Life Insurance is a Good Safety Net, but not for Everyone

The first question is when do you need life insurance? You need life insurance under the following conditions (if you don't fall into one of the categories below, you probably don't need life insurance at this time, but remember to review your situation again from time to time when circumstances may change).

• You have dependent children. The loss of your income will most definitely affect your spouse's ability to remain in the family home with the children or provide the level of education that you would have provided for your children if you were still alive and working.

• You are married to a nonworking spouse. In this situation, your death will affect your spouse's ability to continue in the same life style, as going to work for the first time or going back to work after being out of the workplace will result in a lower paying job with a much diminished standard of living.

• You have a working spouse with an income substantially less that your income. Life insurance is appropriate here as your higher income has given you a lifestyle that your spouse could not afford alone.

• You have parents or special need siblings to care for and support.

• You still have a large mortgage remaining on your home. Having life insurance in this circumstance will allow your spouse to use the life insurance proceeds to pay off the mortgage, easing your spouse's financial burden after your death.

• You are using life insurance as an estate planning tool and wish to provide your family with the proceeds of life insurance that will restore to them the amount of your estate that was diminished by death taxes.

Another question to ask is how much insurance is enough? The proper amount of life insurance would allow your beneficiaries and their dependents to invest the proceeds of life insurance and draw down the earnings thereon and some capital over time to live on to make up for the loss of earnings that the deceased spouse would have provided. There are several basic methods to determine the amount of the insurance that you may need:

• The standard rule of thumb to estimate the amount of your life insurance needs is to estimate that you will need life insurance between five and ten times your annual salary net of taxes. If your net salary is $50,000 per year, you would have a minimum life insurance need of $250,000 and a maximum amount of $500,000. This method is fairly simplistic and does not take into account the specific needs you may have, such as the price of your children's education or the amount necessary for a special needs child.

• The second method seeks to replace the amount of your income over a number of years. For instance, if you earned $50,000 per year and you wanted to make sure that income was available to your spouse for the next fifteen years, you would need $750,000 of life insurance. This method is fine, as long as there are no special needs to address and you have little in the way of financial assets already.

• The third and most detailed method is to review the financial need. In this approach, you would take into account the various expenses that your income would otherwise pay, such as the family's annual living expenses, tuition for college and graduate education, mortgage or debt payoff and future retirement needs, as well as any special needs. This approach will require a little more thought and effort on your part to determine what expenses will be covered and what expenses are already covered by financial assets, such as college expenses that you have already taken care of through Section 529 plans and the like.

Life insurance is not for everyone, but there are many times that it is a necessary part of your financial planning for your family's future.

Should You Exchange Your Life Insurance Policy?

 Staff from FINRA

If you own a life insurance policy, you may have been approached to exchange it for another new policy. You need to know that even though the tax laws make the exchange income tax free and the new policy may appear better to you, you may be losing?not gaining?if you make the exchange. We are issuing this Alert because, increasingly, life insurance exchanges may involve variable products. Variable products are securities, and this Alert will provide information to help you evaluate whether the exchange is right for you, and how you can find out what you need to know to make an appropriate decision.

Types of Life Insurance

There are various forms of life insurance products. Although features and benefits may vary, the following is a general description of typical characteristics of various types of life insurance policies.

• Term Life Insurance. Term life insurance provides coverage for a specified and limited period of time (the "term"). Premiums for most term policies increase with age or at the end of each renewal period. After the policy or term ends, there is no benefit payment if the insured person survives beyond the policy period.

• Whole Life Insurance. Whole life or ordinary life insurance is a form of permanent life insurance. This means it can provide coverage for the life of the insured. It also can build cash value, which is a savings feature. Premium payments typically remain level for the life of the insured.

• Universal Life Insurance. Universal life insurance can also provide coverage for the life of the insured while at the same time providing flexibility in premium payments and in insurance coverage. The cost of insurance protection and, in some cases, other costs are deducted from the cash or policy account value.

• Variable Life Insurance. Variable life insurance, a variation of whole life insurance, offers a fixed premium schedule and a minimum death benefit. But it differs from traditional whole life insurance in that cash values are invested in portfolios of securities in an account separate from the general assets of the insurance company. A policyholder has discretion in choosing the mix of investments the policy offers. The insurance company does not guarantee investment returns and your cash value will fluctuate.

