are available. I would recommend that you speak with a qualified financial professional who can help you sort through the choices and determine which options will work best for your business.

 

Rules Change for 401K In-Service Rollovers

401(k)-to-Roth rollovers are now possible before age 59½.

A new possibility. Sometimes employees want to pull money out of a 401(k) before they retire. It isn’t always because of an emergency. Some workers want to make an in-service non-hardship withdrawal just to roll their 401(k) assets into an IRA. Why? They see lower account fees and greater investment choices ahead.

 

As a result of the Tax Increase Prevention Reconciliation Act (TIPRA), tax laws now permit in-service non-hardship withdrawals from 401(k), 403(b) and 457 plans to traditional IRAs and Roth IRAs before age 59½. Of course, the employee must be eligible to take a distribution from the plan, and the funds have to be eligible for a direct IRA rollover.¹

 

This option may be very interesting to highly compensated employees who want the tax benefits of a Roth IRA. The income limits that prevented them from having a Roth IRA have been repealed, and they may have sizable 401(k) account balances.

Does the plan allow the withdrawal? Good question. If a company’s 401(k) plan has been customized, it may allow an in-service withdrawal for an IRA rollover. If the plan is pretty boilerplate, it may not.

The five-year/two-year rule also has to be satisfied. IRS Revenue Ruling 68-24 says that for an in-service withdrawal from a qualified retirement plan to take place, an employee has to have been a plan participant for five years or the funds have to have been in the plan for two years.²

401(k) plan administrators may need to amend their documents. Does the Summary Plan Description (SPD) on your company’s 401(k) plan allow non-hardship withdrawals? If it doesn’t, it may need to be customized to do so. This year, plan administrators nationwide are fielding employee questions about rollovers to Roth IRAs.

401(k) plan participants need to make sure the plan permits this. An employee should request a copy of the SPD. If you ask and no one seems to know where it is, then call the toll-free number on your monthly 401(k) statement and ask a live person if in-service, non-hardship withdrawal distributions are an option. In some 401(k)s, an in-service non-hardship withdrawal will prevent you from further participation; be sure to check on that.

If this is permissible and you want to make the move, you better make an IRA rollover with the assets withdrawn. If you don’t, that distribution out of your qualified retirement plan will be slapped with a 20% federal withholding tax and federal and state income taxes. Oh yes, you will also incur the 10% early withdrawal penalty if you are younger than age 59½. Additionally, if you have taken a loan from your 401(k), any in-service withdrawal might cause it to be characterized as a taxable distribution in the eyes of the IRS.³

Obviously, this IRA rollover possibility is not a big hit with the national and regional retirement plan providers, who would like to see you keep participating in their 401(k) programs rather than partly or fully bail out. But many employees would like a broader and more diverse range of investment options - and some would like the chance to direct their money into vehicles designed to produce future income streams.

Don’t forget to talk to the professionals. Retirement plan administrators and participants should talk to the financial consultant that has helped them with their 401(k) program before making a move. This article is simply an overview, and there will be different details to attend to with each employee. So be sure to touch base with the financial professional you trust.

 

Citations.

¹ articles.sun-sentinel.com/2009-08-16/business/0908140293_1_roth-ira-roth-conversions-simple-ira [8/16/09]

² smbhr.benefitnews.com/news/rolling-the-dice-with-a-roth-ira-rollover-2682826-1.html [1/22/10]

³ macpa.org/Content/22372.aspx [2/1/10]

 

The Potential of the BRIC Nations

Why emerging market equities have the world’s attention.

 

Brazil. Russia. India. China. These four nations have some of the fastest-growing economies on earth and are becoming drivers in the world economy. In the coming decades, they may command as much attention as the U.S., Japan and other “heavy hitters” … or more.

The future aside, we know one thing about the BRIC nations and other emerging markets: collectively, stocks in these countries have outperformed U.S. stocks for the last 20 years.

During this past decade alone, the MSCI Emerging Markets Index brought a total return of 102.4% while the S&P 500 posted a total return of -10.0% (-24.1% before dividends). Across the 1990s, the S&P 500 produced a total return of 432.0% - pretty impressive. Yet the MSCI Emerging Markets index posted a total return of 2408.6% for that decade.^1,2

Great volatility … but also great potential. If U.S. stocks soar or fall, emerging markets really feel the effect. We’ve seen them recoil in the first quarter of 2010. Yet short-term slumps aside, there are compelling arguments for investing in emerging market equities as part of a diversified portfolio.

Look at last year’s returns. In 2009, the benchmark index in Brazil (the Bovespa) gained 82.66%. Russia’s RTS gained 128.62%. India’s Sensex 30 advanced 81.03% and China’s Shanghai Composite rose 79.98%.³

Look at the last decade. The Dow and the S&P 500 underperformed in the 2000s compared to previous decades. How did benchmark indices in the BRIC nations do?

Are you sitting down? Brazil’s Bovespa gained 301% across the 2000s. India’s stock market gained 249%. China’s Shanghai Composite was the laggard, only rising 72% over that stretch. Russia’s RTSI gained 863% in the past decade.³

BRIC, or BRIMCK? Some economists would modify BRIC to BRIMCK, arguing that Mexico and South Korea belong in this collective powerhouse. The key market indices in Mexico and South Korea respectively advanced 44.87% and 49.65% last year.³

The (corporate) opportunity of a lifetime? Wall Street bulls see wisdom in giving more and more weight to the BRICs in portfolios. They draw a line between the impressive, sustained growth of these nations to higher returns and rising demand for capital. They look at these nations and see a rapidly growing middle class and upper middle class and a corresponding rise in spending … translating to a momentous opportunity for global companies who leap into the right place at the right time … translating to great corporate profits down the line.

Of course, this vision assumes that the BRIC nations will a) keep economic policies in place that drive growth, b) avoid political and social upheaval, and c) escape the worst of global economic crises.

A new alliance? A decade ago, “BRIC” was simply Wall Street slang – a term coined by Goldman Sachs economist Jim O’Neill. Today, the BRIC nations appear to be heading toward some form of coalition. In recognition of their power, BRIC leaders have scheduled annual economic summits – the first one was in Russia in 2009, the 2010 summit is in Brazil. The presidents and prime ministers of these countries entered into dialogue to determine how their economies can work together and maintain their fantastic growth.

In sum, the BRIC nations are responsible for about 15% of global GDP, and about 40% of the gold and hard currency reserves on earth are in their possession.⁴

Does the BRIC demand your attention? Some financial consultants think that any well-diversified portfolio should have a toe (or a foot or a leg) in emerging markets – the gains of recent years are simply too spectacular to ignore. Others counter with the argument that past performance is no guarantee of future results, and cite the remarkable volatility that can affect the stock markets of these nations. If you are interested in learning more, have a chat with the financial professional you know and trust.

Citations.

¹ realclearmarkets.com/blog/Omnivest_1-4-10.pdf [1/4/10]

² cnbc.com/id/34645043 [12/31/09]

³ cnbc.com/id/34643111 [12/31/09]

⁴ nytimes.com/2009/06/17/world/europe/17bric.html?_r=1&pagewanted=print [6/17/09]