Table of Contents 

 
INTRODUCTION AGENT EDUCATION Gaining Additional Education Designations Subject Matter RETIREMENT AND ESTATE PLANNING 3 most voiced questions regarding estate planning list of estate planning goals Estate Planning Advantages (definition) Holographic wills HOW MUCH IS ENOUGH? Investing After Retirement Retirement Savings: Where To Put It After Retiring Fixed Annuities Variable Annuities Relying Upon Life Savings The 4% Strategy Save What and Spend What? What About Early Retirement? TO WORK OR NOT TO WORK . . . SOCIAL SECURITY BENEFITS SOCIAL SECURITY RETIREMENT INCOME figuring the number of years needed to order technical computer support program SOCIAL SECURITY SURVIVORS' BENEFITS SOCIAL SECURITY DISABILITY BENEFITS Paying In and the chart for number of quarters required PENSION PLANS Pension Basics Defined Benefit Plans Defined Contribution Plans INTEGRATING SOCIAL SECURITY WITH THE PENSION PLANS RECEIVING PENSION BENEFITS Choosing Pension Payment Options joint-and-survivor waive form WILL YOUR CLIENTS PENSION SURVIVE UNTIL AGE 65? ANNUITIES Immediate Annuities Deferred Annuities Variable Annuities Interest Rate Paid Surrender Penalties annuity surrender period comparison Administrative Charges CONTRACT CLAUSES Bail-Out Clauses United Insurance Educators, Inc. Table of Contents - 1 4 5 9 9 12 13 14 15 16 19 22 23 23 23 24 24 25 26 28 30 32 33 34 36 37 38 39 40 41 42 45 47 48 49 52 54 54 55 55 57 58 60 61 62 62

Market-Value Adjustments Persistency Bonus Partial Withdrawals ANNUITY PAYOUT PHASE Payout Options Single Life Annuity Life and Period Certain Annuity Joint-and-Survivor Annuity Other Methods of Collecting Income Systematic Withdrawals Lump-Sum Payments Split-Funding Techniques Annuity Taxation Withdrawal Penalties LIFE INSURANCE LONG TERM CARE INSURANCE Why Buy a Long-Term Care Policy? Defining Policy Benefits Part A of Medicare will pay for: Medicare certified hospice program will include: Types of Care Facilities Definitions of Levels of Care (skilled, intermediate & custodial) Qualifying For A Policy Understanding What Is Not Covered Choosing Daily Benefit Levels Are There Alternatives To Long Term Care Policies? to qualify for nursing home care under Medicare Availability of Nursing Facilities Limiting Health Care: Is It An Option? Facing Up To The Facts Applying to Medicaid Judging the Quality of Nursing Facilities asking the financial questions basic facts about nursing homes Financial Considerations assets minus liabilities = net worth Finding a Qualified Professional Advisor What Will The Future Bring? LIVING TRUSTS Revocable Living Trusts Avoiding Probate Revocable Living Trust Disadvantages Durable Power of Attorney Guardians, Conservators & Committees Irrevocable Living Trusts Types of Irrevocable Living Trusts Uniform Gifts to Minors Testamentary Trusts Combination Trusts Trust Record Keeping Trustees PLANNING FOR DEATH Joint Accounts
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63 63 64 65 67 67 67 68 69 69 70 71 71 72 74 80 81 82 86 89 92 92 93 94 96 99 106 111 114 118 123 123 129 130 131 133 135 136 142 143 144 145 146 147 149 151 154 155 156 158 158 160 162

Choosing An Attorney Special Provisions examples of programs which provide special benefits providing for pets in a will or trust two types of property: real and personal three main types of estates Special Agreements DOMICILES AND PROPERTY OWNERSHIP GIFTING AND OTHER PROPERTY DISBURSEMENT 3 conditions which must be met to qualify as a gift when life insurance becomes an indirect gift 4 types or groups of beneficiaries FOLLOWING LEGAL PROCEDURES PROPERTY TRANSFERS THE WILL A Human Document the 2 ways of distributing property SELECTING TRUSTEES & OTHER REPRESENTATIVES what both the federal and state government will do duties of the personal representative order of probate proceedings SETTLING THE ESTATE AFTER TESTATOR'S DEATH when probate delays can occur procedures in small simple estates preparation for postmortem management (7 categories) furnishing information the gross estate: information gathering form AGENT ETHICS Defining Ethics A Matter of Character Why Be Ethical? What Are Our Responsibilities to Other Moral Persons? Ethics In Action Human Nature desired traits listed by the top CEOs Sympathy versus Empathy Learning To Be Ourselves SELECTING A SAFE INSURER insurance company rating chart DUE DILIGENCE A.M. Best's rating guide Quantitative Evaluation From A.M. Best (1) Profitability (2) Leverage (3) Liquidity Qualitative Evaluation From A. M. Best Understanding the Rating System Rating Modifiers Performance Modifiers Affiliation Modifiers Rating "Not Assigned" Categories CHOOSING TO DIE INTESTATE GLOSSARY

163 164 166 167 169 170 171 173 177 177 179 181 186 190 192 193 195 198 200 201 201 203 205 207 209 210 212 217 218 226 227 240 242 244 250 255 260 262 263 266 271 272 273 274 274 275 278 278 279 280 283 285-304

United Insurance Educators, Inc. Table of Contents - 3

Retirement Planning 
Introduction to Retirement Planning     

Introduction 

 

This Course is designed to provide accurate credit hours for your state. It is not intended to be used as selling material or to give any type of professional or legal advice to either the agent or the client. Since this material is gathered from multiple sources, there may be differences of opinion expressed or implied. The material enclosed is subject to change at any time, since laws and customs change. This material is not to be copied or used in any manner without prior written authorization. All courses are sole property of United Insurance Educators, Inc. Internet course material may be downloaded and used in the context of study for continuing education credit hours. Our internet address is: www.cheapce.com It is further understood that the agent requesting the credit hours must have personally read the text and personally taken the test. No certificate of completion may be given under any other circumstances.

Thank you for ordering your credit hours from United Insurance Educators, Inc. We appreciate your business.

United Insurance Educators, Inc.
8213 – 352nd Street East Eatonville, Washington 98328-8638

Email: mail@cheapce.com www.cheapce.com United Insurance Educators Continuing Education

United Insurance Educators, Inc. Page 4

Retirement Planning 
Chapter 1 – Agent Education

Agent Education

 

Gradually, all of the individual states are moving towards requirements for insurance agent education. It has been said that the states have given up trying to educate the consumer, so now they are concentrating on the agents. The consumer didn't always want to be educated, and the same thing may occasionally be said of the agents. Agents often seem to voice the same educational questions: "I get all the education I need for my products from the companies. Why should I be required to obtain further education that I may never need or want?" Twenty years ago, or even just ten years ago, this argument may have had some justification, but that is certainly no longer true today. Just from a legal standpoint, education is vital to prevent lawsuits. The more an agent knows the less likely he or she is to make an error that will cost them their financial future. Aside from the legal standpoint, however, there are additional valid reasons to pursue education (whether it is mandated or not). For the career agent, education validates their knowledge in the insurance field. When consumers know that a person, in any line of work, pursues education their trust level is higher. Can you imagine going to a heart specialist that did not want to take additional classes after he or she graduated from medical school? Would you trust someone who said "I didn't want to go to school anymore, but don't worry. I read all the brochures that the companies send me." Of course, heart surgery is certainly more technical than selling insurance, but the idea is the same. Anyone who is really interested in the consumer's well being knows education is essential. As a provider of education, we are very frustrated by certain agent attitudes. "Which course is the easiest?" "I've been selling insurance for twenty years, so why do I need this stuff?"
United Insurance Educators, Inc. Page 5

Retirement Planning 
Chapter 1 – Agent Education

"Can't you just send me the test? I don't plan to read the book anyway." "How long does it take to complete this 12 hour course?" "Do you have anything on selling annuities? I'm not having much luck with it." Luckily these examples do not represent the majority of our country’s agents. However, we do hear them often enough to be surprised by the number of insurance agents that seem to totally miss the point.

"Which course is the easiest?" Since each person brings his or her own educational background to the course material, it is impossible to say which course is harder or easier. However, the question educators prefer to hear is "Which course will be most beneficial for me?"
Education, in many countries, is a privilege that the masses do have the opportunity to enjoy. In America, we take education for granted. In urban America it is said that students are often afraid to do well in school because of the abuse it brings from the other students. Recently Oprah Winfrey reported that many less developed countries require students to pay for their education. Yet in our society, where education is free through the twelfth grade, education goes unappreciated. Unfortunately, in some schools students pressure others to do poorly, which merely broaden an individual’s probabilities that he or she will be a financial under-achiever throughout their lifetimes. It is no secret that the rich seem to be getting richer while the poor seem to be getting poorer. Education is always the key to success, whether success is measured monetarily or by personal achievement. It is very important that we begin to stress education for our children and consider it a priority in our lives, as well as in the lives of our children. Probably every agent who has ever attended a seminar remembers some agent or agents who slept through the entire thing. There is always the agent who reads the newspaper or spends his or her time doing personal business (whether that happens to be writing a letter or digging noisily through their briefcase). Besides being an irritation to those agents who are interested in hearing the speaker, such actions also display the attitude of these agents to their peers. Obviously these agents either consider the current speaker boring or they simply do not place any value on the potential of the education being presented.

United Insurance Educators, Inc. Page 6

Companies have sprung up that do not market insurance products. Even if the agent is knowledgeable enough to pass the test without reading the book. will that information keep the agent up-to-date on current products available? This point has especially come to light in recent years. "Can't you just send me the test? I don't plan to read the book anyway. "I've been selling insurance for twenty years. Many professionals feel we will be seeing multiple lawsuits. A little education could have gone a long way in such a situation. we are always mystified. In fact.Retirement Planning  Chapter 1 – Agent Education Insurance agents who believe they are too busy to learn are "missing the boat. but who do target insurance agents. Some states do feel that after a certain point. Many of these companies have formed for the express purpose of convincing insurance agents to sell trusts to people who often do not need them. On the other hand. The time spent getting genuine education will reflect eventually in the commissions earned. I guess we could look back at the example of the physician. United Insurance Educators. they are prodding them to greater success. how is the state to know that the agent working for twenty years ever knew anything to begin with? It's a tough question with no easy answers. As nearly anyone who has made it to the top will tell you. both from the consumers and the states. An agent who knows more than the average agent gets more referrals. If the only knowledge they are receiving is coming from the insurers that want them to market their products. the Attorney Generals of some states have initiated lawsuits on behalf of the consumers against such companies. I guess you could say that the insurance agents were "sold" themselves. They simply took the word of the companies who employed them." as the saying goes. Even if he or she has been practicing medicine for twenty years. things change. States who mandate education are not unfairly harassing insurance agents. Unfortunately. an insurance agent should be exempt from education. Page 7 . education is a necessity for higher earnings. We would want our doctor to keep up on all the changes. how accurate and complete will their information be? In addition." Obviously. We are referring to revocable living trust companies. but when the agent believes remaining ignorant is somehow a financial bargain. Inc. over these revocable living trusts in the next few years. so why do I need this stuff?" Providers of education do not make the laws and we realize that views differ regarding the length of service an insurance agent has put in. More referrals mean more earnings. insurance agents did not always understand the products they were marketing. there will always be those who are looking for a bargain. How is that possible if they only read brochures from the companies that want to sell them products? Insurance agents are in the same situation.

We are not advocating that agents fear new products. Most states use a specific method to determine the hours that are granted to a correspondence course. but it is essential that they understand all points. They are running backwards because they are selling a product before they understand it themselves. so times do vary with individuals. a sales meeting is called and someone in the office goes over the brochures with their agents stressing the selling points of the product. Many agents enter new markets simply because their agency introduces new products. however. Usually these methods state a specific number of words per page and pages per hour.Retirement Planning  Chapter 1 – Agent Education he or she will have no way of knowing what information they missed that would have benefited both the agent and the consumer. Even the brightest person can learn something new. United Insurance Educators. Typically. States do not generally allow credit hours for programs that are geared towards selling techniques. and for good reason. "Do you have anything on selling annuities? I'm not having much luck with it. State mandated education programs intend to benefit the consumer through better-educated insurance agents. While that will then take longer to complete the course. it is common to read and re-read sections of the book. Since individuals do read at different speeds and levels. It is our hope. Page 8 . that an agent would gain knowledge BEFORE entering into a new marketplace. Anytime knowledge is gained. "How long does it take to complete this 12 hour course?" I beg your pardon? Each agent reads at different speeds. state mandated programs are not interested in increasing an agent's sales. In these cases. of course. Unfortunately." It is always a challenging to enter a new marketplace. these formulas are thought to be averages. this seldom provides complete information. Agents hit the ground running without realizing they are running the race backwards. the time is well spent because knowledge is gained. Again. The time it takes to complete the test is not part of the formula. some will read slower and some quicker. Inc. the agent and consumer benefits. not just the ones that will promote sales. this is where education is critical. Many insurance agents like to take subjects that are new so that they may broaden their knowledge.

United Insurance Educators. These might be one or more of several things. letterheads and other forms of identification. Earning a designation takes time and effort. Page 9 . but in truth. the designations are only for individuals and may not be used by any agency or firm. policy service. that is not always the case. An agent who wishes to achieve a particular designation is generally required to have been an active agent for a specified time period before applying to the organization for additional schooling. Typically. Once an individual has achieved his or her designation. in the process. We would like to believe that all agents want to do the ethical thing. give the industry a higher level of consumer respect. A particular topic can benefit agents across several lines of insurance or only benefit a specific line. these are professional regulatory organizations. The exact code of ethics will vary from organization to organization. These organizations desire to raise the level of performance in the insurance industry and. such as consumer ethics. Subject Matter Not all states agree on acceptable topics. of course. There are several different programs available. Inc. the applicant must. such as an RHU or CFP. Therefore. Generally. courses on ethics often bring thought to the "grayer" areas. Some subjects are universal. To actually receive the designation. pass the study program and exams. of course. each organization has a printed code of ethics to which their members are expected to conform. diligence in securing insurer information and general fair business practices. it is not unusual to have some chapters of a course disallowed in one state and accepted in another. The level of additional education required is generally higher than that mandated by the states. the individual normally uses it on his or her business cards.Retirement Planning  Chapter 1 – Agent Education Gaining Additional Education Designations It is becoming more common for insurance agents to seek additional educational designations. While an agent certainly should be aware of state and federal laws. but most agree that it is well worth the time and effort put forth. From an agent's standpoint. Normally. which dedicate themselves to education and responsible consumer interaction. for example. The codes of ethics stress consumer confidence through respect for client's privacy. additional education is required during each renewal cycle. he or she is likely to be interested in those topics that aid him or her in the selling field. depending upon the topic. Once a designation is completed.

When the consumer does not properly prepare for retirement. the consumer may be injured by an agent's lack of education. Agents owe those individual faces their livelihoods. The needs and thoughts of the consumers are gaining wider attention by both the selling agents and by the insurance companies. there would be fewer taxes collected. such as how much money should be saved. for example. however. What is sometimes forgotten is where all those insurance dollars come from. unless he or she understands how they work. may not be properly applied if the selling agent does not have enough financial background. If there were fewer jobs. there would be fewer social programs. Anyway one looks at it. there is also a better understanding of the products that are marketed. the agent will not be able to appropriately apply life insurances or annuities. The agent may not have overtly caused harm. both of these programs have a relationship with the types of insurances that are sold. For the agent selling life insurances. an understanding of retirement planning is essential. Even simple topics. When the field agent has an understanding of these social insurances. such as Social Security. Tax-deferred vehicles may not be properly applied for the consumer's benefit if the selling agent does not understand the effects levied by inflation on long-term products. Sometimes only the field insurance agent knows those faces and understands how those dollars were earned. Do they just magically appear under "the rock?" What we sometimes forget is that those insurance dollars come from families and businesses that want a foundation of security for their future. While the lack of sufficient education may not overtly injure the consumer. Even though the agent may not directly work with pension plans. Agents are more educated than ever before. much financial harm can occur years down the road simply because the agent. since few would be willing to take so many financial risks. Page 10 . If there were fewer taxes collected. Every insurance dollar earned has the face of an individual behind it. Part of this must surely be due to the state and federal governments attempts to educate the consumer. neither will the consumer be benefited by the uneducated agent.Retirement Planning  Chapter 1 – Agent Education Sometimes topics apply to the insurance field that one might not have considered relevant. To give United Insurance Educators. Insurance has a definite value to society. there would be fewer jobs. who was in a position to aid that consumer in his or her early years. for example. much of our free democratic society could not exist. Even though an agent does not sell Medicare or Social Security benefits. If fewer businesses took financial risks. but he or she still failed to do what was necessary. for example. The insurance agents themselves have played a larger part. failed to do what was necessary. insurance products are important to our society and to our financial stability. Without insurance. Inc. Social insurance is often overlooked. Consumer views have changed over the past years. In a subtle way.

the selling agent will miss important changes. don't think of it as a chore. Because we live in an ever-changing world. the author stated "Today's insurance controversies or issues are likely to become tomorrow's areas of change. to your clients. does the insurance agent. so. think of it as your contribution to America. the only avenue available is through continual education. accountant and other professionals require and need continual education. Inc. and ultimately to your family. Rather. United Insurance Educators. too. having sold insurance for a number of years may not be enough." Without continual education. Bickelhaupt. Page 11 . The next time your continuing education requirements come due.Retirement Planning  Chapter 1 – Agent Education their clients what they deserve. Just as a doctor. In the text book General Insurance by David L. teacher.

Both involve gathering personal information regarding one's assets. There may be additional elements necessary for correct planning on an individual basis. Social Security was not what it is today. In addition. There is. which does help to keep pace with inflation to some degree. we have begun to have many types of vehicles available to us financially. setting up a trust where applicable and minimizing taxation. Fifty or sixty years ago.Retirement Planning  Chapter 2 – Retirement and Estate Planning     2  Retirement and Estate Planning    Retirement planning and estate planning go hand-in-hand. Inc. Individuals did not expect to live for many years past their retirement age. trustees and guardians. Some people may be tempted to do their own estate planning. including an IRA (individual retirement account). In truth. Most estates will not be subject to federal estate taxes. also Social Security. rather the testator's personal desires should be the basis of all planning. appropriate executors. it would be as prudent as acting as his or her own attorney in a legal suit or attempting to perform their own surgerUnited Insurance Educators. When estate planning. so retirement planning was not as necessary then as it is today. particular plans will certainly vary. Since each person's situation may be different. "Moving in with the kids" is seldom a realistic option in today's world. of course. a company sponsored pension. writing or updating a will. potential or desired beneficiaries. one should never allow taxation to be the focal point. either. family financial needs. Over the years. mutual funds. Page 12 . our family core has changed. it often sounds relatively easy. it was rare for a man or woman to have a pension from the company they had worked for. but are often subject to state death taxes and income taxes on both the federal and state level. Retirement and estate planning has evolved greatly over the past 50 years or so. Estate planning usually includes. After reading a few "how to" books. or a 401(k) plan. giving away some types of assets while living. to name a few. The monthly checks from the government would not allow anyone to live comfortably. A retiree may have several things. Children are likely to be spread out across the United States or even into foreign countries. but may not be limited to.

Retirement Planning  Chapter 2 – Retirement and Estate Planning ies. in many cases. and future desires openly so that future plans may be achieved jointly for the enjoyment of both. Too often. it cannot be properly achieved with just the husband. but even if this is the case. Upon the death of either the husband or the wife. the couple must share the opportunities. For the majority. Why should an estate plan be created in the first place? ("Isn't my pension     and Social Security enough?") 2. In a marriage. There is one possible advantage to separate estate plans: if divorce should occur. it is vital for a single person to establish some type of estate plan since all of their future enjoyment may rest entirely on their shoulders. Page 13 . Probably the three most voiced questions regarding estate planning are: 1. Estate planning needs to be a family affair. Hopefully. it never works out. Much estate planning seems to center on couples. how often should the estate plan be reviewed and revised? ("What? You mean I'm never going to be done with it?") If you have worked in the estate-planning field you have probably heard these questions many times. but a single person must also consider estate planning. it may be advisable for the husband and wife to have separate estate plans. the actual planning should generally be done jointly. ambitions. one of those true professionals will include a well-educated insurance agent. What is owned and how the assets should be disposed of should be in easy access with full knowledge of the deceased's desires. Inc. It is best for the client to simply be able to identify the true professionals and then utilize their talents. If estate planning is being looked at from a tax standpoint. enjoyment and disposition of what is owned now and what will be owned in the future. In fact. Estate planning is an opportunity for a couple (married or otherwise) to share information. United Insurance Educators. Too many aspects of the planning are left for tomorrow . . for example. What kind of an estate plan should be chosen? ("Are there different kinds?") 3. It is true that some individuals do an excellent job handling their own estate planning. Again. however. and tomorrow never comes. . It should be remembered at all times that a legally married spouse cannot be excluded from a will and certainly should not be excluded from the estate planning. frustrations and challenges of developing a good plan of management. each plan is still intact. a person is too close to their own finances to observe necessary fundamentals of it. even if the estate plans are separate and apart. the survivor should not be left in the position of having to search for the deceased partners estate plan and personal documents. the planning should still be achieved jointly. Once established.

If a business is operating. This is especially true if that person dies without a will. Inc. if applicable. 9. The creation of financial security during both one's working years and in retirement. Idaho. Where necessary. to ensure it's continuance (this could include a farm business). Arizona. To institute a proper life insurance plan. Texas and Washington state are community property states and estate planning will have variances there. and needs. Nevada. this text will be treating this subject in a general or generic sense. 5. To review health and disability insurance policies. To reduce income taxes. 10. any experienced agent would realize that they must be aware of their own state's laws and requirements. 6. United Insurance Educators. profitsharing or other work related programs). It would be impossible to discuss each state individually in this text. California. To provide support for one's spouse and children should one die prematurely. New agents will want to seek out specialized advice in specialized cases. 11. 8. To minimize federal estate taxation and. These include a will. 3.Retirement Planning  Chapter 2 – Retirement and Estate Planning     Each of our fifty states has individual laws relating to the division of property when a person dies. There may be the need for other tools of estate planning. a consideration of a living will and a power of attorney. 4. Many people would say that a living will should always be included. state inheritance taxes. as desired. Beneficiary designations where applicable (including on any pension. To designate gifts to persons and institutions. There are specific goals in estate planning: 1. There are basic tools that must always be part of estate planning. Puerto Rico. but such a blanket statement cannot be applied to such an important document. reorganize a business enterprise. desires. To insure equitable treatment of children (not necessarily equal). As a result. Of course. 7. 2. Page 14 . New Mexico. depending upon the individual's circumstances. Louisiana.

Estate Planning Advantages No one should be surprised to hear that there are definite advantages to estate planning. they are not willing to take the time or money to do so. but it should be considered as part of the overall project.Retirement Planning  Chapter 2 – Retirement and Estate Planning 12. True estate planning is not a simple process. Estate planning means planning the estate. Always seek professional tax advice from someone who deals with tax laws and the consequences regularly. They may have a will. it is quite possible that savings would never have taken place. If no estate plan had ever been considered.     Because tax laws are constantly changing. Unfortunately. It is the ongoing process of managing. very few people really set down an estate plan. tax savings should NEVER be the primary goal. for many people. like doctors. that is beginning to change. As we stated. It does cost money to do this on a continual basis and. Attorneys. which brings about thoughtful planning that might never have taken place otherwise. With more and more books being published. without estate planning. In addition. for now and for later. Estate planning is often the catalyst that starts the consumer thinking about the future. no printed text should be used as a tax guide. enjoyment and disposition of property while minimizing taxation. Estate planning is often the only reason that an individual looks at their future retirement and begins saving towards that goal. regardless of any other estate planUnited Insurance Educators. To review fire and casualty insurance policies. there really are not many attorneys who are true estate planners. Simply writing a will cannot achieve that. Unfortunately. Everyone needs an estate plan regardless of his or her personal circumstances. Most Americans are so busy with living that they do not or choose not to consider dying. To provide security and custody of minor children or handicapped individuals. specialize. Don't trust just any attorney with your taxable estate. many of the books written are very biased towards a particular product and may simply mislead the consumer rather than assist them. Inc. Estate planning is the art of designing a program for the effective management. It is often the insurance agent that prompts this process simply by asking questions on a life insurance application. a person's estate. In addition. it needs to be noted that every person of legal age needs to have a will. Although this will be covered more thoroughly later in this text. gross errors can cause the beneficiaries to lose the entire worth of the estate needlessly. 13. but no real planning may ever take place. Page 15 .

Even so. Estate planning always includes a will. regardless of any other estate planning tools utilized. Sarah). A will is a basic estate planning tool and the very least that should be done.Retirement Planning  Chapter 2 – Retirement and Estate Planning ning tools in place (including a living trust). of some type. taxes and the costs of administration. For most estates.     United Insurance Educators. The will is a legal instrument executed under the particular state's laws that allows a person to dispose of his or her property. 2. Holographic wills are recognized in less than half of the 50 states. Page 16 . A holographic will is one that is completely handwritten by the testator and is generally drafted without the help of an attorney. the will disperses the property of the deceased. Any life insurance proceeds. holographic wills are probably not a good choice. The net taxable estate will include at least five elements and may actually include more than these five listed: 1. an executor is nominated and the powers of the executor are defined. Lastly. Any pension and profit sharing plans that will pay into the estate. 3. Inc. funeral expenses and the costs of estate management and estate settlement. All of the property that is personally owned at the time of death (at its current value at the time of death). 5. after all debts are paid. 4. No estate planner would consider omitting it. In addition. Some are merely a sentence (I leave everything to my wife. From these assets will be deducted any debts owed. they are perfectly legal and may do the job as well as any other legal instrument. as he or she desires upon death. in those states that recognize them. length does not necessarily mean quality. Most professionals prefer that the will be drafted by an attorney. All property that is jointly owned with the spouse as a joint tenant with rights of survivorship. A will does not need to be lengthy. however. In such estates. there is too much legality that must be tended to. In fact. including funeral expenses. Any miscellaneous assets.

A woman who does not smoke can expect to live for another 21 years. retirement planning” phrase. Page 17 .     Overall. he can expect. All of this complicates the financial planning that is necessary to a financially secure retirement. a person getting ready to retire must consider: • • • • • Assuming they were lucky enough to have a company pension. too. not replace. particularly the Medicare program. we now have a generation that is helping to care for their own aging parents and entering retirement themselves. retirees in the United States have it better today than ever before in our history. or even raising their grandchildren. these individuals are among the most affluent. Certainly. Even though most of us today can quote the “social security income is meant to supplement. Retirees were once the poorest group of people in the United States. Inc. such as annuities? Is a living trust really worthwhile? Should old life insurance policies be cashed in? How should I fund the high costs of nursing home care? This is a question that may be necessary for both the retiree’s aging parents and eventually themselves. rising land and home values and general education has elevated the financial security of the majority of our retirees. it is also due to the efforts of our retirees themselves. United Insurance Educators. to live for another 18 years. There are additional problems today that were not faced by those retiring 50 years ago. The decisions connected to retiring today are far more complex than ever before. Of course. Years of postwar prosperity. our parents are living longer. that doesn’t mean we actually acted upon the knowledge. at age 65. Our current longevity means that retiring is no longer a simple matter. In addition. For example. the majority of baby boomers have not adequately prepared for retirement. Unlike their parents. Now for the bad news: it is predicted that the baby boomers now approaching and entering retirement will reverse this trend of previous prosperity for retirees. Current retirees are also likely to be helping their grown children. Never having lived through the depression as their parents or grandparents did. Social Security and Medicare can claim some of this improvement as theirs. more companies have established pension plans than ever before. they predominantly preferred to spend rather than save. pension benefits. Today. Smoking does shorten this life expectancy. While public programs have greatly contributed to this.Retirement Planning  Chapter 2 – Retirement and Estate Planning If a man does not smoke. they must decide which pension options are best for him or her and their spouse? Should existing savings be converted to other vehicles.

many financial companies have sprung up with their focus on the retired population. but it is likely that he or she will be unable to give the profession the attention necessary to stay abreast of all industry changes and opportunities. other decisions that will also come up. our dreams will not become a reality if there is not sufficient money or if family responsibilities affect the decisions we make. More often. Page 18 . Early estate planning can supply the money that is needed in retirement. so that our health in retirement permits us full mobility. merely selling insurance evenings and weekends. plus any others that may come up. Agents who have another occupation. such as traveling. would seldom be considered a career agent. Many of these companies claim to have the answers to all the listed questions. When we are younger. it is often the insurance agent who presented this fundamental fact to the consumer during their working years. Again. how can he or she protect him or herself in retirement and still provide care for their minor grandchildren if they should become too ill to continue the child rearing?     There are. One of those consultants should be a reliable and honest insurance professional. Even if our health is good. If we live a healthy lifestyle. of course. it may be possible to do many of the things we always dreamed about. That is not to say that such an agent cannot do a good job for his or her client. As a result. however. United Insurance Educators. The type of insurance agent that we would recommend is often called a "career agent" because he or she considers the insurance field a full-time occupation. it takes several financial consultants in various fields to answer the questions and concerns that arise in retirement. hobbies and so forth. Inc. selling insurance is the only job he or she holds.Retirement Planning  Chapter 2 – Retirement and Estate Planning • If the individual is raising their grandchildren. In reality one entity seldom has all the answers. With the growing financial independence of our retirees. it is common to consider retirement as a time of opportunity and enjoyment.

few would argue that it is better to have too much rather than not enough. It is now common for homeowners to change their residence every seven or eight years. As we know. Some will need more and some will need less. Page 19 . how much money does one need to put aside for retirement? The answer would be easier if we had a crystal ball so that length of life. time is a necessary ingredient for interest growth. most of us would agree that it is better to have too much than not enough. The actual figure is also shaded by individual situations and general expectations of retirement. Inc. a person should start saving and planning for retirement from the time they begin to work. however. We say "ideally" because few people actually do this. Because individuals vary greatly in how they live. United Insurance Educators. It is common for people with only 10 or 15 working years left to just begin to save for their retirement years. but cannot afford to do so. We probably all know of someone who would like to retire. Saving for retirement should begin with a person's first job and continue throughout their working years. and living costs could be easily targeted. So. people tended to stay in one home far longer than they do today. it would probably be wise to let any nest egg in existence to continue to grow. Most people nearing retirement have one common concern: they worry that they will outlive their money. While opinions do seem to vary as to quantity. Obviously it is much easier to save small amounts for forty years than it is to save large amounts for only 10 years.Retirement Planning  Chapter 3 – How Much Is Enough?      3    How Much Is Enough? One of the first things a life insurance agent learns is ways in which to measure financial need. Conventional wisdom says that one needs less after retirement. Again. Most professionals feel that between 70 and 80 percent of pre-retirement monthly income will be needed after retirement to maintain a comparable lifestyle. Ideally. rather than drawing income from it. this figure is not etched in stone. In the past. There is also the assumption that the house is probably paid for and perhaps the car as well. If one of the spouses continues to work at a job that pays an income great enough to live on. health.

in some states. Or. in addition to paying for the insurance premium. Expenses directly related to work will also cease. Inc. union dues or even Social Security taxes. for example. also be required even after retirement. even if equity buildup did occur. This usually relates to health care in some way. this health care benefit terminated. the cost seemed very high to him. which was an additional retirement expense. housing costs must also be considered when looking at the amount of monthly income that will be necessary in retirement. When a person leaves a job they may no longer have subsidized health care insurance. Harry selected a plan that cost him $1. At age 65. their health care insurance premiums would then be an added expense of retirement. rising home values eats it up when a new home is purchased. So. Therefore. Some costs actually increase after retirement.Retirement Planning  These changes do not allow for equity buildup in many cases. For example. Chapter 3 – How Much Is Enough?      There certainly are some expenditures that should go down after retirement. Harry also had to pay for his own medicine. Medicare greatly helped in keeping his insurance premiums reasonable. Page 20 . Harry never considered the need for a nursing home insurance policy (commonly referred to as a Long-Term Care policy). Harry did buy a nursing home policy for $1. If this were the case. the retiree will not be paying Medicare taxes. for Harry. Therefore. he found that the added medical insurance costs and prescription drug costs were far greater than the amount he saved by not working. This might include such things as commuting and clothing. Eventually.500 per year.100 per year. This was another expense that he did not have prior to retiring. Harry felt very healthy. which his employersponsored plan did. This policy (Plan F) did not pay for prescriptions. Although leaving his job did save Harry some expenses. schooling might. After Harry retired. Prior to retiring. some costs may continue even after retirement. since he had not previously paid anything. Let's look at an example of this: Harry Jones had his health care paid for by his employer. such as schooling. For insurance agents. Many companies require an agent to maintain their license in order to receive renewal commissions. Harry decided to retire. retirement was more expensive than working. but several of his friends said they had bought such a policy and urged him to do so. United Insurance Educators. Therefore.

On the other hand. hobbies and leisure activities are likely to consume more time and. during those ten working years. automobile insurance may actually go down if their driving record is good. income probably exceeds expenses. By tracking this over a ten-year period. an individual needs to know and understand what their monthly and yearly expenses are. for example. these habits can be addressed before retirement. If. it becomes obvious that credit card spending has been out of control or it shows that savings were regularly dipped into to pay routine bills. Therefore. this is wise to do continuously. such spending habits can mean financial disaster. At least ten years before retirement. more money. #1 The individual will also want to chart savings and investments for ten years prior to retirement. it is always wise to understand what type of budgeting is necessary. ultimately. which adds up assets and expenses.Retirement Planning  For some retirees. many retirees do not need to continue with their life insurance unless there is a specific reason for doing so. The ten-year worksheet will also point out if expenses exceed income. For example. Page 21 . which are standing still. #2 United Insurance Educators. Sometimes there may even be very large expenditures. not just prior to retirement. these ten years will be very important when planning a retirement budget. and which are loosing money. Whatever the plans. This chart will allow the individual to categorize their savings and tell them instantly which investments are growing. it is possible to understand the probable expenses in retirement (after the weekly paycheck stops). For example. it is necessary to set up some type of financial worksheet. The worksheet will also point out financial habits that are damaging while working and possibly lethal in retirement. if the worksheet shows that deposits are being made regularly into a savings account. which gives estimates of the amount of retirement income that will be needed. Traveling is a common activity and there are usually additional costs associated with it. Of course. Whatever the case. Chapter 3 – How Much Is Enough?      Retirees do spend more money in some areas once they discontinue a paying job. Many older people have types of life insurance policies that really do not make sense continuing. such as a new travel home if the retiree plans to do some serious vacationing. but it is especially useful for retirement budgeting. Other types of insurance may also decrease. This information will aid future decisions regarding the best and worst investments. After retirement. Such a ten-year worksheet also establishes current lifestyles. Inc.

however. United Insurance Educators. since no one can predict future trends. Keogh plans. The individual may have supplemented this with IRAs. This usually means that a retiree must continue to invest for growth even after leaving the work force. If spending is outpacing income. retirees cannot generally afford to take large losses. Since a paycheck is no longer available. A retiring employee needs to look at least 20 years into the future. Inc. it is important not to underestimate needs. #3 Investing After Retirement Most retirees tend to be careful investors. When considering all of these factors. A common mistake for investors of all ages has to do with taxation. Certainly. and savings accounts. Higher expenses must be covered as time passes. but if the money is spent too quickly the retiree might find themselves in a very bad situation a few years into retirement. Tax laws change anyway. of course. Investing should be considered for returns. safety is their concern. for example. prices will double every 14 years. diversification is important. If the rate of inflation stays steadily at 5 percent. Only when two investments appear equal should tax considerations tip the balance. do not overlook the effects of inflation. adjustments must be made. When considering payment options at retirement. a chart will need to be developed for post-retirement expenses. Taking lump-sum payments. annuities. In other words. it is likely that the only income will be from Social Security and employer-based retirement funds. it is important to continue to chart one's financial route. 401(k) plans. Even if the worksheets project sufficient money initially. since circumstances may change. It is common for a person to invest based on tax savings or tax considerations. Page 22 . not taxation. cannot be done until retirement actually arrives. Even so. It is always wiser to look at an investment from a financial angle rather than trying to outguess the taxman. there is always the chance that tax considerations will not remain the same. This. It is especially important to keep a detailed report for the first few years.Retirement Planning  Chapter 3 – How Much Is Enough?      Lastly. If neither spouse is working. might seem appropriate initially. a portion of their financial portfolio may do well in such areas as stocks or mutual funds.

or for a designated (chosen) period of time. look for those that do not have expensive acquisition costs. This is especially important if a spouse will be depending upon the proceeds after the insured's death. Most professionals also feel that it is important to be debt free when entering retirement. a variable United Insurance Educators. Safety is of little use if inflation eats up all the earnings. the income created cannot be outlived. Once a person becomes dependent upon a fixed income they do not want to find themselves struggling with too many expenses and not enough income. Whereas a fixed annuity gives a specific dollar payment each month. it can happen in a relatively short period of time. it is often wise to keep them. but the "right one" is not always the same for everyone. In fact. if that is the option chosen. when paid-up policies exist. ultimately still an insurance company. This means paying off credit card balances and other debts. While safety is definitely a concern. If the retiree (annuitant) lives 20 years or more.Retirement Planning  When investing. the monthly income is fixed so it will not increase as inflation rises. There are several good options available. The issuing company is. Depending upon the rate of inflation. the actual value in the monthly payment will diminish as inflation decreases the dollar's buying power. as do other entities. Although many people do not need life insurance once they retire. This means looking for annuities and other investments that do not have loads or sales charges. income is also very important. Policy loans and the nondeductible interest on them will decrease the death benefits for the beneficiary. While annuities have many things in common. one does not need to live for 20 years for this to happen. the types of annuities also have differences. they often are faced with many decisions regarding their savings. Chapter 3 – How Much Is Enough?      Retirement Savings: Where To Put It After Retiring When an individual retires. Fixed Annuities Insurance companies sell annuities although banks also market them. it is best to pay those back before retirement. however. However. If the monthly lifetime option is chosen. If loans are against these policies. Inc. Page 23 Variable Annuities . however. An annuity provides income for the annuitant for as long as he or she lives.

it is not likely to earn enough interest to do the job necessary (providing lifetime income). Page 24 . One way to achieve this is to invest for long-term growth while using a portion of the investments for monthly expenses. Most professionals feel that variety is important in finances. Unfortunately. On the other hand. those professionals who prescribe to this plan of action recommend that approximately 1/12 of the 4 percent gain be used for current The 4% Strategy United Insurance Educators. variable annuities tend to outperform fixed annuities. as a result. of course. If the investments chosen grow with or ahead of inflation. Many people. if the investment is in such things as low-yield Certificates of Deposit (CD) or other vehicles that yield less than inflation. the growth investment must equal about 7 percent. This may not always work as planned. however. It is this idea that is called the 4% strategy. This is. Chapter 3 – How Much Is Enough?      Relying Upon Life Savings Many retirees saved throughout most of their working years. In other words. Like all things. this course of action may prove financially fatal over the long run. Many professionals prefer the variable annuity because they feel it is more likely to keep pace with inflation. They may feel uneasy when payments are not predictable since they worry that it will dip too low to pay their bills. if inflation is averaging about 3 percent. it is felt that the plan has succeeded. Continuing Current Investments For those individuals who invested wisely during their working years. they may feel no need to change their strategy after retirement. Inc. When savings are kept at the local bank. it is important to look at all that is available and make informed choices. In addition to the 4 percent growth. many of these retirees never trusted anyone enough to invest in a financial vehicle that would allow their hard-earned dollars to grow enough to provide retirement income that would last their lifetime. It is important to realize that the actual payment received will vary from month to month depending upon the current rate of interest being credited. this strategy may be the best course of action. The name comes from the expectation that the rate of return will equal about 4 percent more than the rate of inflation (which always puts the investor ahead financially). outlive their money. Many older people do not feel comfortable with the fluctuation of such payments.Retirement Planning  annuity will vary in the amount of payment received by the annuitant or contract owner. desirable. Over time. but if the returns average in this general area.

