Author Archive for kolbeco_KK

HOW THE GENERATION-SKIPPING TAX WORKS

Perhaps you’re one of the lucky people who are not only financially well off yourself, but whose children are also financially set for life. The down side of this is that they also face the prospect of high taxes on their estates. You may also want to ensure that future generations of your heirs benefit from your prosperity. To reduce taxes and maximize your gifting abilities, consider skipping a generation with some of your bequests and gifts.

But your use of this strategy is limited. The law assesses a generation-skipping transfer (GST) tax equal to the top estate tax rate on transfers to a “skip person,” over and above the gift or estate tax, though this tax is being repealed along with the estate tax. A skip person is anyone more than one generation below you, such as a grandchild or an unrelated person more than 37-1/2 years younger than you are.

Fortunately, there is a GST tax exemption. Beginning in 2004, this exemption was equal to the estate tax exemption for that calendar year. Each spouse has this exemption, so a married couple can use double the exemption. If you exceed the limit, an extra tax equal to the top estate tax rate is applied to the transfer — over and above the normal gift or estate tax.

Outright gifts to skip persons that qualify for the annual exclusion are also exempt from GST tax. A gift or bequest to a grandchild whose parent has died before the transfer is not treated as a GST.

Taking advantage of the GST tax exemption can keep more of your assets in the family. By skipping your children, the family may save substantial estate taxes on assets up to double the exemption amount (if you are married), plus the future income and appreciation on the assets transferred. Even greater savings can accumulate if you use the exemption during your life in the form of gifts.

If maximizing tax savings is your goal, consider a “dynasty trust.” The trust is an extension of this GST concept. But whereas the previous strategy would result in the assets being included in the grandchildren’s taxable estates, the dynasty trust allows assets to skip several generations of taxation.

Simply put, you create the trust, either during your lifetime by making gifts, or at death in the form of bequests. The trust remains in existence from generation to generation. Because the heirs have restrictions on their access to the trust funds, the trust is sheltered from estate taxes. If any of the heirs have a real need for funds, however, the trust can make distributions to them.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

MUTUAL FUNDS: FROM MYSTERY TO MAINSTAY

With more than 10,000 mutual funds now available, and most working Americans contributing to them via their employer-sponsored plans, mutual funds are no longer the mystery they once were. Instead, they’re the mainstay of many family’s investment portfolios.

But if you’re new to investing, you may have some questions. What is a mutual fund? And how do they work? This article is designed to answer these and other important questions.

Designed for the Smaller-Net-Worth Investor

So you want to invest in, say, the stock or bond market. But you don’t have enough cash to diversify your investments. Mutual funds may be the answer.

At its most basic, a mutual fund is a financial intermediary that manages a pool of money from investors who share the same investment objectives. By pooling their money together, the investors can purchase stocks, bonds, cash, and other assets as far lower trading costs than they could on their own. What’s more, rather than trying to manage their assets themselves – a daunting challenge even for experienced investors – a mutual fund is overseen by professional asset managers. These experienced managers are responsible for identifying and investing in the securities they believe will best help the fund pursue its investment objective.

A Range of Investment Objectives

When you invest in a mutual fund, you are essentially buying shares in the pooled assets and you become a shareholder in the fund.

One of the reasons for the popularity of mutual funds is that not only are they extremely cost efficient and easy to invest in, but you can choose from a wide range of investment options. Some mutual funds, such as money market funds and short-term bond funds, are quite conservative and offer a degree of stability and preservation of your principal. Others, such as aggressive growth funds, pursue above-average returns, generally with the volatility and risk that go along with them. And there are options all along the risk/reward spectrum.

The Added Benefit of Diversification

Earlier in this article, the topic of diversification was mentioned. Diversification is the concept of spreading out your money across many different types of investments to reduce the affect of any one investment on your overall returns. When growth stocks are declining, value stocks may be rising. When U.S. stocks are appreciating, international stocks may be falling. Diversifying your investment holdings across asset classes (stocks, bonds, and cash), sectors and industries, and geographic regions can significantly reduce your risk. However diversification does not protect against risk.

