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Dear Everyone!
This marks the one year anniversary of The Insurance Tattler. I try to do one every two weeks... although I've missed a few here and there.
I enjoy doing these as much as most people tell me they enjoy getting them. My goal here is to make sure that people know the truth... and bottom line the truth is that the only friend you have in the insurance biz is your agent. He or she has YOUR best interest at heart... not the insurance carrier and not any provider of insurable service.
People say that I must get a lot of clients from this newsletter. To be honest I don't think I ever got a client from someone who reads this on a regular basis. What I DO get are referrals. People who read this fish-wrap will often tell their friends, family, and neighbors about "This guy who is the 'anti-agent' and is on OUR side." That is what brings me lots of clients.
But if I never got even one client, I would still do this missive because people need to know the truth about this industry and the products it sells.
I'm leading off with an insurance product I truly, truly hate... VULs. If you have one, get the hell rid of it... before it buries you.
Enjoy the summer... fall is close at hand.
-Al
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VULs Suck, Big Time!
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VULs Suck, big time!
I hate VUL. So what is a VUL. It is a Variable Universal Life policy. I hate them with a passion. Any agent who sells them should be boiled in oil and then tarred and feathered.
A huge part of the sales pitch for a VUL policy is the promise of tax-free returns down the road. With a VUL, part of the premium you pay goes to the insurance part of the policy, which pays the benefit, or face amount of the policy, to your beneficiary if you die. But you get to invest the rest of your premium in the policy's "subaccounts," which are essentially the equivalent of mutual funds. And often, really crappy mutual funds.
The idea is that these subaccounts build value over time - this is known as the "cash value" portion of the policy - and you eventually tap that cash value when you need it for, say, a house down payment or child's education expenses or even for retirement.
And here's where the real sales hook comes in. Instead of just selling some of your investments and withdrawing money from the policy, you borrow (usually at a very attractive rate) against the policy's cash value. Since loan proceeds aren't taxable, you're effectively received a tax-free rate of return. Isn't VUL wonderful? (In your dreams!)
Well, it seems that way until you understand the pitfalls. One major downside is that these policies are loaded with fees. Lots of them.
Fees for the insurance protection itself (which, by the way, is usually more expensive than what you would pay for a regular term insurance policy). Fees for marketing and sales commissions. Then there are the investment management fees that can run as high as 2 percent a year. And on top of that there's an annual fee that can run upwards of 0.90 percent that goes by the name of the "M&E," or mortality and expense charge. This is essentially a fee thrown in to assure the insurance company a profit even if all those other fees somehow don't.
As you can imagine, this fee-for-all arrangement can really drag down your returns.
If you buy a VUL you have your head where the sun does not shine!
But wait... there's more! There's another risk you should be aware of... those tax-free withdrawals can backfire. Once you start borrowing from one of these policies, you've pretty much got to keep it going the rest of your life.
Why? Well, if the policy lapses, all the investment earnings you've withdrawn immediately become taxable. If that happens at an inconvenient time - like when you're retired, have been drawing on the policy for income and may not have lots of extra cash on hand for the IRS - you could have quite a tax headache.
VUL plans are evil.
If you ever get to the point where you're maxing out on your 401(k)s, you're funding every other tax-advantaged vehicle the government offers - a traditional or Roth IRA, maybe a SEP for self-employment earnings - and you've got a nice emergency fund going as well as investments in taxable accounts, I suppose someone could make a case for throwing extra savings into a VUL.
But I wouldn't. I'd say move on to tax-managed mutual funds, index funds or maybe even ETFs. As long as you hold these for the long-term, most of your return will come in the form of long-term capital appreciation, which is taxed at the more favorable long-term capital gains tax rate, which now maxes out at 15 percent, compared with 25 percent for short-term gains and regular income.
What about backing out of a VUL? Well, that brings it's own set of problems. Unless you've had the policy many years, simply surrendering the policy for cash would likely trigger surrender charges that could significantly reduce the amount of money you walk away with.
On the other hand, staying in could just mean throwing more bucks into a high-fee investment. These policies come with a "free look" provision that allow you to return them for a full refund within a certain time frame that varies by state, but we're talking a short time period, say, 10 to 30 days. If you've only owned the policy a short time, you might be able to squeeze in under the free-look deadline.
If you can't do that, you're dealing with a more complicated situation. If you feel you've been misled, you can go back to the adviser, demand your money back and, if he/she refuses (which is likely), ask to speak to the firm's compliance manager and make your case to him/her. If that doesn't resolve things, you can complain to the NASD, SEC and your state insurance department. (And good luck with all that!)
Quite frankly, unless you can show you were really duped, I'd be surprised if you get much satisfaction. (On the other hand, I think it's good for people in that situation to get their complaints on the record so regulators get a sense of how these policies are being peddled.)
You might also try talking to an adviser who can run some numbers that will help you weigh options like perhaps waiting until the surrender charges lapse or drop to a less painful level and then cashing out or converting the policy to another form of insurance or doing a tax-free transfer to a low-cost (yes, they do exist) annuity or maybe even holding onto the policy but funneling no new money into it.
You'll have to find someone who knows about these evil products and knows how to evaluate the options. You also want to deal with someone who isn't going to compound your problem by getting you out of the policy and moving you to another expensive insurance policy or annuity or other investment.
Clearly, the moral here is that the best way to keep yourself in the unenviable position of trying to figure out what to do with a variable universal life policy you don't really want is not to buy one in the first place.
I'm going to get a lot of heat from my security-licensed friends. Bring it on. I'm more than a match for them!
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Insurance Options for Those Who've Lost Coverage
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You could find yourself without health-care coverage for any number of reasons, including retirement, being fired, relocation, divorce or your employer's decision to terminate such benefits.
