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How much of a student loan is too much?

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—   College is an expensive challenge and many parents must share the expense with their child. Choosing a major is more important now than ever. If a college graduate goes into a career that has an annual income that is less than the total amount of their student loan, the loan will be an extreme burden on their life for years. A $45,000 income job with a $50,000 student loan is a big problem. Paying back a $50,000 loan at 6% over ten years is about $600 per month.   The Institute for College Access & Success provides a comprehensive state-by-state list of college students’ average debt. The average public college debt per student in Texas is $26,250 (TICAS, 2014). The TICAS website does not list many of the private college’s average student debt, and that is probably because private colleges are so expensive.   U.S. News & World Report list private colleges with the highest per student debt close to or above $50,000 at graduation (Snider, 2015 Feb. 17).

Disability and life insurance are crucial for parents and college graduates that are responsible for loans. If parents have taken on or co-signed student loan debt, it is important to consider increasing their insurance.   A two-parent family, going into retirement with one or more student’s loan debt can be a burden in the event of the death or disability of a spouse. If the new college graduate has taken on student loan debt, it is important for them to consider the burden it could place on their family in the event of their death. It is difficult for a 20-some-year-old to worry about life insurance. None-the-less, life insurance is cheap at that age. What should be more of a concern is not being able to work. Being disabled and not being able to pay student loan payments is a higher possibility than dying (SSA, 2011). A college graduate in their 20’s has a 1-in-4 chance of being disabled (SSA, Pub. 05-10570). Permanent disability is possible; however consider that having two broken legs from a snowboarding accident is a disability too. Not just any disability insurance will suffice for a college graduate trying to protect their income. The definition of disability is essential. Disability insurance that will pay if the graduate cannot perform the substantial duties of the job that they have the education and training to perform is critical. A disability insurance policy with the same definition of disability as Social Security would not be a wise choice (SSA, Pub. 64-030). Click below to

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References

Snider, S. (2015, February 17). 10 colleges that leave graduates with the most student loan debt. U.S. News & World Report. Retrieved from http://www.usnews.com/education/best-colleges/the-short-list-college/articles/2015/02/17/10-colleges-that-leave-graduates-with-the-most-student-loan-debt

Social Security Administration. (2011). Actuarial life table. Retrieved from https://www.ssa.gov/oact/STATS/table4c6.html

Social Security Administration. (2015). The facts about social security’s disability program (05-10570). Retrieved from https://www.socialsecurity.gov/disabilityfacts/materials/pdf/factsheet.pdf

Social Security Administration. (2015). 2015 red book (64-030). Retrieved from https://www.ssa.gov/redbook/documents/TheRedBook2015.pdf

The Institute For College Access and Success. (2014). State by state data. Retrieved from http://ticas.org/posd/map-state-data-2015#

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Caring for your retirement and your family

Consumers who have the foresight to plan for the future can help their plans for retirement as well as reduce potential financial burdens on their family by using life insurance.   Two out of three Americans are concerned about having enough money for retirement and more than one out of three are concerned about burdening their dependents if they die prematurely (Durham).  Life insurance can connect retirement plans and the concerns of providing for one’s family.

Family birth certificates, marriage certificate, deeds of ownership, paychecks and retirement accounts have one thing in common: they represent something that most people care about. There is one class of asset that can connect all of them, life insurance.  It provides for your spouse and children as well as paying off financial obligations such as your home mortgage, and it can offer a paycheck at retirement in the right circumstances.

In general there are two types of life insurance, term and permanent.  Term insurance only pays if you die.  It is purchased for one year or more.  If purchased on a year to year basis, the price will increase year by year.  Life insurance that is purchased for a particular period, such as ten-years, may be more expensive than the yearly term; however its cost remains level for the ten-year term of the policy.  Term policies do not accumulate any cash value.

In brief, permanent policies allow consumers to build money year by year until the death benefit equals the cash value of the policy.  When the cash value equals the death benefit, it is called endowing.  In many instances but not all, over a period of years the cost of life insurance is cheaper in a permanent life insurance policy.  Why then does not everyone buy permanent life insurance if it is cheaper in the long run?  The answer is cash flow.  Term life insurance policies are less expensive in the beginning years and become more expensive in years beyond their fixed term.  For those who have the foresight and the cash flow, permanent life insurance can add money to retirement savings if the owner lives in retirement years.