On the other hand. there is often confusion regarding the variety of investments they may have. Chapter 3 – How Much Is Enough?      Save What & Spend What? When a person retires. for example. the earnings must be reported to IRS for the year withdrawn. United Insurance Educators. There will. (b) First use those investments that are NOT tax-deferred. we recommend that a tax specialist be consulted. If the retiree believes that some of these taxes might be applicable. Since it is not necessary to keep everything earned (since death will eventually occur). Page 25 .Retirement Planning  expenses after retirement. If there is sufficient income from retirement funds and Social Security all the investments may simply be able to continue to grow. If there are balances in tax-deferred plans that are subject to an "excess accumulation" tax. Tax Deferred means that taxes are not paid on the interest earnings until those earnings are withdrawn from the account. he or she should completely spend one of the three investments down to zero before tapping another investment. of course. It seems obvious that the investment with the lowest rate of return should be tapped first and the investment with the highest rate of return spent last. he or she will be required to begin withdrawing from some of the accounts. If the retiree has three items of investment. If the retiree is 70 1/2. An annuity. Inc. some things seem to be agreed upon: (a) Spend one investment at a time. be varying opinions on which investments should be kept the longest. using a portion of the earnings does seem to make sense. for example. if the investments must be partially used for monthly expenses. then some decisions must be made. is tax deferred and should not be tapped first if other alternatives exist. Once withdrawn. Even so. then the retiree might want to begin drawing from those accounts as soon as possible without penalty.

early retirement means a new job because they plan to start their own business. These individuals are too young to collect Social Security benefits. In most cases. When life insurance is offered through the employer. If the employee is 62. Inc.Retirement Planning  Chapter 3 – How Much Is Enough?      What About Early Retirement? Most Americans look forward to retirement with dreams of travel and relaxation. the more careful he or she should be regarding early retirement. If this is the case. In addition. early retirement may be the best choice because the next option may simply be a layoff. the lack of this protection might put his or her family members in jeopardy. the amount of money actually received usually does not add up to a great deal of money. if that is what they would like to do. and too young to receive medical benefits from Medicare. lack of medical benefits United Insurance Educators. For some. too young to withdraw from IRAs. there is the possibility that they will be able to find work elsewhere. Some companies may offer severance payments or Social Security supplemental payments if the employee is age 62 and will draw Social Security. Sometimes a company that is offering generous incentives (for early retirement) is planning to downsize the company. it is common for a person to work primarily for the medical benefits received. This normally terminates when employment ends. Many people who have lost jobs around the age of 50 say that work is hard to come by at that age. The decision to retire early is a very personal one and must be made from logic. Some employers even offer incentives for those who consider early retirement. Page 26 . such as adding 3 to 5 years of service. If a spouse is not working. For others. it means travel and hobbies. Some employers who are looking to lighten their staff may also offer other benefits. it is most likely going to be term life insurance. they may wish to simply go into business for themselves turning that hobby into a profitable business. Keogh and 401(k) plans without penalties. If the employee has not obtained cash value life insurance. job loss or early retirement at this age can be very financially draining. the retiree earns the most only by working the entire length of time before retiring. Social Security will be available. When early retirement is chosen or forced upon the individual. In fact. not emotion. Even if employers do offer early retirement incentives. Many Americans also consider retiring early. for those who have had a long time hobby. There may be health benefits given up to the age of 65 when Medicare takes over. The younger the employee. There is one other factor that is often overlooked. which would not offer any early-retirement incentives. but job offers may not be. so financial problems may occur. Health insurance tends to be a major consideration when it comes to employment. For employees that are 50 or 55 years old.

That is assuming that such coverage is even available since health conditions may prohibit the availability of individual policies. Page 27 .Retirement Planning  is often the harshest part of it. Inc. It can be very expensive to buy individual policies for the retired worker and his or her family. but it may be the only logical choice for some workers and their families. such as Hawaii and Washington. Some states. Conversions to individual policies from a group policy can be very expensive. Chapter 3 – How Much Is Enough?      United Insurance Educators. have mandated health benefits for those in their state who are willing to pay the premiums. health insurance conversion may be the best solution. Where available to those with existing health conditions.

if provided by the employer. if it is a consideration in continuing to work there. In the past. In some cases. it seems. If the employer was attempting to reduce their work force. the worker will also be increasing their Social Security benefit if they delay their retirement credits to the age of 65 (versus taking them as early as age 62). this may also drive up the amount received from the program at age 65. Page 28 . Although there are no firm statistics. that is not always the case. Besides the job satisfaction. Inc. Even if the hobby-turned-business only covers slightly more than expenses. the best option may be to go back to the job from which they retired. will increase. they may find that it is possible to turn a hobby into a profitable business. United Insurance Educators. Accustomed to the pace and accomplishment that their jobs provided. This is especially true for men. pension benefits no longer count after a specific length of employment. so the worker will want to research this. These days. we tended to assume that an older person who was working past the normal retirement age must need the money in order to survive. If their previous employer will allow it. there may not be an opening for even valued employees. If higher wages are earned prior to accepting Social Security benefits. For those who enjoyed a hobby. More and more retirees are reporting that they found there was too much time on their hands after retirement. It is also likely that the worker's pension. Many of these retirees have valuable craft skills and their products show a quality not found in the assembly-line products available in the retail stores. the non-financial benefits can be tremendous.Retirement Planning  Chapter 4 – To Work or Not To Work      4    To Work or Not To Work  It has become increasingly popular to continue working at another job after retiring from a previous occupation. It is becoming more common to see older people at craft bazaars selling the products of their hobby. probably a great many retirees who return to work do not go back to their previous employers. For many people retirement is simply not an option for a variety of reasons. men may find retirement depressing or without satisfaction.

Inc. If the worker's pension will end with his or her death. This is fairly simple to do. Page 29 . For the retiree who likes to see results. Virtually every type of organization imaginable taps into this human resource. it is very.Retirement Planning  Organizations that depend on volunteers often find the help they need in the retired population. for example). such volunteer work can be very satisfying. the wisest course of action may be the simplest: purchase a life insurance policy. planning for retirement must include preparation for this aspect. In such cases. Chapter 4 – To Work or Not To Work      If the retiring worker has a spouse who will be depending upon them for support. Simply make out a list showing an estimate of the spouse's income needs. very important to assess how the spouse will manage if this income source is cut off. Consider multiple factors (will the family home be sold or kept. United Insurance Educators.

the workers and their employers equally support it. What he or she may not realize is that his or her employer is matching that amount. Inc. In the Depression. Social Security money is not like a personal savings account or an annuity invested at interest to pay for each employee's own future benefits. When the Great Depression hit the United States. Page 30 . The Social Security Administration (referred to as SSA) is located in Baltimore. In most cases. When a worker gets his or her payroll check. It is a common misconception that each worker will receive the dollars that he or she sets aside through these deductions upon their retirement. Even though we all realize by now that social security income is meant to be a supplemental income supplementing what we have done for ourselves. these savings were virtually wiped out for most of our population. many still fail to do anything for themselves. It was these conditions that led President Franklin D. and the final leg is represented by private savings. Maryland. Social Security is financed through our payroll taxes. the bulk of the income comes from Social Security.Retirement Planning  Chapter 5 – Social Security Benefits      5    Social Security Benefits It would be unlikely to find any American citizen who was not aware of our country's Social Security program. people had been savers. They knew that it was their own personal responsibility to do so and it was also simply prudent. since it may allow a relaxed attitude towards saving for retirement. Remove any one of the three legs and the stool will not stand. This is unfortunate. Older people lost their savings and their children could not find jobs to help support them. even if all three legs are present. Roosevelt and our Congress to create the Social Security system in 1935. In fact. current workers are paying to support current retirees. For many people. one leg is the company pension. Little wonder so many people limp through retirement. he or she will note a deduction made for Social Security. never quite having enough to live comfortably. Most Americans consider it to be the financial backbone of their retirement. but there is no bank acUnited Insurance Educators. Agents who have been involved in retirement planning are aware of the comparison often made between retirement income and a three-legged stool: one leg is Social Security income.

and (4) Medicare benefits. the system is nearly universal with four types of benefits available: (1) Retirement earnings (2) Survivors' benefits (3) Disability benefits. The amount of payments made by each worker is simply fed into computers and used to calculate what amount each worker will receive at retirement. Inc. Those who are not actually old enough (normally age 65) may receive Medicare benefits. Social Security benefits may be drawn at age 62 but that is not true for Medicare benefits. Page 31 . Actual Social Security payments are made from current funds deposited by current workers and their employers. Of course. Medicare disability was established for those with disabilities that prevent employment. specific qualifications must be proven to receive Medicare disability benefits. Since Congress has made several eligibility expansions over the years.   United Insurance Educators. unless a disability exists.Retirement Planning  Chapter 5 – Social Security Benefits    count at that location for Social Security funds.

Those retiring earlier will use a different number. Social Security benefits form the backbone of their finances after retirement. SSA determines the number of years needed to calculate the average of the indexed earnings. If an individual needs 40 quarters of coverage. It is probably more helpful to everyone concerned to simply understand the basics. for those born in 1927. Page 32 . In order to qualify to receive these benefits. Social Security Administrators use a wage-index factor to adjust each individual's earnings for each year before he or she reaches the age of 60. 37 quarters were required and so on. Inc. If the retired worker was born in 1928. Once an individual has reached age 60. although there are formulas for doing so. rather the actual earnings are used. the retired worker must have accumulated at least 40 quarters of Social Security earnings during their working years. This is true for all individuals who were born in 1929 or later. but that is not entirely true. 38 quarters were required. Since there are four quarters in a year. The amount up to this maximum is referred to as the wage base. It is easy to assume that only the last ten years will actually matter.Retirement Planning  Chapter 6 – Social Security Retirement Income      6    Social Security  Retirement Income  For most retirees. Everyone first eligible to retire in 1991 or later will need to use 35 years for the average. that computes out to 10 years of employment that was covered by the Social Security program. his or her earnings are not indexed. The amount each person receives is based on a figure called the primary insurance amount (PIA). in 1926. That does not mean that an individual MUST work United Insurance Educators. Once an individual's earnings are indexed. 35 years are used in the average. It should be noted that there is a "maximum" amount of earnings that are counted each year. Few insurance agents will want to spend their time figuring out how much their clients will be receiving from Social Security when they retire. The adjustment increases the individual's earlier earnings to about the current equivalent value. only 39 quarters were required to qualify for Social Security benefits. Anything over this maximum will not apply.

Retirement Planning  for 35 years. It should be noted that the law only requires the SSA to go back three years to correct mistakes. SSA then averages the highest earnings for the number of years you need and divides this by 12 to arrive at the individual's average indexed monthly earnings. 40 minus 5 equal 35 years. The Social Security Administration does sell a computer program. called AIME. It is probably a wise idea to check the figures shown by the Social Security administration periodically. The benefit formula works to give workers who earned low wages a greater percentage of their pre-retirement income than a higher paid worker would receive. The IBM-compatible software calculates an individual's benefits in a number of different situations that might occur.S. The primary insurance amount (PIA) is adjusted for changes in the cost of living. The benefit formula is then used with the AIME to arrive at the primary insurance amount. Inc. Errors that are older than three years may not be corrected regardless of how great they are. To order this program. which will figure your benefits. If an individual needs 40 quarters. their Social Security retirement income would equal approximately 42 percent of their pay whereas a person who always earned the maximum taxable earnings would only receive about 25 percent of their working income. "Fully insured" is the key phrase here. When you receive the estimate. Chapter 6 – Social Security Retirement Income      To figure the number of years actually needed for any given person. if an individual's earnings have been about equal to the U. If you have worked for multiple employers. make sure that each one is listed. check it for errors. Certainly they may work a shorter period of time. you can call 1-800-772-1213. Any errors found should be reported immediately to the Social Security administration. Even so. Less time may give less income in retirement. Page 33 . subtract 5 from the number of quarters of coverage the person must have to be fully insured. write to: United Insurance Educators. Their figures of earnings should then be checked against the individual's calculations. average. perhaps yearly. but to fully take advantage of the averaging and indexing. Look to see if you have paid more than the maximum Social Security tax each year. To request current figures. these adjustments do make a difference. The SSA will send the record of earnings upon request. For example. although it is common to hear retirees say that these changes do not keep pace with the actual cost of living. this is the amount of time used. 35 years is the average.

Although it is possible to draw Social Security benefits as young as age 62. As women enter and stay in the work force. If Jenny is younger than 62. his wife. For many entering retirement. may also draw Social Security benefits when she reaches the age of 62. however. she will be able to draw onehalf of Johnny's PIA (as long as Jenny is not drawing on her own earnings). If the divorced spouse remarries. it is likely that their own earnings will equal more than half of their husbands. Jenny Johnson. most professionals recommend that an individual wait until the age of 65 in order to maximize one's income. They will inform you of costs and delivery options.Retirement Planning  Chapter 6 – Social Security Retirement Income      Sales National Technical Information Service 5285 Port Royal Road Springfield. she would not be eligible for Social Security benefits from either her own work record or Johnny's unless she was caring for an eligible child under the age of 16. Even if an individual has never worked they may still be eligible to receive Social Security benefits. Fortunately. however. 22161 Or call (703) 487-4650 and ask for the Social Security Benefit Estimate Program for personal computers. Therefore. when it comes to Social Security income. Inc. VA. this will be true. they will draw from their own benefits rather than his. his or her monthly checks from Social Security will stop unless his or her new partner is already receiving benefits. United Insurance Educators. It must once again be stated that a person who has paid into the Social Security system will probably receive benefits based upon their own earnings and not that of their spouse (unless 50% of their spouse's benefit would be larger). If Jenny is 65 years old when she requests Social Security benefits. There is one requirement that must be noted. The marriage must have lasted for at least ten years in order for eligibility to be established. For example: If Johnny Johnson has worked throughout his lifetime and qualified for Social Security benefits. the divorced spouse may still draw an income based on the amount of the former spouse's PIA. There may be additional earnings if the individual waits even longer than age 65 for those who will not receive their full payment until a later date. This is sometimes referred to as the full benefit age. Page 34 . Divorce can mean many financial hardships for a spouse who has never been in the work force.

Inc. gifts. however. United Insurance Educators. Even though Social Security income is meant to replace earnings. Page 35 . The maximum amount will vary depending upon the level of each person's PIA (primary insurance amount).Retirement Planning  Chapter 6 – Social Security Retirement Income      The Social Security Administration does place a cap on the benefits a family may receive after retirement. dividends and interest payments. the Social Security benefits will be reduced. annuity earnings. inheritance proceeds. the individual's earnings exceed a specified amount. rental income (unless it is part of employment or business interests). lottery winnings or life insurance income will not affect Social Security benefits. it is still possible to continue to work and still collect Social Security benefits. The figure varies from 150 to 188 percent of the PIA. Such things as pensions from employer sponsored plans. In general. capital gains. court settlements. If. only wages and earnings (even if self-employed) will count towards the earnings test.

what survivors' benefits your family might receive will depend upon your status at the time of death. SSA determines the number of quarters required by counting the number of years following 1950. who are generally self-employed. whichever was earliest.Retirement Planning  Chapter 7 – Social Security Survivors’ Benefits      7    Social Security  Survivors' Benefits  Social Security Administrators view eligibility requirements for survivors' benefits differently than they do retirement benefits. or through the year the individual turned 61. an individual must have earned at least 6 quarters of coverage during the previous 13 calendar quarters. In order for an individual's beneficiaries to receive benefits from Social Security. If you are fully insured. Inc. or after the worker reached age 21. If you are simply "currently insured" only a portion of benefits will be available to your family. Page 36 . United Insurance Educators. Are you fully insured? Are you even currently insured? Not all insurance agents. Therefore. currently insured by the Social Security program at the time of death. up through the year before the death occurred. ending with the quarter in which the individual died. Even past this requirement. in some cases. the worker must be either fully insured or. are. Even survivor's benefits are affected by the number of eligible quarters in the worker's history. typically all types of survivors' benefits will be available. to be currently insured for survivors' benefits.

Inc. so individuals are probably wise to appeal a rejection. their education and past work experience when making this determination. United Insurance Educators. Administrative law judges who work for the Social Security Administration do reverse the initial rejection about 60 percent of the time. These rules tend to be rigidly enforced. The mental or physical impairment must also be expected to continue for at least 12 months or must be considered to be a hazard to life expectancy itself (result in death)." The key word here is "substantial." Social Security administrators take into consideration such things as the person's age. Page 37 . In order to qualify. In order to qualify for disability benefits under Social Security. an individual must have some type of severe mental or physical disability or impairment. It needs to be pointed out that an individual is not necessarily even qualified to receive Social Security disability benefits. Many of those individuals who are initially rejected find it beneficial to hire an attorney to fight the appeal for them. When an applying individual does not seem to clearly fit the standards necessary to qualify for Social Security disability benefits. Less rigid rules apply to anyone under the age of 31. one must have earned at least 20 quarters of coverage in the 40-quarter period ending with the quarter in which the disability occurred. their application is very likely to be denied.Retirement Planning  Chapter 8 – Social Security Disability Benefits      8    Social Security  Disability Benefits Social Security Administrators operate by very strict rules when it comes to disability benefits. A great many of these denials are appealed. In other words. Since these standards are so rigid. nearly two-thirds of those individuals who apply are initially denied. It is not surprising that individuals who are applying for Social Security disability often disagree with those who have the authority to grant it (this occurs when benefits are denied). one must have been fully insured and have disability insured status. The definition used is the "inability to perform any substantial gainful work.

Inc. the worker is assumed to reach the age shown in the same calendar quarter in which he or she becomes disabled. After an individual has been receiving disability payments for nine months. At this point they determine whether or not the benefits will continue. The previous chart is a reproduction from the chart on Page 42 in the book "How to Plan for a Secure Retirement" published by the Consumer Reports editors. If the individual does return to work. but his or her earnings drop below the "substantial gainful activity" test. this waiting period is waived if the individual has already received disability benefits which ended less than five years before the current disability began. United Insurance Educators. the local Social Security office will review the case. If they feel the individual can work again. Page 38 . An individual must be disabled for a full five months before any benefits are due them.Retirement Planning  Chapter 8 – Social Security Disability Benefits      Just like other types of private insurance. For the first column. On the other hand. their benefits will stop. Social Security disability benefits have a waiting period in the coverage. Social Security will reinstate the benefits without a new application period (as long as three years have not passed in the interim). Refer to the following chart: Number of Quarters of Coverage Required For: Paying In Age at the time of disability Fully Insured Status Disability Insured Status 25 30 35 40 45 50 55 60 6 8 13 18 23 28 33 38 8 in 16-quarter period ending with disability 18 in 36-quarter period ending with disability 20 in 40-quarter period ending with disability 20 in 40-quarter period ending with disability 20 in 40-quarter period ending with disability 20 in 40-quarter period ending with disability 20 in 40-quarter period ending with disability 20 in 40-quarter period ending with disability It should be noted that this chart applies to individuals disabled in 1989 or later. The number of quarters that will be required can vary by one or two if this assumption is not correct.

but who is convinced that he or she will "do ok" when that time comes. As insurance agents. Of the remaining 73 percent of Americans 65 or older. we commonly run into the individual who is not motivated to save anything at all for the future. Page 39 . these Americans. It is common for an American worker to have faith in the system even when he or she is not doing anything personally at all to acquire retirement funds. profit sharing through their employment. whether it was a cash-out or a short payment durational plan. There have been many changes to the types of Individual Retirement Accounts United Insurance Educators. although each worker funds these accounts individually. of course. Most employer sponsored pension plans are "qualified" plans. the more likely this belief may be. Note the wording "some amount of retirement income. IRA accounts also provide funds for retirement. may mean a number of things to different people." We are not saying that the amount of pension benefits received is necessarily adequate. An IRA may or may not be qualified depending upon the contributors financial situation each year when they personally contribute to the plan. but few of them are realistic. Hopefully. pension plans provide some amount of retirement income for only about 27 percent of those Americans who are 65 or older. A qualified pension plan means contributions are not taxed until they are withdrawn and spent. IRA stands for individual retirement account. reinvested it elsewhere for future retirement benefits. upon receiving this money. Inc. Pension Benefits. The younger the worker. Currently. Keogh plans. Taxation does eventually occur.Retirement Planning  9  Chapter 9 – Pension Plans        Pension Plans    Most Americans automatically assume they will have some type of pension plan in their retirement. Pension Benefits refers to benefits which come from all employees plans that defer income or provide payments after retirement. The term. even if he or she currently has no type of retirement pension at all. They might include such things as 401(k) plans. Americans are a unique group. The excuses are numerous. there may be those who have previously received some type of distribution from a pension plan. and employee stock ownership plans. which are often referred to as ESOPs. according to Consumer Reports magazine.

Even when taxes must be paid after retirement. They are varied in scope and formula. a qualified pension plan is generally more advantageous than a nonqualified one. the individual's age. If an individual has more than one retirement plan. the specific benefit formulas of the pension plan. the advantages to tax-deferred savings during an individual's working years are great. Page 40 . Taxes that must be paid yearly on earnings compound more slowly than funds that are allowed to compound tax-free. Some employer sponsored pension plans are "non-qualified". United Insurance Educators. a pension plan will be either a defined benefit plan or a defined contribution plan. If an individual looks at them in sections. Typically a tax qualified plan will have more advantages than will a non-tax qualified pension plan. including the type of plan the employer established. deferred compensation plans or a phantom stock plan. however. they may have both types. Again the worker may be wise to consult with his or her CPA or financial advisor regarding tax consequences. they then become less complicated.Retirement Planning  that are available and some who could not previously take advantage of them can now do so. These types of plans often include bonus plans. and the amount being contributed. First of all. The actual amount of dollars that will be received in retirement depends upon numerous factors. A pension professional can advise on the type and amount of IRA’s that are available to individuals. There are other aspects that also affect the compounding of pension funds. Those plans that receive contributions from both the employer and the employee are likely to be larger than those plans where only one or the other is contributing. Chapter 9 – Pension Plans        Pension Basics Understanding pension plans is no easy task. the amount of years the plan was in effect (which relates directly to the plan's ability to compound). Obviously. Inc.

employers may adjust the early years' salaries to bring them into line with the rate of inflation. As we stated. one percent of the worker's salary might be credited to the retirement plan for each year worked. which is not based on the amount of the worker's pay. the first one listed. The specific formula. During the individual's working years. The amount of benefits will be dependent upon several factors. Each year's annual credit is added up to determine the total amount of pension to be received. the employer determines in advance what monthly benefits the worker will receive in retirement. Inc. Under the defined benefit plan. the employer funds the plan so that it can meet this predetermined level of benefits. Page 41 . if a worker will be receiving $10 per month (in retirement) for each year of service or employment. including age. this figure would be multiplied by the number of years worked. years of service to the company and employment compensation. The three plans are: (1) Dollars per year of service: under this formula. United Insurance Educators. which is used to figure exact retirement benefits. it would be $10 times 20 years or $200 per month ($2400 per year). For example. but the other two are. One of these three. (2) Career-average salary plan: under this formula. there tends to be three frequent categories.Retirement Planning  Chapter 9 – Pension Plans        Defined Benefit Plans The employer controls a defined benefit plan. is set up at the time the plan is activated by the company. the plan would credit a percentage of the salary earned for each year of service. For example. is not based on the amount of the worker's pay. an employee receives a specified number of dollars each month for retirement which represents each year of service. In some situations. $10 x 20 years = $200 per month in retirement. If the worker had 20 years of service. The resulting figure is then multiplied by the number of years of service the worker has with the company. In this type of plan. this plan is based on the amount of the employee's pay.

Generally. Although the time will vary. Chapter 9 – Pension Plans        Defined Contribution Plans Many employees participate in a defined contribution plan. the worker's retirement benefit is based upon the employee's average salary for the last years of employment. thrift plans. In a defined contribution plan. Page 42 . In addition. the contribution amount is left up to the employer. depend upon the amount of interest the contribution earned during that time. the final average salary plans usually uses a smaller percentage of credit than is used in the career-average salary plan. When the highest five years is considered. money purchase plans and ESOPs. as we stated. whatever amount accumulates is what is available at retirement. it is common for the last three to six years to be considered for this plan. Many types of retirement plans come under the heading of defined contribution plans. employers may use a smaller percentage of credit than they would otherwise use. which is similar to the career-averaged salary plan. the contributions are "fixed" although the actual benefit that an individual will receive is not known until retirement comes. Inc. such as 6 percent of an individual's salary. These would include such things as profit-sharing plans. The retirement contribution must be made at least annually. 401(k) plans generally allow employees to defer part of their salary and have it contributed to their retirement plan with the employer matching their contribution. The amount actually credited will. 401(k) plans generally allow employees to defer part of their salary and have it contributed to their retirement plan with the employer matching their contribution.Retirement Planning  (3) Final average salary plan: under this formula. In some types of defined contribution plans. Defined contribution plans generally do not have any benefit formulas (as do defined benefit plans). The actual benefit received in a retirement plan depends in part on the interest earned. Some plans simply consider the highest five consecutive years of service out of the last ten as the basis for their retirement benefit. The amount will be equal to some determined percentage. Often the contributions made are stated in a percentage amount. 401(k) plans. The individual may then generally make a decision (at United Insurance Educators.

This means the employer must have worked for a specified time for the same employer or group. Prior to 1986. Most retirement plans require the employee to become vested. Now the normal vesting period (or time) is five years. Even if the employer does not have a person assigned as the plan administrator. the employer must provide a yearly statement of the individual's pension benefits.Retirement Planning  retirement) as to how to best use the funds. Now it is common for companies to use a graded vesting. Chapter 9 – Pension Plans        The retirement plan participant will receive a summary of the type of pension plan they are involved in at the time of employment or when a retirement plan is instituted. This summary is known as the summary plan description. If a worker finds that this statement is not automatically provided. The law requires this request to be in writing (which provides a "paper trail"). the formula that is being used. The summary will outline the type of plan offered and. if it is a defined benefit plan. under the Employee Retirement Income Security Act (ERISA). he or she can probably give a ballpark figure of the pension the individual can expect to receive at retirement. Inc. it is common for an individual to work for a number of companies. The administration would become very expensive. The original plans were called "cliff-vesting" and used the 10-year time period. Therefore. to be eligible for a retirement plan. he or she may also elect to simply withdraw the entire amount as a lump sum benefit. an employee must become vested. An employee who has worked less than five years at a job probably will not be eligible for any retirement benefit. ten years was considered the normal vesting period. Many retirees elect to purchase an annuity so that they may receive a lifetime retirement benefit. It would be very difficult for a business to supply pension plans to employees that come and go. If the employer has an administrator for the pension plan. A multi-employer plan is one in which two or more employers contribute to a collectively bargained plan. although the 10-year period still applies to multi-employer plans. Generally. In this day and age. which means 20 percent of an individual's pension is vested each year until 100 percent is vested after seven years. if desired. never United Insurance Educators. such as a union. Some plans may allow vesting in an even shorter time period. perhaps even 100 percent vesting immediately upon joining the plan. Page 43 . In 1986 tax laws liberalized what was considered to be a normal time period. he or she should request it.

Inc. Chapter 9 – Pension Plans        It should be pointed out that the vesting rules apply only to those plans that have been funded in part or whole by the employer. Of course.Retirement Planning  vesting with any of them. any retirement plans solely funded by an individual would not come under the vesting laws. Page 44 . That is why it is so important for each person to make personal plans for their retirement. without depending upon their employer to do so. United Insurance Educators.

300 24% 42% 20. a company can pay more into the retirement plan of their higher-paid employees and less into the plans of their lower-paid workers. The combination of both the retirement plan and Social Security is used to formulate a certain percentage of the worker's pre-retirement income.000 43% 27% Total 56% 66% 70% * How to Plan for a Secure Retirement United Insurance Educators.Retirement Planning  Chapter 10 – Integrating Social Security With Pension Plans      10    Integrating  Social Security  With Pension Plans  Some pension plans are integrated with Social Security benefits. Social Security is designed to replace a larger percentage of pay for lower-paid workers and a smaller percentage of pay for higher-paid workers. in 1990 sion $200. To illustrate this. Inc. a Consumer Reports Book * used the following chart: Employee A B C CompensaPercentage Percentage tion from penfrom S.S. Page 45 . By integrating the two. This integrated method is often used to give more pension benefits to the company's higher-paid employees. An integrated benefit plan means that the employer has considered the amount the individual would receive from Social Security when designing its pension plan. This is most likely to occur with defined benefit plans that use benefit formulas based on an employee's salary. As you will recall from the section on Social Security.000 6% 50% 51.

or it may elect to provide more pension benefits so that retirement earnings will reach a certain level. That level is generally the amount of earnings that the employer has paid for the worker's Social Security taxes. so any plans that subtracted Social Security benefits before that time are not affected. Chapter 10 – Integrating Social Security With Pension Plans      To recap: The pension plan may do one of two things when integrating Social Security benefits into the pension plan: (1) Reduce the amount of pension contributions or (2) Increase the amount of pension contributions. it is best to consult the plan administrator for exact details. If an agent finds himself or herself involved with such a plan. new laws require plans to give the worker. Integration often meant either a very small pension or even no pension at all for the lower paid workers. Our tiny section on them certainly does not cover every aspect. the pension plan is allowed to subtract a portion of the worker's Social Security benefits from his or her pension benefit. integration with Social Security benefits has often only benefited the higher paid employees. regardless of pay. Page 46 . Inc. Now. In the past.Retirement Planning  To integrate Social Security benefits and pension benefits. These new rules only apply to the years worked after 1988. United Insurance Educators. at least one-half of their pension benefits after accounting for Social Security benefits. Integration rules and laws are very complicated. The option chosen by the employer will depend upon his goal.

although ERISA does not require all plans to offer early retirement benefits. . period. Under most defined contribution plans. a worker must be employed with the same company for 20 to 25 years to receive full benefits in early retirement. In addition. the worker may choose to take their pension balance at any time they happen to terminate employment. Inc. The majority of defined benefit plans will also pay benefits for early retirement. Some of these plans may offer a reduced benefit if retirement is collected early. there will be less service time to the company to collect and accumulate funds in the retirement plan. This is understandable. Usually those plans that do offer this feature have a requirement pertaining to years of service. Insurance agents are often the link that prods individuals to investigate what they really have in their pension plans (if anything). All defined benefit plans pay out pension benefits when retirement occurs on or after the time stated as retirement age. It may be taken as a lump sum or left in the plan to accumulate interest earnings. When a person retires earlier than normal. the benefits may be smaller to cover this longer period of collection. but a worker should not assume this to be a feature of their retirement plan without specifically checking on it. such as age 55 or 60.Retirement Planning  11        Chapter 11 – Receiving Pension Benefits  Receiving  Pension Benefits   When it comes to receiving pension benefits. It can be more involved than that and many people find surprises because they failed to properly learn what they had during their working years. they will receive benefits . There are some plans that offer early retirement without a reduction in benefits. most people simply assume that when they retire. even if they plan to continue working elsewhere. usually 65. Generally. Therefore. benefits will be collected for a longer period of time. There may be United Insurance Educators. Some plans require a withdrawal upon termination if the accumulated amount is less than a specific sum. whereas full retirement would have been collected at age 62 or 65 (as stated in the pension plan). . Page 47 . as stated in the pension plan.

with no benefits payable to their spouse or survivors after death. There are. It depends upon job satisfaction or enjoyment. the employer may force early retirement on some of their workers as a way of reducing their work force. Inc. For workers who enjoy their employment and have the health to continue working. In addition.       Chapter 11 – Receiving Pension Benefits  Choosing Pension Payment Options When retirement finally arrives. If the total benefits available are less than $5. many decisions must be made. While early retirement does seem inviting to many people. These decisions will affect the worker for the remainder of their lives. United Insurance Educators. such as hobbies. Therefore. not everyone is interested in doing so.000. Whether or not early retirement is considered is often a personal matter. Under the Age Discrimination in Employment Act (called ADEA) a worker cannot be forced to retire because of age. postponing retirement may be a consideration. financial considerations and outside interests. Most defined contribution plans make the retirement funds available in a lump sum. Another option is payments made in installments or in various forms of annuities. Even if an individual continues working. Sometimes employers will increase pension benefits as an added incentive for early retirement. ERISA says that defined benefit plans must pay the individuals in the plan under some form of an annuity unless an individual selects something else. if the worker so desires. Most of these types of plans first determine the amount the individual would receive under monthly annuity installments for their lifetime. the worker may be required to receive it as a lump sum. other options available. however. however. the decisions should not be made hastily or with limited information. In some cases.Retirement Planning  additional eligibility requirements as well (the worker may have to be 60 years old for example). family members and their needs or desires. Page 48 . pension laws require that retirement funds begin to be withdrawn according to a prescribed schedule by April first following the year in which he or she turns 70 1/2. This is called a life annuity and is the normal payout form. One of these decisions will concern how pension benefits should be received. the company might not give the individual any additional retirement credits for those additional years of service.

if a life annuity is selected. There are differences between the two and they should not be confused. rather than to any survivors. someone of his or her choice (or through the estate) will continue to receive payments until 10 years worth of benefits (which is 120 payments) has been made. Page 49 . In this type. A ten-year annuity would be called a tenyear certain annuity. The key to selecting life annuities is to live as long as possible to maximize the amount of money received. Many insurance agents are familiar with the annuities offered by insurance companies that offer the 50 percent joint-and-survivor option. The benefit must be at least equal to 50 percent of that received by the worker. This arrangement is called a 50 percent joint-and-survivor annuity. but the retiree only lives to collect two payments. To reject this option (joint-and-survivor) the spouse of the worker must sign a consent form releasing the pension plan from their obligation to do so. There are period-certain annuities that pay out the retirement funds over a specified period of time. United Insurance Educators. then payments will stop completely at their designated time. he or she must carefully weigh their options before consenting. so do pension annuities. Retirement plans that offer joint-and-survivor annuity payout options often automatically institute this payout option unless they are specifically instructed not to do so. There may also be a life annuity with a 10-year period certain. Under this plan the surviving spouse would receive the same dollar benefit that the worker received. If a spouse is asked to sign such a form. if the worker selects a form of annuity other than a life annuity.Retirement Planning  Married plan participants have an option of payout which would continue to pay their legally married spouse even after their death. Just as insurance company annuities have multiple payment options. In fact. This payout method is called a qualified joint-and-survivor annuity. Pension annuities pay benefits to a retired worker for his lifetime and then pay 50 percent of that amount to the survivor when the worker dies. Insurance company annuities generally pay benefits to both persons jointly and then reduce the monthly benefit to the survivor when either of the parties in the annuity dies. often ten years. If a payment plan has been selected that is not a life annuity. the retiree receives payments for the rest of his or her life. It should be noted that a straight life annuity does not continue payments to survivors as some of the other selections do. Inc.       Chapter 11 – Receiving Pension Benefits  Such a form would probably be similar to the one at the end of this chapter. the monthly payments are lower to reflect the payments that will be made to the survivors. There are plans that offer the spouse a 100 percent joint-and-survivor annuity. Additionally. but if he or she does not live long enough to collect over a ten-year period. the remainder of his or her annuity reverts back to the insurance company or pension plan. It provides an annuity for as long as the retired employee lives and continues to provide a payment to retiree's spouse until he or she dies.

He may even have felt he was well to do when he combined that with his other incomes from Social Security and savings. What caused Uncle Joe to go from well to do to simply getting by? Inflation. there is no guarantee that increases will occur. Typically. Uncle Joe cannot afford luxuries and seldom travels. Inflation may rob many pension plans over the years. The lack of adjustment for inflation is a major drawback of private pensions. his monthly payment of $940 seemed very adequate. When Uncle Joe retired in 1980. While those who participate may not be able to control how their funds are invested. however. so the retiree should not depend upon them. Most pensions do not provide increases once payments have begun. they will want to be aware of what inflation can mean to their retirement income. Some pensions do give increases. although they are not necessarily tied to the rate of inflation. United Insurance Educators. Now.Retirement Planning        Chapter 11 – Receiving Pension Benefits  Probably one of the most voiced complaints about pensions is their inability to keep up with the cost of living. Inc. Page 50 . It is the major reason retirees must have also saved for themselves.

and in my presence signed and sealed the same and acknowledged that he or she executed the same for the purposes therein contained and acknowledged the same to be his or her act. Date: ______________ Signature of Participant’s spouse WITNESS BY EITHER PLAN REPRESENTATIVE OR NOTARY REPUBLIC WITNESS BY PLAN ADMINISTRATOR: Date: _______________ Signature of Plan Representative WITNESS BY NOTARY REPUBLIC On this ___ day of ________. Page 51 . I hereby elect to waive the qualified joint-and-survivor annuity form of benefit under the Retirement Benefit Plan. I hereunto set my hand and official seal. IN WITNESS WHEREOF. Inc. know to me (or satisfactorily proven) to be the person whose name is subscribed to the above instrument. ______________________. personally appeared before me and the above-named Participant’s spouse. I acknowledge that this election may cause me to forfeit part or all of the benefits that would otherwise be payable to me if I am still living after the death of my spouse. Notary Republic United Insurance Educators.Retirement Planning        Chapter 11 – Receiving Pension Benefits  RETIREMENT BENEFITS PLAN Spouse Elected to Waive Qualified Joint-and-Survivor Annuity Name of Participant: ___________________________________________________________ I. certify that I am the spouse of the Participant named above.20__.

If a company is terminating their pension plan. In that way.Retirement Planning  Chapter 12 – Will Your Client’s Pension Survive Until Age 65?      12    Will Your Client's  Pension Survive Until Age 65? There have been many cases of financial difficulties in pension plans. some companies simply feel they cannot continue to be responsible for the growing number of retired employees. If a company decides to terminate its pension plan. Page 52 . United Insurance Educators. Many companies take the amount of contributions that have been paid in and buy an annuity. The reasons can be varied. Whatever the reason. Many companies are dropping their pension plans from company benefits offered to employees. If the insurance company has the possibility of being unstable or a record of bad investments the workers will at least want to be aware of it. When a worker is notified that the company plans to put the accrued money into an annuity and discontinue the pension plan. but does not have the assets to pay the promised benefits. and has enough assets to pay the benefits previously promised. Of course. Financially. the worker is wise to check into the insurance company being considered. in many situations. This would also be true if the company went into liquidation or bankruptcy reorganization. Inc. the workers have little or no say in where the money is placed. the federal government allows the company to simply end the plan. the amount that has been contributed can continue to grow and be available upon retirement for the workers. even though no more contributions are made. there are few things that can cause sleepless nights like the loss of a pension. it will then be up to the federal government to make sure workers get their benefits. The company would then provide a lump-sum payment to their employees upon retirement or upon request.

If the company who is terminating the pension plan does not have enough assets available to pay benefits. then the PBGC will take over the plan. and then the worker died. this maximum was up to $2. the agency would then become the trustee of the plan and continue to pay pension benefits up to a maximum specified by law. The PBGC will pay the benefits directly to any employee who is about to retire and receive retirement benefits. If the company has decided to purchase an annuity from a life insurance company. rather than the employer. insures most tax-qualified defined benefit plans. In 1991. some defined benefit plans established by state and local governments. If there are enough assets in the plan. The PBGC will also pay survivors' benefits. the Pension Benefit Guaranty Corporation (PBGC) will decide for itself that an employer and its pension plan are in danger financially. The Pension Benefit Guaranty Corporation will keep records of the plan participants and their benefits.Retirement Planning  Sometimes the government's pension agency. which was set up in 1974.250 each month to workers in a single-employer plan who had retired at the plan's normal retirement age. each participating employee will be notified by them. the employee needs to notify his or her company of the oversight. which are set up by private companies. a second notice will tell each participant the amount of the benefit. The spouse would also be covered if the participating worker was in a plan which terminated before his or her retirement. A surviving spouse who is receiving benefits when a pension plan terminates will continue to receive them. Those not covered include defined contribution plans. each worker will receive a certificate from the carrier. church and fraternal organization plans and professional organizations. Chapter 12 – Will Your Client’s Pension Survive Until Age 65?      United Insurance Educators. how it has been valued. If this is the case. Also. Inc. and the assumptions used in any calculations. The pension plan administrator will notify a plan's participants at least 60 days before the plan terminates. When a pension plan is covered by the PBGC and cannot pay the vested benefits to it's covered members. If such a certificate is not received. Page 53 . Multi-employer plans have a smaller maximum. the maximum is smaller for those workers who retired early or who took their pension benefits in some form other than a life annuity. The PBGC. The PBGC may even initiate the termination of the pension plan. Not all pension plans are covered by the Pension Benefit Guaranty Corporation.

