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Thursday, Oct 30, 2014 1:43 PM

Reducing Taxes on Social Security Benefits

Throughout your working career, you paid taxes into the Social Security system. Then, when you retired, you started to receive benefits from the system.

You might think that because your benefits were at least in theory the result of your contributions, your Social Security benefits should be non-taxable. After all, if you pay taxes in but are then also taxed on the benefits, isn’t that double taxation?

For nearly the first fifty years of the existence of the Social Security program, the federal government agreed with you – Social Security benefits were treated as non-taxable income. But, of course, the government’s ever-increasing need for tax revenue caused it to change all that in 1984, when up to 50% of a retiree’s Social Security benefits became taxable, and again in 1994. Now, up to 85% of a retiree’s Social Security benefits are considered taxable income.

What you may not know is that annuities can potentially help you reduce or even eliminate taxation of your Social Security benefits.

Here’s how it works. As a taxpayer, on line 20A of your form 1040, you must fill in the amount of the Social Security benefits you receive. That’s fine, but on line 20B, you must calculate and fill in the amount of the benefits that are taxable. Ideally, regardless of the amount on line 20A, you would like line 20B to be zero.

As usual, the mechanics of tax calculations can seem bewildering. After all, how you get from line 20A to line 20B takes up a full page in the IRS form 1040 instructions document. Fortunately, the fundamentals are fairly easy to understand.

First, you add up the following figures:

  • HALF of your Social Security income, plus
  • ALL of your other income, such as:
  • Wages
  • Pensions
  • Taxable interest
  • Dividends
  • Capital gains
  • Business income
  • And even otherwise tax-exempt interest, such as interest on savings bonds and municipal bonds

For married taxpayers, if this sum exceeds $44,000, up to 85% of your Social Security income is taxed. If this sum is between $32,000 and $44,000, up to 50% of your Social Security income is taxed. For single taxpayers, the two threshold income numbers are lower: $34,000 for 85% and $25,000 for 50% taxable benefits.

Naturally, the last thing you want to do is decrease your income just to decrease your taxes. The golden question is, “How can you earn more than these amounts yet shelter your Social Security benefits from taxation?”

The answer is to recognize a factor that is missing in the combined income formula you see above: Deferred annuity interest that remains in the annuity and is not withdrawn is not included in the above calculation!

Let’s see how this fact can affect you. Let’s suppose that you are retired and your income comes primarily from Social Security and pension income. Let’s also suppose that you have savings somewhere other than in an annuity, and even though you are not withdrawing any money from your savings, the interest income on that savings is causing your Social Security benefits to be subject to income taxes.

If you move that savings into a deferred annuity, then any year that you don’t withdraw money from the annuity, the interest you earned in the annuity doesn’t count in the above calculation. That reduces or eliminates taxes on your Social Security benefits. Pretty sweet, isn’t it?

Here’s the icing on the cake: when you put your money into a fixed or fixed indexed annuity, your money could easily be safer and/or earning a higher rate of interest than where you have the money today, so you win in two ways!

This article is for general information purposes only. We do not provide investment or tax advice. If such advice is needed, the advice of a qualified ad-visor should be sought.

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Thursday, Oct 30, 2014 1:43 PM
Looking for Safety? Look to Annuities!

Throughout recent years, Americans have been pulling their retirement savings out of stocks and stock mutual funds and putting them into places that they hope are safer.

One beneficiary of this flight to safety has been bonds and bond mutual funds, but many people making this choice are probably unaware of a major risk they are taking.

Interest rates right now are at historical lows. In October 2010, for example, the 5-year Constant Maturity Treasury rate was barely above 1%. There is always the possibility that interest rates could remain at their current levels or fall lower, but clearly there is more room for them to move upwards than downwards.

The issue facing you is that if interest rates rise, the value of the bonds and bond mutual funds that you own will tend to fall. For example, if the Treasury rate was to rise to 4%, a new purchaser could get an interest rate of 4% on a new bond. To induce that person to purchase your bond that has an interest rate of only 1%, you would need to drop the price quite a bit.