The most basic level of diversification is to buy multiple stocks rather than just one stock. A stock mutual funds generally holds many stocks, often between 50 and 100 but frequently many more. Achieving a similarly diversified portfolio on your own by purchasing individual stocks would not only be exponentially more difficult, but also more expensive as the trading costs for buying and selling stocks can quickly eat away a smaller portfolio’s value.

Reading A Mutual Fund Prospectus

Before investing in any mutual fund, you should read its prospectus. This is a legally mandated document that provides specific information about the fund’s investment objectives, managers, the types of securities it may buy, fees and costs, and other pertinent information. Recent legislation mandates that a prospectus must be written in clear, common-sense language that the general public can easily understand.

A mutual fund prospectus should outline these six factors that allow you to evaluate the fund and its potential place in your plan.

  1. Investment objective. Is the fund seeking to make money over the long term or to provide investors with cash each month? You’ll find the answers in this section of the prospectus.
  2. Strategy. This section should spell out the types of stocks, bonds or other securities in which the fund plans to invest. It may look for small, fast-growing firms or large, well-established companies. If it’s a bond fund, it may hold corporate bonds or foreign debt. This section may also mention any restrictions on securities in which the fund can invest.
  3. Risks. The prospectus should explain the risks associated with the fund. For instance, a fund that invests in emerging markets will be riskier than one investing in the United States or other developed countries. A bond fund should also discuss the credit quality of the bonds it holds and how a change in interest rates may affect those holdings.
  4. Expenses. Different funds have different sales charges and other fees. The prospectus will spell out those fees so you can compare them with the fees of other funds. It should also explain the percentage of the fund’s return that is deducted each year to pay for management fees and operation costs.
  5. Past performance. Although you shouldn’t judge a fund solely by its past performance, this can show how consistently the fund has performed and give some indication of how it may fare in the future. This section of the prospectus will also show you the fund’s income distributions and its total return.
  6. Management. This section may do nothing more than list the fund manager or managers, or it may give specific information about the management team’s experience. If the prospectus doesn’t contain enough detail, you may be able to find this information in the fund’s annual report.

Mutual funds provide investors with a convenient, effective tool for investing in the stock, bond, and cash-equivalent markets. Let us show you how they can apply in your specific situation.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

WHY WORKING WITH A PROFESSIONAL MAKES GOOD SENSE

You wouldn’t think of being operated on by anything less than a board-certified surgeon. Or going into court without qualified legal representation. Or even repairing your late-model car without a trained mechanic. Then why do so many people believe they can manage their own financial affairs without professional guidance?

Investing is often a complex and confusing process. Even success can throw your investment strategy out of kilter. For instance, let’s say you want to have 60% of your portfolio invested in stocks. If the market does really well and you are realizing higher than expected returns on your stock investments, after a couple of years you may find that you now have 80% of your portfolio invested in stocks, even though you haven’t changed a thing. Without rebalancing to your target asset allocation, you might find yourself getting whipsawed by a volatile market, which happened to literally millions of investors in 2000 through 2002.

No matter what type of investor you are, it’s crucial to keep your plan on track. Revisit your asset allocation periodically (every year or so, depending on market conditions) to determine whether it needs adjustment. You should also periodically re-examine your risk tolerance and investment profile, especially as you get closer to your goal. You may discover you need to tweak your portfolio’s risk exposure over time.

Sitting down regularly to reassess your goals, time frame, and asset allocation allows you to fine-tune your strategy, keep your risk within acceptable levels, and make sure you’re on track. A skilled professional can help you identify investments that not only achieve the greatest absolute return over the years, but also subject you to the lowest overall taxes along the way. Your advisor will also show you how to properly allocate investments among your various accounts and work with you to integrate your investment and financial goals. A truly knowledgeable advisor will also help you stay abreast of developments in the financial marketplace as innovative new products and services become available.