A quick internet search of how to find the best life insurance policy quickly leads to buying the cheapest term life insurance and that may be the best option for some.  However, all of the attention to a one-size-fits-all product has led a large number of consumers to be skeptical.  Thirty-eight percent of people have not purchased life insurance or more of it because they are unsure of how much or what type to buy (Durham).  Life insurance serves many purposes, and several top corporations offer life insurance policies as a part of employees’ compensation.  Last year General Electric paid $314,511 for a $22 million dollar life insurance policy on its CEO, Jeffery Immelt (Melin)

Permanent life insurance (except for variable life insurance) can serve as a long term conservative asset class with significant tax benefits.  Yet the most significant benefit of all life insurance is the tax free death benefit. Over the past 27 years, I have delivered six checks for life insurance death benefits. These were real everyday people: a police officer, a nurse, a flooring store owner, a heating & air conditioning business owner, a manufacturing business owner and my father-in-law. Fifty percent were term insurance, and fifty percent were permanent life insurance. The real key was that even though they did not know what the future would hold, they knew their family would need help without them. A well-planned life insurance policy can pay in the event that the owner dies or be a part of the owners’ retirement.

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Melin, Anders. “GE’s Death Perk for Immelt Is a $22 Million Life Insurance Benefit.” Bloomberg.com. Bloomberg, 20 Aug. 2015. Web. 8 Sept. 2015.

Durham, Ashley. Insurance Barometer Study, Life Happens & LIMRA, 2015. Lifehappens.org, 8 Sept. 2015

Got 401k? Jump, Stand or run?

 

Got 401k Glass_Floor_of_the_CN_Tower 2As world stock markets go down and up wildly, the average 401k investor would be wise to reassess where they are investing their money. The average employee cannot look at their 401k in the same way that a professional money manager views investments. Read the investment objective for any of the investment options available in your company’s 401k. It does not mention your name or personal retirement goals anywhere. It is up to the individual to match their personal goals with the objectives of investment managers of the investment options available in their 401k.

It may be uncomfortable to look at your 401k value when the investment markets are down, however avoiding reality does not make it go away. This is a good time to learn what you are willing to tolerate. 401k investors may be in one of three situations. First, they may be nearing retirement or a time to use 401k money like for college tuition. Alternatively, it may have been a long time since their investment allocation has been adjusted. A 50% stock and 50% bond allocation made five years ago may be predominantly stock weighted now increasing the risk a great deal. Or there may be no direction. Too often I have seen 401k investors put their money into an investment option just because it is there.

Take a look at the following chart in the link. This is the Callan Periodic Table of Investment Returns. This table charts different investment markets year by year. If you follow the Standard and Poors 500, you will see that it was not the best performing market every year. The S&P 500 is an index of the five hundred largest publically traded companies in the United States. The bulk of information in the media about the S&P 500 is how well it has done over many years. Look at what happened if an investor had decided to begin investing in the S&P 500 in 2000? That market began an almost two-year decline. It was a long time before money invested in 2000 made back its losses. Is 2015 the beginning of what happened in 2000? No one knows, however investing in just one market exposes an investor to much more risk than allocating money to different categories of investments. By spreading 401k investments among different investment categories, investors can adjust their 401k investments to fit their personal financial goals.

If you are wondering where to start, begin by figuring out how much risk you want to tolerate. Then choose an allocation that fits your personal investment goals and risk tolerance. Here is a link to a free asset allocation calculator that can get you started no matter what company manages your 401k: www.nationwide.com/investment-tools.jsp

How people save for retirement is outdated and needs to change.

change

Times have changed and retirement advice needs to be more flexible. Traditional retirement advice has been designed to take care of that average turn of the century person. “Life expectancy at the turn of the 20th century was approximately 49 years at birth and about 12 years for those age 60.”[1] I have been giving retirement plan advice for over 25 years and most of it has been based on the strategies that were created by mega mutual fund companies. The traditional concept of retirement planning has been to invest a little every year until you have enough money to replace your income. I’ve met with lots of employees over the years and I am generous when I estimate that the strategy works for less than a quarter of the employees.