What we fear is that folks who have moved their money from stocks to bonds seeking safety may find that they have jumped out of the frying pan into the fire.

There are a wide variety of products that offer assurances of safety, such as savings accounts and money market accounts, but the problem with these financial products right now is that their interest rates are even more dismal, typically well below 1%.

As a person looking to protect and grow your retirement savings, you may be wondering where to turn. Where can you find the safety you desire yet still earn a respectable interest rate? We suggest that you consider annuities.

Fixed annuities offer interest rates that are set by insurance carriers, declared in advance, and guaranteed for at least one year at a time. These annuities typically offer higher interest rates than you can find on other safe financial products.

Fixed indexed annuities offer interest rates that are based upon potential future increases in a stock or bond market index, along with the guarantee that if the index declines, your principal is protected. These annuities offer the potential for even higher interest credits due to their index link.

All fixed and fixed indexed annuities offer four very valuable layers of protection.

1. They are issued by insurance carriers that back the annuities with a pool of assets called “reserves” that are mandated and monitored by state insurance regulators.
2. These insurance carriers are obligated to use all of their general assets to protect annuity values from the effects of any adverse financial conditions.
3. These insurance carriers provide annuity owners with written, verifiable, contractual guarantees that the money you put into an annuity is protected from loss, other than perhaps a penalty for early withdrawal.
4. If you have any problem with your annuity carrier, you can contact your state’s insurance department, which has jurisdiction over the carrier.

Thus, if you are looking for safety with better interest rates than you are finding elsewhere, consider annuities.

This article is for general information purposes only. We do not provide investment or tax advice. If such advice is needed, the advice of a qualified ad visor should be sought.

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Thursday, Oct 30, 2014 1:43 PM
Turning Retirement Savings into Retirement Income

Chances are you know a retired couple like my friends Stewart and Ruth. Stewart worked his entire career as a school teacher in a single school district. Ruth worked more than twenty years as an administrator in a non-profit organization. Neither of them made a fabulous income, but it was steady and reliable.

Then, when they retired, their income continued essentially unchanged. Their employers each provide them with a pension check that will continue for the rest of their lives. As a result, Stewart and Ruth are able to take advantage of their free time and travel the country.

You and I, however, do not have the same advantages as Stewart and Ruth. By the time we were reaching the end of our working careers, traditional pension plans were much less common. Our employers provided a defined contribution plan, like a 401(k) or 403(b), where we were responsible for building our own retirement savings. Now that we have retired (or are planning for it), we wonder how to turn that retirement savings into retirement income.

One of the first things I did was I found one of the many retirement calculators available on the Internet. It asked me for some basic information. How much retirement savings did I have? No problem there. What rate of return do I plan to achieve on my money? Uh, I have a return I hope to achieve. How long do I expect to live? Huh, this isn’t going as well as I thought.

Here’s the problem: I don’t know what rate of return I will achieve. I don’t know how long my spouse and I will live. And if I mess this up, I don’t get a second chance.

Thankfully, I discovered something very helpful. Its name is a mouthful – a fixed indexed annuity with a guaranteed lifetime income benefit rider (say that five times fast!) – but it does exactly what I want.

What it does is provide me with a guaranteed amount that I can withdraw every year from my retirement savings for the rest of my life. There’s no uncertainty – I know the amount and I know that I can withdraw it every year for as long as I live or my spouse lives. The insurance company that issues the annuity guarantees it.

At the same time, I don’t have to give up control of my retirement savings. If at any time I need additional money or just find something else that I think is better, I can withdraw my remaining annuity balance. Naturally, if I withdraw more than I am supposed to in any given year, the amount that the carrier guarantees to pay me annually in the future is reduced. That’s only fair.

Now, thanks to that fixed indexed annuity with a guaranteed lifetime income benefit rider, my spouse and I feel as safe as Stewart and Ruth. When we receive our annual annuity check, we know that we can spend it, because another check just like it will arrive next year, and it will continue to do so for the rest of our lives.