Just as you see your doctor for checkups, your lawyer for legal advice, and your mechanic for tune-ups, consult a qualified financial advisor for financial planning.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

WELCOME TO “LIFE CYCLE PLANNING”

Financial planning means something different to everyone. For some, it’s about getting by month to month on their paycheck, for others it’s about watching how their stock portfolio performs each day.

Unfortunately, few of us feel completely prepared to meet our ongoing financial obligations and objectives. Worries about money have become one of the greatest anxieties of our day – witness the dramatic rise in financial-related publications, radio and television shows, and websites.

Because each person’s situation, lifestyle, and goals are so different, there is no single turnkey solution for successful money management. However, we can identify several steps that successful people take in pursuing their financial goals. We call these steps “Life Cycle Planning” because each step can be tied to the attainment of certain life-defining events that almost everyone goes through.

Development of Human Capital

Human capital refers a person’s ability to turn their skills and abilities into a livelihood. The development of these skills and abilities helps us maximize our income potential in a competitive marketplace.

In our early years, usually between age 18 and 25, we set ourselves on a course that largely defines our human capital potential. Each of us makes an investment in human capital, whether we realize it or not. For some this is an investment of time, gaining experience and skills on the job. For others it is an investment in trade school or college.

It should also be noted that, although our greatest focus on human capital development generally takes place in our early years, this is an investment we should continue to make and assess throughout our working careers. Your ability to earn income, now and in the future, is the most valuable asset you own.

Expense Management and Budgeting

Once your “human capital” investment begins to pay dividends in the way of regular income, you must begin to develop and apply management skills to your newfound earnings.

Without managing your expenses, your wants and needs will invariably outpace your ability to earn. By implementing some form of budgeting, you can begin to set your sights on saving and meeting your longer-term financial objectives.

A beginning budget can be as simple as setting aside a predetermined percentage of your earnings each month for saving, spending what is left until it is gone, then spending nothing more until next month. A more sophisticated budget takes into account irregular and flexible expenses, emergency expenditures, establishment of a “rainy day” fund, as well as saving and investing.

Ensuring Adequate Liquidity

As your budget begins to pay off in a healthy savings account, you might begin to wonder how best to apply your limited savings to your unlimited needs and wants.

Without exception, the first financial need you should meet is to have an emergency fund. An emergency fund allows us to cover unexpected short-term needs using cash instead of leveraging your future earnings through costly loans. As a general rule of thumb, your emergency fund should be adequate to maintain your standard of living for six months.

Ample Insurance Protection

A major disability, the loss of a family breadwinner, a fire in your home, a family member’s major medical problem or need for skilled nursing care … the most dramatic emergencies can seldom be paid for completely using personal savings.

Although such tragedies can create devastating individual financial hardship, the financial risk of such events can be shared by very large groups of families and individuals through insurance.

Life insurance, disability income insurance, property and casualty (P&C) insurance, long-term-care insurance, and major medical insurance all have a place in your “Life Cycle Planning.”

Long-Term Funding Objectives

Once you’ve accumulated sufficient funds to cover your emergency needs and purchased protection against financial risks, you can begin saving for your long-term goals in earnest. We can help you design a plan to pursue your retirement objectives that fits with your personal financial goals, risk tolerance, and time horizon.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

IT’S TRUE – TIME IS MONEY!

People often overlook the time value of money. Economists know full well that a dollar received today is worth more than a dollar received a year from now. Why? Because that dollar could be invested, saved, or used to purchase an asset such as real estate that will appreciate in value. What’s more, inflation slowly but steadily erodes the purchasing power of your money, rendering tomorrow’s dollar less valuable than today’s.

The relationship between time and money provides the foundation for virtually every financial decision you will make. Whether you are saving money for a future event or considering a loan to pay for a current financial need, you will be greatly affected by the time value of money. The following are some tips for making the most of your dollars, today and tomorrow.

Time Value Tips

Whether you are saving for retirement or a down payment on a home, college funding or dependant care needs, you will be greatly affected by these simple time value tips.