So what do you do? Here are the steps that you can take to ensure that you maintain coverage.
Assess the Situation
If you are married, the first thing to check should be whether you can get coverage through your spouse. (Perhaps marry someone for the health coverage? Don't laugh. It's been done before!)
Group coverage may well be the most cost-effective option for maintaining health coverage. If group health coverage is available, you qualify for special enrollment. This allows you and your dependents an opportunity to enroll in a plan for which they are eligible, regardless of normal enrollment periods. Be aware, though, that to qualify, enrollment must be requested within 30 days of losing eligibility for other coverage. After you request special enrollment, your coverage will begin on the first day of the next month.
COBRA
The Consolidated Omnibus Budget Reconciliation Act of 1986 gives employees who do not qualify for Medicare the right to continue their health coverage. You qualify following a reduction in hours and voluntary or involuntary termination of employment for reasons other than gross misconduct. For a spouse, additional reasons include the covered employee becoming entitled to Medicare, divorce, legal separation and their death.
Employers with 20 or more employees are normally required to provide coverage under COBRA. Many states also have similar laws, so check with your state insurance commissioner to see if coverage is available. To be eligible for COBRA coverage, you must have been enrolled in your employer's health plan and the health plan must continue to be in effect for active employees.
Under COBRA, you are liable to pay the entire premium including the amount of the contribution made by your employer together with and extra administrative fee.
Normally, you will be covered for a maximum of 18 months, but coverage can be discontinued if you become entitled to Medicare, do not pay the premiums, your former employer drops health coverage or you join another health plan. A covered employee's spouse who would lose coverage due to a divorce may elect to receive continuation coverage under the plan for a maximum of 36 months.
You, your spouse and your dependents have the individual right to decide among various options for continuing health coverage. You may enroll in your spouse's plan while one of your dependents may elect COBRA coverage through your former employer's plan if, for instance, they have an illness at the time.
If there is no longer a health plan because the company went bankrupt or closed, there is no COBRA coverage available. If there is another plan offered by the company, you may be eligible to be covered under that plan. Collective bargaining agreements may provide for continued coverage for union members.
The Employee Benefits Security Administration, 866-444-3272, enforces and administers the rights and protections for health plan participants and their beneficiaries.
Private Health Plans
The Health Insurance Portability and Accountability Act of 1996 provides protection when you need to maintain health coverage between jobs or limit exclusions for pre-existing conditions under a new health plan.
There are a number of different plan options, including PPO-style plans; high-deductible health plans compatible with health savings accounts; preventive and hospital plans that combine coverage for preventive care with catastrophic coverage for services like inpatient hospital care and outpatient surgery; and an optional dental PPO plan. Premiums vary for the different types of plans, allowing consumers to choose the plan or product that best fits their needs.
According to the EBSA, HIPAA guarantees access to individual insurance policies and state high-risk pools for eligible individuals if you:
1. had coverage for at least 18 months, most recently in a group health plan, without a significant break,
2. lost group coverage, but not because of fraud or non-payment of premiums
3. are not eligible for COBRA continuation coverage or have exhausted COBRA benefits
4. are not eligible for coverage under another group health plan, Medicare, or Medicaid, or have any other health coverage.
The problem with private HIPPA programs is that they cost an arm and a leg.
The type of health coverage you are guaranteed may differ from state to state. Check with your state insurance commissioner's office if you are interested in obtaining individual coverage.
California also has MRMIP... the state risk pool, which I've talked about before. Unfortunately I'm told this pool is closed right now with a waiting period. It is also very expensive for older people.
Coverage for Children
EBSA says that children in families who do not have health coverage due to a temporary reduction in income, for instance due to job loss, may be eligible for the State Children's Health Insurance Program (S-CHIP), a federal/state partnership that helps provide children with health coverage.
States have flexibility in administering S-CHIP programs. They may choose to expand their Medicaid programs, design new child health insurance programs, or create a combination of both. To find out more about the program in your state, call 1-877-543-7669.
Coverage for Retirees
For retirees who are not yet 65, there are individual plans available directly from insurers such as Aetna who also offer a well-known individual plan in some states to AARP members and their families. Aetna says it focuses on making plans affordable while also providing valuable benefits to as many people as possible. The plan is not in CA yet, but from what I've heard about it... it's better than nothing... but not much better.
If you qualify for Medicare, you are not eligible under COBRA, so you must find the right coverage. With the exception of end stage renal failure, for which special coverage may be available, all other retirees, including those undergoing cancer treatments, should be able to obtain access to a Medigap or Medicare Advantage guaranteed issue plan. (I've talked before about getting a Med Supp Plan "F.")
Remember that your spouse or dependents may still be able to obtain coverage under the provisions of COBRA as outlined above.
If all of the above sounds confusing, just call a good agent and he or she will decipher all of it for you. We do this stuff day in and day out... so why strain your brain when you can have one of us to this for you for no cost!
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Well, that's a wrap for this issue. I hope you've found some of the info above useful and interesting. If you have questions about life or health coverage, safe-money annuities, or employer group benefits just give me a call or send email.
Sincerely,
Alan N Canton
InsuranceSolutions123 Agency
InsuranceSolutions123.com
916-962-9296
CA License # 0F31110
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Al Canton, Owner
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I'm Al Canton, owner of the Insurance Solutions Agency.
Everyone promises the best service, etc. So I won't bore you with that message.
Bottom line, I know health insurance, work-supplements, medicare, life, and annuities.
Most importantly, I'm honest. I will not put you in a product just for the money. I've been here 25 years and I've built my business reputation on integrity and honor.
It's that simple.
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