The problem is not picking the wrong investment, or paying too many high fees or investing at the wrong time. All of those things are important, but the biggest problem is life happens and people do not save enough money. Do you remember when you got your first paycheck? What did you do with it? You probably bought stuff and if you didn’t have enough money to get the stuff you wanted, you got a credit card or set up a repayment plan so you could get the stuff you wanted. People set the level of their buying habits based on their income. I contend that if the average person starts off spending less and saving more it will not change their life dramatically. Rather than buying that new car when you get your first job, consider driving what you have and saving about a third of your paycheck.

When I set up a new retirement plan, the employer will match three to six percent of what the employee contributes. Employees generally only contribute only what their employer will match. They see the maximum 401k contribution of $18,000 and think that is only for people making a quarter million dollars a year. Employees need to change their frame of mind. Imagine that $18,000 limit is for the average person. The median household income in 2013 was $51,752.[2] That $18,000 is 35% of income. It’s not impossible to save that much. Let’s be modest and estimate your employer matches 3%. Add the employee’s contribution and that equals $19,552 per year. Even with no interest, that accumulates to a quarter million dollars within less than 13 years. Savings of that level gives financial freedom.

If you are that new college graduate starting a job and think, you can’t save $18,000 a year, then stay with the status quo. Save the standard 3% or about $1,500 a year and wait until you get to your 60’s before you even get close to that quarter million dollar mark of personal savings. In 2011, the average 60-some-year-old had $135,008[3] in their 401k account. No matter what your age is, change your perspective. Thirteen years is not that long. Save as much as you can and give yourself financial freedom.

[1] Wiatrowski, William. “Changing Retirement Age: Ups and Downs.” Bureau of Labor Statistics. Department of Labor, 3 Apr. 2001. Web. 3 Apr. 2015.

[2] Posey, Kirby. “United States Census Bureau.” State Median Income. U.S. Department of Commerce, 1 Jan. 2013. Web. 3 Apr. 2015.

[3] “What “Average” 401(k) Balances Can Miss.” Fast Facts. Employee Benefit Research Institute, 31 Oct. 2013. Web. 3 Apr. 2015.

A look at the new Dallas Morning News series: Cost of Care

Cost of Care form Dallas Morning News R

In the Dallas Morning News series Cost of Care, Jim Landers explains how the recent decrease in US Healthcare spending may appear to be good news but the slowdown is really a consolation prize.  Compared to developed countries like Germany, people in the US spend as much as 89% more for healthcare.  Costs have been a growing problem for over thirty years.  A Kaiser Family Foundation study shows that from 1999 to 2014, family health insurance premiums have jumped 212%.  The United States is number one when it comes to healthcare spending.  The US is also the second fattest country in the world.  Regretfully employee wages have not kept up with the US appetite for healthcare and fatty foods.  In that same time period wages have only increased by 54%.

Landers concludes that the relative high cost of healthcare has forced people to buy health insurance because very few can pay for catastrophic medical care out of pocket.  Those out of control cost have also prompted both sides of the political isle to try to regulate health insurance to control the cost of healthcare.   Landers points out that the government mandates for everyone to buy health insurance would not be necessary if US healthcare spending was more in line with the rest of the world.  Here is the key to his analysis.  Greed now drives the system.

There are so many people making so much money from healthcare spending that it is now a significant part of US culture.  Healthcare spending represents 17.4% of all US spending.  Attempts to control healthcare cost by changing the culture have met with a lot of resistance.  However both politicians and some healthcare providers realize that the current level of healthcare spending is unsustainable.  Since it is not clear what the problem is, consumers are being forced to guide the healthcare market by spending more of their own money.  The average health insurance deductible has risen to $1,500. Forcing consumers to spend more of their own money does not appear to translate into shopping for the best price.  It makes consumers put off going to the doctor which may cost more in the end.   So who is to blame?  Cost of Care is a yearlong series that may not only help us see the problems with healthcare but realize some solutions.