Immediate annuities are most often used at retirement by investing accumulated savings or investing a pension plan's funds. This allows the owner to collect funds even though they were too old to qualify as the annuitant. Annuities may be used for many reasons. Retired persons often use them to distribute retirement funds. their advantages far outweigh any disadvantages (as long as the annuities are used in the proper circumstances). Additionally. Immediate Annuities Immediate annuities immediately begin to pay benefits to the annuitant or contract owner. Inc. surprisingly few agents actively do so. While annuities may have longer surrender periods than many other investments. he or she may designate a family member as the annuitant and themselves as the contract owner. It should be noted that the annuitant and contract owner are not always the same person. Page 54 . Many agents express a feeling of inadequacy when it comes to explaining the benefits of annuities. younger people often use them to build up a retirement fund for later use. agents often express a dislike of the lengthy surrender periods that many annuities have.Retirement Planning  13  Chapter 13 – Annuities        Annuities   Although most states allow any agent licensed in the life field to market annuities. If an interested party is too old to qualify for the annuity. United Insurance Educators. although some of the newer varieties do have fairly short surrender periods (as short as one year). Annuities are seldom used for a short-term investment. Some annuities are deferred and some are immediate.

United Insurance Educators. (2) The terms governing surrenders. Deferred annuities have two phases: (1) An accumulation phase and (2) A payout phase. changes in the cost of living can result in decreased spending power. variable annuity. thus the name. There are factors that determine the value of an annuity. With fixed annuities. inflation can be a major problem. With a Variable Annuity. neither the rate of interest paid during the accumulation period nor the monthly payment received during the payout phase is fixed. A deferred annuity may be purchased by either a lump sum investment or by installment contributions. Inc. The payout phase is the time during which income is withdrawn.Retirement Planning  Chapter 13 – Annuities        Deferred Annuities A deferred annuity is one that draws interest for a period of time before benefits are withdrawn by the annuitant or contract owner. the accumulation phase is the period of time during which the annuity is built up by periodic contributions and interest earnings. As the name implies. Since fixed annuities provide a fixed payment upon annuitization. nor the monthly payment received during payout. using the annuity payout options. and (3) Administrative charges. The primary factors are: (1) The interest rate paid on the accumulation. Variable annuities do not guarantee either the interest rate paid during accumulation. the deferred annuity can be converted into income. Page 55 . At a later time. Variable Annuities Inflation is something we have grown used to.

When the payout phase arrives. Page 56 . Inc. As with so many other types of investments. The policyholder can divide their money among the various investment options. Since the investment funds are officially in an annuity. with changes in investment vehicles available.Retirement Planning  Chapter 13 – Annuities        With a variable annuity. however. the account balance rises and falls depending upon the performance of the funds selected. Even though a variable annuity does offer flexibility. during the accumulation phase. The fees may be called a variety of names. taxes on the interest. Some of these will have no sales fees. An individual may withdraw the accumulated value or convert to a guaranteed monthly income for life. like fixed annuities. there is a 10 percent penalty levied by the Internal Revenue Service (IRS) on any withdrawal made before the age of 59 1/2. according to investment results. Variable annuities. The investor faces about the same amount of risk. These fees range anywhere from 1. dividends and capital gains earnings are deferred until they are withdrawn. a variable annuity offers the same options as a fixed annuity. also have surrender fees on early withdrawals. There are. A variable payout is a monthly income whose size can vary from month to month.5 to 2. Variable annuities typically have fees that can partly offset the tax advantage. the insurance company generally provides the consumer with a choice of investments. bonds and money-market funds to choose from. In addition. including administrative charge. Therefore. consumers who use variable annuities often do so for the tax advantage rather than the investment advantage. These tend to provide about the same rates as a fixed-dollar annuity. important differences. These choices usually include one or more stock. Even a variable annuity can offer a fixed-account option. Outside of an annuity. As with any annuity. usually every 30 days. account fees and so on.5 percent of the fund's assets each year. the policyowner may elect a variable payout. there may be hundreds of stocks. United Insurance Educators. the actual number of funds available for investment may be limited. bond or money market funds. according to investment results. A variable annuity is often compared to a mutual fund account. A variable payout is a monthly income whose size can vary from month to month.

It may. Old money relates to funds previously deposited. This interest rate is called the current rate. the annuity guarantees an annual interest rate. The annuity units are not fixed in value. The current rate is typically good for an initial guarantee period. if the funds earn at a rate that is less than the AIR. Page 57 .Retirement Planning  For some people. A variable annuity provides a fixed number of annuity units. different policy types will determine the length of time involved in the guarantee period. In addition. each year the insurance company would notify the annuitant or policy owner of the rate to be paid. As you can see. Inc. Some insurance companies treat "old" money and "new" money differently. some annuities may even allow longer periods. the value of each unit rises. United Insurance Educators. be sure to compare annuities on the same AIR. The company then divides the policyholder's account value by the net single premium on the day the account is annuitized. it is important to shop around for a variable annuity to be sure the policyholder will be happy with the one chosen. The value of those units fluctuates according to the performance of the selected investments. To calculate the number of units a policyowner will receive. If the net earnings of the funds are greater than the AIR. A fixed annuity provides a set number of dollars each month. while new money relates to the funds deposited into new accounts. The result is the number of annuity units the policyholder will have during his or her retirement. as stated in the contract. If an immediate variable annuity is desired. Their value will fluctuate monthly as the value of the investment funds change. Once this guarantee period has passed (is over) a new rate will be given for the next period. Companies with higher mortality and expense charges will pay out less in monthly payments. If. Chapter 13 – Annuities        Interest Rate Paid Each annuity contract states how interest is accumulated and posted to the annuity account. the interest rate will change periodically. Again. for example. the insurance company uses the assumed interest rate. be posted monthly or yearly. the value of the annuity units will go down. Income will depend upon the performance of the funds selected. depending upon the contract terms. ranging from one month to a year. referred to as the AIR. a variable monthly income is not comfortable because it is not possible to predict what amount will be received each month. for example. Some annuities offer higher rates if the investor chooses a longer guarantee period. Many annuity types allow the investor to determine the length of time guaranteed.

are not intended for short-term investments. Future interest rates are not guaranteed in annuities. or the total accumulation after surrender charges and penalties are deducted. That is why so many professionals find the annuity market an exciting area of the insurance industry. When an annuity is closed during the surrender period. In some annuities. there is a contractual minimum rate. even though the investor does not know at the start of one period what the rate will be in the next period. many excellent products being offered. from annuity to annuity. they tend to pay a higher rate of interest than investments that can be withdrawn at any time without penalty. as we said. The minimum interest rate is the least that will be credited during the accumulation period or over the life of the policy. so annuities with minimum guarantees of 4 percent were guaranteeing lows. these penalties should not be ignored. Chapter 13 – Annuities        Surrender Penalties Annuities routinely have surrender penalties for early withdrawal. Even though an investor may not plan to surrender their contract for a long time. the investor receives the cash surrender value. the investor receives the United Insurance Educators. the rate actually paid is higher than the guaranteed minimum rate. All the elements of the annuity contract should be considered. it is level for the duration of the policy. the contractual minimum rate does vary over the lifetime of the policy. in others. The interest rate quoted should not be the main concern. Page 58 . Inc. Because annuities have a longer surrender period than do many other investments. We saw interest rates plunge to all time lows in the early 90s. they must always be surrendered. When an annuity is closed during the surrender period. Annuities. However. Annuities are sold for periods typically ranging anywhere from five years to twenty years. Normally. There are many. however. which were higher than that credited at most banks for Certificates of Deposit.Retirement Planning  The subsequent periods may be the same length as the original guarantee period or it may be shorter or longer. although they tend to do better than do Certificates of Deposit. but there are also some poor products on the market. There are many good reasons to purchase an annuity. The length of the surrender periods can vary greatly. There are annuities that can never be cashed in.

the higher the surrender penalties are likely to be. Some annuities will express the surrender penalty as a percentage of the premium. For instance. a ten-year penalty will usually go like this: First year penalty = Second year penalty = Third year penalty = Fourth year penalty = Fifth year penalty = Sixth year penalty = Seventh year penalty = Eighth year penalty = Ninth year penalty = Tenth year penalty = 9% 8% 7% 6% 5% 4% 3% 2% 1% zero Chapter 13 – Annuities        It comes as no surprise that an annuity which hangs on indefinitely to a surrender period is not as good as one that has a seven to ten year penalty period. The newer the policy. The time period reflects how long the insurance company feels they need to recoup its expenses. Inc. Page 59 . which is more favorable to the investor since policyholders who cash in the annuity pay a penalty only on the original investment. This is the total accumulation after the insurance company deducts surrender charges or penalties. Also one that has a steady penalty rate for the entire period is not as good as the one illustrated that decreases each year. A surrender penalty or charge is designed to discourage the investor from cashing in the contract before a set period of time. a seven year surrender period would be worse than a ten year period if the seven year annuity had a steady rate and the ten year contract had a decreasing rate. In fact. To illustrate this: United Insurance Educators. not on the interest earnings.Retirement Planning  cash surrender value. A surrender charge is usually stated as a percentage of the accumulation value.

For example Uncle Joe is 82 years old and. many professionals would consider Annuity #2 to be the better buy. The beneficiaries would receive the entire accumulation value regardless of any surrender penalties that were stated in the policy. After the fourth year. he elects to make his daughter the annuitant and himself the contract owner. without penalty.Retirement Planning  Chapter 13 – Annuities        Annuity #1: Annuity #2 7 percent charged each year for 7 years: Year 1 = 7% Year 2 = 7% Year 3 = 7% Year 4 = 7% Year 5 = 7% Year 6 = 7% Year 7 = 7% Year 8 = zero percent A decreasing charge from 10% to zero percent over 10 years. United Insurance Educators. in some of their annuity contracts. That is. For example. All companies waive surrender penalties if the annuitant dies. a 36-month withdrawal. Annuity #2 would have a lower surrender period. There is no penalty for this withdrawal option even though the surrender period has not passed. Inc. the annuitant or contract owner would receive 36 equal payments at which time the account would be closed. The annuity is taken out in her name and Uncle Joe is listed as the contract owner. Year 1 = 10% Year 2 = 9% Year 3 = 8% Year 4 = 7% Year 5 = 6% Year 6 = 5% Year 7 = 4% Year 8 = 3% Year 9 = 2% Year 10 = 1% Year 11 = zero percent Even though Annuity #1 began with a lower surrender period for a shorter period of time. not qualified to purchase a particular annuity due to his age. Page 60 . Some annuities state conditions under which no surrender penalty will be levied at all on early withdrawals. Because he likes this particular product. at any point in the annuity. It should be noted that surrender penalties would not be waived if the person actually owning the policy (the contract owner) is different than the annuitant. one company allows. therefore.

Uncle Joe must pay the surrender charges. Realize that a $25 administrative charge equals a onequarter of one percentage point reduction in the interest rate on a $10. Some annuity contracts only apply these charges to small accounts with a value under a specified dollar amount. administrative charges significantly reduce the accumulation value and should. Because the contract owner is different than the annuitant. therefore.Retirement Planning  Chapter 13 – Annuities        Since Joe's daughter is twenty years younger. Especially on small accounts. but offers a lower percentage rate on small accounts. be avoided when possible. United Insurance Educators. Page 61 .000 dollar annuity accumulation. If a company does not charge an administrative charge. he cannot leave the money in the annuity and must accept the funds. Administrative Charges Some annuity contracts have administrative charges. Inc. but they are usually between $12 and $50 per year. the damage is the same. for example. They may call it a management fee. Whatever the name. the effect is the same. Sometimes insurance companies use different names for administrative charges. she is diagnosed with cancer and predeceases Uncle Joe. it is always wise to thoroughly read each annuity contract for variations. he expects to be the first to die. These charges vary. Since annuity contracts can vary to such a large degree. However. Since the annuitant has died. which are deducted from the annuity accumulation on an annual basis. This is certainly wise for the investor and mandatory for the selling agent.

the insurance company will then waive any surrender penalties if the annuitant or policy owner chooses to cash in the annuity. Most buyers want to be able to listen to the selling agent and buy based on his or her presentation. When a consumer says they are unhappy with an insurance contract. this puts a lot of pressure on the agent to fully explain each policy sold and then hope that the consumer understood the explanation. Page 62 . When this is the case. the contract is often said to contain "fine print." It is easy to see where this saying came from. It is a way of promoting their products with a guarantee on interest rates. it is very important to entirely read the document. the contract usually states that if the current interest rate (at the time of surrender) is lower than the initial rate by a specific percentage amount.Retirement Planning  Chapter 14 – Contract Clauses      14    Contract Clauses As with all types of contracts. whether it is the contract for the new car they just bought or the medical policy they purchased from Blue Cross. Few people actually read what they buy. while other companies do not. This clause allows the annuitant or policy owner. One of these clauses is called a Bailout Clause." Actually the size of print in an insurance contract is regulated in nearly every state. Bail-Out Clauses There are a number of contract clauses in an annuity that can affect the size of the account. Inc. to cash in their annuity without paying the surrender charges that would normally apply. under specific conditions. It has been said that insurance contracts "are the number one unread best seller. Often the Bailout Clause is tied to the current rate of interest being paid. The consumer simply has not read (or not understood) ANY of the print. Some insurance companies still have a fee or administration charge attached to their bailout clauses. Of course. Rather than simply offering a surrender United Insurance Educators.

Persistency Bonus Persistency bonuses are used fairly often in contracts. Inc. rises. but many professionals feel that bail-out clauses simply offer a false sense of security. which would allow them to credit policyholders with higher returns also. This is because when interest rates fall. How this type of clause works will vary with the contract. so the theory claims. Market Value Adjustments may give an insurance company more flexibility to invest in areas that promise a higher return. Chapter 14 – Contract Clauses      There are. Page 63 . in fact. Any surrender charge is still applicable. differing opinions. the company will increase the annuitant's or policy owner's accumulation value. There might be a five or ten percent of the premium used or the percentage might increase gradually as the years go by. but this added value does help to offset it. This is not always an easy concept for the consumer to grasp. the insurance company is sharing the gain on its assets with the policyowner. the value of the company's assets decrease. some contracts offer a choice between surrendering the contract or getting up to one-half of one percentage point more on the money in the annuity account. Some of these clauses will offer higher rates at the beginning of each new United Insurance Educators. which are commonly bonds. so restrictive that it is unlikely a policyholder would even use it. of course. If a policyholder cashes in their annuity during a guarantee period when interest rates are down. Therefore. This clause encourages their policyholders to keep their annuities for longer periods of time by offering an increased return at set time intervals or at some specific time period. market-value adjustments are a way for an insurance company to share both their profits and losses with their policyholders. At least. the reverse is also true. Some bail-out clauses are. in theory. the market value of the insurance company's assets. Of course.Retirement Planning  if interest rates go too low. Market-Value Adjustments Although other factors almost certainly have a greater influence on an annuity's performance. When interest rates rise. A policyholder who cashed in at this time would share in the losses. Insurance companies are not going to put themselves in the position of losing money. The additional amount is added directly to the contract's accumulation value.

come with restrictions. Normally these rates are higher than those received by new customers. often $25." These withdrawals. The conditions will vary. the company may require that it be taken only once per year in order to avoid additional charges. unlike life insurance contracts. This would be true even if the total taken in two or more withdrawals did not go over the 10 percent. A qualified annuity may be borrowed against because taxes have not been paid on the contributions. even if allowed. Page 64 . however. Annuities are designed to be long-term investments. These may be referred to in the contract as "free partial withdrawals. Even if 10 percent per year is allowed. Inc. but they are not meant as a continual source of cash. A qualified annuity is used as a retirement plan and is usually referred to as a tax-sheltered annuity (TSA). For this reason. an individual cannot borrow against the accumulation value in a non-qualified annuity contract. They may have both restrictions (once per year AND a specific percentage or dollar amount). Most contracts commonly allow a partial withdrawal of up to 10 percent of the accumulation value without incurring a surrender charge. Most insurance companies do allow their policyholders to take out partial withdrawals from non-qualified annuities without penalty. but it is common for the company to restrict them to once per year or to a certain dollar amount or percentage amount. Chapter 14 – Contract Clauses      Partial Withdrawals Annuities have many excellent features. It is not unusual for the insurance company to also apply an administration charge. A "non-qualified" annuity is one on which taxes have already been paid on the contributions. United Insurance Educators.Retirement Planning  guarantee period.

The annuity payout phase is probably the most important aspect of a deferred annuity. Certainly this offers emotional security in these uncertain times. the policyowner is then free to reinvest elsewhere. Once annuitization takes place. Monthly annuity payments are usually higher than the income that could be earned by reinvesting. When the payout phase is reached. Inc. an irrevocable bargain with the insurance company is initiated. The word "Annuity" means "a payment of money. If the lump sum withdrawal is selected. how much the annuitant or policyowner receives will depend upon how much was deposited and how much accumulation time was allowed to take place. United Insurance Educators." The insurance industry designed them to do just that. Although the deferred annuity was originally designed with income features in mind. Exactly how the policyowner receives the money will depend upon the option he or she decided upon. spend the money or give it to others. Page 65 . the policyowner will have an income that he or she can never outlive. the policyowner can elect to take payments or withdraw the funds as a lump sum. The word "Annuity" means a payment of money. If a lifetime payout option is taken. there can be great security in knowing that the annuity will provide at least partial financial security. Of course. today they are looked at more for their ability to accumulate and less so for their ability to distribute income at a later date.Retirement Planning  Chapter 15 – Annuity Payout Phase      15    Annuity Payout Phase Annuities are commonly purchased for use in retirement and they work well in this capacity. the policyowner may no longer withdraw funds or do as he or she pleases with the money. If the policyowner chooses to annuitize. However.

Chapter 15 – Annuity Payout Phase      Unisex rates mean the annuity settlement options are the same for both men and women. This is not an example of sex discrimination. because it would be impossible at the time of purchase to know what the rate would be. usually the current settlement-option rate is higher than the guaranteed settlement-option rate. the money is not invested individually for each depositor.Retirement Planning  Some investors choose to withdraw their annuity accumulation is a lump sum from one company and simply re-deposit the funds with another insurance company into another annuity (typically an immediate annuity). which is expressed as dollars of monthly income per thousand dollars of accumulated value. These rates are based on factual life span statistics. however. Some companies have unisex rates. In both cases the insurance actuaries will compute the size of the monthly payments by applying a settlement-option rate. United Insurance Educators. Qualified annuities must use unisex rates. There are two factors used by the actuary when figuring out the settlement option rates. as opposed to those who might be interested in an immediate annuity with money they have saved elsewhere. Insurance companies do tend to offer better settlement options to those policyholders that have been with their company for a period of time. Because settlement rates can vary widely from company to company. Even so. it is always wise to shop around. but non-qualified annuities may use sex-distinct rates. it is still a good idea to do some shopping around since there are insurance companies who specialize in immediate annuities and offer very good rates. Some professionals feel this is an effort on the part of insurance companies to discourage shopping around. This one is written into the annuity contract and represents a minimum payout. the difference has been substantial. However. It is not written into the contract. Inc. Many companies. One is called the guaranteed settlement-option rate. do have different rates for men and women. in some years. While interest rates do vary from year to year with highs and lows that can be very different. In fact. The other one is called the current settlement-option rate. the current settlement-option rate is the one that applies at the time of annuitization if it is higher than the guaranteed rate that is written into the annuity contract. Of course. Settlement-option rates depend on how long the actuary believes the insurance company will be making these payments to the policyowner and on how well the company believes they can invest the policyowners money during that payout period. That means that settlement options are the same for men and women. Page 66 . All of the policyholders' money is pooled which allows the company to invest better than an individual would be able to.

In a way. the policyholder and the insurance company are entering into a "gambling" contract. It is called a "life" annuity because the policyowner receives a check throughout their lifetime. Under this option. there are different options available to them. Thus the saying: "an income that cannot be outlived. he or she will receive a check each month for a "set" amount of money. for as long as the annuitant or contract owner lives. Single Life Annuity This form is also commonly referred to as a life annuity. The vital difference between this option and the Life Annuity has to do with any leftover funds after the annuitant or policyowner has died. the key word to this aspect of the payout option is "life.Retirement Planning  Chapter 15 – Annuity Payout Phase      Payout Options For those who chose to annuitize their annuities. This means that there will be no income for any beneficiary. On the other hand. a life annuity provides the receiver with the most monthly income. long life. the insurance company comes out the winner. if he or she happens to die early. Page 67 ." Somebody is going to get the money. no leftover funds will be distributed to any beneficiary of the policyholder. This option agrees to pay out a specific amount of money to somebody: to either the policyowner or to his or her beneficiaries. the key word to this aspect of the payout option is "certain. Therefore. Therefore. Life and Period Certain Annuity This option may also be called Life and Installments Certain Annuity." Of all the settlement options. If the policyholder wins. even if the policyowner dies prematurely. It is important to note that the income stops when the policyholder dies. Inc. Again. Besides the promise to pay out a specific amount of money. This may work out very well if the policyowner lives a long. The policyholder is betting that he or she will live a long time (hopefully longer than average) and the insurance company is betting that the policyholder won't allow the company to keep any leftover funds that were not paid out. the insurance company promises to pay an income to the policyowner for his or her lifetime. including a spouse. United Insurance Educators. if the insurance company wins." The Period Certain will vary from contract to contract. they pay out less than was paid in. he or she collects more than was paid in.

It is possible to select a 100 percent joint-and-survivor annuity. her heirs would only receive the remaining one-year. Then payments will stop. When the first named person dies. the insurance company will continue to make a monthly payment to the second person until he or she dies. Chapter 15 – Annuity Payout Phase      We used the example of a 10-year period certain. even if that happened to be twenty or twenty-five years (or more). If. If Mary Martin only received five years worth of payments. then her heirs would receive the remaining five years. she could collect the set payments for as long as she lives. Under this option. because the insurance company is taking a lowered risk. the monthly payments will be much lower. If so. she will receive a designated (set) amount of money for her lifetime. the insurance company will make monthly payments for as long as either of two named people survives. If. If Mary Martin had received nine years worth of payments. then her designated heirs would receive the balance of that 10-year period certain. this is not always the case. where payment is made to the survivor only when the retiree dies. Keep in mind that Mary Martin could live to be very old.Retirement Planning  For example: If Mary Martin takes a Life Annuity with a 10-year period certain. she happens to die before she received ten years worth of payments. one of the annuitants is the primary annuitant. Page 68 . because the monthly payment amount may only be slightly lower than the monthly payment made under the single life annuity (which only covers one person). regardless of how long she lives. the secondary annuitant is much younger. a five year period certain would yield a higher monthly income than would a ten year period certain. Of course. The exact amount will depend upon the option that was chosen. Joint-and-Survivor Annuity This payout option is most often utilized by husbands and wives. However. Inc. the insurance company will reduce the amount of the monthly payments to the survivor by as much as one-third to one-half. It does not have to be 10 years. This type is different from the ones available from an individual's pension. Even though payments are reduced. the insurance company has a greater United Insurance Educators. On this type of option. It could be five years or some other amount of time. That is because. it can be written on any two lives. The level of the monthly payment is then dependent upon the secondary annuitant's age and gender. Of course. If the secondary annuitant is older than the primary or fairly close to the same age. the initial payment may not be much different from payments under a life annuity on the primary annuitant alone (a single life annuity option). Often. this is an excellent option to elect. however. payments can be dramatically lower depending upon the ages and sexes of the two annuitants involved. on the other hand.

Additionally. the policyowner withdraws all of the accumulated value. which depends upon the option chosen. gender. of course. Part of the accumulation is taxable as it is withdrawn. United Insurance Educators. The larger the payment to the secondary annuitant. Once withdrawn. there are both advantages and disadvantages to this payout option. This is calculated by the insurance company based on gender and other factors. including principal. taxation does occur. Systematic Withdrawals A systematic withdrawal plan is based on the policyowners life expectancy. many people do need a monthly income. Of course. The primary annuitant receives less money while he or she is alive. Using life expectancy. Many insurance companies will waive the surrender fees when systematic withdrawal plans are used. Under a systematic withdrawal plan. and the amount of money that has been paid in. the amount the policyowner receives is less this way. Page 69 . but they desire to leave any unused balances to their beneficiaries. Other Methods of Collecting Income Not everyone desires to annuitize his or her annuities. Because the annual income from the annuity is less than it would have been under some of the other payout options. Instead. but the secondary annuitant (often a spouse) will continue to have a guaranteed income for the remainder of his or her life.Retirement Planning  degree of risk because the secondary annuitant is likely to live much longer than the primary and continue to collect monthly payments. Rather they choose to simply draw the interest off on a monthly or yearly basis. Inc. the lower the payment will be initially to the couple jointly. they will be able to accomplish this. Chapter 15 – Annuity Payout Phase      Obviously. There are several advantages to systematic withdrawal plans. The interest earnings are only sheltered from taxes while they are in the account. Therefore. Many investors never annuitize their annuities. the insurance company calculates a monthly payment amount. without ever actually annuitizing the account. The money in the account continues to earn tax-free interest during the withdrawal period at whatever rate the insurance company is posting. Some people never annuitize them. the annuity owner saves income taxes. because the principal is never collected. they draw off the earned interest. There are also other ways to get money out of an annuity besides simply drawing off the interest periodically.

depending on how the account grows and on Internal Revenue Service rules. it is an option available to the policyholder. The reason often given is "availability of funds. Because he needs more money now. he elects larger payments to begin with. most insurance companies will allow them to do so. annual payments can be increased or decreased. but will need less money later (when Social Security kicks in). it may well be." An insurance comUnited Insurance Educators. the account is less. For example: Sam decides to retire at the age of 60 even though he is too young to receive Social Security payments (age 62 is the earliest age he can draw Social Security). Eventually. Since his retirement from the lumber mill is not enough to live on. so decreasing his payments will also insure that the money lasts longer. Obviously. they would probably either leave the funds in their current annuity or re-deposit them in an immediate annuity that they feel more comfortable with. late in life is never a good time to enter into a risky investment. However. In a few years. Inc. due to his monthly withdrawals. If they understood them fully. this is not a wise choice. Many people take a lump sum withdrawal because they have become unhappy with the rate of interest paid on their annuity and they feel they can invest it better elsewhere. many people elect to simply draw all of the funds out in a lump sum. he decreases his monthly income from the annuity. the payments may go up or down each year. Additionally. Chapter 15 – Annuity Payout Phase      Another point to consider is the flexibility of systematic withdrawal plans. but if he does not. It is not uncommon for an individual to withdraw the funds in a lump sum and then simply deposit them into a Certificate of Deposit that pays a substantially lower rate of interest. Page 70 . Often people take their annuity as a lump sum simply because they do not understand their annuity options. Sam decides to begin a systematic withdrawal plan on his annuity. Although this is not always a good idea. Even if the policyowner decides part way into the systematic withdrawal plan that he or she would like to annuitize the remainder of their funds. Sam will probably draw all of the money out of his annuity. The ability to recoup losses is gone when employment ends. With this type of non-annuitized withdrawal. Lump-Sum Payments When the accumulation phase of the annuity ends.Retirement Planning  this. the remainder will go to his beneficiaries because he never did annuitize the account. In some cases this may be true. The IRS will require that the policyowner withdraw a minimum amount each year based on their life expectancy. By this time. Under a single life option or a joint-and-survivor annuity option. since the size of the account will change as interest rates change and as withdrawals occur. While this may not initially sound like an advantage. the monthly payment is fixed until death.

How accessible do you seem to your clients? Chapter 15 – Annuity Payout Phase      A person is not wise to invest in risky vehicles during or just prior to retirement. Even though the funds are still in an insurance company that is "far away. Page 71 ." If an individual annuitizes a non-qualified annuity. Annuity Taxation Even though annuity funds do grow tax-deferred. Split-Funding Techniques Although this may seem like a new withdrawal method. Many people." the bank itself seems close and accessible. an annuitant or policyowner could claim that only principal was being withdrawn initially. Taxes are paid only on the portion that is interest. It is not necessary for the individual withdrawing the funds to try to determine how much is interest and how much is principal. Under this method of withdrawal. the insurance company does that and sends a statement to the policyowner. whereas their bank seems close and accessible. like Sam who take an early retirement. find this method especially beneficial.Retirement Planning  pany often seems very far away. the monthly payments are fully taxable. it has actually been used for some time. The definition of deferred is "to delay or postpone. taxation does eventually occur.an immediate annuity which provides an immediate flow of income and a deferred annuity that continues to grow at the designated rate of interest. Now the Internal Revenue Service uses a formula to determine which part of each monthly payment is interest and which part is principal. because the contributions themselves were not originally taxed. but that is no longer true. If an individual annuitizes a qualified annuity. only part of each monthly payment will be taxable. College Edition This definition is exactly how taxation occurs: on a delayed or postponed basis. Inc. That fact is exactly why the annuities are "qualified. Perhaps there is a lesson in this for all insurance agents. At one time. United Insurance Educators." * *Webster's Dictionary. Perhaps it is this logic that has aided banks in recent years in their own annuity sales. since the principal was taxed before it was deposited. an individual takes a sum of money and divides it into two separate annuity funds -.

United Insurance Educators. At the time of death. Page 72 . If the insurance company has surrender charges in their contract. if they are applicable. Withdrawal Penalties As we stated earlier. taxes will be paid. there will be a penalty levied. If the insurance company has surrender charges. the entire amount withdrawn would be taxed because taxes were not paid on the principal prior to deposit. there are penalties imposed by the IRS for early withdrawal. the annuity is also subject to federal and state estate taxes. the IRS will tax the proceeds the same way. At some point. Inc. so it is important to stress this difference to clients. This is true even if the insurance company does not have any. If the individual withdraws funds from his or her annuity before the age of 59 1/2. the IRS will require that he or she take the proceeds from the annuity account within five years of the death of the policyowner. For qualified annuities. This is especially true for single life annuitizations. the entire amount of the monthly payment will be taxable. Placing money into an annuity will not save taxes. If the beneficiary of an annuity is a child or some other person. When this happens. Primarily used for retirement funds. those charges will be in addition to those levied by the IRS. the annuity value is normally included in the value of the estate. the IRS imposes a 10 percent penalty tax on the amount by which the value of the annuity exceeds the premium that you paid in. Many people assume that the IRS taxes the entire amount withdrawn on both qualified and non-qualified annuities. Therefore. If a spouse will be the beneficiary of an annuity. annuities are designed for long-term investing. or will become the new owner upon the policyholder's death.Retirement Planning  Chapter 15 – Annuity Payout Phase      It should be noted that it is possible to entirely withdraw the principal at some point and end up drawing entirely interest earnings. There will be no tax savings. If the funds are left in the account past this five-year period. those charges will be in addition to any levied by the Internal Revenue Service. This IRS rule assumes that the annuity is non-qualified.

anytime one is dealing with tax consequences. Inc. This is not really too surprising. If the policyowner chooses a systematic withdrawal plan and meets certain conditions. the insurance company makes a point of keeping up on current taxation rules. Usually. For example. they must continue for at least five years AND until the policyholder turns age 59 1/2. Page 73 . Bear in mind that tax accountants do not always have annuity knowledge. United Insurance Educators. a third opinion may need to be sought. if you find that the insurance company's legal department differs with that offered by the tax accountant. Liability would certainly exist anytime tax suggestions are given. it is always wise to consult both the insurance company's legal department and with one's own personal tax accountant. once payments begin. there are exceptions for both qualified and non-qualified annuities. Therefore.Retirement Planning  Chapter 15 – Annuity Payout Phase      As with so many things. The problem is they may not allow their personnel to give tax advice in which case they will not help an individual make a tax determination. then he or she may be able to avoid IRS penalties. Changes occur frequently. however. If early withdrawal is desired. In fact. since IRS rules change periodically. This exception would apply only to qualified plans. it is vital to make sure that the information is current.

perhaps a young family needs pure insurance protection. Page 74 . 4." but it is not efficient use of the dollars spent either. so the consumer bought insurance at a higher price than was necessary. wasted on types and amounts of insurance that do not achieve the desired goals. Many people purchase or continue to carry life insurance protection when it is not truly needed. No comparison shopping was done. 2. Not all companies charge the same premium for the same amount of protection. Term insurance might be a better purchase than would cash value insurance at this point in their lives because they would be able to afford higher amounts of term insurance. even when buying life insurance protection. The wrong type of insurance is bought. There are four primary reasons money might be wasted on life insurance: 1. 3. Inc. Continuing products that are no longer needed is often a problem. it may be necessary to reevaluate the consumer's current protection levels. Millions of dollars are. unfortunately.Retirement Planning  Chapter 16 – Life Insurance      16 Life Insurance It would be very difficult to do any retirement planning without considering life insurance products. Inflation must always be considered. United Insurance Educators. For example. There are two general purposes for life insurance in retirement planning: To provide income for the surviving spouse and dependents and As an estate planning tool. When inflation reduces the value of the life insurance protection. Perhaps this is not necessarily "wasted dollars.

For many of these consumers. his or her children have probably completed college and left home. Taxes that would be due upon death might also need a life insurance policy for the protection of the beneficiaries. therefore. Life insurance is often purchased when special circumstances have a bearing on the value or disbursement of the estate. the money spent on a life insurance policy would be put to better use on a long-term care nursing home policy. Life insurance is a way of providing income for dependents should the family breadwinner die. Usually. Many companies encourage term policies to be converted into some form of cashvalue policy. Lois would want to continue the business. The other daughter. When considering whether or not to keep a life insurance policy. Therefore. when it does seem to make sense to purchase or continue payments on an existing life insurance product. This often comes up when the estate is "land poor. Page 75 . Term policies usually are not renewable after age 65 or 70. She makes collectable dolls of a type that are not available in department stores. Irene buys a life insurance policy with Marlene as the beneficiary. if it applies. she United Insurance Educators. cash-value policies are also very expensive and. consider the total outlay for all the consumer's insurance needs. She has two grown daughters. Inc. but often this is not a desired course of action. Even if a term policy is renewable. has her own career and has no interest in the business. it is unlikely that it could be easily sold. By the time the consumer retires.Retirement Planning  Chapter 16 – Life Insurance      Many insurance agents make a strong case for maintaining or even buying a life insurance policy in the retirement years. specialized business. There are times. One of the daughters. Late in life. keeping a life insurance policy no longer makes sense. Generally. Marlene. the beneficiaries could sell the land they inherit. Neither child is dependent upon her for support. probably not a good idea. In Irene's will. a consumer needs larger amounts of insurance when their family is young and less as they grow up and leave home. however. Lois. Usually this is the case when debts exist that the surviving spouse would not be able to pay. works with her in her shop and genuinely loves the business. This would include premiums paid for Medicare. For example Irene began a small business some years ago. Being a small. in truth doing so may not be sensible. but Marlene would rather have a cash inheritance. While this may sound logical on the surface. the premiums are so high that it is foolish to continue them. even if the consumer is retired. Many people fund a buy-and-sell agreement with a life insurance policy." Of course.

younger families often need higher insurance amounts. please. This would include. That resulting figure is the amount of life insurance that is necessary. Consider any income that is coming from current trusts or inheritances. Maryland. Chapter 16 – Life Insurance      When a need exists. Eventually it is likely that such young families would convert to a cash-value policy as their needs and finances change. the agent should begin by defining the needs of the insured's dependents. a consumer's greatest insurance needs do occur when their families are young. Generally. In addition to the cost factor. When reviewing a consumer's life insurance program. By purchasing a one-year to five-year renewable term policy. Inc. Many professionals also suggest that such things as a future college education be added in. List the needs of the survivors minus income. but should also include children and any other persons who are financially dependent upon the insured. so term insurance may be the type needed at that moment in their lives. Social Security benefits may be available (see the chapter on Social Security). of course. such as taxes and house insurance. Once needs are computed. Each case is specific and should be looked at individually. the spouse. look at other sources of income that will be available besides insurance proceeds. Obtain the figures from the Social Security administration in Baltimore. Remember to include yearly payments. Next the consumer and agent need to determine which type of life insurance best suits their needs. it is a wise idea to look at past expenses. life insurance can be very important.Retirement Planning  specifies that Lois is to receive her business in its entirety and Marlene is to receive an equal value in life insurance proceeds. Younger families often are not able to pay the higher costs of cashvalue insurance. Perhaps the surviving spouse or children are able to earn a living in their existing or future jobs. All is necessary is a postcard with the request: "Benefit Estimate. When computing the dependent's needs. There is no one life insurance policy that every individual absolutely must have." Pension and profit sharing plans should also be considered. It is not necessary to guess what Social Security benefits are available. the premium costs have a direct bearing on the type of insurance purchased. Page 76 . Often. they are able to United Insurance Educators. Social Security benefits which will be payable at retirement are available by request.

Estate planning is an important part of retirement planning. A cash value policy has two elements to it: life insurance plus a side savings. but if it has been transferred to an insurance trust. Page 77 . By the time the cost of the term insurance becomes higher. These cash values grow from the additional premiums paid in and also from the interest the cash values are earning. the policyowner can borrow against it and change the beneficiary if so desired.Retirement Planning  afford higher insurance amounts. providing for financial needs or requirements. but it is certain vital that we do so. Of course. it might be possible to talk them into returning the ownership. United Insurance Educators. Now the usual recipients of life insurance gifts are the children or an irrevocable insurance trust. Keep in mind that ANY trust that allows the individual to change or revoke it does NOT eliminate estate taxes. These rights are lost when ownership is given up. An individual should carefully consider all options before giving up the ownership of an insurance policy. the real value of life insurance is always most obvious after the insured's death. It might also involve life insurance policies. Any trust that allows the individual the right to change or revoke it will not eliminate or reduce taxation. This does seem obvious. If ownership has been given up to a family member. keep it out of the estate and incur no estate tax and little or no gift tax in most cases. but it needs to be stated. the trustee may not have the power to return it or to change the terms of the trust. Should the insured die the beneficiaries receive the total value of the policy. It is this cash value that can be borrowed. one spouse usually transferred ownership of a policy to the other in order to reduce estate taxation. Before Congress allowed the unlimited marital deduction. The marital deduction now makes that unnecessary. This type of planning involves gathering information and recording it. Inc. it is likely that this same family will be able to afford the premiums of a cashvalue policy. If ownership is kept. trustees and guardians to carry out one's wishes. making sure the right people will be involved in the estate settlement. An individual can give away life insurance. selecting appropriate beneficiaries and appointing the appropriate executors. This is the insurance benefit and the cash value benefit combined. It is not always easy to consider our own death. Chapter 16 – Life Insurance      The accumulating cash portion of the life insurance policy is its cash value. which can be borrowed at any time from the insurance company.

Unlike other types of property. It has reference to rights of the insured to any economic benefits of the policy. Chapter 16 – Life Insurance      Life insurance is considered a vital part of wise estate planning. When using life insurance to establish an estate. One aspect that is often either misunderstood or ignored in life policies is how ownership will affect proceeds at death. The uses of life insurance are varied and numerous. it is important to name a beneficiary so that probate may be avoided or bypassed. This means if the person who dies has any ownership in the policy it is part of the taxable estate. or otherwise benefit in any way. Without adequate coverage. whether by sale or by gift. In order for the policy to escape this. the insured must REALLY part with the policy. When the spouse dies. Page 78 . it does make sense to set up an irrevocable insurance trust. Payable to any other beneficiary. gifts of life insurance policies given within three years of death will escape taxation. Inc. such as a home. It can be used to create an educational fund or retirement benefits. There is often the impression that life insurance policies and annuities are taxed less than they actually are. when estate planning. This might especially be true if the spouse will need the income from the insurance to live on after the insureds death. It has become common to use a child as the insured and the parent as the owner of a policy or annuity. The Federal Code and the Internal Revenue Service (IRS) regulations include in a decedents' estate all those proceeds of life insurance and annuities that are: 1. all ownership must be given up. It can protect other investments. but the trust is not required to pay estate taxes. Payable to the estate or 2. It creates an immediate estate for those who otherwise would not own an estate. surrender or cancel the policy. The trustee has the power to invade the principal in the trust for the spouse's benefit. Therefore. United Insurance Educators.Retirement Planning  Sometimes. there is often no estate to work with because there are no assets yet acquired or the assets have been used up prior to death. to take a policy loan. the trust passes on to the children. Those include the right to change the beneficiary. if a person wishes to remove life insurance from taxation in the estate. The IRS term "Incidents of Ownership" is not limited to meaning ownership in the technical sense.