• Variable Universal Life Insurance. Variable universal life insurance combines features of universal life insurance and variable life insurance.

Most variable life insurance policies and variable universal life insurance policies are securities registered with the Securities and Exchange Commission (SEC). Registration requires that investors receive important financial and other significant information concerning the securities being offered for sale. This enables investors to judge for themselves if the securities are a good investment. These regulations also provide important remedies to investors if they can prove that there was incomplete or inaccurate disclosure of important information provided to them.

1035 Exchanges

The Internal Revenue Service allows you to exchange an insurance policy that you own for a new life insurance policy insuring the same person without paying tax on the investment gains earned on the original contract. This can be a substantial benefit. Because this is governed by Section 1035 of the Internal Revenue Code, these are called "1035 Exchanges."

But this benefit comes with some important strings.

• The tax code says that the old insurance policy must be exchanged for a new policy - you cannot receive a check and apply the proceeds to the purchase of a new insurance policy.

• The tax code also says that you can make a tax-free exchange from: 1) a life insurance policy to another life insurance policy or 2) a life insurance policy to an annuity. You cannot, however, exchange an annuity contract for a life insurance policy.

A transaction in which a new insurance or annuity contract is to be purchased using all or a portion of the proceeds of an existing life insurance or annuity contract is referred to as a "replacement." A 1035 Exchange is a type of replacement transaction. Although the term "1035 Exchange" is often used to describe any form of replacement activity, technically not all replacements are Section 1035 Exchanges and as a consequence are not tax-free.

Reasons to Exchange an Existing Policy?

There are various reasons why a life insurance policyholder may want to replace an existing policy with a new life insurance policy. For example,

• Improved health or mortality improvements across the general population may result in insurance coverage at a lower cost.

• You may have concerns with the solvency of the insurance company that issued the original policy or with the service of the agent that sold you the policy.

• A new life insurance policy may have more desirable features or benefits.

Reasons Not to Exchange an Existing Policy

There are also various reasons why replacement of an existing insurance policy may not be a good idea. For example,

• Cash value built up in the original policy may be applied to the new life insurance policy's first year expenses, including commissions.

• Life insurance policies (other than term policies) often include early surrender charges, which can reduce the amount of cash value available toward the new policy. The new policy will likely have its own new surrender charge schedule, which may extend beyond that of the original policy.

• You may pay higher premiums if, for example, your health has declined since the purchase of the current policy.

• The new policy typically will have a new contestability period - a two-year period from the issuance of the new policy during which the insurance company could challenge a death claim based upon a misstatement on the application.

• There may be unfavorable tax consequences caused by surrendering an existing policy, such as a potential tax on outstanding policy loans.

What You Should Watch For

You should exchange your life insurance policy only when you determine, after knowing all of the facts that the exchange is better for you and not just better for the person who is trying to sell the policy to you.

Both variable life insurance and variable universal life insurance are securities. Those who offer these products must follow SEC, FINRA, and state securities regulations, in addition to state insurance law. This means that a broker must tell you the important facts about the pros and cons of the exchange. Your broker or insurance agent should recommend such an exchange only if it is in your best interest and only after evaluating your personal and financial situation and needs, tolerance for risk, and the financial ability to pay for the proposed insurance policy.

Your broker or insurance agent may recommend that you use insurance policy values, such as loans or withdrawals, to pay premiums for a new life insurance policy. This activity is generally called "financing" premiums. It may not be appropriate for you. For example, withdrawals from existing policies may be subject to federal income tax and may reduce the death benefit. Borrowing money from an existing policy will almost certainly reduce the death benefit. Withdrawals or loans may make it more difficult to keep the original policy in force without additional out-of-pocket premium payments. If you can't keep the original policy in force, you will lose the insurance protection and the loans themselves may give rise to tax consequences. Remember for a transaction to qualify as a 1035 exchange, the old policy must actually be exchanged for the new policy. Many states and brokerage firms require forms to reflect customer acknowledgement of a replacement transaction. These forms typically are signed by the insurance policy owner and the broker or agent. These forms may provide a comparison of the features and costs of an existing policy to a proposed policy, and point out what you need to focus on when considering an exchange. Some brokerage firms may provide brochures or educational material designed to outline the possible advantages and disadvantages of the transaction. You should review these forms and materials closely.