Time Value Tip #1: The longer you have to prepare, the less your objectives will cost. Assuming you are able to invest your savings and earn a positive return, you will always be better off saving for your goals in advance. Not only will your savings earn interest, but the interest you earn will also begin to earn interest. This is called “compounding” and was referred to by Albert Einstein as the “the most powerful force in the universe.” (No one knows whether he was serious or joking.)

Time Value Tip #2: The higher the rate of return you are able to secure on your savings, the faster your money will grow. Generally, the amount of risk you are willing to take on your investments will determine your long-term rate of return. The longer you have to save for your goals, the more risk you should take on your investments, and the greater rate of return you should expect.

Time Value Tip #3: It’s almost always better to postpone paying taxes on your investment proceeds. When you have the choice, you should usually choose to delay paying taxes on investment proceeds as long as possible. That’s because as long as you retain all your investment’s growth, instead of losing some to taxes, you can continue to earn more interest on that growth. Once you pay the taxes, you will never earn interest on those lost funds again. One way to postpone the payment of taxes is to invest in qualified retirement plans, such as IRAs and 401(k) accounts. Another tactic is to invest in annuities, which also allow your money to grow tax-free until withdrawn.

Time Value Tip #4: Factor inflation into your long-term plans. When preparing for long-term financial objectives, you must factor inflation into your plan. Over the last 20 years, inflation has averaged about 4% per year. At that rate, in 20 years a salary of $50,000 will buy what only $22,100 does in today’s dollars – that’s less than half. Looked at another way, that $30,000 luxury car you’ve had your eye on will cost you a whopping $67,872 just two decades from now!

The cost of some financial objectives will grow even faster than this — college costs, for example, have increased by some 8% annually on average. Planning for such cost increases will ensure that your asset accumulation level is sufficient to meet your objectives.

What’s the best time to start preparing for a sound financial future? Twenty years ago, goes the old joke. Failing that, the second-best time is today. Why not start now by contacting us?

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

SELLING YOUR HOME FOR MAXIMUM GAIN IN MINIMAL TIME

If you’re like many Americans, your home probably represents your biggest investment. But the current tax treatment of capital gains from the sale of personal residences is favorable – gains of up to $250,000 for singles and $500,000 for married couples are generally tax-free, provided you have occupied the property for at least 2 years and it is your primary residence. So depending on your circumstances, moving up to a larger home or one in a better school district, or trading down to a smaller dwelling and realizing gains for your retirement, certainly can be appealing.

Once you have decided to try to sell your home, the next big decision you will face is whether you want to sell it yourself of go through a real estate broker. A broker usually charges 5-6% of the selling price for his or her services. However, realtors often earn their commission (and then some) by knowing the local market, helping you determine a reasonable selling price, and saving you a lot of time and hassles, not to mention the risk and liability that come with selling your home yourself.

In selecting a broker, invite several realtors to tell you what they would deem to be a fair selling price, explain their commissions and fees, and present a marketing plan. They’ll probably do this for free in return for the chance to win your business. You will also want to ask about their past experience in the area.

Nearly 90% of all home sales are through agents and brokers. But if the market is a “sellers market” – that is, homes are selling quickly and at or above asking price – and your home is in stellar condition, perhaps you might want to try selling it yourself. There are a number of resources on the Internet designed to help you do just that.

Does My House Need Fixing Up Before Listing?

It doesn’t hurt to do minor repairs and cosmetic touch-ups prior to showing your home to potential buyers. We hear a lot about “curb appeal” — how a house appears from the street. Is it attractive enough for a buyer to even want to come in and look? If there are major repair problems, you may have to lower your price in the end. Maybe what you think is important to do to fix up the house will not appeal to potential buyer – they’d rather do it the updating to suit their own taste.