Page 79 . Often the insured realizes that his or her beneficiary would not be financially responsible. Or. Therefore. they may elect to have the proceeds paid in monthly installments. The insurance funds may be poured into the testator's Residuary Trust so that there is only one trust. If a person decides to have a life insurance trust. The determination of how much insurance and how it is paid is extremely important to the planning of an estate. Inc. reducing trust fees. the assets of the estate may be channeled into an already setup insurance trust which contains instructions from the insured (now deceased) that are the equivalent of those found in a Testamentary Trust.Retirement Planning  The decision regarding whom the beneficiary should be and how the life insurance ought to be paid out is just as important as the determination of the amount of insurance that is needed. decisions regarding life insurance and annuities need to be reviewed periodically. In that case. it needs to be tailored to the needs of the family it is intended to protect. A payment mode selected years before death can be very wrong at the time death actually occurs. Chapter 16 – Life Insurance      United Insurance Educators.

the longer one lives. Medicare will pay a co-payment of $87 per day (again. at first. is that nursing home care or even just home care in many cases. for skilled care only). tend to concentrate on other financial areas apparently assuming that long-term care needs will never arise. it is expected that 3 out of 5 people will live to be 85 years old. the odds of living to the age of 85 have doubled. Unfortunately. These limited benefits simply are not adequate when it comes to the nursing home needs that elderly Americans face. Page 80 . seem surprising to have a section on long term care products in a retirement planning course. Over 30 percent of Americans who are 85 years old live in nursing United Insurance Educators.Retirement Planning  Chapter 17 – Long Term Care Insurance      17    Long Term Care  Insurance  It may. Medicare pays for only one level of nursing home care: skilled. Our retired Americans are lucky to have the benefits they do in our Medicare program. Agents. It is true that there are limited benefits for the level of care called skilled care. From the 21st day through the 100th day. In fact. the number of persons over the age of 65 will approximately double. Despite all that may be wrong with the Medicare system. Both the hospitals and the doctors are basically well covered. Since 1940. too many people overlook this area when they plan for retirement. The simple truth is that. What many Americans and their families fail to realize. more and more of them will end up spending some time in a nursing home. In addition. as Americans live longer and longer. Medicare will pay the first 20 days for skilled care only. History tells a different story. as well as consumers. By the year 2030. is not covered by Medicare. Inc. there is also much that is right with it. the more likely it is that they WILL enter a nursing home.

there is no one at home to care for an aging parent or grandparent.Retirement Planning  homes. It is common for both spouses to be employed and. Few families are set up. United Insurance Educators. it is more likely that strangers will provide care. Now the need for assisted care of some type results primarily from simply growing older. Home care can include a wide range of services including (but not limited to) regular living assistance. and food preparation. A congressional subcommittee on aging found that between 70 and 80 percent of all nursing home residents become impoverished within the first year of confinement. In May 1988. it was children caring for parents. Home care may include physical therapy. having spent their life savings on the nursing home fees. or meal preparation and delivery. light medical services. Nursing home fees are rising at a rate that is higher than inflation. family members usually took care of their aging members. but gradually leave people increasingly helpless. the inability to care for oneself tended to primarily result from illness or injury. in fact. in fact. administration of drugs. Where does all of this leave our aging population? It leaves them in a position of having to look logically at the possibility of needing care in a nursing home. Costs do vary depending upon the region looked at. Home care rates are also rapidly rising. That is no longer true.000 per year according to the May 2007 Government Accountability Report. necessary financially for both spouses to earn an income. arthritis. Usually. either financially or physically. Chapter 17 – Long Term Care Insurance      In the past. Obviously they severely underestimated the increasing longterm care costs. The next question: Can they pay for it out of their own pocket. and other conditions that do not require hospitalization. Another 20 percent require some type of home care. the ONLY realistic solution. Consumer Reports magazine estimated costs would run over $55. to care for their aging members. People live on for years with such things as Alzheimer's disease. Page 81 . Now. typically in some type of formal setting. or would an insurance policy be more realistic? For most Americans. Inc. Why Buy a Long-Term Care Policy? The cost of providing long-term nursing care is very expensive. but it is common for costs to run at least $70. Most people cannot afford these costs for any length of time. an insurance policy is. In past years.000 for long-term care by the year 2018. As a result. housekeeping.

It is easy to see why. prescription drugs. Chapter 17 – Long Term Care Insurance      It is unlikely that the federal government or state governments will ever develop a program to pay for long term care costs. Since Medicare does such a good job with the hospital and doctor fees. As a result. specific statutes may well vary from state to state. due to the projected cost. relatively unknown just thirty years ago. According to the Health Insurance Association of America (HIAA). which includes Skilled. Some people believe that Medicare will. It would likely be cost prohibitive for the government to cover these fees. These policies are commonly referred to as LTC policies. pays more than half the cost of nursing home care. In other words. 81 percent of out-of-pocket expenses go to nursing home fees. there can be policy differences. It is common for adult children to pay part of the bill for their parents. Such care. Page 82 . at some point in the future. In the past it was hard to convince the citizens that Medicare would not also cover their fees in a nursing home (Medicare pays only about 1. Intermediate and Custodial care. paying these bills is also a financial burden to the children. Of course. Most states now require that all levels of care be equally covered by the currently marketed insurance policies. if skilled care is covered at $150 per day. certainly not a situation enjoyed by the parents who always thought they would be self-supporting. while people may not enter a nursing home poor. Defining Policy Benefits Multiple insurance companies market long-term care policies. Inc. they soon become poor. will end up broke within 13 weeks. In fact. begin to pick up some of these long-term care costs. our elderly citizens pay little out-of-pocket. Many states have mandated specific LTC requirements. The best policies pay all levels of care. but many are doubtful that this will ever actually happen. The balance goes to dental fees. is now common. and doctors combined. The need for encouraging our elderly citizens to purchase long-term care insurance protection clearly exists. Primarily the patients and/or their families pay the remainder of care. however.Retirement Planning  Medicaid. then both intermediate and custodial care must also be covered at the same United Insurance Educators.4 percent of the total nursing home costs) but today most people realize they cannot count on Medicare for long-term care costs. Over half of all unmarried persons who enter a nursing home. Even within a given state. the Federal program that finances medical care for poor citizens of all ages. the Medicare budget is constantly in trouble financially.

simply multiply the daily benefit selected by the number of days not covered. they would be very old policies indeed. The waiting period is a deductible expressed in time not covered. although it may mean higher rates for the care received. since that requirement has now been around for quite awhile. in dollar terms what an elimination or waiting period means. It is not unusual for a nursing home policy to have a 100 day wait before benefits are payable. Since company brochures may be laid out in a variety of designs. While it is possible that some older policies exist that were issued prior to this requirement. Benefits under non-tax qualified plans could possibly become taxable as income in the future. under specific conditions. be given in either a skilled or intermediate facility. Tax qualified plans do allow the policyowner to deduct. but it could be much longer. regardless of the level being received. This means that the policyholder must choose an indemnity amount to be paid should they enter a nursing home. The daily benefit is typically chosen by the policyholder at the time of application. This should not cause difficulty for most policyholders. To understand. For example. comparing apples to apples can become difficult. A common waiting period or elimination period is 30 days. Those who do not itemize will not benefit. There are some basic points to consider: Chapter 17 – Long Term Care Insurance      Is the policy tax qualified or non-tax qualified? Tax qualified plans will not cover ambulating as a benefit trigger and confinement must be estimated to last at least 90 days. It is also referred to as an elimination period. Inc. The amount chosen should probably be no less than $100 per day.000. The number of days not covered depends upon the option selected by the insured at the time of application. Tax qualified plans would not have their benefits taxed. United Insurance Educators. This means that the first days of confinement would not be paid for under the terms of the insurance policy. the premiums from their year-end federal taxes if they itemize. if a policyholder has a benefit of $100 per day and the elimination period (deductible) in the policy is for 90 days that would amount to: $100 X 90 days = $9. although that is a personal choice which must be made by the insured. Page 83 .Retirement Planning  $150 per day level. It is not easy to compare long-term care policies. It is not unusual for an LTC policy to require that care. Some states have mandated minimum amounts.

Since the average length of stay is 2. Chapter 17 – Long Term Care Insurance      Each policy will have a maximum benefit period. If the insured does not mind covering such a deductible. Six months later (past her release date). Many policies contain two benefit periods: one is "per confinement" and another is a "lifetime benefit". For example Bertha is institutionalized in a nursing home for three months with a broken hip. intermediate or custodial. perhaps larger waiting periods are advisable. her benefits will renew IF she does not re-enter the facility for six months for treatment of the same condition. Page 84 . These benefit periods determine the length of time (coverage) that the insured is protected for while institutionalized in a nursing home. this is a large deductible. chances are the person will enter the nursing home and then remain there. Since there are medical conditions that may disable a person but not kill them. Many policies do offer lifetime benefits. This does not usually pose a problem for the insured as long as he or she is aware of the requirement. this means that some portion of the "per confinement" benefit is renewable and may possibly be reused at some future date. a three-year plan is considered a safe choice. When she is released from the nursing home. the more expensive the policy will be. This means that the benefits are payable for a set time period per confinement. Typically. and a three-year per confinement benefit. Most professionals recommend no less than three years of coverage. Some policies specify which type of facility is covered under the policy: skilled. If Bertha has a lifetime benefit of five years. Of course. then up to two years could renew itself and be reused. it will be either skilled or skilled and intermediate facilities that are specified. United Insurance Educators. On the other hand. it is always beneficial to have all types of facilities covered by the policy. if the confinement is for something more serious. Inc.5 years. A custodial facility would not provide skilled or intermediate care. While it is common for a person to have a short stay in a nursing home for such conditions as a broken hip or a knee replacement. the three months that she used on her nursing home policy renews itself and may be available for future benefits. The "lifetime" benefit in her policy states that only so much time may renew itself. The LTC brochures often list several choices. Most nursing home patients do not come and go. If a policy limits which facilities are covered. lifetime benefits can be important to some clients. premium rates would be significantly lower when large elimination periods (deductibles) are selected.Retirement Planning  Obviously. Of course. the longer the benefit period.

Assisted living offers 24 hour care. The cost is less than that charged by a nursing home and allows the resident to remain as independent as medically possible while still receiving help in areas that are needed. which the policyowner may apply in any manner desired. The insured may feel that having a home care option will allow them to remain at home. rather than a logical decision. If the insured lives alone. Some policies also offer the additional option of home care. Usually. Certainly. there are staff members on duty at all times. within the terms of the policy. usually for an extra premium. Inc. then the home care benefit would be $100 per day. As a result. United Insurance Educators. if the insured selected an $200 per day nursing home benefit. Assisted living may be called residential care in some states. home care may not be realistic unless someone is available to move in with the insured. There are differing opinions as to the value of home care benefits added on to a nursing home policy. whether or not home care is offered with the basic nursing home policy is seldom a factor when determining health care needs. Whether or not home care is added is often an emotional decision. One major factor has to do with living style. the doctor must typically stipulate that the insured would have to be in a nursing home if assisted living were not available. In reality. most people would prefer to remain in their home. Therefore. When home care is added. Chapter 17 – Long Term Care Insurance      Some nursing home policies make a "pool of money" available. a family member must be available to live in. One such form of care is assisted living. Page 85 . Many factors determine the best location for care. Although most insurance policies require that a Medicare certified agency provide the care. there are a wide variety of services available. Insurance companies tend to favor assisted living because it is less expensive than paying for care in a nursing home.Retirement Planning  As long-term care options change and expand. but the resident receives "assistance" rather than total care. the benefit is generally half of the nursing home indemnity benefit. In other words. new forms of care are developed. In other words. Assisted living may be covered anywhere from 50% to 100% of the nursing home benefit. but not total care. the home care benefits attached to a nursing home policy are not adequate to pay for 24-hour care. it is impossible to know how much home care is actually being received across the United States. In order for the policy to cover it. If home care is a realistic option. much more home care is given from individuals that are hired by family members.

and is under the care of a doctor. not full time. If the beneficiary requires any of these services. Coverage can also be provided for a portion of the cost of durable medical equipment provided under a plan of care set up and supervised by the physician. skilled nursing care (note the fact that care must be skilled and cannot be intermediate or custodial) Physical therapy Speech therapy. Page 86 . Part A of Medicare may also be able to provide other services which includes: • • • • Part time or intermittent home health aide services for skilled nursing care. such as bathing or getting dressed.Retirement Planning  Part A of Medicare will pay for some home health care services. Items NOT covered include: • • • • • Coverage provided for full-time nursing care in the home. Coverage includes: • • • Chapter 17 – Long Term Care Insurance      Part time. is confined to their home (homebound). There are gaps in Medicare's home health coverage. not intermediate or custodial care. Medicare covers only part time help. The amount of the visits by home health personnel is unlimited as long as the patient meets all of the requirements set down by Medicare. note that the care must be skilled. The patient pays nothing since United Insurance Educators.) Occupational therapy Medical social services Medical supplies and equipment provided by a Medicare contracted agency. Part A will pay the full cost of medically necessary home health visits if the beneficiary is homebound. unless a Medigap policy is in place to cover the co-payment. Drugs and biologicals Meals delivered to the home Homemaker services. such as cleaning or cooking General daily maintenance care. (Again. There is often much confusion regarding home health care. Inc. The beneficiary must also pay 20 percent of the reasonable charge for durable medical equipment.

it must somehow be paid for. Family and/or friends provide seventy percent of home care. physical. such as kidney dialysis. the physical work of taking care of a sick or injured person becomes more than the family can bear. Those conditions include: 1. A national debate has grown over the role of paid home care in the nation's long-term care system. It is not surprising that the entire family suffers from the situation. which is often the best place for them medically. This is an issue that families must cope with every day. reported Bruce Fried. or occupational therapy. Homemaking services may also be provided. Often the child must keep their parent in their own home since it is not realistic to move into the parent's home. their ages and their current health). The caregiver’s family is pushed into second place as the parent steps into first place. Doctors set up the home health care plan.Retirement Planning  Medicare will cover all eligible costs. unable to do an outside normal routine of shopping or other daily routine chores. United Insurance insurance companies now have very stringent underwriting guidelines for issuing long term care policies. There are many more people who are paid home caregivers that are not licensed. We can all certainly understand why a person would prefer to be at home as opposed to a nursing facility. that child is put in a very stressful situation. However. Most do succeed temporarily. The patient is housebound. 4. Eventually. which is provided by a Medicare contracted home health care agency. There are conditions that must be met before care will be given. Educators. the biggest block to such a move is the cost. but like all things. Chapter 17 – Long Term Care Insurance      Due to ever increasing claims. speech. When a parent asks a child to keep them home. Inc. It is a rapidly growing industry. The groups provide many services ranging from high-technology care. All types of care can be costly. the ill parent will end up in the nursing home. many of these people desperately need some sort of help. Thousands of agencies nationwide are licensed to provide paid home care. The treatment requires only part-time skilled (not intermediate or custodial) nursing care. As family members become increasingly frail and/or tired (depending upon who the family members are. 2. There is little debate over the need of such services. A doctor must certify the need for home health care. 3. to simple custodial and personal care. Millions of Americans are doing everything they can to keep chronically ill parents at home. a director of a citizen coalition group seeking health care reform. While many people would like to expand the availability of home care services through federal health care programs. Page 87 .

Retirement Planning 
Chapter 17 – Long Term Care Insurance     

Very little private insurance is in place to pay for such care. People tend to consider the need for such coverage later than they should. Once health problems exist, obtaining such coverage can be difficult or even impossible. Over the last five years, underwriting for any type of long term care has become more stringent. Those who wait until health problems develop may either pay more for long term care coverage, or have difficulty obtaining it at all. We have mentioned that many long-term care policies have home care benefits as an option, usually for an extra premium cost. There are also policies that offer strictly home care benefits. It is often felt that these benefits are better when bought through a separate policy, rather than as an additional option on a long term care policy. Home care policies currently have few state restrictions, so they may vary widely from company to company. Most home care policies are indemnities, which mean that they pay a set dollar amount per day for home care benefits. The insured chooses the level of the indemnity at the time of application. Just as there is underwriting for long term care nursing home policies, there is also underwriting guidelines for home care policies. Of course that means that an insured is more likely to qualify if they apply for the coverage as early as possible when health is more likely to be good. Premiums will also be lower if application is made during younger ages. Many things do not qualify for home care, either under Medicare or under a home care policy. General housekeeping services, such as cleaning, meal preparation, and shopping will not be covered. There are sometimes volunteer agencies that will offer help in these areas. Medicare also offers help for those who are terminally ill. Hospice is covered under Part A of Medicare. Hospice is care for the terminally ill. Hospice care is given at home. Part A will pay for two 90-day hospice benefit periods, a subsequent period of 30 days, and a subsequent extension of unlimited duration.

Hospice care is care provided for those who are terminally ill.

When a beneficiary enrolls in a Medicare certified hospice program, he or she receives medical and support services necessary for symptom management and pain relief. It is most common for these services to be provided in the patient's home. When a Medicare certified agency provides the care, the coverage will include:

Physician services
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• • • • • •

Nursing care

Chapter 17 – Long Term Care Insurance     

Medical appliances and supplies which includes drugs for symptom management and pain relief Short term inpatient care Counseling Therapies Home health aides and homemaker services.

Medicare's Part A and Part B deductibles do not apply to services and supplies that are furnished under the hospice benefit programs. There are limited charges for outpatient drugs and inpatient respite care. If care or services were needed for a medical reason, for a condition that is not related to the terminal illness, then regular Medicare benefits would apply with the deductibles and co-payments in effect. As with all benefits under Medicare, certain requirements exist. To be eligible for hospice care under Medicare, the beneficiary must: 1. Have been diagnosed as terminally ill, having only six months or less to live, and 2. Receive the care from a Medicare contracted hospice program. There are gaps in Medicare's hospice coverage: 1. The beneficiary is responsible for the limited charges for inpatient respite care and outpatient drugs. 2. Medicare's deductibles and co-payments do apply if treatment for conditions, other than the terminal illness, is obtained. Medicare requires prior hospitalization in order to qualify for nursing home care, but policies may or may not require prior hospitalization, as an option. This means that the insured may be required to first be in a hospital before entering the nursing home. Often this requirement depends upon the state of issue since some states prohibit a prior hospitalization requirement. There may be a requirement as to the amount of hospitalization, usually three days. The nursing home admittance may have to be within a certain time period, usually within 14 days of discharge from the hospital. There may also be the requirement that skilled care be required upon admission to the nursing home. This level of care may then be downgraded to either intermediate or custodial. There may also be a provision as to how long the skilled care

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must first be maintained. All of these requirements are typically referred to as gatekeepers. They "close the gate" on excess claims saving the insurance company money.
Chapter 17 – Long Term Care Insurance     

Gatekeepers are clauses within an insurance policy that "closes the gate" on claim payments.

Although most companies do cover Alzheimer's disease as long as it was not present at the time of application, this is still something that should be specifically addressed by the consumer before buying a long-term care policy. In fact, the consumer (and the agent) should be aware of how all mental conditions are covered. Alzheimer's disease is not actually a mental condition; it is an organic condition. That is why most policies would cover it. It is important, however, to understand how the policy treats all types of mental disorders since they are very common in the older ages. Inflation protection comes under a variety of names, depending upon the insurance company. This provision increases the daily indemnity amount of the policy each year to reflect increased costs in the long term care community. A built in inflation adjustment is usually a policy option which means that the insured pays extra to obtain it. Inflation adjustment options may work differently from policy to policy, so it is important to ask questions. Is the increase based upon the daily benefit amount chosen at the time of application or is it based on the compounding daily benefit? Does the inflation adjustment continue for the lifetime of the policy or for a set number of years (the first five years, for example)? Preexisting conditions will determine not only whether or not the policy will be issued at all, but also how those conditions are treated under the policy during the first months. It is normal for a policy, of any type, to have a preexisting clause in the policy. This clause will state when and if those existing health conditions are to be covered under the policy. Some conditions in health will be totally unacceptable by the insurance company. Other conditions may be rated up in premium cost, or excluded entirely from the policy. It is becoming increasingly popular to use an "accept or deny" underwriting method. In other words, the potential client is either accepted or denied coverage, rather than excluding coverage for specific health conditions. Premium rate-ups may still be used. It should be noted that state statutes might not allow a company to exclude conditions under a long-term care policy. In those states, all physical conditions must be covered if the insurance company accepts the applicant for coverage. Be sure to check with your particular state.

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If the policy is issued, there will still typically be a period of time under which preexisting health conditions will not be covered. For example, most companies will accept a person who has high blood pressure as long as it is under control. Even though they have accepted that person, however, claims that occur during the beginning months of the policy that are directly related to the high blood pressure condition, will not be covered. That preexisting period will vary from company to company, so it is necessary to read the terms of the policy on an individual basis.
Chapter 17 – Long Term Care Insurance     

The term "level premium" means that the policy premium will not increase as the insured ages. It does not mean that the premiums will never increase, because that is a possibility. This is a commonly misunderstood policy term. Even agents have interpreted it to mean that premiums will never be increased. Level Premium simply means that increases will not occur because the insured has a birthday and becomes older. There are long-term care policies that increase the premium level as the insured becomes older. It is best to avoid these policies since premium levels can become excessive.

Level premium policies can still experience rate increases; they just won't increase due to advancing age.

It is always important to buy policies, of all kinds, that are guaranteed renewable. This means that the insurance company will always renew coverage each time the premium is paid. Without this protection, a company could cancel the policy if it cancels all other policies of that type in a given state. Of course, if the company would like to discontinue the policy, it is probably because it is not a profitable policy for the company. Therefore, it is likely that premium increases would occur. It is becoming increasingly popular to have Waiver of Premium in long term care policies. This feature allows policyholders to stop paying premiums once they have been admitted to a nursing home for a specific time period, usually 90 days. Although often overlooked, this is a valuable feature. It is not an easy job to sort out the various policies on the market. Since brochures and policy outlines of coverage can vary in their layout, it can be confusing. The insured relies upon the insurance agent for help in this area. Therefore, it is important that the agent be well educated in the products that he or she represents.

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Chapter 17 – Long Term Care Insurance     

Types of Care Facilities
Much of the confusion regarding Medicare payment of nursing home stays has to do with the level of care received. There are three types of care: skilled, intermediate, and custodial. Medicare pays only for the skilled level of care. Medicare will not pay for either intermediate or custodial care. A patient is less likely to receive skilled care and more likely to receive either intermediate or custodial care. Some insurance policies, especially the older ones, may not cover all levels of care, although most states now mandate that newer policies must cover all three levels of care.

Definitions of Levels of Care
SKILLED CARE Skilled care is care that must be prescribed by a doctor, given by a skilled medical professional, and is available 24 hours a day. A skilled facility is licensed by the state, and daily medical records must be kept on each patient. INTERMEDIATE CARE Intermediate care is care that must be prescribed by a doctor and given by a skilled medical professional. However, the medical care is less frequent in nature, or on an "intermittent" basis. An intermediate facility may also be licensed to provide custodial care, but may not provide skilled care. CUSTODIAL CARE Custodial care is care that is often called Maintenance Care. Custodial care is nonmedical in nature and may be performed by a person who has no professional training or skills. It involves help with routine, daily activities such as walking, eating, bathing or taking oral medications. Custodial care facilities may not provide skilled or intermediate care. Many states require that Custodial facilities be licensed. Many insurance policies also require that facilities be licensed in order to pay benefits. The best LTC policies cover all three levels of care. Most states have mandated that such policies must now cover all three levels of care. Of course, there may still be old policies in existence that do not do so.

Qualifying For a Policy

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All long-term care insurance policies have underwriting requirements. That means that health conditions play a vital role in obtaining this type of protection. Exactly how each company underwrites can definitely vary from company to company. Some companies may even postpone actual underwriting until a claim occurs, called post claim underwriting. Because it is not good for the consumer, many states do not allow post claim underwriting. It is always better to know whether or not a policy would be issued (from a medical standpoint) before a claim arises.
Chapter 17 – Long Term Care Insurance     

Long-term care policies are all underwritten. However, the underwriting may take place either prior to issue, or at the onset of a claim.

Some surprising medical conditions may be accepted by an LTC policy that would never be accepted by a major medical policy. Since long-term care policies underwrite from the standpoint of "Will this condition cause a nursing home confinement?”, conditions that would cause claims under a major medical policy and, therefore, possibly cause a policy denial, may be accepted by a long term care policy. A director of Aetna told Consumer Reports magazine in 1988 that they would be more likely to accept an applicant with a history of cancer than they would one with mild arthritis. Underwriting has changed dramatically since 1988, but it is still true that underwriting long term care policies can be very different than underwriting other types of insurance. It is not surprising that a person who is already sick is much less likely to be accepted for coverage by an insurance company. Certainly, a person who appears close to needing a nursing home will be denied benefits. Most insurance companies try to weed out those they consider a high risk, or undesirable. If an agent sees that an applicant is not able to get around well, and must rely on aids such as a walker or oxygen, he or she should probably not take the application. Chances are, the insurance company will deny the applicant coverage. Most professionals recommend purchasing, or at least consider purchasing, a long term care policy around age 60. Health is likely to be acceptable and the premiums will be lower and, therefore, more affordable in the long run. At one time most professionals thought buying prior to age 50 was not necessary, but many are reconsidering since 40 percent of those in a nursing home are younger than 50 years old.

Understanding What is Not Covered

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Accreditation is voluntary. however. DC 20036 United Insurance Educators.Retirement Planning  No insurance policy covers everything. Residents in these communities get private apartments. plus other services such as meals and housekeeping services. such as apartment size and maintenance costs. provide private apartment settings for the comfort of the resident. and many fine communities simply do not apply. Just as with other types of insurance. Another indicator of performance is accreditation by the American Association of Homes for the Aging (AAHA). A person considering the purchase of a retirement apartment (not an assisted living apartment. These types of residences are becoming increasingly popular. which are often covered by insurance policies for long-term care. whereas assisting living facilities are. Chapter 17 – Long Term Care Insurance      No insurance policy covers everything. and so forth. the consumer must pay attention to those items or benefits that are excluded.20th Street NW Washington. One may also check with the state's attorney general. This is also true for long-term nursing home policies. prices are understandably higher. Retirement homes should not be confused with assisted living facilities. When such arrangements are included. Page 94 . It is a trade group based in Washington. Both. Some communities charge a flat fee for entrance. Even though a flat amount is paid. It is wise to check out the reputation of the community. which is typically not purchased) should be very careful about the community selected. It is important that it continue to operate so that benefits may be received. For a free listing. Again. or old-age retirement homes. however.C. Complaints may be registered here or the department may have some insight as to the performance of the communities. there is generally an additional monthly fee. the general appearance. Both the agent and the consumer must understand those situations that are excluded from coverage. The amount paid will determine many other benefits. D. as well. write: American Association of Homes for the Aging 1129 . Retirement homes are not designed with personal or medical care in mind. what you pay depends upon what you get. Almost no policy will pay for rest cures. Some of these retirement communities have nursing home arrangements available. Inc.

States have generally prohibited such wording that is intended to prevent coverage. which limits the insurance company's liability. This clause is a gatekeeper. That limitation may vary from policy to policy so exact limitations need to be noted. It could be compared to hitting a tree with an automobile. Inc. Many policies specifically exclude care for mental and nervous disorders. These periods range from six months to two years depending on state mandates. The fact that the insured's pressure was normal at the time of application does not matter since it was normal only due to medication that was taken.Retirement Planning  Chapter 17 – Long Term Care Insurance      Generally. Most policies limit coverage for preexisting health conditions. again. Prescribed medication is considered treatment and should be included in an application for a long term care policy. nor will they pay for drug or alcohol rehabilitation. the policy will not cover claims relating to that condition for a specific time period. United Insurance Educators. except as specified within the policy. If the policy will pay only for illnesses with demonstrable organic disease. the symptoms mimic mental disorders. it is important to know what basis is used. but usually it is defined as any health problem experienced by the insured in the six months prior to buying the policy. Page 95 . in fact. How a preexisting condition is defined will vary from company to company. Although this disease is organic in nature (not mental). pay special attention to any statements regarding Alzheimer's disease. When an insurance company accepts an individual even though a preexisting condition exists. LTC policies will not cover confinement in a mental hospital. It must be noted that medication is treatment. As stated. medication is treatment. it prevents a person from buying a policy specifically because he or she knows it is needed to pay for an existing condition. and then buying coverage to pay for the resulting damage. it is a preexisting condition even if it was controlled by medication. the question then arises "how does one prove that the illness is. In other words. Alzheimer's disease and not a mental disorder?" The problem comes in the wording: demonstrable. The only way to show that an illness is Alzheimer's is by performing a biopsy or an autopsy. Some companies will go back as far as three years to define a preexisting condition. If this is the case. so if an insured has high blood pressure. so. A preexisting condition is an illness or disease that existed at the time the policy was applied for and issued or in the time period prior to application.

some states have mandated minimum daily standards. but it is equally important that diagnosis by medical professionals be accepted. Most professionals recommend no less than an $100 per day benefit. refuse to do so. This choice is often made on the basis of premium cost. What is charged locally today may be far short of what is being charged in five years. and in such high cost regions. Page 96 . due to rising claims. Some areas are naturally more expensive than others.Retirement Planning  This vague policy language. it must be remembered that Medicare pays only for skilled nursing care. Policies have a wide range available for the daily benefit amounts. then benefits under the policy would not begin until the 101st day of confinement. current policies will be written and issued according to federal and state standards. If the insured selects a 20-day elimination period that means that coverage would not begin until the 21st day of nursing home confinement. The insured is United Insurance Educators. As we stated. The next decision to be made concerns the elimination or waiting period. Most states have clarified such things as coverage for Alzheimer's disease. It makes sense to know what local nursing homes are charging. gives insurance companies the ability to change claim practices. but it must be realized that rates are rising faster than inflation. It is important that policies clearly state that Alzheimer's disease is covered. While it is possible that Medicare may cover some of the nursing home confinement. the elimination or waiting period is a deductible expressed in days not covered. Even so. but it should not be the only factor. it is understandable that cost must be a factor in the decision. which does not specifically state that a doctor's opinion is acceptable. Certainly. Luckily for the consumer. Chapter 17 – Long Term Care Insurance      Choosing Daily Benefit Levels Most policies allow the insured to choose the daily benefit level at the time of application. In fact. Minimum daily benefit levels selected should reflect local costs. A company may be paying claims based on medical opinion one year. any type of benefit or underwriting concern should be addressed with the insurer prior to accepting the policy. The insured must decide how much of the front costs he or she is willing to pay. If a 100-day elimination period is chosen. minimum daily benefit levels selected should reflect local costs. Inc. but the next year. As a result. current policies are less confusing and certainly less limiting.

Luckily. the less premium will be charged for the policy. To put it in personal terms. As a result. If she had. Then. in July. Some policies call them "periods of confinement" or "benefit period. number of days for all nursing home stays. Some policies approach policy limitations in a different way. When he or she returns. Molly had selected a nursing home policy that did not require she first be in the hospital." What ever the term used in the brochure or the policy. Rather than state benefits to be received in terms of years or days. was $100 per day. the policy will impose some conditions upon the subsequent confinements. the policyholder must have been out of the nursing home for at least 180 days (six months). rather than a daily benefit. it is determined that Molly can no longer care for herself adequately at home. Chapter 17 – Long Term Care Insurance      The third decision has to do with the length of the benefits. When Molly was in the nursing home in November with her broken hip. she had to pay the first 30 days. When a person does receive benefits for a repeat stay in a nursing home. She stays in the nursing home for three months. Her daily benefit. The United Insurance Educators. these policies are more advantageous as long as the dollar maximums are adequate. Usually. In those policies set up as dollar maximums that pay actual per day charges. this policy would not have covered her confinement in the nursing home. Page 97 . Molly paid the first 30 days. her doctor readmits Molly to the Sand Point Nursing Home. Molly Morgan enters Sand Point Nursing Home with a broken hip on November first. how long the policy lasts will depend upon what actual charges are. Molly begins to experience weakness and dizzy spells. The longer the elimination or waiting period. it refers to the length of benefits to be received. because that was the waiting period she had selected when she bought her nursing home policy three years prior to the confinement.Retirement Planning  least likely to need that level of care. or lifetime. When a policy uses dollar maximums. In some ways. The nursing home stay may be called by many terms in the policy. Long-term nursing home policies vary in the length of time benefits will be paid. Inc. Eventually. they are expressed in dollar maximums. The best policies pay benefits for an unlimited number of days for each confinement in a nursing home. and an unlimited. coming home on February first. All goes well for several months. since she did not need to be hospitalized. selected at the time of application. plus the difference between the actual charges and the $100 per day covered by her insurance policy. It can be as short as one year of confinement or as long as lifetime benefits. simply take the per-day benefit and divide it into the dollar maximum to find the number of benefit days. the waiting period that was selected starts all over again.

The doctor cannot say whether Molly will improve enough to return home or not. Had Molly bought a policy that required previous hospitalization. The price of long-term care policies may vary as a result of numerous factors. Chapter 17 – Long Term Care Insurance      When Molly's doctor and her family decided to readmit her to the Sand Point Nursing Home in September. she will certainly expect to go home to her own house. Molly Morgan entered the nursing home the second time without being hospitalized. Molly felt she had made a good choice when she bought her policy. That is a false impression. she again had to pay the first 30 days of confinement. Many states do not allow insurers to have a prior hospitalization requirement. the amount paid by the policy was substantial. This means that the insurance company must renew your policy as long as premiums are paid in a timely manner. Even though she had to pay the first 30 days of care and the cost difference. the higher the premium will be. Page 98 . she simply did not wish to pay the entire cost.3 percent of all nursing home admissions did not have previous hospitalization. but it will not wipe out her savings entirely. since that is the waiting period in her policy. It is a common misconception that most people go from the hospital to the nursing home. Of United Insurance Educators. Molly's policy was Guaranteed Renewable. the more expensive the policy will be. The less time the insurance company has to collect premiums. Inc. so the difference was considerable. This is not surprising. In Molly's state. and long-term care policies are no exception. The nursing home had increased their daily rate. Even so. so she did not have to worry about having the policy taken away from her as long as she paid her premiums on time. As you recall. although Medicare does require hospitalization to qualify for their limited skilled care benefits. her policy would not have paid any benefits on her second admission.Retirement Planning  Sand Point Nursing Home charged twice her insurance benefit. Those that are Guaranteed Renewable are best. they are thankful for the $100 per day that she does have. Although her family would have preferred that Molly have had a higher per day policy benefit. Meeting the additional cost will take most of Molly's monthly income. There will be many such decisions that her family will have to make. In fact. Policy Renewability is always an important feature of any insurance policy. The older a person is at the time of application. all LTC policies are required by state mandate to be guaranteed renewable. so Molly now had to pay an even higher amount of the nursing home costs. her family must decide whether to maintain Molly's house or whether to go ahead and sell it for her. 61. If Molly does improve enough to be discharged from the Sand Point Nursing Home. Of course. We have already mentioned one factor: age. Molly knew she could afford to pay part of the costs.

In other words. Medicare benefits (for those aged 65 and older. but many of the others are a derivative of those listed. Group plans. When we are young adults. and to offer advice when situations appear difficult. and pound foolish. Are There Alternatives to Long Term Care Policies? Are there alternatives to long term care policies? Certainly. usually referred to as Medigap policies. when health conditions are least likely to prevent the availability of benefits. assist with children when work schedules become hectic. There are several options when considering living and funding arrangements once a person is no longer able to care for themselves. Page 99 . Chapter 17 – Long Term Care Insurance      A major factor in determining cost has to do with the benefits selected. and company sponsored retirement plans. 4. For instance. The bigger question is "Are those alternatives worthwhile and effective?" The answer to that question will differ depending upon whom you are asking. The basic options normally considered are: 1. these options need to be considered long before the need actually arises. We United Insurance Educators. When considering this type of insurance coverage. It is best to get the necessary benefits at the time of application. Inc. union plans. it is foolish to try to save a couple of hundred dollars in premium with the result being thousands more paid out of pocket when a claim occurs.Retirement Planning  course. 2. home care may be an option. Certainly. There are also other options. our parents are often our cornerstone. 3. Veteran's benefits. it is foolish to be "penny wise. The more you get the higher the cost. unless on Medicare disability). Young families often rely upon parents to help them get into their first home. for those who qualify. Medicaid benefits (medical care for all ages). Waiting until arrangements MUST be made often lend themselves to poor decisions. Medicare supplemental policies. there is also the fact that older people are more likely to be institutionalized than younger people. 5." as the old saying goes. but payment for such would come under the listing of Medicare or Medicaid unless a policy had been purchased to specifically cover it.

There are many "alternatives" that may be listed on paper. United Insurance Educators. When Molly was in the nursing home with her broken hip. getting lost frequently. There is one estimate that perhaps as much as 10 percent of the elderly are admitted too soon. There is no longer the traditional family where Mom stays home. as children. Page 100 . or home care costs? Could you quit your job and care for that family member in your own home? What would you do if your parent said to you: "I do not want to go to a nursing home. The traditional care giver (Mom) is out in the work force along with Dad. all went well. must someday reverse roles and take care of our parents. her Medigap policy and her long-term care nursing home insurance. it may be easy for analyst's to make assumptions based on facts and figures. assisted living facilities are doing an excellent job of keeping some residents from entering a nursing home prematurely. simply because there is a lack of knowledge of available alternatives. I want to stay in my own home"? Could you move into your parent's home in order to care for them? What would you do if your parent became increasingly disoriented. Let's begin with Molly Morgan and the medical situation that has developed.Retirement Planning  often do not consider the possibility that we. Of course. Currently. Of course. Inc. Many people will still need the care of a nursing home. Currently. forgetting to pay bills. It should be noted that most people do not have long term care insurance even though many professionals recommend obtaining it. specific criteria still exists to take advantage of an assisted living facility. It was a short-term confinement and the majority of the cost was covered between Medicare. or doing dangerous things such as leaving a stove burner on? How would you find someone to watch over your parent on a day-by-day basis? • • These are questions (among many) that families must cope with every day. especially if they are not the people trying to cope with a difficult situation. Consider these questions: • Chapter 17 – Long Term Care Insurance      What would you do if your parent grandparent faced increasingly severe nursing home costs. but acquiring these alternatives at affordable prices may be a different matter entirely. assisted living facilities are delaying hundreds of nursing home admissions.