Regardless of whether such forms are provided, you should specifically ask the person recommending that you exchange or replace your existing policy to provide you with illustrations for your existing policy and the new policy. You should also ask:

• What is the total cost to me of this exchange?

• What are the new features being offered? Why do I need those features?

• Are these features worth the cost?

• Can the existing policy be modified or supplemented to provide some or all of these same features?

• Will you be paid a commission for the exchange, and if so, how much is it?

You should not sign any exchange form or agree to exchange or purchase an insurance policy until you study all of the options carefully, have all of your questions answered, and are satisfied that the exchange is better than keeping your current policy.

If You Have Questions or Complaints

If you have questions or complaints about a life insurance policy exchange, you can contact FINRA, the SEC, your state securities administrator, or your state insurance commissioner.

Census Bureau: Number of U.S. Uninsured Rises to 47 Million Americans are Uninsured: Almost 5 Percent Increase Since 2005

For the sixth consecutive year, the number of Americans living without health insurance has risen, according to new U.S. Census Bureau data. Approximately 2.2 million people were added to the uninsurance rolls in 2006 — the largest one-year increase in the number of uninsured Americans since 2002.

Annual Census Bureau estimates released in August show 47 million people, or 15.8 percent of the U.S. population, were without health insurance during 2006 — a 4.9 percent increase. In 2005, census figures showed that 44.8 million people, or about 15.3 percent of the population, lacked health insurance coverage.

The number of uninsured Americans has increased 22 percent since 2000, at which time 38.4 million people lacked health insurance.

Fewer Americans had employer-based coverage in 2006, the new data show. The percentage of people covered by employer plans fell from 60.2 percent in 2005 to 59.7 percent in 2006, according to the report, "Income, Poverty and Health Insurance Coverage in the United States."

Also of note, more children were without health insurance in 2006, the census data showed. The percentage of uninsured children younger than 18 rose from 10.9 percent in 2005 to 11.7 percent in 2006. According to the data, children ages 12–17 were more likely to be uninsured than children younger than age 12.

In response to the new data, dozens of health care organizations, including APHA, issued statements criticizing the nation's troubled health care system and urging Congress to reauthorize and strengthen the State Children's Health Insurance Program, which was due to expire Sept. 30. More than 6.6 million children in the United States were covered by the federal children's program, known as SCHIP, at some point during 2006. Since Congress first authorized SCHIP in 1997, the number of uninsured children in America has fallen by 24 percent.

In an Association news release, APHA Executive Director Georges Benjamin, MD, FACP, called the new uninsurance rate "a travesty."

"Access to health care is critical, especially for children," Benjamin said. "Children who are uninsured are more than three times less likely to have seen a doctor in the last year, and have a higher incidence of preventable disease than insured children."

Benjamin urged Congress to "forward the strongest possible SCHIP bill to the president for his signature."

According to the Commonwealth Fund, the difficult nature of obtaining and keeping health insurance coverage in entry-level jobs has resulted in major increases in the numbers of uninsured younger adults ages 25–34 and uninsured older adults ages 45–64. The new census data revealed that those hardest hit in 2006 were families with incomes between $25,000 and $75,000, but even when family income exceeded $75,000, the numbers of uninsured Americans grew by 1.3 million in 2006, suggesting that family premiums are becoming increasingly unaffordable, especially when employers do not provide coverage, the organization stated.

However, Commonwealth Fund President Karen Davis, PhD, said the jump in uninsured children is the new data's "most disturbing" finding. The number of uninsured children younger than 18 rose from 8 million in 2005 to 8.7 million in 2006.

"That's a jump of 9 percent in one year, and all of this was attributable to a decline in employer coverage," Davis told The Nation's Health.

The numbers of uninsured children would have been much worse if Medicaid and SCHIP had not covered an additional 5 million children over the six-year period from 2000 to 2006, Davis said, "because it was a period when employers were really dropping dependent coverage."