Most real estate and interior design experts will tell you that two of the best “bang for your buck” upgrades are new carpet and a fresh coat of paint. Select neutral colors that will appeal to the maximum number of buyers. Odors from pets, smoking, and unconventional foods should be eliminated as much as possible, or masked by baking cookies or putting a few drops of vanilla into a hot sauce pan for a moment or two. Reduce clutter and consider moving some items into your garage or storage to make the home appear larger. And above all, keep it clean – especially during those times when you know prospective buyers will or may be visiting.

How Much Should You Charge?

This is a more complex question than it appears at first glance. In this situation, you and the buyer are at odds – you want the highest price possible, they want to pay as little as possible. But listing your house for more than it’s really worth can backfire. You’ll attract fewer buyers to begin with, as your house may be above the top end of their budget, and you may turn away buyers with the resources to purchase your home. Once that initial flush of interest wanes – since realtors and home seekers usually flock to a new listing early – you’ll be left with fewer and fewer people who may buy your home.

By definition, the value of any asset is whatever someone is willing to pay for it. A buyer and seller generally find it easier to reach an agreement upon when both parties have access to all the relevant facts. With homes, there are several ways to arrive at a “starting point” from which to begin this process.

A good first step is to see what similar houses in similar locations in your community have sold for in the recent past, known as “comparable sales” or “comps.” A good local real estate agent should have ample information about recent sales in your area. Don’t be overly impressed by the asking price of comparable homes, which may be inflated or unrealistic; instead, look to actual sales prices as your best guides.

You may also want to enlist the help of a professional home appraiser. For a cost generally between $300 and $500, an appraiser will prepare a detailed evaluation of the estimated value of your home. Then, in conjunction with your agent, arrive at a price low enough to entice a high number of buyers but high enough to meet your goals. In a market where homes are selling briskly, don’t worry too much about pricing your home too low – such a tactic could actually result in multiple offers and may even trigger a bidding war for your home!

What If Nothing Happens?

If the real estate market is slow in your community due to national or local economic issues, there isn’t much you can do (besides continually lowering the price, which you probably won’t want to do). If no one is expressing any interest in your home, or it simply does not sell, you could consider the following:

  • Lower your asking price.
  • Make some obvious repairs or upgrades.
  • Confirm your real estate agent is working aggressively to sell your home and change agents if you do not feel they are.
  • Try selling the house yourself, lowering the price to reflect the commission you won’t have to pay (please note, however, that the buyer’s agent will still expect a commission).
  • Offer to finance all or part of the purchase price yourself.
  • Offer to include items from the home, such as hot tubs, certain furniture or built-ins, lighting fixtures, and perhaps even a big-screen TV that would be costly to move anyway.

Selling your home may take time and patience, but it deserves your most detailed attention as it is one of the largest transactions you will undertake in your financial life. If you’re successful, you’ll be saying “Home Sweet Home!” after the sale has closed.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

YOUR PERSONAL FINANCIAL STATEMENTS

Personal financial statements are the roadmap that guides us from where we are today, to where we want to be tomorrow. They also provide fixed points of reference from which we can measure our progress over time.

What are Personal Financial Statements?

There are two basic personal financial statements that everyone should prepare, or have a financial advisor prepare, at least once each year: the cash flow statement and the balance sheet.

This process is a critical first step in financial planning. Tracking your financial position and progress gives you a great feeling of control – you know where you are going financially. It helps you to make smarter decisions about financial matters.

The Cash Flow Statement

Simply put, “cash flow” is a measure of the money coming in and going out each month. A cash flow statement is an ongoing financial document that tracks your sources of income, your uses of income, and the difference between the two (surplus funds which can be invested towards future financial objectives or saved for a rainy day.)

If you keep a budget, you are, in essence, keeping a running cash flow statement. By tracking your cash flow on a monthly basis, you’ll be better prepared to meet your financial needs:

  • Short-term expenses – your day-to-day expenses and standard of living items such as food, transportation, childcare, rent or mortgage, utilities, telephone, cable, etc.
  • Recurring expenses – periodic payments for items such as periodic insurance premiums, tax payments, medical and dental expenses, etc.
  • Financial emergencies – an emergency fund of between three and six months salary that provides cash for emergencies instead of using debt.
  • Intermediate- and long-term goals – systematic planning and saving that helps you meet pursue your financial objectives.