After all. She began to realize that the most difficult aspect of helping a parent is not the sacrifice of time or money. but rather the emotional suffering that goes along with it. Steven and Robert had full time jobs themselves and felt inadequate when it came to making health care decisions for their mother. Steven's mother-in-law was in bad health herself and his wife spent much of her time looking after her needs. when she began to have dizzy spells. Robert's wife held a stressful job and had little time for her own family. the physician was consulted. With families growing smaller. Jane began to realize that she needed as much help as Molly did. Our elderly population continues to make the greatest gains statistically. Some of the decisions would reflect the financial aspects of the care. He told Jane that Molly would become increasingly dependent and would eventually need to be cared for on a full time basis. her children did not initially concern themselves. Jane did take a week's vacation time to stay with Molly when she returned home. Steven suggested that both brothers carry the financial load if Jane would handle the actual decision-making and physical burden of caring for Molly. or 1 out of every 25 persons. Within a few days. Both Steven and Robert offered immediately to help pay for whatever care was needed and this was a relief to Jane. yet fewer children are being born to care for them in their old age. Steven and Robert. but she primarily did some light housekeeping and made sure her mother was well enough to be home on her own. At the turn of the century. It has United Insurance Educators. Unfortunately for Jane. 3 million Americans. For years Molly had been a cornerstone of the family. they did not feel it was their place to care for their mother-in-law. Inc. Jane began looking at the options at hand. Jane. always ready to help where necessary. Page 101 . she handled all of the bills and claim forms herself (although most claims were handled by the medical providers). Molly was 75 years old. Now Molly was becoming increasingly dependent upon the very people she had previously helped. Few bonds are as strong as those between a parent and a child. They had their own mothers to look after. However. A few months later. so Jane returned home to her own family. were over the age of 65.Retirement Planning  Chapter 17 – Long Term Care Insurance      Because Molly's health was good enough to maintain her independence. it was evident that Molly could handle things alone. let alone Molly's needs. There are simply more elderly parents living longer lives. Being a responsible daughter. In the 1980's we saw a dramatic transformation in the ratio of adult children to elderly parents. there were less family members to aid in the care of elderly parents (as Jane quickly realized). By 1980. Although both brothers were married and their wives loved Molly. Steven and Robert. when Molly seemed to be getting more and more forgetful. Jane told her brothers. or 1 out of 8 people. both brothers left the decision-making up to her. that number had increased to 25 million. Her children. did not have to help with any of the paperwork. of the situation.

she did not qualify on this point either.Retirement Planning  been traditional that the female children take on the burden of caring for their parents. Jane contacted the doctor's office hoping for some information on home care. As we have changed our family roles. Medicare. Since Molly's income only covered her living expenses. she rejected this idea. When Jane checked into Medicaid. Steven and Robert would have to bear the full cost. More than half the children born in the 80's will not spend their childhood with both parents in the home. Medicaid is medical care for the poor of any age. under Medicare's guidelines. Molly's doctor warned Jane against drifting into an unsatisfactory situation with her mother. she found that Molly's income was too high to benefit from this federal program. however. there is one divorce. Even if Medicare had covered the care. Jane planned to use home health care since she felt strongly that Molly would want to remain at home. Additionally. Since her condition did not necessarily keep her home. Medicare would only have provided for part time help and Jane felt that Molly needed to have someone with her all the time. This aspect will bring even greater change to the way we deal with elderly parents in the future. Surprisingly. However. the nature of the family itself is changing. her income would not help in the cost of such care. When she spoke with the doctor. Inc. administration and the people it serves. Chapter 17 – Long Term Care Insurance      Initially. United Insurance Educators. such as shopping. Molly did not seem to feel as strongly about remaining at home as Jane did. home care would not be paid for. Since Jane knew placing her mother in the nursing home would likely be permanent. Since Molly did not qualify for Medicare. There is usually a point in time where someone such as Molly would qualify for Medicaid since it does not take long to use up all that has been saved over a lifetime. For every two marriages. There are set "rules" involved when it comes to Medicare funded home care. a neighbor suggested that Molly see if Medicaid (Medi-Cal in California) would pay for the care. In other words. He pointed out that trying to care for Molly herself was not a workable solution and recommended that she place Molly in the nursing home. Her medical condition did not warrant such care. Medicaid is quite different from Medicare in terms of financing. First of all. meaning that she was unable to leave her home to do normal routines. Molly had already been in a nursing home with her broken hip and knew what to expect. Her care had been excellent and the staff was friendly. Molly would have to be receiving skilled nursing care. he explained that. Her only request was the option of choosing where to be placed if a nursing home became the best choice. Medicaid was created in 1965 along with the sister program. those female children now are in the work force along side of their brothers. Page 102 . Also Molly would have to be classified as "homebound".

Page 103 . In other words. blind and disabled generally also qualify for Medicaid. on the other hand. States pay health care providers directly for services to patients and almost invariably require doctors to accept the state fees as full payments. In fact. the doctor or medical supplier may not charge the patient more than the amount paid by Medicaid. Since 1980. States mostly determine who will and whom Medicaid will not cover. but they only receive about 30 percent of the total funding. Like Medicare. laboratory and X-ray services. Those services include such things as inpatient and outpatient hospital care. premiums paid by those covered and general tax revenues. About half of Medicaid spending goes for federally mandated services. Medicaid has also experienced sharply rising costs. which is why some providers do not want to treat Medicaid patients. examination and treatment for children under the age of twenty-one. and imposed an increased demand for revenues. and Supplemental Security Income (SSI). but too low to cover their medical bills themselves. not just poor elderly. In other words. which is primarily the aged. how much each state receives varies anywhere from 50 to 78 percent. federal law permits states to provide Medicaid assistance to the "medically needy" whose incomes are too high to enable them to qualify for AFDC or SSI. plus a few other factors. it is surprising to realize that about 45 cents out of every dollar goes to pay for nursing homes for only about 7 percent of its beneficiaries. Medicare is entirely a federal government system. only 7 out of 100 people receive nearly half of the Medicaid funds. The federal and state governments. People who qualify for two of our big welfare programs. Aid to Families with Dependent Children (AFDC). jointly fund Medicaid. Some states have actually put a ban on building additional nursing homes in an attempt to keep those expenditures down. Inc. family planning and rural health clinics. States have the discretion to provide additional coverage or services. Realizing how many services must be provided by Medicaid to people of all ages. skilled nursing home care and home health services for those twenty-one and older. depending on per capita income. Medicaid's share of our entire nation's health bill has been between 10 and 20 percent. Medicaid is basically a grant program. financed through payroll taxes. AFDC children and parents make up about 70 percent of Medicaid's caseload. Chapter 17 – Long Term Care Insurance      Medicaid was designed for poor people in general.Retirement Planning  While Medicare is very much an insurance program. These swiftly rising costs have sent many state budgets into deficit. which covers over 5 million parents and 9 million children. Although the federal government pays about 50 percent of the program. United Insurance Educators. Federal law requires states to provide a minimum level of services to Medicaid beneficiaries. the proportion of Medicaid recipients in each state.

We are seeing Medicare move towards a “managed care” concept with early statistics showing positive results. Finally. These cuts could be minimized by the states if they had qualified cost-review programs. Since 1982. Although Steven and Robert planned to pay for the care. much to Jane's relief. Congress has allowed states to impose copayments on patients for mandatory as well as discretionary benefits and has further tightened eligibility standards. Molly did have some savings. they had families also.Retirement Planning  Both the federal government and the state governments have been trying to control the rise of the Medicaid expenditures. Each state also patrols for fraud and abuse within that system. After a month of doing this. Since each state administers their Medicaid program. Molly knew she United Insurance Educators. the routine began to fall apart as family members began to find it a chore. The millions of daily transactions are prone not only to fraud and abuse. so the cost had to be within their budget. or if its recoveries from fraud and abuse equaled 1 percent of its federal payment. It is very difficult to control Medicare costs. How hospitals were paid has been reviewed bringing in more stringent standards. In 1981. however. Inc. Jane did finally settle on a woman who would come to Molly's home for eight hours per day. which meant that someone in the family would have to give up weekends to stay with Molly. It also became clear that the woman they hired was tiring of her 7 day a week job. but they knew it was not enough to last for any lengthy period. She was requesting that her workweek be cut down to 5 days. The next step was to organize family members to take turns staying with Molly during the night. Jane's next step was to find a person that would come to the home and care for Molly at a rate that was affordable. However. Jane did not find anyone suitable that was willing to move in and take care of Molly around the clock. overpayments and restitution. Each year these units prosecute hundreds of offenders and collect millions of dollars in fines. Most of the states do have some form of fraud and abuse units. federal legislation reduced the amount of federal Medicaid payments to the states by an increasing percentage in each of the three following years. Molly would be admitted to the nursing home. The magnitude of the program means even simple cutbacks affect huge quantities of people. which try to determine where it is occurring. but simple error as well. Several of Molly's grandchildren were old enough to take turns along with the adults. Much of the waste is due simply to Medicaid's inherent complexity. or if their unemployment rate was 150 percent or more of the national average. Page 104 Chapter 17 – Long Term Care Insurance      . many newspaper ads. Molly accepted this idea well. each jurisdiction sets its own income level for determining eligible individuals or families. There have been many other attempts to curb Medicaid costs. Jane gave in to the doctor's original suggestion. After many. the cost of doing all this sometimes eats up any savings realized.

Understanding the stress that comes with an ill parent. As a result. Medicare covers only skilled nursing care. Medigap policies cover only skilled nursing care. the facility must be licensed to give such care. The nursing home portion of Medicare comes under the Part A benefits. Others at work told stories of elderly parents who adamantly resisted institutionalization. Doctor Aimes knows that over-involved children may not make sound decisions regarding their parent's care. Don Demmit. as long as the charges are approved and there was prior hospialization. he realizes from past experience that if Jane becomes less involved. Under Plan F. Medicare will pay the first 20 days at 100 percent. The agent. However. A Medigap policy is an insurance policy that is designed to fill in the "gaps" (thus the name) left by Medicare benefits. For the nursing home. Chapter 17 – Long Term Care Insurance      Once Jane told Molly's doctor. decision-making is more likely to be sound and carry less guilt. In the nursing home. Inc. as well as intermediate United Insurance Educators. He had recommended that Molly buy her long-term care policy because he knew her Medigap benefits would not help in the nursing home. which is not covered under Medicare. Many facilities are licensed to give skilled care. First she turned to Molly's Medigap policy. her Medigap policy would pay according to Medicare's benefit guidelines. Her agent had recommended that she do so. he also warned her about becoming too involved personally. Doctor Aimes. about her mother's situation. He knows that Jane may feel guilty. The "approved" statement bothered Jane. Jane could well imagine how difficult that would have been. explained that Molly had Plan F which is one of the more common forms selected. as well as full coverage for all approved charges under Part B of Medicare. Jane began to look at the finances that would be involved. most people require either intermediate or custodial care. Then Medicare will pay all but the copayment from the 21st to the 100th day. In fact. What does that mean? The insurance agent explained that this is what so many people misinterpret in their Medigap policies. Having decided to admit Molly to Sand Point Nursing Home. Molly had taken out a new policy when standardization came in. both Steven and Robert are likely to become more involved. To qualify for Medicare benefits for skilled nursing care. Page 105 . If all children become involved.Retirement Planning  was becoming a burden to her family and she felt depressed that she was causing so much trouble. Jane called her mother's agent to find out just what benefits Molly had in her policy. Molly felt going to a nursing home was the least she could do to lessen Jane's stress. as long as the charges are approved. Molly had full coverage for all of her hospital deductibles. Jane knew she was lucky that Molly was so accommodating. or sometimes even angry. that she would begin looking at admitting her mother to a nursing home.

5. Molly is among a minority of people who have actually purchased protection for such care. The care must be "rehabilitative" in nature. Page 106 .Retirement Planning  and custodial care. After the 100th day. Inc. The doctor must certify that the care is necessary. Some of the changes have come about simply due to competition. is still something many people have just begun to consider within the last ten years. To qualify for nursing home care under Medicare. 4. the average length of stay in a nursing home is 456 days. 2. or a Medicare designated Peer Review Organization commonly referred to as a PRO. Chapter 17 – Long Term Care Insurance      50% of all nursing home stays are for just 3 months or less. The stay may not be denied by the facility's Utilization Review Committee. In a skilled nursing facility. In other words. and are expected to continue doing so. Some sources may state as long as 2. Many of the major United Insurance Educators. while a very real financial threat. Long term care. the care must be designed to improve the patient's physical condition. A beneficiary is much more likely to require either intermediate or custodial care and often does not receive prior hospitalization. there is no coverage or benefits under Medicare at all. In fact. Skilled nursing or skilled rehabilitation services must be received on a daily basis. Fifty percent of all nursing home stays are for just three months or less. In fact. The facility must be Medicare approved or certified. which pulls down the "average" figure used by the Department of Health and Human Services. The policies offered for long term care have changed rapidly over the last few years. but many of the changes have been mandated by the individual states. This is due to the fact that only skilled care is covered and prior hospitalization must occur. According to the United States Department of Health and Human Services. the following conditions must be met: 1. Medicare is not a reliable source of long-term nursing home care cost reimbursement. only two percent of the time will Medicare actually pay a portion of the nursing home charges.5 years and this is understandable. 3. Medicare will cover skilled (and only skilled) care from the first day through the 100th day to some degree.

however. Since Medicaid budgets are becoming so stressed and will only get more so as the baby boom generation hits retirement. Chapter 17 – Long Term Care Insurance      Since runaway costs are a concern to the families of our senior Americans. Some insurers require hospitalization first or even three to six months in a nursing home before the policyholder can begin collecting benefits. however. For example. Most states have set minimum standards for nursing home products. the insurer will pay part of the death benefit to the policyholder each month until the benefit is exhausted or a preset maximum is reached. often do not take effect immediately upon the onset of illness. which would set national standards. but many states have not yet done so. For example. we are seeing some new variations in other types of policies. Most politicians feel that it is politically safe to go financially after insurance companies. As an alternative. and we may expect to see one or more of these bills put into effect in some form.Retirement Planning  companies are trying to keep the industry out of the state's hands by requiring strict agent codes. If the policyowner dies before the maximum benefit is exhausted. These riders. and sometimes put a limit on how much can be collected. the remainder of the benefits will go to the beneficiaries named in the life insurance policy. Passage of the Deficit Reduction Act of 2005 allows the individual states to pass legislation allowing asset protection even if the individual applies for Medicaid benefits. according to James Hunt of the National Insurance Consumer Organization in Alexandria." says Hunt. can be very confusing. he suggests coupling a straight universal life policy with a separate nursing home insurance policy. One product requires premiums to be paid in for at least three years first and then only delivers 48 percent of the death benefit. the federal government is attempting to shift at least part of the nursing home costs (funded through Medicaid). if Molly had United Insurance Educators. "is that anything added on to a life insurance policy is usually a gimmick. Many companies are joining this concept in marketing their life insurance products. Those who purchase longterm care Partnership Plan policies will be able to have dollar-for-dollar asset protection based on the amount of long-term care benefits purchased. There are many bills currently up for discussion in our Congress. however. Inc. The coverage offered. Virginia. The fatal fault. for a two to ten percent higher premium. Some of the more recent market trends have been life insurance policies with long term care riders. There is no way to know how effective this actually is. is that they are very overpriced. of these riders. as well as to the elderly themselves. "The problem with these riders." Long-term care insurance is now becoming one of the fastest growing insurance markets. Page 107 .

this is not the case. That is a non-governmental group that inspects hospitals and nursing homes. Although there are many ways to check on the quality of care. Different facilities will focus primarily on different aspects of nursing care. Many families spend weeks hunting for a facility that is both convenient and of high quality. be sure to examine the dates. Usually. Once presented. so there was no "shopping" for Jane to do. First hand experiences are an important indicator of quality care. Jane did not have Molly covered under her own policy. Of course. while others focus on intermediate and skilled care.000 in nursing home benefits. By all means. but the situation did make her realize that it could someday be herself in this position. Jane knew that her major medical policy that she carried through her work would not pay for any nursing home costs either. The JCAH certification is an indicator of quality. It is common for nursing facilities to be less than desired by the patient's family. Inc. Check for approval of the facility by the Joint Commission on Accreditation of Hospitals. although personal visits are still advised. Finding a good nursing home is mostly a matter of taking the time to inspect the facilities personally. Jane realized that long-term care was something that would one day face all of them. Ask to see the facility's licenses and certificates. Molly did not qualify for any veteran's benefits. Income is never protected by Partnership policies.Retirement Planning  bought a Partnership policy that gave her $50. the chance that there would be space for her was questionable. United Insurance Educators. If Molly was lucky enough to get some skilled nursing care benefits from Medicare and her Medigap policy. Chapter 17 – Long Term Care Insurance      It was now clear to Jane that her mother's Medigap policy could only be relied upon to pay for costs connected to hospital and doctor bills. Even if she had. the same amount would be protected from Medicaid spend-down requirements. There are homes that specialize in personal care (custodial care). Page 108 . simply going to the institutions and observing first hand is still the most effective. Therefore. they would be few. Molly already knew she liked Sand Point Nursing Home. You want to be sure that the licenses and certificates are current. it is important to know what type of care the patient needs. check with others who have used various facilities.

the size of policy print is generally mandated). so turnover is often high. The job of caring for numerous elderly patients. The daily benefit Molly selected was too low. That is why it is so important that the location of the home chosen be close enough for frequent visitations by friends and relatives. Since they do not have the ability to handle the situation. So many families are spread out across our nation that simple distance may make it difficult for children to be of much help to their aging parents. Jane would have preferred that her mother have taken a smaller (shorter) elimination period than the 30 day period she chose. While it is more likely that the adult children will be the ones to move about. both Jane and Molly were lucky to have a facility that they liked that was also near to Molly's children. Also. Texas. As an outstanding nursing home administrator once said. People born in America today are more likely to move or change households about once every seven years. something that is often missing when a parent needs to enter a nursing home. Molly had bought a fairly good product. They may pretend that everything is all right and actually distance themselves rather than step in to help. "You can't teach people to be kind. Having admitted Molly to Sand Point Nursing Home. many of whom are disoriented and uncooperative. Unfortunately. but it was certainly better than no benefit at all. Many adult children do not know how to handle the aging of their parents. and other Sun Belt states. Although her brothers felt inadequate when it came to Molly's physical care.Retirement Planning  Lastly. They were also willing and able to help financially. Some estimate that about one million retired Americans have moved to places such as Florida. Chapter 17 – Long Term Care Insurance      As we mentioned. they may withdraw. Despite both of these factors. she was actually lucky to have two siblings nearby to talk with. the more likely you will be to see the actual care and tenderness given. Although there were times when Jane felt that she was carrying the burden of her mother alone. These children may begin to visit and call less. This situation usually forces more of the burden onto another relative who has forthrightly dealt with the role of caretaker. few nursing homes pay their staffs well. Jane was very glad that her mother had been wise enough to plan for United Insurance Educators. the personnel they hire is of extreme importance. is a difficult and backbreaking job. Inc. retired Americans are also on the move. Page 109 . she now had to deal with the socalled "fine print" in Molly's nursing home policy (actually. It has to be there to begin with. or both. either physically. no matter how clean or new a facility may be. That meant that all three could stop by often and visit with Molly while also keeping an eye on the care given." The type of personal care given is probably more important than anything else when it comes to the patient's happiness. mentally. being only $100 per day. The more often people "pop in" unannounced. they were handy when decisions or options needed to be discussed. For the most part.

she would probably have told her not to buy any policy at all for the nursing home. Molly did not know to ask about this and she did not check on it when she bought her policy. Very often. Jane was not looking that far ahead. Molly's policy also had a 90-day waiver of premium. This requirement specifying that skilled care must first be received is a very dangerous gatekeeper in any policy. Molly's policy also covered all levels of care equally. she would no longer have to pay premiums. Even policies that cover all three levels (skilled. he was aware of this catch in many United Insurance Educators. the brochure is so vague on this point that it would be difficult for the consumer to know it existed. on another point. At this point.Retirement Planning  such a circumstance by buying a policy. It is dangerous because it is so often overlooked by both the consumer and the insurance agent. He had often heard children and other family members tell his elderly clients that it cost too much to buy long term care insurance. Since the first 30 days did not receive any benefits under the policy. At that point. it would not have surprised Molly's insurance agent. Molly had always been so very healthy! Jane did not express these thoughts to her brothers or the insurance agent. She simply trusted her insurance agent to do what was best for her. Many policies would have denied her benefits if she did not FIRST receive some amount of skilled care BEFORE being downgraded to either intermediate or custodial nursing care. Jane realized that. she never really thought that her mother would ever need to be in a nursing home. her length of benefits will probably be adequate. Chances are if Molly falls within the averages. they would not count towards the waiver of premium provision in the policy. Molly's policy did not require that skilled care be given first before other levels of care could be received under the terms of the policy. Luckily. consider only benefit confinement days. while others. Why does it not take effect after 90 days of confinement? Because the waiver pertains to confinement days that are covered by policy benefits. however. intermediate and custodial) of care equally may contain this dangerous provision. but if she had. There was always the hint that the insurance companies and their agents were somehow "taking advantage" by trying to push these policies onto people. Rather she was put on intermediate care from the first day of confinement. Inc. Jane simply assumed that this would not have been necessary since her mother had Medicare and a good Medigap policy. Long-term policies may vary on this point. This is very important in any policy. Page 110 Chapter 17 – Long Term Care Insurance      . the benefits would run out. had her mother asked for her advice. like Molly's policy. in the back of Jane's mind. Simply handling each day as it came was enough of a burden. Also. Molly's policy gave benefits for three years. which meant that once she has been in the nursing home for 120 days. Molly was luckier. some waivers will take into consideration total time confined. Molly was not admitted under skilled nursing care.

activity centers and club houses. The company would not necessarily have done so. If Molly had applied to a company that underwrites at the time of a claim (post claim underwriting). may still increase premium rates on all the policyholders for other reasons. If the company is experiencing a high claim loss. Even companies that do not increase premium rates due to rising age may still increase the premium if they do so for all policyholders in the same class. Page 111 . Remember that long-term care policies can have rate increases. although not necessarily affordable for many elderly citizens. A policy that does not increase its rates due to increasing age is called a "Level Premium" policy. Many wish hospitals would take a more direct role in the type of care given by nursing facilities since many feel that hospitals could easily provide this care. America now has many types of care facilities available. the fact that the agent requested it be done sooner may not have been acted upon. so he made a point to represent policies that did not have this provision in them. If it is their policy to underwrite when a claim occurs. Chapter 17 – Long Term Care Insurance      Availability of Nursing Facilities In 1966. Companies with lower loss ratios tend to have steadier premium rates." Such care is basically the type of care given in a nursing home. no surprises come up later.Retirement Planning  policies. Since Molly's policy had already been underwritten. A level premium policy." That report listed the construction of additional facilities as a top priority. the National Commission on Community Health Services characterized the lack of sufficient places to meet the long-term illness requirements of our nation's elderly as "the widest gap in health-care facilities in most parts of the United States. When Molly applied for her policy. The policy that Molly applied for completed underwriting prior to issuing the policy. There are also high-quality care nursing homes that attempt to provide as much dignity as possible during the final years of their resident’s lives. her claims came through quickly. In fact some hospitals do have what is commonly referred to as "swing-bed care. this may become more common United Insurance Educators. There are assisted living complexes that offer home-like apartments and around-the-clock personnel to assist in the activities of daily living. Eventually. there were health-underwriting standards. while not charging increases due to birthdays. That way. Inc. her agent would have requested (in writing) that the company underwrite the policy before issuing it. it is likely that the company will choose to increase premiums at some point. There are senior complexes that cater to the healthier retired population by offering golf courses.

Retirement Planning  but so far most hospitals have elected not to give long-term nursing care for a variety of reasons. Hospitals with less than 50 beds were the only ones to express size as a reason for not offering extended care because their resources did not allow them to do so. As we mentioned. and attitudinal elements. Usually. supplies. Long-term care is not usually hospital associated. Hospitals have manpower. The chronically ill who are admitted to such facilities as nursing homes (skilled. It would be ideal if partial hospitalization with flexible hospital admissions. and equipment at their disposal that nursing homes do not have. economic. Hospitals in Hawaii are most likely to offer extended care benefits with nearly 40 percent doing so. and rehabilitation facilities are typically kept out of the mainstream. psychiatric facilities. with little opportunities for dramatic successes. whose practices tend to be individualized and highly varied. Hospitals are strongly influenced by their own medical staffs. It is unfortunate that more hospitals have not shown an interest in offering long-term care benefits. Page 112 Chapter 17 – Long Term Care Insurance      . a skilled or intermediate facility is the only option available. many of the problems would still not be solved. The issues involving our nursing home population are multifaceted. Community general hospitals and our teaching hospitals are geared and relate primarily to the acutely ill or those who are undergoing elective surgical procedures. political. hospital involvement would lessen some of the difficulties. Inc. social. or our very old citizens. Most emphasis is placed upon the acutely ill patient and the often striking successes achieved in coping with crises occurring at the hospital. intermediate or custodial). Of course. however. there are many reasons why the majority of hospitals have chosen not to become involved in extended care. The need for alternatives certainly exists. or long-term care. coronary care. Some states did not report any hospitals at all offering extended care. Location did seem to have some effect in this area. Dealing with the acutely ill have given many hospitals and medical personnel rewarding experiences in the development of recovery rooms. Few practices deal primarily with the type of patients found in nursing homes. intenUnited Insurance Educators. Caring for the very aged is often a matter of simple maintenance care. highly complex and broadly inclusive of medical. Even some of the hospitals with less than 50 beds did offer some amount of extended care. The size of the hospital seemed to make little difference in their desire to offer extended care units. Even if hospitals did become more actively involved in the care of our chronically ill. extended-care and home-care services could be available and accessible for appropriate individuals who are victims of chronic illnesses.

Her other children often live miles away and work outside of the home. Chapter 17 – Long Term Care Insurance      Chronically ill patients (whose needs and problems are different and ongoing) are outside of the typical hospital emphasis. day-out care for the growing elderly population. Usually. While these people may certainly be deserving. since the standards imposed by hospitals would flow over into the nursing home environment. either in a hospital setting or in a general field of practice. In many areas. In addition. all of it for the short term. taking four or more prescription drugs per day. it always comes down to the same major block to doing very much to improve the individual's situation: funding. In fact. dialysis. It is felt by many that hospital involvement would actually upgrade much of the care given. However. Our nation's hospitals are more aware than ever before of the situation faced by our elderly and more and more involvement has been seen. there is not much interest in the medical field to make this typical patient a priority. and other special units and services. uncommunicated and highly proliferated efforts and expenditures of billions of dollars in behalf of the chronically ill. will come forward to take advantage of that available funding. The future will likely United Insurance Educators. She may already be at or very near the poverty level upon admission to the nursing home. impairments. it still comes down to the same thing: is the taxpayer willing to take on one more financial load? A clear national policy is needed. She is most apt to be widowed. If government funding ever does become a reality. hospitals are now reaching outside of their major care facilities. Page 113 . the patient (most often female) is apt to be quite old. Given the limited resources. She will probably have some degree of cardiovascular disease. The typical patient is often not able to walk without assistance and may have some type of mental impairment. she will probably be at the poverty level within a very short period after institutionalization. Admitted to a nursing home. Inc. a new political pressure will bring these problems into view. She will have multiple diagnoses. and may even have outlived one or more of her own children. the government has tried to bring about reform and improve the conditions of care in the many facilities that take on the task of giving day-in. Every so often. living alone.Retirement Planning  sive care. if only to give direction and bring about cohesion to the uncoordinated. those who are currently handling the situation on their own (usually at home). She will be on multiple medications. Most of this dramatic activity is crisis intervention. It is not unusual for her to be forgetting to take some of her medications. and a variety of social problems that are connected to her illness and aging situation. respiratory. developing mobile units and rural clinics and facilities. past or present bone fractures. and arthritis. Long-term care is very expensive and government funding is likely to bring existing costs even higher. This general patient profile is well known to the medical profession. there is widespread sympathy for those in this situation and a desire to solve the many problems experienced.

This 30 percent segment usually received hightech. Of course. only a few years ago. would have died are now living. Joseph Califano pointed out that our science in the medical field has been making some dramatic breakthroughs. Mr. Joseph Califano found. that more than 30 percent of Medicare's multi-billion dollar budget was spent on patients with less than a year to live. is also a major factor in our rising health care costs. life-extending care in hospital's intensive care units. titled "America's Health Care Revolution. Inc. The truth is. When the majority of our funds pay for the care of the elderly. perhaps we would not mind the increasing costs so much. Jr. Califano. Education. This segment consumes the largest portion of the most expensive high-tech medicine and procedures. Chapter 17 – Long Term Care Insurance      Limiting Health Care: Is It An Option? In 1986 a book published by Random House written by Joseph A. With all of the new technology in the medical field. Califano probably did not reflect the majority of Americans in his views. Much of the fraud and abuse is directly in the Medicare and Medicaid system. Recently. but while some are caught many more are not. Page 114 . as we are experiencing the "graying of America" more and more people are in the retirement segment of our population. since the system initially did little to prevent it. United Insurance Educators.Retirement Planning  see more hospitals looking at providing extended benefits as they experience less patients for other reasons. court cases have even had to attempt to decide when life begins and when life ends. who suffers? Often it means our nation’s children have less so that the elderly can be cared for. Ironically. If we Americans had open access to good health care as a nation. Today there is an active division tracking fraud and abuse. that fewer and fewer Americans actually have access to good health care. however. There are numerous examples that could be given of waste and duplication in our medical system. It has been very easy for medical providers to participate in that fraud and abuse. The quality of life may be questionable. in many areas. but he certainly hit some important aspects that trouble our society. People who. Medicare was denying hospice care to those terminally ill beneficiaries that remained at home even though the cost was dramatically less. and Welfare. for example. we cannot overlook one major factor: such technology is extremely expensive. Who Lives? Who Pays?" raised many questions. it is not simply the technology that has driven our health care costs up so dramatically. but they are living. As Secretary of Health. Waste. He pointed out that.

Unfortunately for the taxpayers. such as Medicare and Medicaid. and doing so will save some money. the cost system was tailored to the desires of the hospitals and doctors. Few of us were truly concerned about those who had no company paid health care plans. Disciplining abusers will probably temporarily curb future abusers. Throwing additional money into the system has not resulted in better care or even in a larger quantity of care for the currently uninsured. the damage was complete. without ever really addressing the health system itself. Their workers often did not even know what their health care did cost the companies they worked for. Chapter 17 – Long Term Care Insurance      The real problem lies in how Americans view health care as a whole. This attitude was not born overnight. There is still much work to be done. Hospitals became the first choice for treating even minor ailments. As long as the workers did not receive a bill most simply sought the care. Fraud. and still more". At the beginning of the twentieth century. if anything. of course. we considered it someone else's concern. especially if the cost was covered by someone else. that is only a part of the overall problem. we seldom worried about the size of the bill. If we had health care covered by our company. As a whole. Inc. Americans basically quit taking responsibility for their own health. Doctors did place a broad monopoly over the practice of medicine. and waste are really symptoms of the health care system in general. although fraud and abuse will always exist in some form. our elderly population expanded far beyond expectancies.Retirement Planning  It would be easy to blame all the problems on fraud and abuse. the public accepted the thought that only doctors could decide how to treat us. the leading causes of death in the United States United Insurance Educators. Even when it came to programs paid for by the government. On top of all this. That placed unanticipated financial demands on Medicare to provide the high-tech services. our government reacted by simply shifting budgetary problems around. Eliminating them is certainly necessary. The debate on how to best provide health care for all Americans continues with no current solution. abuse. Companies and unions themselves did little. Corporations and unions allowed expensive health care without questioning the costs. more. as long as we had it for ourselves. which is not all that long ago. but at least the problem is now being recognized by the government. to discourage overuse. We have gotten to this point as a result of multiple factors. However. There were virtually no incentives for efficiency. Health care benefits were (and still are) a bargaining tool during union contract negotiations. The cost-plus system that Medicare worked under eventually had to be addressed. All of us must take at least part of the blame for where we are today. The American way has been "more. Page 115 . but by that time. As long as we did not pay for it.

In fact. Over the past decades. streptomycin. Doctors organized state medical societies and created the American Medical Association in 1845. hospitals were places where people died. state and national governments made the doctor's prescription the indispensable key to patient access. Health care is. since their newfound status had not yet occurred. what medicines were available could be purchased without a prescription. the AMA began to lobby for restrictive prescription drug laws. Towards the end of the nineteenth century and accelerating into the twentieth century. and gastrointestinal infections. an industry today.Retirement Planning  were tuberculosis. By this point. It is the nation's second-largest employer. although it has been argued that many prescriptions could be just as well prescribed by pharmacists. influenza. Inc. At that time. They quickly became a potent force in the legislative and regulatory process. All of these factors began the change in our health care system. Americans began to view doctors as healers. cholera. As their profession became one of importance. No one looked forward to checking in. as we know. penicillin. so it was not even necessary to see a doctor. due to several factors. With the amount of drugs on the market today. coming in only after education. Initially. The AMA had little influence initially. Eventually. an 1870 English study concluded that the death rate from surgery was higher in a hospital than for surgery done at home. New techniques were found in the treatment of a variety of diseases and injuries. the AMA claimed 70. and many others. As quacks began selling often dangerous remedies to the public. a doctor's main role was to console the afflicted and help find the priest to give last rites. both locally and nationally. doctors began to enjoy new found economic and social status. diphtheria. such as sulfa drugs. certainly contributed to many our successes in the health care field. we have nearly eliminated these types of deaths. It would be impossible for the layperson to understand all the drugs available. Until the twentieth century. Primarily. Longevity (or the lack of it) was seldom a concern. It is the third-largest industry in consumer spending with food and housing coming in first and second. The health care industry consumes over 15 percent of our gross national product (GNP) with over $387-billion in United Insurance Educators. few doctors even bothered to join the association. the AMA was beginning to create political action groups. eliminating costly doctor visits. At that time. however.000 members which was about half of the doctors in America. Page 116 Chapter 17 – Long Term Care Insurance      . By 1910. Wonder drugs. As medicines were found and the importance of sanitation became known. pneumonia. there is no argument that such restrictions are necessary. this change came about due to their increased knowledge. the role of doctors changed as our perception of them changed.

it is likely that very few. and. In 1984. government health programs. We pay far more for our health care than other nations.Retirement Planning  spending. even their friends. We pay for health care in nearly everything we purchase. This is true for most of the products that we buy. More than one cent of every first-class postage stamp goes to pay for the health care of postal workers and their dependents. For years. Because the figures are so large. not defense or Social Security. We continue to spend. All of this may seem remote from the dilemma of long term nursing care. Facing Up To The Facts During the coming years. The sad part is the fact that Americans who have no health care coverage themselves are supporting those that do. these costs are passed along to the consumer. it is estimated that one out of every 180 people living in the United States will come to terms with living in a nursing home. but we cannot solve the problems of one segment of our health care system without looking at the system as a whole. we tend to lose sight of what this means to us individually. While it certainly affects the individual actually in the nursing home. if any. yet we do not equal other nations in the quality of our care. Obviously. Inc. yet we do not equal other nations in the quality of the care we receive. Americans broke the billion dollars per day mark in health care spending. in some cases. If you took a random poll. We want our government to solve many health care problems. Chapter 17 – Long Term Care Insurance      We pay far more for our health care in America than any other nation. but the financing to do so may be prohibitive. Page 117 . yet many Americans are still uninsured or underinsured. for example. Health benefits for active and retired employees are a large part of the reason why American steel can't compete with foreign steel. They support other's programs through the products they buy and in the taxes they pay. it also severely impacts their families. has been the fastest rising segment of the federal budget. The fastest rising cost of doing business has been health care and health insurance premiums rather than labor or raw materials. of the people you talked with would have any idea how to go about handling the United Insurance Educators.

Medicare does not handle the costs of long term nursing home care. religious. we simply cannot pinpoint exactly who those people will be. paperwork. but has little to do with reality." United Insurance Educators. the need for knowledge in this field belongs to everyone. Having general knowledge may mean saving hundreds of thousands of dollars in nursing home fees. With our advancing medical technology. nor their spouse will end up in a nursing home. private insurance also does not cover long term nursing home care. according to a government pamphlet on it. Contrary to popular belief. In addition. and other illnesses related to growing older. Many state insurance departments are encouraging the use of nursing home policies because other coverages do not provide these benefits. I will stay at home until I die. The majority of people who enter a nursing home end up poor even if they were not so when first admitted to the facility. is "a program that pays bills for low income people who cannot afford the cost of Health Care. finding the answers would not be an easy task. Most simply do not want to know about it. Many of these people would simply have died in the past. Inc. As an agent in the selling field. Page 118 . Nursing home residents are a cross section of our society that includes all ethnic. The general type of medical policies carried for major medical coverage exclude long-term care benefits in a nursing home. Only policies specifically designed to cover such expenses will do so. and costs that come with entering a nursing home. with few (if any) exceptions. Medicare does a good job with hospital and doctor bills. but even if they did. but simply will not cover long term care costs. Medicaid. such as a nursing home. Since any person could end up being involved with a nursing facility." We realize that such a statement is based on desire. Even young people sometimes end up in a nursing home. we have all heard people say "I will never go to a nursing home. living longer often means no longer being able to care for oneself adequately. That is not surprising considering the cost of such care. No one can say for certain that neither they. either as a patient or as a family member of a patient. not just insurance agents. An AARP study revealed that fully 70 percent of those they polled thought Medicare would cover such expenses. and racial segments. The need for nursing home care is on the rise due to such things as Alzheimer's disease. Chapter 17 – Long Term Care Insurance      Anyone can end up in a nursing home for a variety of health or age reasons.Retirement Planning  numerous questions. We know that a certain percentage of people will end up living in a nursing home.

so there can be differences from state to state. who prided themselves on "paying their own way". People who were never poor prior to needing a nursing home are now quickly qualifying for Medicaid. As a result. Both of his sons worked. what worked for Great Aunt Bess in Iowa may not be the same for Uncle Charlie in New York. Clyde's family never entertained the idea of stepping in to care for him. a married couple. however. this may be true since many of our states are becoming burdened with the weight of the claims against the Medicaid system. Medicaid is a federal program. this is a depressing circumstance. In some cases. although it is said by some to be misleading. Connie's health. Medicaid is quickly becoming an option for the middle class segment of our society. Initially. When Clyde began to experience mounting health problems. the results can be surprising. The basic format of Medicaid is the same for each state. and his daughter-in-laws were not able to cope with an invalid along with their own family responsibilities. Each state individually administers Medicaid. while failing. Chapter 17 – Long Term Care Insurance      Unfortunately. due to the prohibitive costs of long-term care. Inc. Although Medicaid is a federal program. since it is a joint venture between the federal and state governments. It was not until her own health began to fail that the family realized that someone else would need to care for Clyde. it saves the state that much money. You and I fund Medicaid through the taxes we pay. one which may cause additional problems as that depression sets in. United Insurance Educators. What would happen if the situation involved a married couple with assets? Sometimes. also known as Title XIX of the Social Security Act enacted into law in the year 1966. Taxes are used on both the federal and state level to fund Medicaid. Connie at first tried to care for him at home.Retirement Planning  While that statement is over simplified. If the system can keep a portion of those who would like to draw Medicaid out the system. Page 119 . Many people have said they felt that the agencies working with Medicaid preferred that consumers stay ignorant of the Medicaid process. While Molly was likely to eventually end up on Medicaid. it does basically define the program. was still good enough for her to stay in her own home as long as she did not try to carry the burden of Clyde's care. Let's look at Clyde and Connie Rose. each state interprets the regulations according to its own needs and may administer its funding differently. For many people. she did not initially qualify since she did have some savings and monthly income. Medicaid is not really health care for just the poor any longer. We have seen Molly go through the options that were available to her. it looked like she might be able to handle the situation.