Davis said earlier data show that employer coverage is much more limited for children at less than 300 percent of the poverty level, "so reauthorization of SCHIP, with adequate funding to cover uninsured children, is essential to prevent a reversal of progress made through public programs in the past six years," Davis said.

Among children, the likelihood of health care coverage in 2006 varied by poverty status, age and race. Children in poverty were more likely to be uninsured than the overall population of children. While 7.3 percent of white children were uninsured in 2006, 22.1 percent of Hispanic children lacked coverage, as did 14.1 percent of black children and 11.4 percent of Asian children.

Families USA, a national health care consumer advocacy group, said the "epidemic" of uninsurance has reached crisis proportions. The number of uninsured Americans exceeds the cumulative population of 24 states and the District of Columbia, said Kathleen Stoll, director of health policy for Families USA.

The data "underscore the critical role that public programs such as Medicaid and SCHIP play in providing a health care safety net for millions of Americans," Stoll said in a statement.

Despite SCHIP's earlier success in decreasing the number of uninsured children, the number of uninsured children rose for the second consecutive year in 2006, Stoll said, again pinning the increase on the decline in employer-based coverage.

"SCHIP resources must be increased to meet the health care needs of the increasing number of uninsured children," Stoll said.

The likelihood of having health coverage rises with income levels. However, while the nation's official poverty rate declined slightly for the first time this decade, decreasing from 12.6 percent in 2005 to 12.3 percent in 2006, the actual number of people in poverty in 2006 — 36.5 million — was not statistically different from 2005, according to the Census Bureau.

The number of uninsured full-time workers increased from 20.8 million in 2005 to 22 million in 2006, while the number of uninsured part-time workers, 5.6 million, remained the same as in 2005. The number of Americans insured by Medicaid and Medicare in 2006 also remained the same as in 2005, at 38.3 million and 40.3 million respectively.

Between 2005 and 2006, the number of U.S.-born residents who were uninsured increased from 33 million to 34.4 million. The number of foreign-born people who lacked coverage rose from 11.8 million in 2005 to 12.6 million in 2006. People living in the nation's "principal" cities in 2006 had a higher rate of uninsurance than people living in the suburbs, according to the data.

The Midwest had the lowest uninsured rate in 2006, with 11.4 percent of Midwesterners lacking coverage, as compared with 12.3 percent of people in the Northeast, 17.9 percent of people in the West and 19 percent of people in the South.

Based on a three-year average from 2004 to 2006, Texas was home to the highest percentage of uninsured people, with a staggering 24.1 percent of Texans lacking coverage. Conversely, the nation's lowest uninsurance rates in 2006 were in Minnesota, Hawaii, Iowa, Wisconsin and Maine.

For a copy of the census report, visit www.census.gov. For more news from The Nation's Health, visit www.thenationshealth.org.

Stay insured: new penalties for motor vehicles without insurance

The new vehicle insurance law means that the registered keeper of a vehicle must keep it insured unless they've made a Statutory Off Road Notification (SORN). If you're not insured and haven't made a SORN, you could face a penalty. Find out what the change in the law means for you.

Stay insured: new penalties for motor vehicles without insurance

The new vehicle insurance law means that the registered keeper of a vehicle must keep it insured unless they've made a Statutory Off Road Notification (SORN). If you're not insured and haven't made a SORN, you could face a penalty. Find out what the change in the law means for you.

The new vehicle insurance law - don't be caught out

Stay insured - stay legal

Watch a video on the new rules on being insured and penalties you could face

Stay insured

If you're the registered keeper of a vehicle, it must be insured at all times.

The exceptions are:

if you have made a SORN for the vehicle

if your vehicle has been kept off-road since before SORN came into force on 31 January 1998 – unless it was brought back into use

if your vehicle is recorded as stolen, passed or sold to the motor trade or between registered keepers

if your vehicle is recorded scrapped or permanently exported by the Driver and Vehicle Licensing (DVLA)

What will happen if your vehicle doesn't have insurance

From the end of June 2011 Insurance Advisory Letters (IAL) will be issued by the Motor Insurers' Bureau to the registered keepers of uninsured vehicles. This will be following a check of the Motor Insurance Database (MID) - the UK's central record of vehicle insurance. The IAL will advise the registered keeper that their vehicle appears to have no insurance and what actions to take to avoid receiving a fixed penalty from DVLA.