Landers, Jim. “Cost of Care: The U.S. Health Care System Is Bleeding Green.” The Dallas Morning News 1 Feb. 2015, Metro sec. Print.

http://www.dallasnews.com/news/metro/20150131-cost-of-care-u.s.-health-system-is-bleeding-green.ece

Planning For The Future

CyFair_Chamber_Logo_V_hi-rez On February 3rd the CyFair Houston Chamber of Commerce will host a roundtable meeting on business succession.  The session is being hosted by the Business Development Networking Committee.  You can register for the session by clicking here.  Why should you attend?

Did You Know?

Seven in ten small business owners have thought about who would run the business in their absence, but only 25 percent have formal retirement succession plans and only 35 percent have formal continuation plans in the event of their deaths.1

This means that 65-75 percent of small business owners do not have any type of succession plan in place should they retire, become disabled or die.

What is a Buy-Sell Agreement?

A buy-sell agreement is a written legal contract that specifies what happens to the business interest in the event that the owner dies, becomes disabled, or retires from the business. It can help prepare the business owner for the continuation of their company and provide financial security for their family.

When fully funded, the buy-sell agreement will:

  • Establish a ready market to purchase a business interest
  • Establish a value for the purchase price of the business interest
  • Identify the future buyer(s)—typically co-owners or key employees
  • Identify the events that would trigger the buy-sell agreement
  • Create a legal obligation for all parties involved
  • Provide a source of funds necessary to make the buy-sell arrangement effective

How it works:

There are three different approaches that can be taken to structure a buy-sell agreement. These are commonly referred to as:

  • Cross Purchase
  • Entity Purchase
  • Wait-and-See

The appropriate method depends upon several factors, such as:

  • The number of owners
  • The number of buyers
  • Whether the buyers are family members, co-owners, or outsiders
  • The legal structure of the business entity
  • Tax consequences

How Much is the Business Worth?

Determining the value of the business is a crucial part of the business succession planning process. Most business owners think they know the value of their business, but are surprised at the actual value when all the relevant factors are analyzed. There are several criteria that come into play when determining the value of a business. These are:

  • The book value of the company
  • Company’s earning capacity
  • Recent sale of company stock
  • Company’s ability to pay dividends in the future
  • Business performance comparison to similar companies
  • Existence of goodwill
  • History and nature of the business
  • Economic outlook

Business valuation is also used to determine the tax basis for the seller and buyer. If the business is sold by the beneficiaries after the owner’s death, typically no income tax is due upon the sale. This can be done when the business interest receives a step-up in basis to the date of the death value.

How is a Buy-Sell Agreement Funded?

A buy-sell agreement, on its own, is not effective unless the agreement is also properly funded. Permanent life and disability buyout insurance policies are the best ways to fund buy-sell agreements. Business cash flow, cash reserves, or borrowing may also be used, but they are typically insufficient and expensive solutions. They are more suited for supplementary funding.

There are many advantages to both the departing and surviving owners when funding the buy-sell agreement and each has its own unique value.

Advantages to the departing owner(s) include:

  • Provides money to help meet ongoing expenses
  • Converts business wealth to personal wealth to pay for retirement
  • Payments are prompt
  • Sets a fair and reasonable price
  • There is as little conflict as possible

Advantages to the surviving owner(s) include:

  • Prompt exit of deceased’s heirs
  • Continuity of management
  • Stability for employees, vendors and clients
  • Establishes a fair and reasonable price
  • There is as little conflict as possible

If you have an interest in learning more about how to sell your business when you retire, die or become disabled you are invited to the Peer Coaching Session on February 3rd, 2015 at the CyFair Houston Chamber of Commerce. For more details click here.

1 LIMRA Small Business Owner Report: 2009

Life happens. . . . . . .who do you love?

Life Happens Who do you love

Over the past 25 years I have delivered six checks for life insurance death benefits. These were real everyday people: a police officer, a nurse, a flooring store owner, a heating & air conditioning business owner, a clothing manufacturing business owner and my own father in-law. When they did not even know what the future would hold, I sat with them and they shared their heart. They did not know when or how, but they knew at some point someone in their life would need a little extra help.