Balance Sheet

Your balance sheet is a snapshot of your personal net worth.

Total Assets
less Total Liabilities
equals Your Net Worth

Estimating Your Net Worth

Total Assets: A list of current estimated value of your assets might include the following: cash in banks and money market accounts, cash surrender value of life insurance policies, IRA & Keogh account balances, pension and 401(k) accounts, equity in real estate, and personal possessions. Add them up and you’ll have a figure that represents your Total Assets at the moment.

Total Liabilities: Next, make a list of your liabilities, which might include the following: mortgage, bank loans, car loans, charge accounts, taxes owed, college loans, etc. Add these up and you’ll have a list of your Total Liabilities. Hopefully, it’s less than your assets!

Your Net Worth: Your personal net worth is the difference between your total assets and your total liabilities.

As the control you gain through cash flow management turns into increased savings, your success is reflected in an increasing net worth. The process of preparing personal financial statements will bring you closer to controlling your personal finances and accumulating sufficient assets to meet your objectives.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

 

HOW MUCH LIFE INSURANCE DO YOU REALLY NEED?

Some people equate life insurance with tragedy and death. In truth, life insurance is for the living. Without it, the sudden demise of a key breadwinner could leave a family stranded without the resources to maintain their lifestyle – or even retain their home.

Not so long ago, professionals recommended that families carry a life insurance policy with a death benefit of between five and seven times their annual household income. Today, however, in light of rising house prices in many parts of the country and spiraling college costs, most advisors now recommend eight to 10 times income.

Unfortunately, most American families are underinsured. According to statistics from industry research and consulting firm LIMRA International, the average American household carries just $126,000 in life insurance – approximately $300,000 less than they actually need – and only 61% of adult Americans have life insurance protection, a decline from 70% in 1984.1

A Cornerstone of Sound Financial Planning

Financial professionals generally consider life insurance to be a cornerstone of sound financial planning, for two key reasons. First, it can be a cost-effective way to provide for your loved ones after you are gone. And second, life insurance can be an important tool in the following ways:

  1. Income replacement – For most people, their most valuable economic asset is their ability to earn a living. If you have dependents, then you need to consider what would happen to them if they could no longer rely on your income. A life insurance policy can also help supplement retirement income, which can be especially useful if the benefits of your surviving spouse or domestic partner will be reduced after your death.
  2. Pay outstanding debts and long-term obligations – Without life insurance, your loved ones must shoulder burial costs, credit card debts, and medical expenses not covered by health insurance using out-of-pocket funds. The policy’s death benefit might also be used to pay off a mortgage, supplement retirement savings, or fund college tuition.
  3. Estate planning – The proceeds of a life insurance policy can be earmarked to pay estate taxes so that your heirs will not have to liquidate other assets to do so.
  4. Charitable contributions – If you have a favorite charity, you can designate some or all of the proceeds from your life insurance to go to this organization.

Determining How Much: A Four-Step Process

Determining how much life insurance coverage you need is a four-step process:

Step 1: Determine Your Family’s Short-Term Needs

Short-term needs are financial obligations and/or expenses arising within six months of death. Examples of short-term needs include expenses you pay now such as:

  • Loan balances (automobile loans, etc)
  • Outstanding credit balances (credit cards, revolving lines of credit, etc)
  • Mortgages (first and second mortgage, home-equity loans, lines of credit)

Add to these current expenses any death-related expenses that must be paid in the short term:

  • Funeral expenses
  • Final medical costs
  • Estate settlement costs and probate
  • Estate taxes due
  • Charitable bequests you would like to make upon your death

If you don’t already have one, your survivors should be left with a liquid emergency fund sufficient to get them through any unexpected financial needs. Most advisors recommend between three and six months’ worth of living expenses.

Step 2: Determine Long-Term Needs

In addition to covering your survivors’ short term needs, some level of monthly income will be needed to maintain their current standard of living and meet financial goals such as saving for retirement and funding college for children.