To use a trust as a means of protection.000. While any attorney may legally draw up a trust.Retirement Planning  On the advice of their attorney. should Clyde get on Medicaid. sat down with their mother. For Clyde and Connie. Page 120 . This is not necessarily possible in all states. and looked over the finances. Clyde and Connie had always considered their savings as their pension. and Clyde had always worked steadily in his roofing trade. Molly did not qualify because she did have a good monthly income. Under Medicaid. He received about $18. Joe and Darren knew that the first priority was to protect Connie. their monthly income was not great. Molly might eventually become eligible. Do not rely upon the advice of any person except an attorney in this situation. as was their car. Sometimes. only attorneys with specialized training will do the type of job desired.000 per year in Social Security benefits. Clyde and Connie had been disciplined savers during their working years. types of trusts may be used to shelter funds and allow Medicaid qualification. which allowed either Clyde or Connie to withdraw money. Since they lived in a state that allowed the spouse to take possession of the savings account. Companies who sell trusts should not be relied upon. If Clyde's nursing home confinement totally wiped out their savings. They simply are not geared for such complex situations. Connie. the illness must be handled at home for a long enough period of time to allow completion of the transfers and still qualify for Medicaid. They had managed to save $250. The Deficit Reduction Act of 2005 increased the allotted time to transfer assets from three to five years. even with the additional amount that Connie received from Social Security. Joe and Darren. Since their home was paid for. they had no bills other than the normal monthly living expenses. Inc. she would also be responsible. Chapter 17 – Long Term Care Insurance      The savings was in a jointly held account. If the monthly income of Connie were high enough. There is a time period that allows the spouse to move assets entirely in order to protect them from Medicaid spend-down requirements. Connie was able to move the savings into her name entirely (removing Clyde's name from the account). and it was essential that the couple's savings be available to her during her life. which made him ineligible for Medicaid assistance until he "spent down" these assets to the acceptable Medicaid level. as costs continue to rise. the boys. these funds would be considered totally available to Clyde. She was likely to live for many more years. a specialized attorney should be sought out. United Insurance Educators. but did not have a pension since he had always been self-employed. When transferring assets. for paying a portion of the monthly nursing home costs. At some point. Connie could not possibly live on the small amount she received per month (which was based on Clyde’s earning years).

it will be up to the family to find an appropriate facility willing to take on a Medicaid patient. It is necessary to understand that this program is massive. Be aged. residence is not required. hospitals must find an available bed in order to discharge the patient. There is one last requirement not previously mentioned that is certainly important. 3. Be a legal citizen. We have seen cases in the news of elderly parents being "dumped" by their children. Getting into financial qualifications for Medicaid is tricky. Such people may be referred to as Legal Permanent Residents. The residency requirement is usually immediate. The family must find an available bed in a facility willing to admit the person. in order to qualify as a resident. a person must: 1. as they change how they look at the program.Retirement Planning  Medicaid has many avenues. may change from time to time within any given state. Durational residency means having to reside in specified period of time. but we are going to look only at Medicaid as it applies to long-term care needs. If the beneficiary is being discharged from a hospital. or Durational a state for a residence at Chapter 17 – Long Term Care Insurance      The citizenship requirement is either United States citizenship or a legal alien status. Be medically in need of a nursing home facility. Requirements vary from state to state and. Reside in the state in which he or she is applying. 2. If Medicaid would pay in a nursing home for any reason. Inc. hospitalization was not a factor. It is not surprising that Medicaid requires the beneficiary be in need of medical care. and may apply in those states. domicile. Some states are also working on including people who are eligible under the new Amnesty regulations. Although Medicaid is medical care for a person of any age. Page 121 . at the time that the nursing home confinement is required. The simple legal the time of Medicaid application is sufficient. To apply for Medicaid. Let's look at these requirements a little closer. and 4. Typically. or a legal alien. It would take an extremely large manual to fully cover the financial aspects of United Insurance Educators. qualifying for benefits in a nursing home does have age requirements. If. this is not likely to be a problem. That means the legal residence. There are some basic applications to Medicaid. which tend to hold true in all states. The term aged means 65 years or older. it may be assumed that these homes would surely become a dumping ground. however.

or dependent child. If the non-institutionalized spouse receives over that amount. the time limit was 36 months. The Medicare Catastrophic Coverage Act of 1988 was originally a lengthy bill. the portion that is above the line may be used to either offset what Medicaid will pay (with the well spouse perhaps having to chip in) or will affect the actual qualification. Inc. there were changes in how individuals qualify for Medicaid. In simple terms. The transfer of assets for the purpose of meeting eligibility requirements for Medicaid must be completed 5 years prior to application. 3. All personal property and household goods were also exempt. Previously. As of September of 1989. 2. Once done. the monthly income that can be retained by the community spouse will gradually be raised. Some states set a specific level of income that the noninstitutionalized spouse may receive without affecting the institutionalized spouse's qualifications. As we stated. Chapter 17 – Long Term Care Insurance      United Insurance Educators. thus the variations from state to state. However. In applicable situations. Only a small section of this bill was left in effect with that portion affecting Medicaid for the aged (not all Medicaid beneficiaries) in long term health care facilities. which was repealed on December 13th. Page 122 . there are some generalities that we will mention.Retirement Planning  Medicaid. in some cases. different states will treat the income of the non-institutionalized spouse in various ways. This section had been written specifically in an effort to aid the spouse who was not institutionalized. All states are required to exempt the home from being included in the countable resources provided the community spouse. It was hoped it would protect the income and resources of the couples in order to guard against impoverishing the community spouse along with the one in the nursing home. Such could be the case for Connie Rose. No resources of the community spouse will be considered available to the institutionalized spouse after he or she has been declared eligible for Medicaid. some of Clyde's income could be diverted to Rose for her living expenses even though Clyde is in the nursing home. If the non-institutionalized spouse makes less than a specified amount. 4. the spouse who is in the nursing home may actually have some of his or her income diverted to that non-institutionalized spouse. Each state will determine the amount of liquid assets the community spouse is permitted to retain. who had been living in the residence prior to institutionalization of the ill person. 1989. it is unlikely that anyone (with a sane mind) would even want to read it. 1. Since her income is only $500 per month.

3. or other proof of age 2. simply having ready knowledge will prevent the loss of funds that could have otherwise been protected. but may take as long as 60 days. VA. Processing the application for Medicaid usually takes between 30 and 45 days. 1. having the knowledge in advance is a definite advantage when the need arises. 4. 6. there are many emotional factors involved. when a member of one's family suddenly needs to enter a nursing home. This is an absolute must in any state. In fact. The applicant's Social Security number. Any proof of earnings. the emotional roller coaster that evolves is a difficult ride.Retirement Planning  Chapter 17 – Long Term Care Insurance      Applying to Medicaid When applying to Medicaid. That is certainly not surprising since few of us enjoy such settings. or pensions that are being received. Information on ownership of real property and motor vehicles. Just as Jane discovered. Inc. Page 123 . When an applicant is approved for Medicaid that status will usually be reviewed annually. Remember that Jane already had a facility that she knew she could depend on. if applicable. depending upon the state of application. Judging the Quality of Nursing Facilities Most people have no interest in looking at nursing home facilities. Had she also had to find a place to put her mother. However. Any significant changes in that person's financial standing could cause him or her to become ineligible for future Medicaid benefits. Life insurance and medical insurance policies. A birth certificate. any monthly income must be reported 5. Savings account or banking statements 7. there will be some basic information that will be required. In many cases. There may be more information required than what we have listed. It would have been much easier on Jane had she been better prepared. it would have been much more difficult. It is best to simply bring in the policies when applying. Typically. Letters or forms with amounts of income from Social Security. SSI. and the specific case in question. Knowing the laws and regulations within your United Insurance Educators.

due to age. Since their physical health is good. While they may succeed for a period of time eventually the weight of caring for someone around the clock makes it impractical. A parent has a sound mind but. a parent who does not remember to take important medication. Does the aging parent have friends. they are prone to wandering. Consider these situations: 1. avoiding the nursing home entirely. a parent who is no longer able to drive even to a doctor's appointment. A parent. getting to appointments on time. Chapter 17 – Long Term Care Insurance      Many families plan to keep their elderly parents at home. Inc. or some type of social contact? It is very important for a person of any age to have some type of social interaction.Retirement Planning  given state can be very important in the future. 2. we are not advocating that you make a second career out of studying nursing homes and the admitting requirements. Of course. Their intentions are good. must be willing to sacrifice in order for the home care to succeed. some of these duties may be assigned to hired help. 2. perhaps even impossible. with failing health. The church is often a good starting point. caring for their home. but their reasoning is faulty. Page 124 . All the family. When the stress of providing around-theclock care becomes difficult. is not able to be left alone. but is otherwise healthy. A forgetful parent who constantly forgets to turn off the stove burner. Are your parents physically near or in touch with someone who can arrive at their home quickly if the need should arise? Is your parent(s) able to use a United Insurance Educators. A parent has lost their mental ability. or a parent who is simply very. if left unguarded. All of these situations make the use of a nursing home a possibility. If just coping with a daily routine of being alone is the problem that may be able to be solved through local agencies and programs. is not safe to leave alone. priorities may need to be reconsidered for the good of all. such as cleaning and minor home repairs. Certainly. 3. but some simple. including young children. has no relatives or children close by. 3. but due to medical or mental conditions. 4. There are some general questions children can ask themselves regarding the need (or lack of need) to consider a nursing facility: 1. cleaning and cooking. Is the parent(s) still able to carry on the everyday routines necessary in daily living? That would include such things as shopping. A widowed parent would like to remain in his or her own home. very old often cannot live alone. basic knowledge is well worth having.

then all you can do is suggest. Often meals are provided in a common dining room. Of course. Page 125 . When a nursing home is the only realistic solution. and skilled. If your parents are able to make their own decisions (they are sound of mind). perhaps even daily. this can mean a great deal. Many of the nursing facilities go to great lengths to establish a "social" aspect to the living arrangements. In fact. 1. 5. There is usually ample staff on duty to keep tabs on each resident. there are some positive points to the decision. Of course. there are times when your parents will not let you make decisions concerning their place of residence. Inc. Some of these communities even offer such things as assisted care. which should not be overlooked. which relieves the older person from having to cook (and frees their children from worrying about such things as stove burners left on). In other words.Retirement Planning  medical support system? This may be something as simple as calling 911 in an emergency. Chapter 17 – Long Term Care Insurance      These simple questions may be able to help in evaluating the situation. dressing and taking medications. they try to facilitate friendships and associations with peers on a fairly frequent basis. shopping and home maintenance can become a burden for a person whose health is not good. 4. these advantages do not mean that a nursing home is the best solution in all situations. 3. Generally. If a medical emergency or crisis should arise. Many older Americans are choosing to live in retirement communities. the person is in an atmosphere that is geared to meet it. 2. Assisted care may include help in bathing. The daily chores are no longer a burden for the individual. For a person who had been previously isolated to some degree. cleaning. Such things as cooking. The mental comfort of having staff personnel around can be great. most people would probably prefer to remain at home when posUnited Insurance Educators. these are apartment buildings designed specifically for older people. This is especially true when the staff members are warm. Such living arrangements may keep some elderly people out of the nursing home. The person is no longer isolated as is often the case for individuals who live alone. the final choice will still be theirs. Even if you do not agree with how they live. Often these retirement communities can keep an elderly person out of the nursing home. caring.

a patient may end up farther away than the family would have liked. If the facility is too distant. care. although it was appropriate. participating in the Medicaid program. choosing the facility will likely be based upon the location of the facility in relation to the children. this may not be possible. The second one states that no nursing home. However. there may be less choice in the facility used. The first one states that no nursing home. When Medicaid is paying the bill. can discriminate in any manner when it comes to patients whose bill will be paid by Medicaid. Inc. The staff would be less likely to leave such a patient without needed care for long periods of time if there is the possibility that a member of the family or a family friend may easily discover the situation. these beds are difficult to come by. Each facility has allotted a "set" amount of beds to Medicaid patients. such as skilled. When the staff knows that family members and friends will be checking in often. is paying the bill (perhaps with the aid of a nursing home policy). A durational residency requirement is illegal under Medicaid. There are two important basic federal regulations (Federal Regulations 42 CFR 435. Even so. these advantages should bring some degree of comfort to the family members who did not want their loved ones in a nursing home at all. or the patient's family. Page 126 . can require that a person seeking entrance into a nursing home must have lived in a specified area for any specific length of time. intermediate and custodial. the care is more likely to be good. Even so. It is very important that family members come and go often. they may not be given inferior accommodations. there is certainly more to choosing a facility than the type of care they are licensed to provide.403(j)(1). 42 CFR 430. As a result. locations and so forth. The care given a Medicaid patient must be the same as the care United Insurance Educators. the cleanliness of the institution. participating in Medicaid. Chapter 17 – Long Term Care Insurance      We previously discussed the types of nursing homes. the daily cost. and at different. many people find that some nursing homes do try to use a durational residency requirement to prevent admittance of patients. unpredictable times. a durational residency requirement is illegal. In other words. In other words.0 (b)(2)(ii)(residency) and (financial) 45 CFR 80 and 84) that govern all nursing homes participating in the Medicaid program that are often violated by the nursing homes themselves. Sometimes the facility chosen will depend to some degree on how the bill is to be paid. In many areas of the country. Often the location is a primary factor since the children or other close family members must be able to come and go with ease.Retirement Planning  sible. and a general "gut" feeling for the place. If the patient.

as we previously stated. but also realize that you are in a nursing home. the women should have clean. There should be grip railings along the hallways. the furniture should also be sturdy without sharp corners or obvious safety hazards. those beds may not be located in a specific wing of the facility. a family does feel that this is the case. The family may call or write to senior citizen groups. managed hair. Page 127 Chapter 17 – Long Term Care Insurance      . Some of the items are simply a matter of using your eyes and nose. While it should be clean and presentable. There are some groups that may help. or if the family members were simply feeling the stress of the situation as a whole. because she had already had an experience with a nursing home. for example. The Department of Health in the given state may be able to advise the family. Usually. The hallways should be well lighted. since they license all nursing homes. Watch for odors. The hallways should be clean and uncluttered. Once calls are made (to see if a bed is available under the funding being used). this would not be the case. Bed number 20 may hold a private pay patient one month and a Medicaid patient the next. even though a designated number of beds are assigned to be Medicaid beds. However. There should be a general appearance of order throughout the facility. a nursing facility may not designate a specific area as "Medicaid". In fact the entire facility should give an air of light and vitality. The designated number of beds simply means that a percentage of the total capacity is assigned to Medicaid patients. they should report it to the proper authorities. the facility was located conveniently for the children. and the staff knew Molly. United Insurance Educators. since the capacity simply states a percentage of the whole to be Medicaid. If. Inc. Few families know where to go when a nursing home or facility is needed.Retirement Planning  given private pay patients. this does not always produce results as quickly as needed by the family. as should the entire facility. There are those families who have felt that their family members in a nursing home under Medicaid were given less care than a private pay person. There are several things to look for when selecting a facility. and knew which one she would be happy with. In fact. There will be occasional odors. Such things as cleanliness are very important to the well being of the patient. per say. It is hard to know if this has actually happened. In addition. however. or church volunteer groups (who work with the elderly). Do not overlook the furniture. The men should be clean-shaven. but they are not "specific beds". There should not be long lasting odors. the family must go from facility to facility until they are satisfied with the accommodations available at a particular facility. This means that. or a doctor or hospital staff may have some suggestions. the family ends up simply consulting the yellow pages of their local phone directory. The residents should be clean in dress and person. For most people. Molly was very lucky.

their health will surely suffer. If the family finds the taste or texture of the meals to be poor. The better facilities will have recreation rooms. It is important that the residents have a place to socialize and make friends. This is not only for convenience. two per day would be better. for whatever reason. Inc. The room(s) should be pleasant. to inspect the kitchen at the facility. Inspect the toilet facilities when looking for a nursing home. The family will want to make a point. Page 128 . the meals are the highlight of the patient's day. Often. it is important that meals be supervised and that personnel be available to assist those who need it. especially if the patient is a nonsmoker. Even if the patient shares the room with another. Ask the administrator what recreational activities are provided for the residents. it is likely that other areas of the facility will be lacking also. Since some of the residents will need assistance in eating. such as wall hangings. They should be designed to specifically accommodate wheelchair residents. We often do not think of the patient's room as a "bedroom". may be brought in and displayed. but to the patient. Each room should have windows and open into the corridors. then it is likely that the patient will feel the same way. including a handrail near the toilet and in the shower or tub. but for safety as well. airy and cheerful. when looking for a nursing facility. It should be clean and well lighted. These rooms make visiting with the patients more homelike which adds to the comfort of both the patient and the family. Ask if personal items.Retirement Planning  Chapter 17 – Long Term Care Insurance      The dining room and meals should be of particular importance. that is exactly what it is. Some of the activities should include physical activities that give mild exertion for those residents who are able to participate. since the kitchen should be a major focus for the management staff. there must be plenty of hot water also. The showers need to have seats in them. If the patient does not eat properly. Each room United Insurance Educators. The rooms themselves should be light. Certainly there needs to be at least one hot meal per day. If the kitchen does not appear to be clean and organized. The kitchen should be set up so that it can respond to special dietary needs since there will surely be those patients that must have special diets. The Board Of Health or the Department Of Health should also approve it. it still needs to be personalized to the individual's tastes. It is a time of group gathering and conversation. Look for designated smoking and nonsmoking rooms. pleasant and well organized. The types of activities offered should have variation and be geared to the age group involved. The family is wise to make a practice of joining the patient when meals are served. as well as receive recreation. Of course. The food itself should be well balanced. The tables and chairs should be positioned to allow easy passage between and around them to prevent accidents. bright and cheerful. The dining room needs to be clean.

Nor should an exit ever be locked. fresh drinking water. such as an on-grounds hairdresser and barber. and a separate closet and drawers for personal belongings. most families will also need to inquire as to the cost of the care. This means that the facility will need to have enough staff to be able to watch the residents in case one should decide to leave the building unsupervised by way of the fire exit. Therefore. United Insurance Educators. Usually. Certainly. the rate is probably already set. special mattresses or even the use of a wheelchair. a privacy screen. if two or more persons share the same room. Here are some basic questions that need to be asked: 1. An outside recreational area might be simply a shaded area with chairs and tables. Do not be shy about asking financial questions. Inc. The outdoor area should also probably be fenced. a good. safety must always be a concern. but private pay families will need to understand what costs they will be facing. intermediate and custodial)? Even if you know which level of care you are seeking. Page 129 . such areas are paved. Any therapy services will also probably be extra. it is wise to know the costs for each level of care. Safety features in general should be noted. Chapter 17 – Long Term Care Insurance      It is ideal if the facility also has additional benefits. there is an extra charge for such things as laundry services for personal clothing. Are rugs secured in a safe manner? Is the general building in good repair? Does the plumbing seem modern and well cared for? Does the facility have a general air of good upkeep? Once the facility is decided upon. with the use of walkers and canes kept in mind. If Medicaid is paying. that level may not remain constant as health conditions change. Which items or services are not covered under the basic rate? Usually. It is also ideal if the facility has an outside area on the grounds that allow the residents to enjoy good weather.Retirement Planning  should also have easy access to a nurse-call device (check it personally to be sure it actually works). What is the rate per day for each level of care (skilled. a library and transportation to doctor appointments and nearby community affairs. 2. It is most important to fully understand all charges beforehand. since many of the residents may be confused and apt to walk away if left unsupervised. personal items such as a toothbrush. All exits should be clearly marked and furniture or other items should never block them. The walking area needs to be safe. Look for accessible exits in the event of a fire. working reading light.

In other words. 4. Most people use all their life savings up within a short time period. United Insurance Educators. Ask the doctor if he makes emergency calls to the facility. Even if your family member is entering as a private pay patient. Knowing how likely it is to find an available Medicaid bed can be very important and may alter the choices made. 4. All reputable nursing homes who participate in Medicaid. If the family has gone to the trouble of finding a facility they like. Page 130 Chapter 17 – Long Term Care Insurance      . it is best to ask if the facility accepts Medicaid patients. perhaps 40 out of 100 beds would be considered normal to allot to Medicaid. they will also want to advise the patient's doctor of their choice. such as statistical information on the relation of the aged population to the number of beds currently available. ask about the procedures for making the transition from private payment to Medicaid. even within the same state. that situation may rapidly change. Medicaid works according to a set formula. Along this line. as a whole. The percentage. in case the need arises. Generally speaking. Part of the process determines how many beds may be allotted to Medicaid patients.Retirement Planning  3. you may wish to have him or her suggest an alternative doctor. however. Nursing homes generally must be licensed by the Department of Health in the state where located. Whichever formula is used in any given area. must apply for a certificate to do so. Inc. chances are they will not want to have to move the patient when the money runs out. 3. the patient will be settled and probably not want to be moved either. Also. Find out if the doctor works with the hospital used by the nursing facility. There are some basic facts about nursing homes that tend to be fairly constant within any given state although variations may exist from state to state. The cost of a facility can vary. but it does give some basic information that you will want to gather: 1. For example. while the patient may enter the facility as a private pay patient. Again. of the nursing homes that participate in Medicaid. If the patient's regular doctor does not work with that hospital. For the most part. it is basically consistent within that given state. The state makes the determination to grant this certificate based on demonstrable need. Will the facility offer assistance or counseling should the transition need to be made? Once the family has selected the facility. The following list is not meant to be inclusive. 2. the same kind of care brings basically the same price. Often a nursing facility has made arrangements with a nearby hospital to handle emergency situations.

Their "financial planning" now involves hanging on to what they already have while still enjoying life. Chapter 17 – Long Term Care Insurance      Financial Considerations We have touched upon the financial considerations of receiving long term nursing home care earlier in this text. but the basic cost will be close around the state. It should include: Monetary Investments: • Cash on hand • Checking accounts • Savings accounts • CDs (certificates of deposit) • Treasury notes • Bonds (corporate. municipal. such as a sound Medigap policy. the demand in the area. of course. Treasury. as they relate to the nursing home admission. The financial devastation brought on by a nursing home confinement can be minimized to some degree. the person has some sort of nest egg put away. Usually. There are. a nest egg. in most cases. Typically. we will be assuming that there is adequate protection for the other areas of their life. 5. numerous books available on personal finance. When we look at the financial considerations. having already done so in his or her younger years. We also will not be addressing other complications that might arise. the person entering the nursing home is past the point of financial planning. or convertible) • Mutual funds United Insurance Educators. net worth should be made. It is very important to learn how your state handles evictions. Does the nursing home have the power to evict a patient for inability to pay? Many states protect the residents from such actions. Certain steps should be taken immediately: An inventory of the person. Inc. it may even be avoided. but very often they are not particular to how it relates to long-term care. such as counseling for depression that a non-institutionalized spouse might require. which the nursing home confinement will eat up quickly. but not all states. etc. or couple's. In some situations. Page 131 .Retirement Planning  the cost for custodial care may vary depending upon some of the factors in the nursing facility (the luxury provided.).

including recreational vehicles. including investment-types Retirement Funds & Pensions: • Civil Service • Foreign service • Military service • Railroad retirement • Corporate pension plans • Retirement plans of the corporate type • Keogh profit sharing plans • Corporate profit sharing plans Insurance Products: • Annuities • Cash value life insurance • Term life insurance • Medical policies. Against this list must go the person or couple's liabilities and debts. Auto loans. and • Any other valuables The previous lists are the person or couple's assets. Inc. whether it was on the personal home or on business real estate. Credit card balances. such as Medigap plans • Any other insurance that is carried Personal Possessions: • The personal home • Vehicles • Paintings and other artwork • Antiques • Rare books • Jewelry • Silverware. china or crystal. but would not be limited to: • • • Any outstanding mortgages.Retirement Planning  • • Stocks IRAs Chapter 17 – Long Term Care Insurance      Business & Real Estate: • Business partnerships including limited partnerships • Real estate property. United Insurance Educators. This might include. Page 132 . such as rentals.

and tends to end should the person become mentally incompetent. begins to diminish his or her personal assets. it is likely that the beneficiary will qualify for Medicaid. Assets minus Liabilities = Net Worth This resulting figure must be considered in terms of whether we are dealing with a single person or with a married couple. A trust document basically creates another "entity". This is likely to occur where qualifications for Medicaid are not immediately met by the institutionalized person. which holds the title to the property rather than the person. As we know. many misconceptions when it comes to living trusts. some of which may be applicable and some of which may not be. it states certain conditions under which this may take place. There are many. in paying privately for his or her care. it is very unlikely that any assets will be protected in any capacity. a revocable trust does allow for assets to be used in any way desired. depending upon the individual circumstances. Typically. a revocable living trust WILL NOT protect assets from a long-term care nursing home confinement.Retirement Planning  • • Private or personal loans. A trust of some type may be applicable. Therefore. It may be wise to seek some type of professional advice in trying to protect some portion of the acquired assets. It has become common for salespeople to say that a revocable living trust will protect the person from such things as creditors. United Insurance Educators. If the patient will be a private pay (at least initially). Chapter 17 – Long Term Care Insurance      Do not overlook any loans for which the person or couple has acted as a cosigner. Any asset that may be removed and used for the benefit of the grantor carries NO special protections. lawsuits. That means that the patient. This is a legal document granting another person the ability to act in behalf of another specified person. A Power of Attorney should be obtained by the non-institutionalized spouse. Page 133 . When the resulting figure is known (assets minus liabilities) you will have the person's or couple's net worth. and even taxes. and Any other debts. Some of the assets may be joint while others may belong exclusively to one spouse. The assets will also have to be viewed according to how the resident state views assets. Inc. There are many types of trusts and many people willing to sell them. A Durable Power of Attorney tends to begin when a person becomes mentally incompetent. "spending down" may occur. If a revocable living trust is used. At some point. since this is normally what eventually happens. There are many possibilities.

There are other documents that may also be used. aid in other ways. or because some type of salesperson. a will needs to be in place. This is especially true if the person's mental ability has diminished. people feel tempted to handle the preservation of assets themselves. Finding a Qualified Professional Advisor United Insurance Educators. Usually this applies when Medicaid application will be made. So many details go into finances that it really does usually take professionals to cover all aspects of financial protection. Guardianships are often used to protect minors or handicapped individuals. A Living Will is a tool used in some states to avoid prolonging life by artificial means. Transfer of Assets was previously mentioned in the text. such as the irrevocable trust may especially be beneficial. The ability to legally do this may vary to some extent from state to state. preferably an attorney. depending upon the circumstances. Chapter 17 – Long Term Care Insurance      Certainly. however. Inc. It is legal to transfer any or all assets of any person applying for Medicaid.Retirement Planning  A trust may. In fact. Sometimes the individual being protected is the institutionalized spouse. Every person of legal age needs to have a will drafted. This is seldom wise. Some types of trusts. Page 134 . providing that the transfer has been completed 30 months. Only a professional in this field. Many banks have trust professionals that may be consulted and they often tend to give better advice than the mainstream counsel. A mistake in this area can be extremely costly to all involved. Often. A living will states that the use of extraordinary means of life support systems may not be used to extend their life. either because they feel knowledgeable enough personally. friend or relative gives the family false or grossly limited information. a will is one of the very first documents that every person of legal age should have in force. should be consulted. or as required by the particular state. prior to applying for Medicaid benefits. Many professionals advise that the will be registered at the local government office.

Handling your own. Since there may be a fee for the initial consultation. After the names of several attorneys have been obtained. but only a limited number that are actually specialists. and a responsibility that should only be shared with someone well qualified to do a superior job. The first thing to realize is that the family attorney. but it is not always so easy to find such a professional. you will want to interview them. An agent who gives themselves such titles. It is now common for salespeople to declare themselves to be "estate specialists" when there is no formal training to back up that assertion. a salesperson's card may declare "financial advisor" when. A starting point would be your state's Bar Association. there are many attorneys who are willing to attempt the job. Page 135 . to turn over the decisions to someone who is not completely qualified by either training or experience to handle it. you will need to provide some information so that he or she may do the job you desire. Certainly. a person may label themselves in almost any manner they choose. In many states. they have had little or no actual training in that field. is a deadly serious matter. Chapter 17 – Long Term Care Insurance      United Insurance Educators. without education or experience to back up the claim. if the estate will be a sizable one. Your local bank may also be able to give some suggestions. Generally speaking. as well. there are plenty of people willing to step in and "act" like a professional. while trusted and competent in many areas. in fact. Organizations and/or associations in the field of financial planning may be able to make referrals. Ask for an attorney specializing. may not be the best person to handle the financial considerations of someone facing institutionalization. most actual specialists would recommend that an estate-planning attorney be consulted.Retirement Planning  It is easy to tell your client that they need a qualified professional to direct them. it is not necessarily wise to allow him or her to handle the situation. by way of training as well as experience. or a close family member's. be sure to ask about fees beforehand. Many people feel awkward interviewing attorneys. Again. In other words. finances and determining what is best for all concerned. Once you have decided upon an attorney. Ads almost never reveal actual ability. in the financial considerations of nursing home residents. but it is more common than you may realize. You may also find help by inquiring at a local university in the law school division. Inc. will be inviting lawsuits. It is seldom possible to find such a person (typically an attorney) by just looking in the yellow pages. The professors there often know multiple attorneys and have an insight into their ability. Even if a family member is an attorney. There is simply too much at stake.

A trained and caring agent can help the consumer understand those options and make wise choices. only time will really tell. emphasize your need to be respected by being furnished with information. While the May 2007 GAO report raises some questions as to the potential success of the program. Partnership plans will be sold by private insurance companies. even asset protection models must be an acceptable risk. and by being listened to when you feel strongly about taking or not taking certain actions.Retirement Planning  1. What Will The Future Bring? Partnership Plans Many states are hoping the Partnership Program will result in reduced Medicaid spending. While most states mandate some types of coverage. Be sure the attorney understands that you are concerned about the financial aspect of a nursing home confinement for yourself. so that the procedures may be expedited. Inc. be able to provide asset protection from Medicaid spend-down requirements. 3. Program Benefits Partnership plans. Since insurers underwrite the policies. After all. as the case may be. Let the attorney know that you plan to participate to whatever extent necessary by providing needed information. but through state and federal legislation. Chapter 17 – Long Term Care Insurance      2. it is you and your family that must ultimately live with the results. At the same time. such as family documents. such as equality among the levels of care. Just like traditional LTC policies the applicant must medically qualify for the Partnership plans. Page 136 . Just like a non-partnership policy. Any person performs their job better when they know they are trusted. United Insurance Educators. Not every person will feel they need the same policy benefits in their long-term care insurance policy. while preserving assets also have many other components. your spouse. Let the attorney know that you wish to be kept advised at all times of the progress being made. or your parents. the applicant must make decisions regarding the type and quantity of benefits they wish to purchase. Certainly it should serve as an incentive for larger numbers of people to purchase long-term care policies. as well as any developments that might occur. there are other options that may be purchased or declined. Do strongly reaffirm your trust in their ability to do a good job for you.

Retirement Planning  Chapter 17 – Long Term Care Insurance      Making Benefit Choices Some choices are made for consumers by the insurers. All policies offer some options. An inflation protection guards against the rising costs of long-term care by providing an increasing benefit according to contract terms. 3. Other choices fall on the applicant. in some states insurers must offer no less than a $100 per day nursing home benefit and all three levels of care must be covered equally (skilled. the more expensive the policy will be. Inclusion of an inflation guard: Non-partnership plans will not require this. such as the minimum daily benefit available. Policies following federal guidelines will be taxqualified. the longer the length of policy benefits. while Partnership plans have inflation protection guidelines that must be followed. Of course. Agents selling Partnership policies must certainly acquire additional education in order to market partnership plans. intermediate and custodial. Inc. which may be purchased for additional premium. Non-partnership polices following state guidelines might be non-tax qualified plans. This is the period of time that must pass while receiving care before the policy United Insurance Educators. When a consumer decides to purchase an LTC policy. consumers may also refuse the optional coverage. Many states mandate specific agent education prior to being able to market or sell non-partnership LTC policies. the goal is to have educated field staff relaying correct information to consumers. must be selected. The length of time the policy will pay benefits: this could range from one year to the insured’s lifetime. Of course. also called personal care). Page 137 . Daily benefit amounts: this is the daily benefit that will be paid by the insurer if confinement in a nursing home occurs. When refusing some types of options. such as whether to purchase a $100 per day benefit or a $150 per day nursing home benefit. In fact. a rejection form must be signed and dated by the applicant. In both cases. 4. The waiting period. These could include: 1. an existing policy may be modified. For example. all policies must follow federal and state guidelines. insurers will not offer a policy that does not meet minimum state and federal standards. several buying decisions must be made. also called an elimination period. In some states. 2. Regardless of the choices consumers make. in others an entirely new policy would be required when changes are desired. Partnership plans have two types: an increase based on a predetermined percentage and an offer at specific intervals allowing the insured to increase benefits without proof of insurability.

Perhaps that explains the younger ages that seem to be applying for and buying Partnership long-term care plans. It is a deductible expressed as days not covered. the actual benefit decisions need to be made by the consumer.Retirement Planning  will pay for anything. Those who choose the lifetime Partnership benefit have apparently decided that they never want to use Medicaid funding. Page 138 . 5. but they also affect something else that is very important: the amount of assets that will be protected from Medicaid spend-down requirements. There is something else about Partnership policies that mirror non-partnership contracts: underwriting. A few policies may have a choice of a longer time period. Therefore. Benefit choices are primarily the same as for non-Partnership policies in that there is a daily or monthly benefit. explaining each option. absolutely everything available can be selected. Typically an agent will go from available benefit to available benefit. and getting a decision from the applicant before moving on to the next decision. elimination or waiting periods. As every field agent knows. The difference is that the long-term care policies have no limits on the choices that the consumer can make. The option can range from zero days to 100 days. an inflation feature. the daily benefit amount is usually the first policy decision. This means the agent must fully explain each option so that the consumer can make informed choices. Inc. although statistically that has not been validated. clients often prefer to have the agent make selections for them. In a way. with the second one being the length of time the benefits will continue. but this is not wise. they also underwrite Partnership contracts. Chapter 17 – Long Term Care Insurance      Daily Benefit Options While there are many policy options. Not all states offer all options since DRA specifies all new LTC Partnership plans to offer only dollarfor-dollar models. A Hybrid model may also be available. Dollar-for-Dollar Partnership asset protection or Total Asset protection. Both of these strongly affect the cost of the policy. and a benefit period with a lifetime maximum generally offered. if both are available. Just as insurers underwrite traditional long-term care policies. it is similar to the cafeteria insurance plans where employees have an array of choices in benefits. in the hope of keeping premiums affordable for lower and medium income individuals. This is not surprising since people often believe Medicaid funding leads to inferior care. The total benefit amount (daily benefit multiplied by the length of beneUnited Insurance Educators. the applicant must medically qualify in order to purchase such a plan. a home health care and adult day care benefit level. Although the agent will be valued for the advice he or she gives. If he or she is willing to pay the price.

the consumer cannot select a figure higher than that offered by the issuing company. Inc. At one time insurers offered as low as a $40 per day benefit in the nursing home. Insurance companies will determine the upper possibilities. Integrated policies are generally more expensive than indemnity contracts. and so forth. Other policies (called integrated plans) offer a more relaxed benefit formula.Retirement Planning  fit payouts) determines the amount of assets protected in dollar-for-dollar Partnership plans. As a result this pool of money could be spent for home care rather than a nursing home confinement. Benefits will be paid as long as this maximum amount lasts regardless of the time period. since consumers see it as a way to make health care choices more freely. The "pool of money" type is gaining popularity where offered. These policies have a "pool" of money. Chapter 17 – Long Term Care Insurance      The type of policy being purchased will affect how the daily benefit works. for example a non-partnership policy may be purchased that covers home health care only (not institutionalized care). this may work out well. This daily benefit can have variations. Many states have mandatory minimum limitations ($100 per day benefits for example). within the terms of the contract. as long as the care met the contract requirements. they do not simply hand the insured money to be used in any manner desired. California reported that the average daily amount purchased in Partnership plans was $150 (2003 GAO figure) with a lifetime benefit period. Indiana reported an average daily figure purchased as $130 per day. The amounts paid will usually vary depending upon whether they are going towards a nursing home confinement. Californians can expect to pay about $230 per day in a nursing home while Indianans will pay around $170. While sales can and do vary from state to state. that would be extremely inadequate for nursing home care. Integrated policies will vary from those that pay a daily indemnity amount. which may be used however the policyholder sees fit. As in all policy contacts. Policies that cover institutional care in a nursing home will have options that may vary from policies that cover only home care benefits. and limitations. If the funds have been previously used up. integrated plans have benefit qualification requirements. Obviously. however. Since people prefer to stay at home. but it can also quickly deplete funds in a wasteful manner. exclusions. Page 139 . Nor can an insurer offer a daily indemnity amount that is lower than those set by the state where issued. which may reflect the difference in state costs. adult day care. The danger in having a pool of money. By today’s standards. home health care. New United Insurance Educators. there will be no more benefits payable. is that the funds may be used up by the time a nursing home confinement actually occurs. Some policies will specify an amount (not to exceed actual cost) for each nursing home confinement day. The daily benefit is based upon the type of policy selected.

There were initially two asset protection models. Of course. Page 140 . This may apply to a single confinement or it can apply to the total amount of time spent in an institution. Some people will only be in a nursing home for three months while others may remain there for five years. both methods require that eligibility for benefits first be met. An indemnity contract offers benefits payable for a specified number of days. but they also have some of the nation’s highest nursing home rates.Retirement Planning  Yorkers were buying an average of $200 per day benefit. While statistics vary depending upon the source. 2. While it does not make sense to over-insure. When funds are depleted. Chapter 17 – Long Term Care Insurance      Expense-Incurred and Indemnity Methods of Payment When benefits are paid from a specific dollar schedule for a specific time period. they are generally paid in one of two ways: 1. three or four year policies are likely to do a good job for them and still be affordable. although a third variety developed: United Insurance Educators. most professionals feel a policy should provide benefits for no less than three years of continuous confinement. Inc. Asset Protection in Partnership Policies A primary reason for purchasing a Partnership long-term care policy is the asset protection it provides. it is also important to have adequate coverage. The indemnity method in which the insurance company pays benefits directly to the insured in the amount specified in the policy without regard to the specific service that was received. An integrated plan pays whatever the daily cost happens to be unless the contract specifies a maximum daily payout amount. the policy ends. months or years (depending upon policy language). Determining Benefit Length While the daily benefit is typically the first choice made. Since the majority of consumers will not be willing to pay the price for a life-time benefit. the second choice is just as important to the policyholder: the length of time for which benefits will be paid. The expense-incurred method in which the insured submits claims that the insurance company then pays to either the insured or to the institution up to the limit set down in the policy.

Consumers have purchased more longterm care insurance coverage to get total asset protection than they have the less expensive coverage for the dollar-to-dollar program.000 of private assets are protected from the required Medicaid spend-down once policy benefits are exhausted and Medicaid assistance is requested. To trigger total asset protection in 2005 policyholders had to buy a policy benefit valued at $196. Indiana introduced a hybrid model in 1998. This would indicate that consumers are willing to pay a higher premium for the better asset protection offered by the Total Asset model. Total asset protection will not be offered in any of the new Partnership plans. While it is too soon to tell if the Partnership Program will meet the desired goals (reduction in Medicaid spending). United Insurance Educators. 87 percent of policies purchased had total coverage amounts large enough to trigger total asset protection.994 or greater. The type of asset protection depends on the initial amount of coverage purchased. Chapter 17 – Long Term Care Insurance      2. as long as the individual buys the minimum required benefits under the state plan. Dollar-for-Dollar: Assets are protected up to the amount of the private insurance benefit purchased. Total asset protection is available for policies with initial coverage amounts greater than or equal to a coverage level defined by the state. Page 141 . In this case. If policy benefits equal $100.Retirement Planning  1. Only New York and Indiana have this option. there is little doubt that it will benefit those consumers who take advantage of it.000. When compared with just the first quarter of 2005. all his or her assets are protected from Medicaid spend-down requirements even if the assets exceed the total policy benefits purchased. As you know. under the Partnership program the state will disregard the policyholder’s personal assets equal to amounts paid out under a qualifying dollar-for-dollar model insurance policy or it will disregard all assets under the Total Asset Model. Total Asset Protection: All assets are protected when a state-defined minimum benefit package is purchased by the consumer. Prior to 1998. 3. Inc. then $100. Hybrid: This Partnership program offers both dollar-for-dollar and total asset protection. only 29 percent of the policies purchased had total coverage amounts large enough to trigger total asset protection.