This article is for general information purposes only. We do not provide investment or tax advice. If such advice is needed, the advice of a qualified ad-visor should be sought.

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Thursday, Oct 30, 2014 1:43 PM
If you’re healthy, you can save money on your life insurance

Every year, the Centers for Disease Control (CDC), an agency of the federal government, releases an updated study on life expectancy in the United States. It may not surprise you to hear that thanks to improvements in medicine and public health, the CDC has been reporting steadily improving life expectancy over the last decade.

The life insurance industry has seen similar data among its customers, and as a result, life insurance rates have decreased over time.

Even beyond that, carriers have introduced lower preferred and even lower “super preferred” rates in an effort to earn the business of the healthiest insurance applicants.

That means it’s time to pull out your life insurance policies, give us a call, and let us find out if we can get you a better rate.

Also, you should be aware that we are an independent insurance agency. What that means for you is that we can shop among many carriers, not just one, to find you the best rate. If you bought a life insurance policy from an agent who cannot do this, chances are you are overpaying.

Let’s suppose you’ve never purchased life insurance, or perhaps you figured the amount your employer gives you is enough. The good news is that life insurance is now more affordable than ever, and individual insurance may be both cheaper and higher quality than your employer’s plan.

So give us a call. We would love to help you save money on life insurance.

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Thursday, Oct 30, 2014 1:43 PM
Diabetic? Yes, you can get life insurance

If you know the difference between the two types of diabetes, and if you know your blood sugar level and your most recent hemoglobin A1c level, then chances are you think you can’t get life insurance. Or perhaps you think you can, but it will be prohibitively expensive.

You are correct that diabetes is a serious health condition. It is the seventh leading cause of death in the U.S. and is often a contributing factor to heart disease, stroke, and a variety of other health problems.

But on the other hand, diabetics are simply too large a segment of the population for the insurance industry to ignore. According to the American Diabetes Association, nearly 8% of the population has diabetes, including 23% of all people age 60 or older.

As a result, yes, you can get insurance if you are a diabetic, and yes, it can be quite affordable. What insurers are looking for when they consider your application is a history of good control. The insurer will order copies of your doctor’s records and will look through the blood tests that have been taken from time to time over a period of years. If the blood sugar and A1c levels show consistent good control, and if you are not suffering from any of the secondary symptoms which indicate the advanced stages of diabetes, you can actually qualify for a standard rate from some insurance companies.

If you have diabetes, it is very advantageous for you to work with us because we are an independent insurance agency. What that means for you is that we can shop among many carriers, not just one, to find you the company that will give you a standard rate. If you attempt to buy a life insurance policy from an agent who cannot do this, chances are you will overpay or may even be declined, depending upon the way that agent’s carrier views diabetes.

So give us a call. We would love to help obtain life insurance at the best possible price.

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Thursday, Oct 30, 2014 1:43 PM
The importance of policy review

As you can imagine, it was a tragic day when David died leaving his wife Linda a widow with two young children. It became doubly tragic when Linda discovered that the beneficiary of David’s life insurance policy, the policy that Linda was counting on to provide the support she needed, was David’s ex-wife, his first wife.

Across the street, Tim and Susan had been paying $200 per month on their universal life insurance plan for the past twenty years. They had received statements from the insurance carrier annually, but they really didn’t know what they meant. They just assumed everything was fine until they received a notice indicating that their policies were about to lapse. When they called the insurance company to inquire, they were told that they would need to triple their monthly premiums. That wasn’t good news considering they were starting to prepare to retire.

You may think that stories like these are unusual, but we hear similar stories all the time. The fact is that life insurance is an important asset. It has significant value, and like other assets with similar importance, it needs to be managed and maintained.