If a vehicle does not have insurance, the registered keeper could:

receive a fixed penalty of £100

have their vehicle wheel-clamped, impounded, or destroyed 

face a court prosecution, with a possible maximum fine of £1000

Payment of a penalty does not replace the need for motor insurance.

How to avoid a penalty

The details of all insured vehicles should be on the MID. You can check that your motor insurance details are on the database and are correct by following the link below.

Check your vehicle is insured - askMID Check the Motor Insurance Database now Opens new window

If the details aren't correct, or are not on the database, you should contact your insurer immediately. Only your insurer can update the MID's information.

If not already insured:

insure your vehicle immediately

make a SORN, if the vehicle is not used on the road

notify DVLA if you are no longer the registered keeper

Failure to take one of these actions will result in a £100 penalty.

Could you be breaking the law?

If you're not using your vehicle, you should make a SORN. If you are using it, it must be insured

When to make a SORN

The change in the law means, you will only be able to take your vehicle off the road and cancel your insurance by returning your tax disc to DVLA.

It must be returned on a V14 (application form for a refund of a tax disc) and SORN declared at the same time.

Download 'Apply for a vehicle licence refund (form V14)' (PDF, 170K)

How does this law affect a vehicle used only in the summer?

If you have a vehicle that is still taxed but not insured, you could face a penalty. This includes vintage and classic cars, motorbikes and motor homes – all vehicles that people sometimes leave uninsured for part of the year. If this applies to you, you need to return the tax disc on a V14 (including nil value discs) and declare SORN at the same time.

Are vintage/classic cars affected?

If you have a vehicle that was manufactured before 1 January 1973 that has a 'nil value tax disc' it is still considered by DVLA as taxed. If your vehicle is taxed it therefore must be insured unless you return your tax disc on a V14 and declare SORN at the same time.

How does this affect pre-SORN vehicles?

Vehicles which have been kept off-road since before SORN came into force on 31 January 1998 are exempt from this law. If they are brought back into use they will no longer be exempt. If you want to bring the vehicle back into use, you will need to tax and insure it. Follow the link below to do this.

Apply for a tax disc onlineOpens new window

What if you have a personalised registration on your vehicle?

You should inform your insurance company if you change the registration number of your vehicle. If you do not you could receive an Insurance Advisory Letter (IAL) to say your vehicle is shown as uninsured.

Personalised reg and number plates

Why would someone receive a letter about a vehicle they no longer have?

When the vehicle record was compared to the MID, they were shown as the registered keeper. This is why the letter was issued. The IAL will explain what action needs to be taken to notify change of keeper. Follow the links below if you no longer have the vehicle.

How to notify DVLA if you sell your vehicle

What to do if your vehicle is scrapped or written off

What if I am moving abroad and taking my vehicle?

If the vehicle will be abroad for less than six months your vehicle is still subject to UK motoring laws and would need to be insured.

If permanently moving abroad, follow the link below for further details.

Taking a vehicle out of the UK permanently or temporarily

Does this change affect the Off Road Register?

Off road bikes and construction machinery on the Off Road Register are not affected by the change in the law. If they are later registered for use on the public road they will be affected by the change.

Where does the new law apply?

The new law will apply in England, Scotland and Wales. It will not apply in Northern Ireland, the Channel Islands or the Isle of Man.

Points to remember

To summarise if your vehicle is on the road it must be taxed and insured at all times or you may face a penalty.

If your vehicle is:

taxed and insured – you do not need to do anything until your tax and insurance runs out

taxed and uninsured - you must insure your vehicle or make a refund application with a SORN declaration to DVLA if your vehicle is off-road

not taxed and uninsured – you must make a SORN and keep the vehicle off the road

not taxed and insured – you must make a SORN and keep your vehicle off the road

How to make a SORN (Statutory Off Road Notification)

Getting the best insurance deal

You can get expert tips and advice on reducing your insurance costs from the Stay Insured website. Follow the link below to find out more.