Retirement Planning  Chapter 18 ‐ Trusts      18    Living Trusts In the past few years. United Insurance Educators. both revocable and irrevocable. does have their place in estate and retirement planning. Trusts have long been used to preserve family lands for future generations. a simple will is all that is needed to dispose of their assets at death. Sometimes the cheaper and easier will just makes more sense. the will is the easiest and most suitable method in the majority of cases (despite what you were told by the company who is touting living trusts). the trust is not a cure-all. it has become increasingly common to attempt to cure everything connected with death through a revocable living trust." Whatever truth this statement contains. For some people. Trusts are often used to provide funds for children. For many people. Page 142 . Trusts come in many forms and all of them are designed to accomplish one or the other or both. there are some positive aspects to forming a living trust in the right circumstances. There are two major reasons for setting up a living trust: To manage assets and To save or minimize taxation (irrevocable trusts only). Consumer Reports book titled How to Plan for a Secure Retirement calls the trust "the most complicated way of assigning someone the task of managing your money. a trust can be a valuable estateplanning tool. the trust becomes the central feature of their estate plans. however. In fact. While a trust. Inc. grandchildren and other relatives. They are still used today to control family fortunes. For those estates where extenuating circumstances exist. What many people fail to recognize when trusts are being sold to them is that they nearly always involve some expense and inconvenience.

• • Trusts are either revocable or irrevocable. This might especially be true if early signs of Alzheimer’s disease have been diagnosed. While the individual's health permits it. some types of insurance trusts are combination trusts. Perhaps the individual is fearful that. Page 143 . The third entity is the beneficiary. Combination trusts are set up while the testator is alive. but it is not used until he or she has died. until the testator has died. A trust that is created under the will is called a testamentary trust. but they do not become effective.Retirement Planning  A trust is a legal arrangement under which one entity transfers ownership of assets to another entity. The testator can name themselves as one of the trustees along with some other person or group of people. A trust that is revocable gives the individual creating it (the testator) the ability to change or even terminate the trust. If the trust is irrevocable no changes may be made by the testator. A few trusts have characteristics of both and are called combination trusts. To Recap: • Chapter 18 ‐ Trusts      An inter vivos or living trust is created and used while the individual is living. the co-trustees can then take over. It is possiUnited Insurance Educators. a trustee then manages them for the benefit of yet a third entity. at some point. they may be unable to manage their own assets. A trust created during the individual's lifetime (the individual being the trust creator) is called an inter vivos or living trust. Inc. A combination trust is created while the individual is alive. like inter vivos trusts. In fact. usually a person. he or she can take an active role in managing the assets. Once these assets are transferred. although it can be an organization also. A testamentary trust is created through the will and is used after the individual has died. but when their health deteriorates. The entity may be a person or a corporation. Trusts are either revocable or irrevocable. individuals use revocable trusts because they want to manage their assets in some way for some specific purpose. Revocable Living Trusts Generally. like testamentary trusts.

The IRS has been around for a long time. if a trust was set up. However. Inc. if the individual's estate is part of a trust created by the will. United Insurance Educators. having a trustee who watches over the business in one state while the individual is in another can be a great advantage. on the other hand. for example. Any time a person retains the right to receive income or decide how principal should be used. or even retain the right to vote stock in a family business. Since a revocable living trust is a living entity. it is able to disperse property without any court proceedings even after the death of the testator or trust creator. to benefit the individual's children. If the trust was created for the benefit of others. Revocable trusts do not save taxes! All too often revocable trusts are thought to prevent the IRS was taxing assets. On the management end. If a person owns real estate or businesses located in several different states. the trust was also more expensive to set up and probably had expenses of administration as well. Chapter 18 ‐ Trusts      Revocable trusts have many uses when it comes to asset management. trust departments or to another person. but also estate disbursement much easier. taxes must be paid. Because the trust lives on. the distribution may be delayed for months or even years until the estate is settled. it can continue to benefit them long after the creator has died. The trustee(s) simply continue to administer the trust assets for them. Avoiding Probate A popular reason currently for creating a living trust is to avoid probate proceedings. The Internal Revenue Service considers anyone who is able to change or terminate a trust to be the owner of the assets located in it. the trustee can begin paying them income almost immediately upon the testator's death.Retirement Planning  ble to write a revocable trust naming the individual (the testator) as a trustee with the power to actually handle the investments assigned to a bank. this can be a major advantage for an individual. In many situations. Congress would simply not allow individuals to bypass taxation simply by using a revocable trust. This is true even if someone else actually receives the income from the trust. If. Of course. just because the creator dies does not mean that the trust dies also. a trust can make not only management. It is true that transferring an estate through a trust is generally cheaper and faster than having an estate go through probate proceedings. that can happen also without court proceedings. Page 144 . the intent of the creator is to have the trust terminate at his or her death. This is simply not the case. Even so. The trustee will simply follow whatever directions were made in the trust.

However. so the less expensive will make much more sense. They do qualify. trusts can have disadvantages. Inc. It is expected that the coming years will experience multiple lawsuits regarding this point by state officials against those selling trusts. but the estate will not be without expenditures. When the owner of these assets dies. a revocable trust simply is not appropriate. though. Their pensions cannot be transferred to a revocable trust. Avoiding probate may save commissions paid to an estate executor under a will. Some assets simply do not do any better in a trust. assets must be in a form suitable for trust management. For example: Darin and Darla Dobson are husband and wife. the assets in the trust are subject to federal estate and state death taxes. few professionals recommend that a corporation be placed into a trust. the testator will have to tolerate another individual interfering in his or her financial affairs. To begin with. If an individual decides that it does make sense to establish a revocable living trust. United Insurance Educators. it will probably be necessary to transfer a number of bank accounts or securities and set up a system for record keeping. Assets transferred to a revocable trust are not considered gifts under the federal gift-tax exclusion. In many states (though not all) the testator cannot be the sole trustee. All of their assets (their home. for the unified tax credit and the unlimited marital deduction. automobiles. we mentioned that a living trust might be used to benefit real estate or businesses located in multiple states. bank accounts and so forth) are held jointly. probate could easily be required in multiple states if the assets were outside of a trust. Page 145 . The estate must still pay any expenses due for legal and accounting fees. Doing so creates multiple tax liabilities. this can be avoided. Chapter 18 ‐ Trusts      Most professionals advise against placing a corporation in a trust. Revocable Living Trust Disadvantages Despite what some trust salespeople would have you believe.Retirement Planning  Earlier. In those states that require a co-trustee. Additionally. This is probably the most frequent mistake made by many people. If a new asset is purchased. In this situation. By putting these assets into a trust. that investment will have to be registered in the name of the trust as well.

Chapter 18 ‐ Trusts      Durable Power of Attorney A power of attorney is a legal tool used to give another person the power to act in another's behalf. there will also be fees to accountants or tax preparers. there may be fees for trustees. This would include banks and trust organizations. Page 146 . That person does not. Some organizations provide trustees for a fee. A simple power of attorney cannot be used after the death of the grantor. A person may only allow the agent to sign on real estate contracts. they cannot be used if the grantor becomes disabled. A power of attorney may be extensive or quite limited. A simple power of attorney may not be used after the death of the grantor. There will probably be real estate recording fees. depending upon the individual's personal situation. The powers that are given to the agent or attorney-in-fact are listed specifically.Retirement Planning  Depending upon the situation. creating a revocable living trust can be expensive. but he or she would certainly have the right to do so. Although forms can be purchased. depending upon the desires of the individual. Additionally. Often even stationary stores carry these forms. Depending upon who is chosen. Again. If the trust must file income taxes. For example. face-to-face. attorney or legal supply store. There should always be an attorney involved. have to be an actual attorney. If an individual does not work with the attorney. The person given this power is called an agent or an attorney-infact. Some of the advantages of the revocable living trust can be accomplished without actually creating a trust. it is not a desirable situation. The will should be coordinated with the trust to avoid tax problems. unless the form specifically gives this authority. it may be a good idea to have a specially written form drawn up by an attorney. despite this name. There may be additional costs to transfer asset titles to the trust. brokerage house. an individual can give another person a durable power of attorney. Inc. it can be any person of legal age. for example. it simply depends upon the desires of the individual. A power of attorney is initiated simply by signing a prepared form obtained from a bank. A family member may not charge a fee. or he or she may be allowed to sign virtually any legal form. When a power of attorney gives the agent the power to act on an United Insurance Educators. if there are going to be specific requirements and limitations. Attorney fees can run from only a few hundred to several thousand dollars.

When a guardian is needed a family member or some other person who is acting for the individual. Guardians. Powers of attorney are often short-lived documents. The agent can act while the grantor is still alive and make decisions that he or she may not approve of. Furthermore. he or she may even want a copy filed at his or her office. A power of attorney can be terminated simply by tearing up the legal document that assigned the powers to the agent. If this is the case. files papers with the court requesting a hearing. that may not help any. Even though the agent is required to make all decisions for the benefit of the grantor. there are few safeguards to prevent the misuse of funds. these organizations and institutions usually have a form on the premises that the grantor can use. such as Certificates of Deposit at the local bank or just a mutual fund or two. it is very important that more than one person be aware of a power of attorney that is in existence. conservator or committee to manage his or her affairs. Chapter 18 ‐ Trusts      Powers of attorney are simple to establish and should be part of every will. Sometimes it is done because the individual or a member of the family or some other interested party requested it. The papers generally United Insurance Educators. Should that happen. If a power of attorney does not suit the situation. They are especially suitable if the grantor has only a few assets. an individual may also allow the court to appoint a guardian. Any person giving another a power of attorney in their behalf does want to be aware of some possible disadvantages. Some organizations and large institutions will not accept standard-form power of attorneys. A power of attorney may be terminated by simply tearing up the document that granted the powers in the first place. A few may require that it be drawn up by an attorney. Conservators & Committees Sometimes guardians. Page 147 . Inc. that form is then called a durable power of attorney.Retirement Planning  individual's behalf when they are incapacitated. the only option may be a lawsuit and if there is nothing monetary to recover. If the grantor has a trusted attorney. conservators and committees are appointed by the court simply because the individual did not make any other arrangements.

the individual has the right to be represented by an attorney. Still. An application of guardianship may also set out a plan for managing the money and caring for the individual. It is often assumed that only certain people or attorneys are qualified to be a court appointed guardian. Appointing a guardian is not an easy task. Most professionals feel that this situation is not desirable and recommend the establishment of joint accounts. it is an option. In other states. In some states the individual has little or no say in the hearing. such as the spouse. Often the individual knows better than the courts do who would fairly represent them. If the person is of legal age. Anyone can be a guardian. Trusts. Chapter 18 ‐ Trusts      United Insurance Educators. The papers would also address the individual's financial assets and liabilities.Retirement Planning  specify the relevant facts about the mental and physical conditions of the person being represented. When an individual believes that relatives may try to have a court declare them incompetent for financial reasons. but that is not true in all states. they seldom are. Where the individual has not recommended a desired guardian. but this is not the case. most states allow the individual to choose or at least recommend their own guardian. Normally he or she will appoint a close family member. even though it concerns him or her and his or her finances. They are most likely to appoint a person the individual has already been living with. That allows them to retain their income for life without allowing the suspected relative or relatives the satisfaction of gaining control. such as California. We often see cases on television and in the newspapers of multiple parties applying for guardianship when lots of money or other assets are involved. the person must give their permission for a guardian to be appointed. can be challenged in court. the court will appoint one. but a trust is very difficult to successfully challenge. such as the spouse. The attorney is called the guardian ad litem or a special guardian. Page 148 . In every state. Some states require that the guardian reside in the same state as the individual being represented. This would help to provide evidence that the individual is unable to care for himself or herself and his or her finances. this amounts to a legal declaration of insanity. or other blood relative. It can be complicated and costly. like wills. If the individual does not have an attorney. established power of attorney or a living trust instead. Inc. adult child. It is actually advisable to list desired guardians in one's will while they are mentally competent. In some states. most state laws leave the decision up to the judge. It is common for the doctor to be called to the court to testify about the person's mental and physical condition. attorneys often recommend that a revocable living trust be set up immediately naming the individual and a co-trustee of their choice. Therefore.

An irrevocable trust. It is called an irrevocable living trust. we said trusts had two main functions: asset management and tax minimization. Even though she loves this grandchild. At the beginning of the trust chapter. are used primarily for asset management.Retirement Planning  Chapter 18 ‐ Trusts      Irrevocable Living Trusts There is another type of trust that is created during one's lifetime. Revocable living trusts are used primarily for asset management. which allow the testator to make changes at any time. Inc. We do not always know what the future will bring. An irrevocable living trust will shift the individual's assets for use by a beneficiary and remove the assets from the estate. but it is usually done for someone other than the trust creator. The revocable trust is most often used for asset management and the irrevocable trust is used primarily for tax minimization. Lucy feels that the grandchild would quickly spend all United Insurance Educators. When an individual cannot change the terms of the trust and retains virtually no power over the assets. Revocable living trusts. has several other uses. Any agent selling trusts absolutely must understand the differences between a revocable and irrevocable living trust. money that would otherwise have not been transferred until death. and also saves income tax while the creator is living. the trust is irrevocable. A trust allows an individual to give to beneficiaries during one's lifetime. on the other hand. It is more common to see an irrevocable trust used to benefit specific people. When a trust is used for tax minimization. Lucy has seen evidence that her grandchild is not responsible with money. Page 149 . which saves estate taxation. it is always necessary to shift control of the asset or assets to someone else and the grantor and his or her spouse must give up the right to income from the trust. An irrevocable trust can be used for asset management. Other uses include the removal of property from the taxable estate. For example: Lucy has a grandchild she feels very close to. For this reason. irrevocable trusts are often used for other reasons and not tax minimization. even though that is a possible use. The trust can continue to shelter the money for the beneficiary protecting them from outside influences. whereas a revocable trust usually manages the assets for the trust creator. Many people do not want to do this for many reasons. To completely give away assets is not always something that a person feels comfortable with.

if an individual creates a trust with the intention of primarily benefiting the children. he or she may also be subject to estate taxes. However. this may not be possible. If the desire is simply to save or minimize taxes. but in the meantime Lucy wants the money partially available. Inc. something that the creator probably thought they were avoiding. Lucy sets up an irrevocable trust to manage the money and give it to her grandchild gradually in a responsible manner. if one of the beneficiaries happens to be a minor child. If a husband and wife own property jointly. The court proceedings are time consuming and costly. For example. Medicaid cannot touch funds placed inside an irrevocable living trust. Sometimes only court proceedings can reverse an irrevocable trust. A revocable trust can be tapped by creditors. In addition. both of them must create the trust. Another consideration must be looked at if the trust creator is married. the individual must be sure that he or she will not need the assets in the future. Page 150 . but an irrevocable trust cannot be. Therefore. A trustee will follow Lucy's instructions and give the grandchild a monthly allotment. Sometimes an irrevocable trust can be terminated if all the beneficiaries give their consent to do so. it is very hard or even impossible to undo. Currently. there are certainly some disadvantages also. but still maintains control of the income and disposition of the principal. but will still be responsible for paying the income taxes. Creating an irrevocable trust is a serious step to take. This is true even if that person is not receiving any of the income being generated. He or she will have relinquished control over the assets. but Medicaid can tap funds placed in a revocable trust. A person who is a trustee of a trust they have created may also still have to pay income taxes. this could mean that the assets in the trust wind up in the estate United Insurance Educators. It is also very important to completely understand all the powers retained and given up. if the trust creator holds on to the purse strings of the assets in the trust. It is Lucy's hope that over time her grandchild will learn to be more financially responsible. Depending on how the trust is drawn up. It is very important to consider all areas before enacting an irrevocable living trust. he or she may be in for a nasty surprise. Despite the advantages of an irrevocable trust. Chapter 18 ‐ Trusts      A primary reason irrevocable trusts are used is for Medicaid protection.Retirement Planning  the inheritance that she plans to give her. Neither the grandchild nor any creditors can touch the money in the trust. Once it is set up. including unborn children. There is no way to know what will happen years down the road.

Some people try to avoid having to "spend-down" to required Medicaid levels by simply hiding their assets in a living trust. Let's look at some examples: Example #1 Marjorie has created a trust and named her child. To qualify as a Medicaid resistant trust. before it can be transferred to a trust. Either the average consumer is not willing to spend the extra premium dollars or they are refusing to recognize the financial danger. she gave United Insurance Educators. Even attempting to use an irrevocable trust for this purpose is tricky. Chapter 18 ‐ Trusts      Some real estate groups do not allow property to be held by a trust. Having done this. as the trustee. In addition. neither the creator nor the trustee can have any control over the assets in the trust or over the income they generate. Page 151 . If property is put into the trust successfully. then Medicaid counts both the income and assets in determining the individual's eligibility for benefits. They include: (1) Medicaid qualifying trusts (2) Trusts for children and grandchildren (3) Grantor-retained interest trust Unfortunately. Giving up all control preserves the savings and assets for the individual's heirs. This is often seen in cooperatives and condominium apartments. it may be necessary to get the permission of the bank or mortgage company. refinance loans are often hard to obtain. Because Marjorie was concerned about the rising costs of living. if property is mortgaged. relatively few people seem willing to pay the cost of long-term care nursing home insurance. for any personal reason. If either the creator or the trustee does have control. All rules and regulations must be conformed to and these can vary from one state to another. This is usually an unintended consequence of a joint trust. Donald. the individual cannot tap the funds. neither the principal nor the interest.Retirement Planning  of the spouse who dies last where they would be subject to estate taxes. Inc. however. Types of Irrevocable Living Trusts There are several types or intentions of irrevocable living trusts. A revocable living trust will not hide assets.

Chapter 18 ‐ Trusts      In this case. Janet felt that the premiums were too high on the nursing home policy she was considering. she had considered buying a nursing home policy. Gladys retained the income generated from her assets. but retained the right to all income AND also kept the ability to draw up to $5. such as traveling. Again. but it will do nothing to help her achieve Medicaid United Insurance Educators. but her daughter. In fact.000 each year from the principal in the trust. but retained the right to all income from the trust's assets. Even if Howard had not necessarily planned to withdraw the $5. In this example. Janet.Retirement Planning  the entire principal up. Example #3 Gladys created a trust also. Marjorie will still have to spend that income for her nursing home care.000 of the principal each year he is institutionalized. the power to invade the principal for her benefit. if Marjorie has other income. The trust may help her in other ways. At one time. If her income is greater than her state's income limit to qualify for Medicaid benefits. Howard thought this would enable him to retain some financial freedom while still qualifying for Medicaid benefits. Janet. She would then still have had access to the principal for other enjoyment. Gladys gained absolutely nothing by creating the trust. including those in the trust. The principal will remain safe. Since Janet had attended a sales meeting put on by a local attorney and insurance agent (who had combined forces to sell trusts) she felt a trust would be much more useful when it came to protecting her mother's assets. she would have probably done just as well if she had spent the income generated from those assets for a sound nursing home policy. Howard should have worried less about qualifying for Medicaid and more about finding a good nursing home policy.000 each year. while he is in the nursing home he will be required to do so. Page 152 . however. Example #2 Howard created a trust. Inc. Gladys will now have to spend down all of her assets. talked her into creating a trust instead. before she can qualify for Medicaid. Because Janet (it could have been ANY trustee) has the ability to withdraw principal for Gladys. but she gave her trustee. should he need them. Howard will have to spend his income received from the trust on his nursing home care and also spend the $5.

even if the grandparent paid the cost. many of these trusts are established for college funds. Generally. any income generated will be taxed at their parent's rate. The children. Since tax advantages do not necessarily benefit all individuals in the same way it is always a good idea to seek professional tax advice. they must be transferred at least 30 months before applying to Medicaid. By shifting some assets the couple may also avoid taxes on the income these assets generate. to transfer assets one day and begin receiving Medicaid the next. it may be possible. The grantor retains the right to reUnited Insurance Educators. to these examples. Sometimes the 30-month period does not apply. such as a child or other relative. Gladys should have bought a long-term care nursing home policy. the husband and wife must give up all control over these assets. Again. however. That includes both the asset and any income it generates. Chapter 18 ‐ Trusts      In addition. If the child or grandchild is over the age of 14 and the trust is used for such necessities as food and clothing. it is better to be preparing in one way or another. Since such circumstances are impossible to predict. There may be tax advantages to using irrevocable trusts for education. it would apply if the assets were being transferred to an individual. This is an irrevocable trust created solely to save taxes. Often these are intended to pay for college. If an individual has been receiving care in a Medicaid-approved facility. such as adult day care center. This type of trust is usually referred to by the acronym GRIT. The assets must also be transferred for their fair market value. consult a tax expert for details. when assets are transferred to a trust. Inc. The third reason irrevocable trusts are often established is for grantor-retained interest Trusts. so this is actually an additional advantage in many cases. For a third time. there are often other qualifications for Medicaid as well. Often the children and grandchildren. the IRS usually considers it to be the child's and also taxes it. Note: If the child or grandchild is under the age of 14. depending upon the state of residence. As we stated. While this does not usually apply when transferring to a trust. grandchildren or the trust itself will be responsible for any income taxes that come due. Often those creating these trusts do not realize that the Internal Revenue Service has ruled that income used to pay for a grandchild's college fees will be taxed to that child's parent. are in a lower income tax bracket.Retirement Planning  qualification. or even the trust. Irrevocable trusts are commonly set up for the benefit of children or grandchildren. Page 153 .

United Insurance Educators. Rather than using a trust document. If the individual dies during the stated time period. Inc. the individual has removed assets from his or her estate (having put them into the irrevocable trust). At the end of the stated time period. Depending upon the date of residence. rules do change as well. Be sure the person giving the advice is well qualified because putting real property into a trust can be tricky and. Many people put their home into a GRIT. so their assumption is that they will live to collect the payments during the time period stated. the grantor may be able to transfer insurance policies. People who are not wealthy do. also use GRITs. Any increase in value was also in the trust. of course. there may not be savings on estate taxes. If the estate is too small. the assets go to his or her estate. charges will eat up any tax savings. Uniform Gifts to Minors Sometimes it is not necessary to utilize a trust to accomplish a particular goal. Grantor retained interest trusts (GRITs) should only be used when the estates are very large. real estate or even limited partnership interests to a Uniform Gifts to Minors account. the assets in the trust pass on to the named beneficiaries. This works especially well if the grantor has little money to spare. Chapter 18 ‐ Trusts      Wealthy people use GRITs to save estate taxes. but this should not be done without receiving expert tax advice in advance. If the individual lives for the entire ten-year period (or whatever period was stated). If an early death occurs.Retirement Planning  ceive an annuity or percentage payment from the trust for specific time period (generally no more than 10 years). the charges associated with establishing and maintaining the trust will eat up any tax savings. a gift may be made by utilizing the Uniform Gifts to Minors Act. but would still like to give something to a grandchild. Tax savings come about because the individual (the grantor) is making a gift of the discounted future value of the property put into the trust. If the estate is too small. which benefited the estate. At the stated time period when the trust ends. A Uniform Gifts to Minors account may be set up at a local bank or brokerage firm with any amount of money or securities. Page 154 . however. There is no limit as to how much can be contributed. he or she has no further interest in the trust beyond that time period. GRITs are most often used by those who have very large estates.

while a very smart woman. As a result. In fact. They allow assets (to specified limits) left in trust by one spouse for the other to escape estate taxes in the survivor's estate.Retirement Planning  Chapter 18 ‐ Trusts      If desired. After the death of the creator. Page 155 . In the Q-TIP trust. Another type of testamentary trust is the Qualified Terminable Interest Property Trust (called a Q-TIP trust). but it can be changed by changing the will while the creator or grantor is alive. Inc. Most experts do not recommend that. however. Testamentary trusts. There are different types of testamentary trusts. When the child attains legal age in their state of residence. These trusts are designed to take advantage of the federal unified estate and gift-tax credit. since they are irrevocable. Bob decides to create two trusts under his will: a Q-TIP and a bypass trust. does not have the experience to manage the finances. the grantor can be the custodian himself or herself. This may especially be true because her health is not good. however. As an example: Mildred and Bob have been married since they were childhood sweethearts. A child who has just turned 18 (or 21 in some states) may not be able to handle large sums of money with wisdom. Many people feel this is a disadvantage of Uniform Gifts to Minors accounts. Bob names Mildred and a trust United Insurance Educators. thus exempting it from the gift or estate taxes. welfare and education. can save estate taxes and preserve assets. Bob is concerned that Mildred. The Q-TIP trust is commonly used and most likely to be recognized by name. Bob has always handled the finances and done very well financially. depending upon the child. The assets in the Q-TIP trust are taxed in the spouse's estate. a trust may be the better choice. no one can change the provisions. the grantor could give the money or assets to a "custodian" who would then be required to use it in the child's behalf for health. all the income from it must be paid to a spouse and the executor of the estate is responsible for making sure that the trust is eligible for the marital deduction. One type is a Credit Shelter or Bypass Trust. Testamentary Trusts A testamentary trust created under an individual's will is always irrevocable. the money remaining in the account automatically belongs to that child.

An individual sets them up while he or she is still alive. but if an individual's spouse is not a United States citizen.Retirement Planning  management firm as co-trustees. United Insurance Educators. As you may know. Inc. A non-funded trust may also be called an empty trust. This type of trust is not often necessary. the trust collects the proceeds. but they do not become effective until after the creator's death. will go to their two sons. Insurance trusts are often combination trusts. there are three choices: (1) An individual can establish a revocable trust that does not actually own the insurance policy. This trust could also receive other assets and help eliminate some of the delay and expense of probate. The Q-DOT preserves the marital deduction for spouse's that are not citizens of the U. When Mildred dies the assets in the bypass trust will also escape taxation. The Q-DOT is similar to the Q-TIP in that the surviving spouse must receive all the income during his or her lifetime and the executor of the estate must choose to qualify the trust for the marital deduction. The trust is named the beneficiary of the policy. Without a Q-DOT the portion of the individual's estate that exceeds the unified credit would be subject to federal estate taxes. When death occurs and funds are deposited into the trust. so when the individual dies. Page 156 . Combination Trusts As we mentioned. if that was desired. Chapter 18 ‐ Trusts      Another type of testamentary trust is the Q-DOT or Qualifying Domestic Trust. if necessary. or non-funded. combination trusts combine qualities of both the living trust and the testamentary trust. for Mildred. the marital deduction is not available under normal circumstances to spouses who are not citizens. The assets in both the trusts will escape federal estate taxes. This type of trust is inactive. It is very important to seek qualified legal and tax advice before establishing a Q-DOT since rules do change. when Mildred dies. during the creator's lifetime. due to the marital deduction. it may be the best choice. The assets in both the trusts. but those in the Q-TIP trust will not.S. it then becomes a funded trust. When setting up an insurance trust. Mildred will receive all the income from both trusts and the trust management firm can tap the principal.

Perhaps one of the most widely stated reasons for an insurance trust has to do with second and third marriages. The trust can buy the policy. If the individual seems set on using an existing policy.Retirement Planning  (2) An individual can establish a revocable insurance trust that does actually own the insurance policy. Inc. Therefore. that any outstanding policy loans would reduce the amount of death benefit. Chapter 18 ‐ Trusts      (3) An individual can establish an irrevocable living insurance trust. The insurance policy is removed from the taxable estate and also from the estate of the spouse and beneficiaries. This will eliminate the potential for gift taxes. they may be considered gifts to the trust and may. In larger estates. which means that the individual has given up all rights of ownership." Many law and tax professionals expect the future to bring multiple lawsuits from beneficiaries who feel the sting of improperly written trust documents. Other assets that were also put into the trust can pay the insurance premiums. the individual must give up control over the trust and could not. If the grantor of the trust pays the premiums. while the estate assets will go to the current spouse. an attorney should draw up this trust. In addition. As always. The primary purpose of such a trust would be to save estate taxes. for example. premiums may also be subject to generation-skipping taxes. they can still remember their children from former marriages by creating an insurance trust. but the individual will have to pay the premiums. United Insurance Educators. such as the ability to change beneficiary designations. ownership of the policy must actually be transferred to the trust. Far too many trusts are improperly written by people who proclaim themselves to be "experts. therefore. The trust owns the policy. be subject to gift taxes. There are many uses for insurance trusts. however. The individual must give up any rights associated with ownership of the policy. be a sole trustee. it is vitally important that it be properly drawn up. The insurance proceeds will go to the children. It should not be forgotten. Page 157 . such as the ability to change beneficiary designations. borrow the cash value before putting the policy into the trust. Whatever type of trust is utilized. Any time assets are removed from an estate there could be gift-tax implications. if an individual is considering an insurance trust it is probably best to have the trust buy a new policy rather than attempting to transfer an existing policy. While he or she may want to leave the estate to their spouse. It belongs solely to the trust. If this is the case. It is now common for an individual to have children from a previous marriage.

such as a bank or other individual. If the trust creator cannot be the sole trustee. accountant or professional in the same field as the trust creator. If the family attorney draws up the trust. since professional fees could be unfairly charged. Unfortunately little information is given regarding record keeping when the trusts are sold. that banks and trust companies do charge for this service. It is not recommended that one of these professionals be the ONLY trustee. Inc.Retirement Planning  Chapter 18 ‐ Trusts      Trust Record Keeping Revocable trusts are becoming very popular. the creator may be one of the trustees in either a revocable or irrevocable trust even if he or she retains no interest or control. However. Page 158 . It should be noted. however. (2) A professional person. a simple will is often adequate and will save the expense and administration of a trust. In fact. (3) A bank or trust company is often a good choice for a co-trustee. If a bank is chosen. do try to avoid conflicts of interest. Anyone who would benefit from the estate should be avoided as trustee because their goals could certainly be different than those of the trust creator. They tend to know the duties well and are prepared to perform them. It is when trusts are established by trust companies that have no long-term connection to the trust creator that proper record keeping can be overlooked. The most effective esUnited Insurance Educators. be sure to check their investment history. Not all banks are experienced enough to handle a large trust so this should also be considered. many of the trust advantages would be lost if records were not kept properly. the creator of the trust may act as the sole trustee and this is often done. Trusts definitely have a place in estate planning. If this is done. such as an attorney. A beneficiary should never be named as trustee. this is probably not a danger. he or she may still share the responsibilities with another party. In fact. there are many good alternatives: (1) An adult child or close relative is a common choice. or does not desire to be. Commingling trust assets with nontrust assets could even render the trust ineffective. Even if the individual's particular state does not allow them to be the sole trustee. Whether the trust is revocable or irrevocable. good record keeping is necessary. Trustees In many states.

Retirement Planning  tate-planning specialist will understand which tool is most appropriate in individual circumstances. he or she is a salesperson. Rather. Any professional that believes the same tool is correct for each individual is not really an estate planner. Inc. Chapter 18 ‐ Trusts      United Insurance Educators. Page 159 .

experts generally recommend that one use the services of various specialists. Page 160 . There are several things to focus on when estate planning: (1) Recognizing the appropriate beneficiaries. interest in a closely held corporation or partnership. When planning ahead for one's death. such as wills or trusts. United Insurance Educators. It is possible in many states to write one's own will. In addition. but far too many people never plan for the event. trusts and tax minimization. it is necessary to have an experienced accountant or tax advisor involved. These normally include an insurance agent. and a CPA or general accountant. among them a will. Therefore. (3) Obtaining competent managers for trusts and so forth. an attorney. Inc. (4) Providing sufficient liquidity of assets to meet death obligations. children from any marriage.Retirement Planning  Chapter 19 – Planning For Death      19    Planning For Death Everyone knows they will die one day. Estate planning and retirement planning go hand-in-hand. but there may be state death taxes and both state and federal income taxes. (2) Selecting the correct estate planning tools. but if an individual's financial circumstances include more than one marriage. Estate planning refers to death planning whereas retirement planning refers to life planning. it is often difficult to be objective. and (5) Recognizing and planning for special situations or responsibilities. if the individual expects the value of their qualified pension or profit-sharing plan to exceed $100. such as a handicapped child. The attorney is almost always necessary since even simple estates need to follow the letter of the law. investment real estate or significant assets in more than one state then an attorney is absolutely essential. Most estates do not end up paying federal estate taxes.000. Estate planning includes many things. gifting.

NOT doing any estate planning will cost much more than the fees involved in a proper plan. Wills first came into being as a way of giving peace of mind to those writing the wills. a will was defined by the first edition of the Encyclopedia Britannica.Retirement Planning  Occasionally. such as the complexity of the estate. Revocable and irrevocable trusts will be more expensive than a will. Generally. This is not only foolish in most situations. there are laws that apply. Some states require half of the estate go to the legally married spouse. Some attorneys charge relatively small fees for drawing up a will because they feel it will lead to other business. The ultimate test of a will is simple: Does it seem basically right and fair? It cannot be denied that it is the right of each person to do as they wish with their possessions. Some lawyers charge a flat fee for a will. Page 161 . Most statutes also state that all children must be given an allotted portion. it is wise to share a will's contents with the adult children. for example. Its definition: Will: Signifies the declaration of a man’s mind and interests relating to the disposition of his lands. dark secret. where the individual lives and variations in fees from one area to another. A will or trust can be a powerful. In 1769. or of what he would have done after his death. As soon as reasonable. A legally married spouse cannot be cut out of a will entirely. Actually. useful tool in estate planning. goods or other estate. if the attorney insists upon being named the executor of the estate. Inc. Some of an individual's property will automatically pass to others whether or not a will exists. however. United Insurance Educators. others charge by the time involved. joint accounts with right of survivorship pass to the surviving joint owner. When it comes to wills. For example. On the other hand. Chapter 19 – Planning For Death      The actual monetary cost will vary depending upon many factors. The primary concern should always be in accomplishing what is considered best for all parties concerned. Many people still keep their wills a deep. For years following their death. a person may direct the management of their money and other assets. at least one third must go to the spouse. a person may resist estate planning because he or she feels it will be costly. but groundless when considering the laws that exist to protect all parties. a cheap will could end up being very costly in the end.

any one of the people may use the money in any way they desire. United Insurance Educators. the individual signs an authorization card giving one or more joint owners the right to withdraw or deposit funds in the account. which the new owner would be liable for. even withdrawing all of the funds. For instance. Page 162 . however. Such cases cause family fights in probate court every day. Therefore. it is also common for a child to have a joint account with his or her parent. Inc. An individual who has a joint account needs to realize that the person chosen as the joint owner has the ability to raid the account at any time and to take all of the money in it. depending on who contributed to the account. Fifty percent of the money in the joint account belongs to each individual so Medicaid can use that money. suppose Jane Jones states in her will that her children are to share equally at her death. When a joint account is set up. either one can withdraw all of the assets in the account for any reason. there can also be some drawbacks. We all want to believe that we can trust our children. In any case. but that may not always be true. Deciding who will manage our money when we die is part of estate planning. In most cases.Retirement Planning  Chapter 19 – Planning For Death      Joint Accounts Establishing a joint account at a bank or a brokerage is one way of managing one's money. The son that lives closest to her. As parents age. Even though there are many valid reasons to have a joint account with another person. Some elderly citizens mistakenly believe that a joint account will help them qualify for Medicaid and protect their money at the same time. There may be estate taxes. When two or more people are on the same account. however. Since the will governs only property that goes into probate. the remainder of the account value immediately belongs to the other. the new owner may need tax waivers to use the money if the account is large. when one of the owners dies. is a joint owner in her checking and savings account. This enables the child to make deposits and write checks as necessary when the parent is no longer able to do so. an owner who did not contribute any funds to the account cannot keep more than half its value. If the account has two owners. Jane's son will get his share of the rest of her estate PLUS the amount in the joint checking and saving account. Sometimes a joint account can mistakenly circumvent the will. joint account owners may want to also keep a separate account for the bulk of their money. Joint accounts are commonly used between husband and wife. Therefore. the money in the joint account will not be covered by it. In some states.

Neither are joint accounts the same as accounts that are being held in trust for another. The other half of the money goes into the estate of the deceased.not a podiatrist. Realistically. Any attorney can write the standard estate planning documents.Retirement Planning  Chapter 19 – Planning For Death      Do not confuse a joint account with rights of survivorship with tenancy in common (another device for transferring assets). Page 163 . the very first fiduciary in the sequence of a will or trust. Because so many consumers believe that estate planning is costly. Of course. Until recently. An attorney or law firm that specializes in estate planning is a must. administration and distribution of an estate. For most lawyers. Both are doctors. estate tax. in fact. and gift tax rulings every year. death. With trust accounts. an attorney that does not specialize in this field cannot be expected to keep up with all of these rulings. United Insurance Educators. Seek out the attorney who specializes in your needs and the needs of your client. An attorney has a high fiduciary duty in every client relationship. the survivor will only receive the half he or she already owned. There are thousands and thousands of income tax. an individual may have control over the money. that person would seek out a cardiologist . Many still try to do all things. Inc. The attorney often speaks for his or her client. but only one specializes in hearts. such as a will or simple trust. A tenancy in common states that each person owns half of the assets. it was difficult to find a "specialist" when choosing a lawyer. If a person suffered a stroke. few actually take the time to seek out a specialist. estate planning is only a small percentage of his or her overall business. but at the death of either owner. An estate-planning specialist can almost invariably save your clients in taxes many times the cost of developing a program for his or her estate. The attorney is. Choosing An Attorney Choosing an attorney can and should be a major decision. but it is not theirs to use. The same concept applies to attorneys. Every lawyer professed to be a specialist at all things. we would expect a specialist to keep abreast of all changes. but few are qualified to actually design an estate plan.

Even if it is only a "feeling" of distrust. Even so. this is more a listing of time served than legal ability. there is often a need for special provisions. That does not necessary measure their actual competence in estate planning. Under the personal category. a charity is often named. Page 164 . Generally exceptional or special provisions fall into four groups: 1) Personal 2) Beneficiary arrangements 3) Property distribution 4) Family and public relationships. it is easy to understand why personal situations might affect the testator. ask a businessman. Never go with any attorney who does not have your fullest confidence. Since a will is a personal document. public offices held and association memberships. it is certainly a good starting point. Also listed will be a biographical section. but ten years' admission is the minimum required for the legal ability rating of 'a' (very high). Then get on the telephone and call the names you have.” Obviously. includes only those attorneys who possess a professional reputation. five years for the 'b' (high) rating and three years for the 'c' (fair). The Bar Register. ask your friends. which lists legal education. Ask Questions. Ask your bank. a paragraph is included to direct the state in the rare event that all of the family is wiped out together. published annually. In this event.Retirement Planning  If a person is not familiar with a good estate-planning attorney. Do not hesitate to ask about schooling specifically in tax planning and trusts. A nurse or housekeeper who has stayed with the family through all United Insurance Educators. The task of finding the type of specialist desired can be a most difficult one. Chapter 19 – Planning For Death      Special Provisions A tightly drawn will contains a residuary clause. The Martindale-Hubbell Law Directory lists every attorney in the United States and rates his or her legal ability with the statement: “No arbitrary rule for determining legal ability has been formulated. This pertains to what remains after the rest of the estate has been distributed or paid out. Inc. go to another attorney. Get several names. Generally. start to look for one by asking around.