Just as maintaining your car requires more than filling it with gas, maintaining your life insurance involves more than just paying the premiums. Like an instrument panel, annual statements often provide vital tidbits of information, and a little adjustment today can prevent a painful breakdown later. Also, given how much life changes from time to time, checking occasionally to make sure your beneficiary designations are up-to-date is simple to do today, but impossible to correct if suddenly you are gone.

These are the types of things we review with you when we meet to review your coverage. Also, when we meet, we always look for opportunities to save you money or provide you with better coverage.

A meeting to review your coverage is part of our free service to you, so please give us a call. We would love to put your mind at ease, since you’ll know for certain that your coverage is as good as it can be.

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Thursday, Oct 30, 2014 1:43 PM
Did you know you can get life insurance with no medical exam?

Usually, when you obtain life insurance, you expect to undertake a medical exam. But for some people, that medical exam is an obstacle that prevents them from seeking insurance. Perhaps you have a health condition that you fear will disqualify you from obtaining life insurance, or perhaps you simply dislike needles.

We have good news for you. There are now a wide variety of life insurance plans available that do not require medical exams.

Some plans are designed and priced like plans that require a medical exam. On these plans, the carrier may still have stringent health requirements in an effort to only insure the best risks, but the carrier has replaced the medical exam requirement with some new technologies that were not available a few years ago.

Other plans are priced a bit higher but allow for insureds with a variety of medical conditions. Since we are independent insurance agents, we offer a wide variety of carriers. This means that if you have a particular medical condition, we can often shop among our carriers and find one that will issue you a competitively-priced plan without a medical exam that allows for your health condition.

Many carriers have also started writing life insurance on our older clients using relaxed underwriting requirements without a medical exam. No medical exam means you are more likely to be accepted for insurance and the policy is placed into effect faster.

So if the medical exam has been keeping you from trying to obtain life insurance, give us a call. We can help you to get the insurance you need.

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Thursday, Oct 30, 2014 1:43 PM
Business Planning Techniques, Products and Strategies

Small business owners can often be your best prospects for writing insurance. Not only do they usually have better-than-average incomes, but they are also subject to certain unique risks and have some unique opportunities due to their ownership of a business.

For example, a small business is typically dependent upon a key employee. What if that employee dies or is disabled? The business could be crippled due to the loss of that employee’s skill, ability to get things done, expertise, or customer relationships. The answer – key employee life and disability insurance – is often quite affordable.

Small businesses are often partnerships. What if one of the partners dies or becomes disabled. Rachel may be concerned that if Heath dies, besides the fact that Heath is a key employee, she might need to quickly gather funds to buy out his share of the business. Also, Heath’s heirs might disrupt the business if they don’t like the financial arrangement. On the other hand, Rachel is concerned that if she dies, Heath might not be able to pay her heirs a fair value for the business, and he may not be able to continue to run the business without her. Thus, both partners are well served to have a buy/sell and business continuation arrangement in place secured by life and disability insurance.

Small business owners often have two large expenses looming in the future – retirement and estate taxes. The business owner may consider the business itself to be his retirement plan, but the fact that the owner is also a key employee makes many small businesses nearly worthless at the owner’s retirement. Plus, very few people want to buy a particular small business, further depressing the value below what the owner would consider fair. Fortunately, there are a variety of ways that business owners can store considerable money away for their retirement and reduce their income tax bill. Individual 401(k)’s and SEP-IRA’s are two examples. On the other hand, preparing for estate taxes may involve setting up a will and trusts, gifting the business to heirs over time, and providing a plan for how the estate taxes will be paid using joint second-to-die life insurance.

Besides planning for retirement on a tax-preferential basis, business owners can sometimes purchase certain benefits with pre-tax dollars. For example, owners of C-corporations can buy long-term care insurance for themselves on a tax-advantaged basis. LTC premiums paid by the business are tax-deductible to the business and are not considered taxable income to the employee, yet LTC benefits received are income tax-free to the employee. A plan like this can be set up where the only covered employee is the business owner.

So, let us help you learn the opportunities that are available to serve small business owners. They have unique risks and great opportunities.

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