The value of these future obligations is discounted back to present value amounts to provide a dollar amount that, if invested, could provide an adequate income stream to fund all of your long-term goals.

Step 3: Calculate Your Total Available Resources

By this point, you should have a good idea of your family’s total cash needs in the event of your untimely death. With any luck, you have already begun to set money aside to cover some of these costs. Other resources that may be available to your family include pensions, annuities, funds from retirement accounts, employer-provided life insurance, and Social Security.

The Social Security program offers benefits to survivors under age 17, and those whose spouses were receiving retirement income from Social Security can also count on survivorship benefits.

The total value of these future resources is discounted back to present value amounts. This gives us a single dollar amount that we can use to offset your total needs.

Step 4: Provide Funds To Cover A Shortfall

In most cases, comparing total needs to total resources will result in a shortfall. That’s where life insurance comes in. Without it, your survivors will be left with the choice of either finding or creating additional resources (such as having the surviving spouse return to work) or experience a decline in the quality of their lifestyle.

Life insurance is uniquely suited for covering such a shortfall. It is a means of sharing the financial risk of premature death with many, many others who have similar concerns.

You pay a relatively small premium to an insurance company in exchange for their promise to pay your beneficiaries a specified death benefit in the event of your death. You may find it ironic that a financial need arising from death can be alleviated by a financial resource that is created after death. That’s why life insurance, although something no one hopes to ever need, is indeed for the living. It’s also a vital issue we can help you investigate in greater detail to ensure your family’s financial future will be protected.

  1. “Life Insurance Awareness Month,” LIMRA International, August 2004

(Updated May 10, 2011)

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

THE ROLE OF PRIVATE MORTGAGE INSURANCE

If you put a downpayment of less than 20% when you bought your home, chances are good that you had to purchase private mortgage insurance, or PMI, in order to qualify for your loan. A mortgage insurance policy protects the bank in the event they are forced to repossess your house and sell it at a loss. As with most other types of insurance, you pay a monthly premium on top of your monthly mortgage payment for this policy. A mortgage insurance policy provides the means for purchasing a house you may otherwise be unable to afford, due to a limited down payment.

The good news is, PMI makes it possible for a homebuyer to obtain a mortgage with a down payment as low as 5% and for low-to-moderate income homebuyers as low as 3%. PMI may be also required when buying a second home or refinancing an existing mortgage with cash out. Mortgage insurance protects the mortgage lender against financial loss if a borrower defaults.

Low-down-payment mortgages are becoming more popular. Mortgage insurance allows borrowers to purchase a more expensive home than they might otherwise be able to afford. With lower downpayment, you might retain more funds for home furnishings or remodeling, buying a car, or other investments.

The mortgage insurance premium is based on loan to value ratio, type of loan, and amount of coverage required by the lender. The good faith estimate of closing costs provides the estimated premium and monthly cost for the PMI coverage.

It may be possible to cancel PMI at some point, such as when your loan balance is reduced to a certain amount – below 75% to 80% of the property value. The law in certain states requires that mortgage insurance be cancelled under some circumstances. But because of the wide variation in lender, investor and state requirements, it is necessary to find out the specific requirements for cancellation before you commit to paying for mortgage insurance.

Federal legislation enacted in 1999 made it a little bit easier to rid yourself of your monthly mortgage insurance premium. It requires lenders to automatically eliminate your mortgage insurance once you own 22% of your personal residence. Unfortunately the 22% equity is based on the value of your loan compared to the home’s original purchase price so the lender does not take into account the appreciation of your home – just the gradual paydown of your mortgage. However, some lenders will consider your home’s appreciation in deciding whether or not PMI is still required, so it doesn’t hurt to ask.

Mortgage insurance should not be confused with mortgage life insurance, which is designed to pay off a mortgage in the event of the borrower’s death.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

BORROWING SMART: THE BASICS

Many people instinctively believe that borrowing is inherently a bad thing. Used to excess, they’re right. But how many of us have the money to buy a house – or even a new car – outright? Used judiciously, however, borrowing can provide powerful leverage that can improve your financial standing.