September is Life Insurance Awareness Month. Life happens. Who do you love?

Make it a great day,

Van

Health Insurance PPO’s: From Glory to Gory?

sony walkman

Remember the Sony Walkman, disposable cameras and the compact disk?  Are you still relying on health insurance strategies that had their hey-day in the 80’s?  Preferred Provider Organizations (PPO’s) are the heart of many group health insurance plans.  They are also one of the reasons for over inflated prices today.  In the 80’s an insurance carrier could approach a hospital system or other health service provider and offer them access to their thousands of customers if they would offer a discount.  Times have changed.  Instead of dozens of insurance carriers, there are now about a half dozen.  Here is the biggest difference today: every hospital system is in every PPO network and as a result every hospital network is in every insurance plan.  There is no leverage.   The prices you see are not real.  The prices and the discounts you see are structured to give you the perception of value.  Plus the consolidation of hospital systems gives hospitals power to manipulate PPO pricing.  A study done by Cory Capps, an economist at Northwestern University found the following: “Most consolidations among competing hospitals lead to higher, not lower, prices.”[1]

Some health care providers are beginning to change the way they do business and the trend is catching on as consumers realize what they are actually paying.  Here is how one hospital in Oklahoma is changing to help their clients and be competitive in the marketplace:

So what can you do with your group health insurance plan?  Forget the PPO concept of discounts.  There are strategies that will allow employers to replace the PPO discount concept and replace it with a real-world pricing system.  For more on pricing models that could save as much as 30% in premiums, contact me through LinkedIn at www.linkedin.com/in/vanrichards/ or visit our website at www.abs-insurance.com

 


[1] Capps, Cory. “Hospital Consolidation And Negotiated PPO Prices.” HealthAffairs. 23.2 (2004): 175-181. Web. 30 Oct. 2013.      <http://content.healthaffairs.org/content/23/2/175.full&gt;.

The Cost of a Heart Attack in Houston!

The Cost of a Heat Attack in Houston (2)

The public’s fixation on the individual mandate detracts from parts of the ACA that are good, yes good.  This is not a Democrat or Republican issue, this is an American issue.   Healthcare is such complicated problem that the breath of the Affordable Care Act will never get through to the average American.  Congress needs to break it down into smaller portions and make a more reasonable plan of implementation.  The ACA is more than the individual mandate.  One of the major problems today is that the average family pays over 20% of their income for health insurance.  At the current inflation rate of healthcare premiums that same family will be paying over 40% of their income for health insurance within 10 years.  That is an unsustainable rate of increase.  The part of the ACA that is good is it is shining the light on parts of the healthcare system that are causing cost to be out of control. Acting on disclosure requirements of the ACA the Centers for Medicare and Medicaid Services released a document called Medicare Provider Charge Data.  This details cost of medical procedures at hospitals from around the United States. Information from this report shows that if you had a heart attack and were treated at Methodist Willowbrook Hospital in Houston it would cost $72,128.  If you were taken 15 miles away to Memorial Hermann Hospital’s Memorial City location in Houston, it would cost you $31,313.  Both are great hospitals.  Why such a big difference?  The answer we have found in similar situations is unreasonable mark-ups and billing practices.  The Constitution allows Congress to pass tax laws to control commerce.  Control the cost of healthcare and you bring down the cost of health insurance.  Lower cost means more people will voluntarily buy health insurance.  When it comes down to feeding your family or buying health insurance, you feed your family.  The President and Congress need to drop the individual mandate and concentrate on fixing the current system not creating a new one.  But until Congress catches on private enterprise has already begun to fix problems like this by creating health insurance pricing models that are based on cost and a reasonable profit.  We’ve been using this model with a great deal of success thereby reducing cost over traditional pricing models by as much as 30%. For more information on fee model pricing vs. mark-up pricing contact me through LinkedIn at http://www.linkedin.com/in/vanrichards/, or visit our website at http://www.abs-insurance.com

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