Take a $200,000 house. Assuming a downpayment of 20%, or $40,000, a $50,000 rise in the price of that home would mean the owner more than doubled his or her money! If the homeowner had paid with cash, the $50,000 increase would represent a return of just 25%, minus the opportunity cost missed by not investing the remaining $150,000. That’s the power of leverage.

To help you “borrow smart,” this article explains some of the basic terms and concepts behind lending.

Structuring the Terms of Your Loan

Borrowing can be a smart investment in your financial future, especially if used for a house that will likely appreciate over time, improvements that raise the value of your home, or college costs that will eventually pay off in higher earnings potential. And sometimes borrowing is unavoidable, especially in cases of emergency.

Fortunately, today’s financial institutions make a wide variety of loans readily available and relatively easy to obtain. However, loans are generally complex financial transactions. The more you know before signing the loan contract, the better prepared you will be to choose the type of loan that best meets your needs.

How your loan is structured helps the lending institution determine how much risk they are assuming, and, in turn, what interest rate they will charge. There are three basic loan features that define your loan: whether the loan is paid back in installment payments or as a lump sum, whether the loan is secured or unsecured, and whether the interest rate on the debt is variable or fixed.

Installment Loans vs. Lump Sum Payment

When you take out a loan, you promise to repay the loan, plus interest, based on a contractual agreement. When you choose an installment loan, you borrow a lump sum of money, and then pay back a fraction of what you borrowed at regular intervals over an extended period of time. This way, you pay back both the loan principal and interest gradually. If you prefer, you may choose to borrow a lump sum of money, then pay back the entire loan principal and all accrued interest in a single payment at some future date in a single, lump-sum payment.

Secured vs. Unsecured Loans

When a lender analyzes the risk they associate with a debt, an important consideration is whether the loan is secured or unsecured. A secured loan is based on your ability to provide collateral of similar or greater value than the amount being loaned. Should you default, the bank can reclaim and sell the collateral to recoup most, if not all, of the amount loaned. A home loan is an excellent example of a secured loan – the bank will lend most of a home’s purchase price, but retains a lien against the home for as long as the loan is outstanding.

In contrast, an unsecured loan is based solely on a promise of repayment. Because the lender holds no collateral, unsecured loans carry significantly more risk for the lender which, as a result, charges a higher interest rate on the borrowed funds.

Fixed vs. Variable Interest Rate

The interest rate you pay on a loan is based on many factors, including your credit rating, your payment history, and whether your loan is based on a fixed or a variable interest rate. Fixed interest rate loans are just as the name implies – the interest rate does not change during the term of the loan. Because the lender cannot change the rate as market conditions change, a fixed-rate loan usually has a higher initial interest rate than a variable interest rate loan.

The rate on a variable interest rate loan, in contrast, generally starts slightly lower than the fixed rate, but it is “adjusted” from time to time to reflect current economic factors. If rates drop, the variable loan rate will typically drop. If rates rise, the variable loan rate will normally rise. Because of the initially lower interest rate, the monthly payment on a variable rate loan is lower than its fixed counterpart. This lower payment often allows you to qualify for a higher loan balance.

Required Lender Disclosures

Lenders are required to tell you exactly what a loan will actually cost per year, expressed as an annual percentage rate (APR). Some lenders charge lower interest but add high fees; others do the reverse. The APR allows you to compare apples to apples by combining the fees with one year of interest charges to give you the true annual interest rate. If the lender quotes you a periodic interest rate, this won’t be the true interest rate because it does not include the fees he may charge you.

Every lender is required to provide a total cost disclosure before a loan is made. It will tell you exactly what the loan will actually cost you in dollars and cents if you make all payments to the lender as you’ve agreed.

Smart borrowing can work in your favor – but only if you understand how lending really works. Contact us for more information if you’re considering a new loan or deciding how to proceed with an existing one.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.