Often it also serves to keep a person's loyalty when they know that loyalty will be financially recognized. however. becoming increasingly popular to donate. it can be expected that more and more testators will make provisions for this in their wills. Why leave a person something he or she probably will not live to enjoy? Sometimes. Another problem that can come up when designating beneficiaries arises when the beneficiary is a mentally or physically handicapped child. This might be an older sister or brother. Then the question becomes one of good sense. When the estate is small. There simply may not be enough resources to do any long range planning. Therefore. many people also like to include their funeral arrangements in their will. often ties into the first group of personal wishes. the will is not read until days after the grave is closed. It is also. even if the estate is relatively small. but willing them in a way that will best protect that child. one's body to medical science or to others. In this United Insurance Educators. This is one situation where a living trust may be called for. For instance. As with funeral wishes. Sometimes an estate is set up to tie a caregiver into it. Page 165 . they simply state their funeral wishes with no actual arrangements having been made. it can be extremely difficult to provide for a disabled child. The second group. some special considerations may need to be considered. With so much in the news about people who can live only with organ transplants. beneficiary arrangements. a better choice is to put the money into a financial vehicle that can be used prior to the testator's death. Sometimes it is not merely a matter of willing financial assets. Many states now list organ donors on their driver licenses. the testator needs to make their wishes known to family and friends. Inc. This is especially true with organ gifts where timing is so often critical. Their main concern may be who will care for that child. Providing funding is often not the main concern for the parents of a handicapped or retarded child. If the testator wants to make a lump-sum bequest to another person who has a shorter life expectancy.Retirement Planning  situations may certainly deserve to be recognized in the will. financially aiding a sibling that provides care for their disabled sister or brother may receive special treatment. Chapter 19 – Planning For Death      Still under the personal heading. Sometimes. these types of gifts need to be common knowledge among friends and family. It would also be wise to record their wishes elsewhere. in part or whole. Frequently. as a personal choice. or someone with severe health conditions. An annuity is often used for this purpose since the money can revert back to the testator upon the annuitant's death.

a testator may include a provision in his or her will regarding the possibility of one of the beneficiaries becoming disabled after the will was written. 4) A federal-state program of assistance known as Aid to the Permanently and Totally Disabled. The various programs available are in a constant flux. while still allowing the trustee to provide for necessary living expenses. Sometimes. The Railroad Retirement Act. This clause is designed to prevent claims by third parties from touching trust assets. It is simply a protection against those who may want to tap into the funds. In California. tax benefits may easily be lost. 5) Benefits under GI insurance policies and other veteran's benefit programs. Otherwise.Retirement Planning  situation. 2) The Department of Health. it should be expressly inapplicable to those portions of the document establishing or relating to a Marital Trust. Generally. If a spendthrift clause is used. The trustee is then entitled to protection against the claims of other United Insurance Educators. Page 166 . It does not necessarily mean that the beneficiary is not financially dependable. it is wise to investigate state and federal programs that may be able to help the disabled child. Inquiries into the programs available could result in provisions in the will that might otherwise have been overlooked. it is referred to as MediCal. they direct a trustee to make payments directly to those supplying that beneficiary with goods or services. such as Orphans Educational Assistance 6) If either parent worked for the railroad. Some examples of providers of these programs are: 1) Medicaid (medical care for all ages). Still under beneficiary arrangements comes the Spendthrift Clause. Chapter 19 – Planning For Death      Spendthrift Clauses prevent claims by third parties from touching trust assets. Inc. such as salespeople or creditors. These programs listed are only some that might be available. Education and Welfare 3) The Old Age and Survivors Disability Insurance Program under which a disabled child may be entitled to benefits.

of course. Had she specified in her will that these items should have gone to. compositions. it takes two or even three separate arrangements. Generally. but it will also go a long way in keeping family peace in the event of her death. The high cost of storage can be saved and the lives of the beneficiaries can be brightened if such items are specifically mentioned in the will. the trustee will need to United Insurance Educators. The trustee must still. 2) During the interim months of postmortem management. Often a person's favorite things should not be wholesaled into the residue of the estate. If a trust is established. Sometimes. Care for pets must cover three time periods: 1) Prior to the death of the testator. This is certainly understandable since wills are so often written prior to obtaining the pets. when critical illness may prevent proper care of the pets. There will undoubtedly be items she would not have wanted another wife to use. this is not always the case. Say. Unfortunately. This may also include special pieces of furniture. wills make these items available for use and enjoyment directly by the beneficiaries. This is true of both published and unpublished manuscripts. Page 167 . but also make it known to family members. Not only is this wise legally. these important family members are forgotten in the will. the matter would be much simpler for the husband to handle. Many people own art objects. The wife should not only make mention of special items in her will. one simple arrangement covers all three periods. there may not be any problem of continued care. for example. These items may or may not be valuable. Chapter 19 – Planning For Death      Under the third group. or other items that should not be sold as simple possessions. and 3) For the rest of the pet's life once the will and distribution of property is completed. Inc. some types of property need special attention.Retirement Planning  disgruntled beneficiaries who feel that the trustee was too generous in caring for the needs of the one beneficiary who became disabled. Every person has personal items that they hold dear. If other family members are equally attached to the pets in question. sometimes. act in good faith. silver. A special possession for many people is their pets. A special literary executor with authority to handle all matters affecting artistic property needs to be named. property distribution. that the wife dies and the husband remarries. and artwork of writers and artists. All too often.

for instance. although many family-owned businesses continue to give a cash equivalent. rather than a flaw on United Insurance Educators. Anytime this is considered. This is an outdated way to write a will and is often considered more of a statement about the testator's personal shortcomings. It is not unusual for a testator to want to "forgive" a debt when distributing property through a will or trust. it is necessary to be very clear in the will as to how it should be accomplished. Inc. estates tend to be more of an equality issue. some testators still want to make their will an occasion to denounce certain family members. there sometimes occurs what is called Ademption. was originally rooted in the belief that estates begin passing on primarily to the eldest son. cannot be transferred to the beneficiary. that pet cannot speak up for itself. The best protection for pets is friends or family who act. Therefore. Perhaps any number of happenings prevents the specific bequest from being honored. the pet has no legal recourse. but out of love for the pet and the pet's previous owner (the testator). in many ways.Retirement Planning  have specific instructions as to the financial arrangements to assure proper care of the pets. This is why the "do-it-yourself" wills and living trusts often cause more problems than they ever solve. There can be so many small technical issues that it may have been wise to forgive the debt before death. When making any specific bequest. The ability to actually offer legal protection is limited since it is not likely that any person will care about that particular pet as much as it's original owner. The fourth group. The will needs to specify whether or not the estate is to pay off the mortgage before transferring the title to the beneficiary. not on legal grounds. Perhaps the value may be given in cash instead. Unfortunately. Another factor to be considered is any money owed against the property. a tax specialist should probably be consulted for the best tax results. It could be because the piece of property ended up being given to the beneficiary (or another person) prior to the testator's death. Now. for example) no longer exists. all factors need to be stated clearly. as stated in the will. If the testator does wish to do so. This means that a specific bequest of a will is no longer possible. No matter how well a person attempts to protect and provide for the pet. It may be due to the fact that the property (a car. eldest or not. Page 168 . The plan is really an act of faith. the will needs to include instructions in the event that the property. the difficulty of the situation is obvious. whether it is a car or a piece of real estate. This was done to ensure that the family and its name continued its status through the generations. Seldom was it passed on to a daughter. If the pet's rights are violated. family and public relationships. Chapter 19 – Planning For Death      Of course. for whatever reason. Sill under the third division of property.

enjoy. garage. Therefore. for example. an attorney could successfully argue that it was merely an oversight or a clerical error. unless it has been put on a permanent foundation. felt. as a legal precaution. If all sisters and brothers are mentioned. There are two classes of property: (1) Real Property and (2) Personal Property. Real property is land and all things that are permanently attached to that property. It does not include a mobile home. If the testator avoids excessive eccentricity in his or her will. Anger present today may not exist at the time of death. Often a kind. If a testator truly wishes to exclude family members. Tangible property can be touched. the testator can simply not give anything to a family member. Chapter 19 – Planning For Death      As previously mentioned. such as a home. and seen. Page 169 . in some states. receive a statutory minimum even if the testator tried to prevent them from receiving anything. difficult to achieve. Some wills include a clause or two providing that if anyone contests the will. children. such a no-contest clause must be very carefully thought out. use or transfer something. except one. at best. A testator who makes extremely unusual bequests may make himself or herself look senile and invite a will to be contested. it needs to be well thought out and reviewed often. and so forth. Property is anything capable of being owned. This may include material objects held in outright ownership or the rights to possess. that a testator has the right to NOT bequeath. or. Inc. Except for spouses and. in some jurisdictions. Due to state laws governing wills. growing crops. If this is the desire of the testator (and he or she wishes it to hold up if contested). Often anger ends prior to death. Personal property may be either tangible or intangible. United Insurance Educators. when changes in the will are not possible. Both types include any property that is not "real" property. well thought-out will can prevent someone from contesting the will in the first place. however. it will also make a will more difficult to contest. shrubs.Retirement Planning  the beneficiary. trees. he or she will receive a trivial amount or perhaps be cut out entirely. The types of property owned will play a key role in the will or trust. children as well as the spouse. then it needs to be done correctly. that one excluded sibling needs to be specifically mentioned as disinherited as a matter of record. It is true.

when estate owner Sam Jones dies. The person's legal interest in the property ends at their death. Insurance policies come under this situation. Intangible property has no intrinsic value. An estate for a term of specific years sets the interest in the property for a set amount of time. the right to possess the property for the rest of the term will be determined by the will. Fee-Simple Estates mean that there is an interest in the property (real property) that belongs to an individual. ownership goes to a person specified in Sam's will. and stocks. The will states what is to become of the property at the end of the term. In a Life Estate. The owner of a Life Estate for his own life has no interest in the transfer at their death. as previously stated. Howard Jones. etc. are joint bank or brokerage accounts with the right-of-survivorship. the tenant has no right to transfer the property either during his or her term or at the close of the term. If a tenant dies before the end of the specified period of time. This would include insurance contracts where beneficiaries are stated. whatever the will designates. There are three main types of estates: 1) Fee Simple Estates.Retirement Planning  This would include motor vehicles. however. Howard never had a legal right to pass on the home according to the terms of Sam's will (the original owner). his will states that his home goes to his son. 2) Life Estates. an individual has absolute right to possession. For example. In most states. and 3) Estates for a Term of Specific Years. Estates generally involve ownership interests in real property. Of course. then to the heirs forever. Page 170 Chapter 19 – Planning For Death      . These items pass outside of a will or trust because they have a named beneficiary. not to a person named in Howard's will. enjoyment. his will leaves the house to his daughter. Only if the beneficiary stated is the "estate" will they pass through the probate procedure. Sam Jones dies. When Howard dies. This would include bonds. Items that list beneficiaries pass outside of living trusts and wills. When Howard dies. For example. A life estate can be measured by the tenant's life or by the life of another person. furniture. Inc. clothing. Howard Jones. This might continue through generations. Jane Jones. Also included. there are assets that speak for themselves regarding who are to be their new owners. In his will he leaves his home to his son. and profit from the property for the duration of his or her life. United Insurance Educators. mortgages.

If Sam's grandson had not married by that specified period. Some wills may have Reversionary Interests. Also. One point to keep in mind regarding remainder and reversionary interests . This means the property owner transfers the property while still living. tentative . most wills would then state another person to receive the property or it would remain with Howard himself. specifies in his will that his son. Page 171 . United Insurance Educators. whereas a contingent interest is not. Inc. a vested interest is absolute. The property may be taxed to the original grantor as if the grantor were still in possession of the property. Sam specifies that the home reverts to Sam's grandson who turns 21 years old at that point in time. This is called a Contingent Interest. Some wills may put a condition upon receiving property at a specified time. for example. Sam Jones. Howard Jones. If the grandson must be married at a specific time to inherit the house that would make him a contingent remainderman. He received ownership of the home only when the five years were up. Sam's grandson had a vested interest because his right to receive property at a specified time was fixed and absolute. Sam's grandson would be called a Remainderman.they must be carefully structured to avoid the tax liability of incomplete transfers. Remember that a contingent interest may or may not materialize. Reversionary Interests may be either vested or contingent. A Contingent Interest is dependent upon a set occurrence (or even nonoccurrence) and is therefore. A vested interest is absolute. may have possession of the home for five years. An agreement may be supplying college funds for a grandchild in return for care during their last years. but reserves the right to have all or part of the property returned.not absolute. Special Agreements Agreements often control how a will is written. For Example: suppose Sam Jones said his grandson could have the house in five years ONLY if he were married. To recap. At the end of that five years.Retirement Planning  Chapter 19 – Planning For Death      For example: estate owner.

To make any changes requires a mutual consent. Inc. The Legal Owner is the most common type. Page 172 . Many older people are now involved in second and third marriages where both husband and wife have grown children.Retirement Planning  several types of ownership are so well aimed at estate planning that they require special attention in a will. If either one dies. This individual has absolute ownership with all the related responsibilities of ownership. It often prevents problems and misunderstandings when Antenuptial Agreements keep the husband's and wife's property separate. These types of agreements can be especially important in community property states. United Insurance Educators. Chapter 19 – Planning For Death      A beneficial owner is someone who is entitled to all benefits of the property. it goes to the person's direct family as in this example. This might be through a trust where the trustee is vested with legal title. An Equitable or Beneficial Owner is a person entitled to all the benefits of the property. There can be two types of property owners. but typically. an Antenuptial Agreement can bequeath property to anyone. but the income from the trust goes to someone who has Equitable Title. the legal owner has legal title to the property. The disadvantage is that the will takes on an undesirable finality. their property reverts to their own children rather than to their spouse. Of course. As implied. A type of agreement used more and more is Antenuptial Agreements. A legally binding agreement regarding mandatory provisions of a will are useful to both parties involved.

Tangible personal property is taxed according to where the property is kept. The permanent residence of the person who dies is called the Domicile. One is the location of the property. This is true regardless of the deceased person's stated domicile. Taxation of property can also take several avenues. A domicile is established by several factors: (1) Bank accounts and safe deposit boxes (2) Living in a residence for more than six months out of a year (3) The automobile registration (4) Their voter registration (5) Memberships established in social clubs or religious groups (6) The location of the property that is considered to be the principle residence. The place where the property is located is called the Situs.Retirement Planning  Chapter 20 – Domiciles and Property Ownership      20    Domiciles and  Property Ownership There are several factors that affect ownership of property. In some cases. Inc. it is possible to have what appears to be more than one domicile. All personal property (real and tangible) is subject to the tax laws of the state or jurisdiction in which the property is located. Since a person may have several residences. Intangible personal property is taxed by the state where permanent residence is kept regardless of where the property is located. it may also be taxed by the state of the domicile. Page 173 . Real estate is taxed by the state in which it is located. a bond may be kept in a safe United Insurance Educators. or where the property is kept. For instance.

Of course. the most common form of co-ownership is Joint Tenancy with Right of Survivorship (JTWRS). The new owner becomes a co-owner with the other tenants. a co-tenant is treated as a separate owner. Should a co-tenant wish to sell his or her interest and the property cannot be divided. As previously stated. for example. There is a legal relationship between the joint tenants. When a cotenant sells or gifts their interests. Oregon could tax all property. Montana may also tax the tangible personal property unless Montana exempts personal property of a nonresident. gift it or direct it to their heirs. This means that the tenant's share cannot be transferred by will. without consent of any of the other tenants. At death. the state of residence would collect any tax owing on it. except real estate in California. Tenancy Incommon means co-ownership between two or more people who are not necessarily related to each other. the gain or loss may be realized on the transaction. The people involved may have unequal or equal shares. This is called a Partition Sale. However. When a joint tenancy is created. Each person's share is an Undivided Interest in the property. that a person's permanent residence is in Oregon. Say. Each tenant may sell his or her interest in their property only during their lifetime. They may sell it. that tenant's share goes to the surviving tenants. In addition. the last surviving tenant becomes the sole owner. the entire property must be sold and the sale proceeds then distributed among the co-tenants. United Insurance Educators. Page 174 . When a joint tenant dies. What happens when the person who dies is a co-owner of property? This is also called Concurrent Ownership. Chapter 20 – Domiciles and Property Ownership      Multiple taxations can sometimes occur. Each person may do with their share as they choose. The new owner would become a TenantIn-Common with the other tenants. Inc. With such scattered assets. It does not require the consent or knowledge of the other tenants. For tax purposes. Interest on bank accounts is reported in a proportionate amount to the amount of money they put into the account. As each tenant dies. Real estate is always taxed by the state in which it is located.Retirement Planning  deposit box in another state. There are four types of co-ownership of property. the person giving the most money to buy the property has made a gift to the other joint tenants. Each co-owner would also pay their share of the maintenance and operation expenses. but they also own real property in California. any income generated is divided among the co-owners according to their share of property. it would be wise to investigate the use of a living trust. He or she may then dispose of the property as they wish. tangible personal property is located in Nevada and intangible personal property is in Montana.

then his or her creditors CAN attach the property. During the death of a tenant. Inc. One may be the possibility of gift taxes. the property comes under the laws of the original state where purchased. Page 175 . neither one can will more than half of the joint property to another person. but it is limited to the co-ownership of property by a husband and wife only. Depending upon the state laws where the property is held. This means all property acquired during the marriage is owned equally by both husband and wife. inheritances and property bought with individual funds are also generally considered Separate Property. Therefore. of course. then each tenant is also entitled to an equal share of any interest earned. If a couple moves out of a community property state to a common-law state. There is also the possibility of double federal estate taxation. At death. United Insurance Educators. it may be exempt from state death taxes. Another definite advantage is the fact that there are no probate delays at death. joint wills are used where jointly owned property needs to be willed. The death of either spouse would put sole ownership with the remaining spouse. the passing of ownership is also private. They would. there are also some disadvantages. Neither the husband nor the wife could sell their share without the consent of the other.Retirement Planning  If immediate vesting is given to the co-owners. Some states are Community Property states. There are some distinct advantages of Joint Tenancy with the Right of Survivorship and also of Tenancy by the Entirety. All of this gives the tenants great security. Gifts. If the property gets down to a lone surviving tenant. A Joint Will is one where the same document is made the will of two or more people and is jointly signed by them. Property acquired prior to marriage is generally considered to be Separate Property. The tenancy would automatically terminate should a divorce occur. in most cases. As with all things. the reverse is also true. If a couple moves from a common-law state to a community property state. those properties acquired in the community property state will still be considered community property. Typically. also be taxed on that interest earnings. One of these advantages is that it puts the property outside the reach of a tenant's creditors. Chapter 20 – Domiciles and Property Ownership      Tenancy by the Entirety is similar to a JTWRS.

Retirement Planning  When two or more people make separate wills containing mutual provisions in favor of each other. Inc. it is called a Mutual Will. Chapter 20 – Domiciles and Property Ownership      United Insurance Educators. A will may contain provisions that make a single will both joint and mutual. Page 176 .

gifts seldom make a substantial taxable difference. he or she will reduce his or her own income tax liability. whether by illness or other circumstances. This means that the gift given was not compensated for by the donee in any adeUnited Insurance Educators. The tax consequences are not the most important factor to consider. it is necessary to first think about what is being given away. gifts can also sometimes be taxable. A gift is generally considered to be any gratuitous transfer of property. The donor is the person who gives the gift. The transfer of property must be for less-than-adequate consideration.S. In addition. A book put out by U. No gifts should be made that will reduce the size of the estate below the amount that will be needed for the individual's future standard of living. although gifts in excess of the allowable exemptions are taxable. Since future events may be uncertain at best. no one should give away property that they may need to live on in the future. Each person must consider how much is necessary to have to maintain the current level of comfort. But again. Naturally. Page 177 . It is true that an individual can save money by giving it away. News & World Report titled Money Management states very specifically that one must think before giving away large gifts. Inc. Do not forget about the effects inflation will have on the standard of living. There is no way of knowing how future needs may change. There are three conditions that must be met to qualify a transfer of property as a gift: 1. If an individual gives away income-producing property. unless the estate is very large.Retirement Planning  Chapter 21 – Gifting and Other Property Disbursement      21    Gifting and Other  Property Disbursement  Although gift giving is generally an effective tool for estate planning. It should also be remembered that things can quickly change. The donee is the one who receives the gift. Taxation occurs when the value of the gift is over a certain dollar figure. extensive gifts should be limited.

he might decide to refuse the gift. Howard would be responsible for the property taxes on that parcel of land. Jones wishes to give to his son was barren and of little value for any practical use. Chapter 21 – Gifting and Other Property Disbursement      A gift made by check is not considered complete until the check has actually been cashed. the donor gives up all further control of the property. or perhaps. that Mr. but never actually transferred the title. Howard. Under federal regulations. Say. Gifts given through a revocable living trust are Incomplete Gifts in Trust. the gift transfer is not complete until the registration has been changed to the donee. The donor has the right to change his or her trust at any time. Howard's verbal thanks are not adequate monetary compensation. the donee must accept the gift. Say. for example. If the check becomes lost in the mail the gift transaction cannot be completed until a new check is issued and cashed. 3. Page 178 . Once transferred. that the land Mr. Lastly. A sick person may gift property to transfer at his or her death. Inc. government bonds occurs under federal law rather than state law. Therefore. never occur at all. 2. In an irrevocable trust. The donor must actually deliver the gift to the donee. A gift of cash issued by check is not complete until that check is actually cashed. Jones merely promised Howard the land. Only death actually completes the gift transfer assuming the donor did not revoke the gift during their lifetime. the transaction cannot be completed. In other words.Retirement Planning  quate fashion. In return Howard thanks his father and promises to be a good son. the land is a gift. An irrevocable living trust would complete the gift transaction before death. Jones gives his son. If that person then recovers from their illness. Sometimes a gift transfer is not completed for technical reasons. the gift transfer may not complete itself for a long period of time. If Howard did not want to pay property taxes on property he had no use for. if Mr. If Howard refused to accept his father's gift of the land. Transfer of U. for instance. no gift was legally given. a parcel of property. due to changes. United Insurance Educators. This should not be confused with a revocable trust where the donor retains control.S.

To illustrate this. This concept may sound confusing.000 now becomes a gift. one could give their time or services Chapter 21 – Gifting and Other Property Disbursement      United Insurance Educators. Helen gave that money to her grandchildren. Indirect gifts are more common than we might realize. Sam decides not to require Howard to pay him back. let's say that Helen Jones owns a policy on her husband. Since services given are not considered to be property. Third party transfers involve three people or three groups of people. An indirect gift also occurs when property rights are shifted. the first party provides a gift to the second party who agrees to provide a service to a third party. For instance. Inc. After consideration. The second party is Helen. feels that she needs to bring in an income to help the family. Life insurance is often an indirect gift. $40. (2) Makes the beneficiary irrevocable. As the name implies. Therefore. pays Howard's life insurance premiums for him and does not expect to be repaid. Sam would like Howard's wife to take care of Sam's mother. That is an indirect gift. The third party is the donee. Helen makes the beneficiaries her grandchildren. This happens when the insured buys a life policy on his or her own life and: (1) Retains no reversionary interest. 1. so his father. it may possibly be taxed as a gift. The first party is Sam. There are gratuitous transfers that are not considered by the IRS to be gifts. Howard signs a note agreeing to pay his father back.000 for a down payment on a new home. Sam. When Sam dies. He is the donor who gives the gift. but it does have its uses. She agrees to provide a service to the third party (Sam's mother) for the gift. Direct gifts are probably the most common. The third party is Sam's mother. Typically. The $40. so he cancels out the note Howard signed. (3) Names a beneficiary other than his own estate. Sam Jones loans Howard. However. Sam agrees to give Helen something of value in return for caring for his mother. the IRS could argue that the death benefit was a gift. As a result. Sam's wife. She is also the donee who receives the service. Sam Jones. Page 179 . This often happens when a money transaction begins as a loan. Howard is fired from his job. The first party is the donor. Helen. 3.Retirement Planning  There are several types of gifts. 2. For example. In other words. property is simply transferred to another. For example. his son.

The balance owing on the property does not reduce it's gift liability. The donor would still be liable for any tax due. then the gift amount is the equity value of $15. if the gift was determined to be a sham gift. If Sam pays off the mortgage.000. If the donee must pay property tax. If the donee pays off the mortgage and will have no ability or right to recover the amount of the outstanding mortgage. In other words. the value is determined by the date of the transfer. it is considered a sham gift. Also tuition paid to an educational institution is exempt. The first one listed here is no surprise: political donations to organizations (not individuals) for use by that organization. Page 180 . If the donor is personally liable for a mortgage on the parcel of property. When a gift is made solely to shift the income tax from one person to another. Another exemption is money or other property given in payment of someone's medical care. the value is still for the entire amount of the land. Howard Jones. The entire value is considered to be $40. then the value will be based on the donor's equity only. There are also some gifts that are exempt from gift taxes. then today's market values would be used. United Insurance Educators.Retirement Planning  without fear of a gift tax. There is a mortgage owing on the property of $25. When a value needs to be placed on a transferred property for gift tax reasons. Only if the donor pays for the mortgage will the full amount be considered its gift value. Properties transferred between husband and wife during a divorce settlement is never considered to be a gift. if the son (Howard) pays off the mortgage. Inc.000. Howard was gifted the entire amount of $40. and will not be honored by the taxing authorities. However.000. If a parcel of property purchased ten years ago is gifted today. Chapter 21 – Gifting and Other Property Disbursement      A sham gift is also not considered to be a gift. Sam Jones gifts a parcel of land to his son. Transfers in the regular transaction of business are also not considered to be gifts. then the gift value is reduced by the amount of the tax. This means that the transfer of property was done solely to shift the income tax burden from a person in a high tax bracket to a person in a lower paying tax bracket.000.

Upon her husband's death. etc. Both terms have generally been replaced by what may be called Statutory Share of the surviving spouse. protected by law. It may refer to churches. schools. Preferential beneficiaries are those people who. Other than providing people and charities with a testator's property. have legal rights to designated portions of an estate. One of the primary elements of any will is the designation of beneficiaries. The husband's reciprocal interest in his wife's estate is called Courtesy.Retirement Planning  When life insurance and annuities are transferred within the first year of the policy. Inc. the gift amount is the entire amount of the premium paid during that policy's existence. in the eyes of the law. a will is merely a format to disperse personal assets. to be mentioned in the will as proof that they have not been forgotten. Many testators simply leave as little as one dollar to a particular child. was traditionally called Dower. Page 181 . it is valued roughly at the policy's cash value and the unearned premium on the date of transfer. In common law states. United Insurance Educators. or at the least. as required by law. Many states also demand that other beneficiaries (children) be remembered. A single premium or paid-up policy is valued at its replacement value. We are using "charities" in a broad sense. although not necessarily left anything substantial or equal. hospitals. the wife's portion. Therefore. Chapter 21 – Gifting and Other Property Disbursement      The replacement value is based on the insured's age at the time of the transfer. A husband or wife who was willed less than required by their particular state's law may elect to take their statutory share despite the will's division. If the policy is in the premium paying state. There are four types or groups of beneficiaries: (1) Preferential (2) Primary (3) Secondary (4) Tertiary The basic purpose of a will is generally to provide property for the benefit of people and charities. a spouse who decides to cut out their legally married partner will find himself or herself unable to do so. are between one-third and one-half of the total estate. she becomes a Dowager. These portions.

When estates attempt bequests to grandchildren. a teenager that is a problem today may be a model adult five years later. One child of the deceased may have only one offspring of their own. It is generally felt that all children should be treated equally. for example. However. Primary Beneficiaries may include parents and siblings. The first and foremost primary beneficiary is the spouse of the deceased. A will written to exclude that child today may be regretted five years later. Say. mentally or emotionally would need to be treated differently than a sibling who was employed with a bright future ahead of him. Equal treatment can often be measured in terms other than dollars." What is equal treatment? Equal does not necessarily mean equal divisions of an estate. Chapter 21 – Gifting and Other Property Disbursement      Equal treatment is not necessarily measured in dollars. where there is less to go around. Often. Therefore. Leaving that child the bulk of the estate is fair and equal because it is repaying her for past years of service. United Insurance Educators. Page 182 . while another child of the deceased may have several.Retirement Planning  A Primary Beneficiary is probably self-explanatory. If the estate goes to the grandchildren Per Stirpes. it is normally recommended that all children be treated equally in a will or trust. Even with this inborn inequality. for instance. Say. Inc. Even though the disabled child would receive the bulk of the estate. That may be especially applicable in smaller estates. it is impossible to keep it equal. The question then becomes hinged on the word "equally. Therefore. Second only to the spouse are the children. It can mean balancing out what has been delivered by life. that one unmarried (or even married) child took care of the parents during their last years of life. that one child marries at 18 years of age and becomes self-supporting while another child attends college for four to eight years. Per Stirpes is still the general method used in wills and tends to work well. it is often difficult to keep it equal and fair. That college education might be considered to be part of their inheritance. an estate that seems partial to one child might actually be an exchange for past services. That is not to say that a testator may not divide his or her property as he or she sees fit. it is still fair and equal treatment since the estate is balancing out the children's future. Per Stirpes means the grandchildren will get their parent's share if the parent becomes deceased. A Primary Beneficiary is a member of the immediate family. A child who is disabled physically. equality is not possible. though not necessarily.

and may also include special friends." This can also apply to finances. projects. where the terms are typically quite specific. This is often seen when grandparents have favorites among their grandchildren and wish to recognize those favorites." children will likely sense at an early age that some of them "have". as the testator's children die. Many times parents do not feel comfortable being "fair and equal" in their will in regards to stepchildren. yours and ours. mine and ours. Adopting each other’s children sometimes proves the most desirable step to take. however. in a family made up of "yours. there is no attempt (nor should there be) to be fair or equal. Inc. each grandchild would share equally. Generally speaking. Adoption may still not equal out a trust. rather than a substantial property transfer. but need not do so if openly discussed. the grandchildren would inherit in a trickle effect. This means that the will specifically states what each grandchild will receive.Retirement Planning  Another method is by specific bequests. was the factor that split the family. after all. Tertiary Beneficiaries are the third class of beneficiaries and it includes charities. Only a minority of wills contains fairly large bequests given to Tertiary Beneficiaries. their right. Second and third marriages also bring up another fear when drafting a will: divorce. The testator's youngest child may not be much older than the oldest grandchild. When a trust is in effect which expressly benefits some of the children. when portions of an estate are given to secondary beneficiaries. rather than death. since finances may already be unequal. Chapter 21 – Gifting and Other Property Disbursement      In a Per Capita distribution. which is. A common part of families today are stepchildren. It may even be due to specific financial needs of certain individuals. In such situations. aunts. Page 183 . in some cases. Large gaps in the grandchildren's ages can cause some problems in this type of distribution method. but not others. When dealing with secondary beneficiaries. it is extremely difficult to draft a will that is fair and equal to all. although that may not always be a possibility if divorce. which the testator wishes to address in some way. There is no easy answer to this problem. and people where there is no push of duty. With second and third marriages on the rise. cousins. It may be due to special affections or to services given. while others "have not. organizations. This can especially be true if trusts have been established by deceased parents or grandparents. sisters. there are good reasons why sharp distinctions are made." This does sometimes strain the relationships. It may seem to happen more often United Insurance Educators. Therefore. many families now have "mine. Secondary Beneficiaries include brothers. It is common for the bequest to be a small token amount with the intent to be more of a formal mention in the will. but it is often solved by separate wills with each spouse being private in their decisions. uncles.

to worthy charities and groups. it is wise to put as few restrictions as possible on it. In the past years. For example: Mary Beth Jones. This is especially true when it comes to beneficiaries outside of the immediate family. with so many charities appearing to copy the names of well-known organizations. When giving assets to charities through a will. it was popular. Even if immediate family members are quite sure the testator meant Aunt Betsy. To simply say "My aunt. A general directive is all that is needed. Sometimes a charity may even go out of business. Giving to charities allows a tax credit. Page 184 . wife. This is especially true now. In many towns. the courts may decide otherwise. A person who has a fair sized estate is likely to give to charities while they are alive. Such advice is likely given to the testator by both his and her attorney and accountant. Too often restrictions placed on a will today poorly apply 20 years later when the testator dies. there are organizations (the Cleveland Foundation was the first) established to administer and disburse funds. wife or children. for instance. as donors have directed. to stipulate that funds go to research for a specific disease. Does the testator mean their Aunt Betsy (often called Bess) or her Aunt Elizabeth. Usually. the exact division of that charity should also be stated for clarity if the testator desired a particular area. not after they are dead. If giving to a broad charity. the exact division of that charity should also be stated for clarity if the testator desired a particular area. If giving to a broad charity. Chapter 21 – Gifting and Other Property Disbursement      There is a good reason why Tertiary Beneficiaries do not generally get large estates willed to them. such as small pox or polio. names must certainly be clear. That organization will then apply the money to a group working with boys and girls at the time of the testator's death. When giving to charities. There may be two aunts with similar names. also often called Bess. which is why it makes more sense to give to charities while one is still living. There should be no vagueness when it comes to beneficiaries. For example. Bess" could cause much confusion. full names need to be used and the relationship to the testator stated. Inc. Even when it comes to a husband. By the time the testator actually dies. There have been court battles over large United Insurance Educators. a bank is the trustee when these organizations are utilized.Retirement Planning  than it actually does because these are often bequests that end up in the local newspaper. a testator might simply say that he or she wants their money to benefit wayward boys or girls. the money may have been much more beneficial for more people had it merely been restricted in the will or trust to medical research in general.

Retirement Planning  estates when the charity named was vague. Inc. Chapter 21 – Gifting and Other Property Disbursement      United Insurance Educators. These court battles can go on for years and cost thousands of dollars in attorney and court fees. Page 185 .

Retirement Planning 
Chapter 22 – Following Legal Procedures     

22 
 

Following  Legal Procedures 

Laws governing wills vary from state to state. In every state, however, the laws concerning wills are strict, since the person who signed the will is dead and cannot say what he or she intended. That person cannot redefine what they wanted done with their property. It must be clearly understood by those reading the documents. It must also be clear that the decedent KNEW what he or she was signing. Therefore, witnesses are required for legal documents. At the time of the execution, the testator must declare the document to be a will and request the witnesses personally attest to the signature of the testator. Once a will is executed according to the laws of the particular state where it was signed, that will is then valid anywhere. Many states now allow for Self-Proving Wills. Such a will has an affidavit attached to it, which contains a sworn statement by each of the witnesses. The affidavit is completed at the time the will is signed. The witnesses swear under oath that the testator signed the will in their presence and was competent and not under any duress. When a Self-Proving will is used, it is not necessary to locate the witnesses at the time of death to obtain their testimony. Obviously, this saves time and money after a death. When a person has a living trust drawn up, or some other estate planning vehicle that requires a trustee (or fiduciary), there are responsibilities which the trustee or fiduciary must accept. The trustee will be acting for another' benefit. It is important to understand that the trustee does not have to accept the position or appointment. If they do accept it, however, the trustee is then under legal obligation to fulfill all responsibilities connected with the position until relieved of the duties. The duration of the appointment may be up to one year or even for the trustee's lifetime. The trustee or fiduciary must meet many responsibilities. He or she is acting for the benefit of another person. With that in mind, he or she cannot delegate power, nor can he or she profit at the expense of the beneficiary. Full disclosure is required and the trustee must be impartial when there are two or more beneficiaries involved. A layperUnited Insurance Educators, Inc. Page 186

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son is expected to handle the responsibilities according to the Prudent-Man Rule. This means that the trustee must act in a manner that would be reasonably expected of a prudent man. A professional, such as an attorney or an insurance agent, would be held to a higher standard. A fiduciary can be a guardian, an administrator, an executor, or a trustee. Whichever the title, the fiduciary is expected to refrain from several specific types of action. They may not compete for investments or business opportunities that would involve the assets they are responsible for. Personal profits from the properties are not allowed. The trustee may not invest trust funds in any stock of the fiduciary. In some states, if the trustee is a bank, then the trustee cannot even deposit the funds in their own bank. The trustee cannot purchase property from any party in which the trustee has an interest. If a trustee has several trust accounts, they must all be treated equally. Obviously, a fiduciary cannot use any of the trust properties for personal reasons or personal gain. When a person is setting up a trust for himself or herself, choosing a trustee should be done with much thought. Many people act as their own trustee initially, but even if this is done, a trustee still must be chosen to follow in the event of their death or to take over if the testator (acting as trustee) becomes ill. Complications often occur when the trustee is also one of the beneficiaries. Family members are often in uncomfortable and difficult situations when they are the trustees. That is because the trustee cannot participate in some of the decisions. Age must be considered also since an elderly person may not be able to handle the position for very long. Also of great importance is the person's background and capabilities when it comes to managing a trust. In some cases, cost is also a consideration. Banks, for example, charge a fee to act as a trustee. Attorneys may also charge a fee. Many experts recommend that the attorney who draws up the trust never be the trustee also since there can be definite conflict of interests. If an attorney is desired to serve as the trustee, have a different attorney than the one who drew up the trust. This protects not only the trust property itself, but also the attorney serving as the trustee. Most professionals take it one step farther; they use attorneys in two different offices rather than two attorneys who perhaps work closely together. A trustee can commit what is called Breach of Duty. This means the trustee fails to act appropriately. It can occur if the trustee takes funds from the trust for an unauthorized reason. This is a civil and a criminal breach of duty. A trustee does have considerable power. Although the trustee must act prudently, the trustee has the power to compromise claims; distribute property in cash or kind or both. The trustee may sell property and investments and borrow money, if the trust docuUnited Insurance Educators, Inc. Page 187 Chapter 22 – Following Legal Procedures     

Retirement Planning 
ment so allows. A corporate trustee may invest and reinvest in common trust funds. This occurs when banks and trust companies combine investment funds from many trusts to get better returns. A trustee may employ attorneys, advisers and accountants. Again, the amount of power given is good reason to choose a trustee with long consideration.
Chapter 22 – Following Legal Procedures     

An executor or administrator acts for the person at the time of the person's death. All powers come from statutes and last for the term of the estate. When choosing an executor, consider their skills of managing assets, their personal knowledge and their ability to give their time. Do avoid selecting someone who will have a conflict of interest. A guardian is given the responsibility of caring for another person and their property. There may be two types of guardians in an estate: one for property and another for a person or persons. A ward is the person the guardian cares for. Generally, a guardian is needed because the ward is under the legal age or is unable to protect themselves due to physical, mental or emotional disabilities. A guardian does not receive any ownership of the ward's properties. Usually a guardian is in charge of either a person or of property, or even both. A guardian's duties last until the ward reaches legal age, or until the estate is settled and disposed of. A guardian is held to the same legal standards as trustees. A witness to a will normally does not read the will. It simply is not necessary to do so. The witness is merely witnessing another person's signature, not the contents of the document. It is best if the witness knows the testator and is younger than the testator. Even then, the witness may happen to die first and be unavailable when the time comes to testify (if that should be necessary). It is most convenient if the signature is one that can be easily verified, such as an attorney whose signature appears on multiple court documents, or a doctor whose signature can be confirmed by many pharmacists, or any person whose signature is easily proven. If a person has a personal interest in the estate, either directly or indirectly, they should not be used as a witness. The parent of a beneficiary, for instance, should not be a witness to the will or trust. Those who should not be witnesses would include (but may not be limited to) beneficiaries, or heirs, executors, trustees and their spouses or any relative of a beneficiary. An officer or the principal stockholders of a corporate beneficiary might also be challenged. Also, anyone who would not likely be available at the testator's death is not a wise choice for a will's witness. In this situation, proving a testator's signature can be difficult and expensive when the witnesses cannot be located and there was no self-proving will (an affidavit of signature with the will). If there will be the slightest chance that a testator's mental state of mind will be questioned, the witnesses should be people who, by training or knowledge, can attest to the
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fact that the testator was of sound mind. This would include nurses, doctors and other people who would be in a position to back up the authority of the will. In many states, it is not valid for another person to guide the hand of the testator when signing the will, even if the person is simply too weak to sign for themselves. In 1970, the Supreme Court of Wisconsin ruled that a guided hand was not acceptable as a valid signature. The judges thus overruled a 1943 Wisconsin decision involving the will of Walter Wilcox, which previously held that physical touching of the pen by the testator was all that was required.
Chapter 22 – Following Legal Procedures     

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Retirement Planning 
Chapter 23 – Property Transfers     

23 
 

Property Transfers 

Property can be transferred at death several different ways. Insurance policies transfer through contract designation. In other words, they transfer through a listed beneficiary. In fact, anything listing a beneficiary will usually operate independently of a will or a living trust. State laws will distribute property when no will was left or discovered. In some states, spouses can use a community property agreement to leave all property to each other. Often, this is the only document needed when all property will be given between a husband and a wife. There are several types of property that will pass directly from the decedent to another person by contract. As mentioned, insurance policies are included in this category. Of course, if no beneficiary designation were listed in the contract, the asset would still follow probate proceedings. Property owned jointly with right-of-survivorship passes also by contract. Investments involving survivor benefits of joint-and-survivorship annuity or survivor benefits of a life annuity pass by contract designation. Qualified employee retirement plans typically also list a beneficiary in their death benefits. Benefits under Antinuptial/Postnupital agreements list beneficiaries and lastly non-qualified employee benefit plans with a designated beneficiary. In short, any vehicle that lists a beneficiary will generally pass outside of the probate proceedings through a contract designation. That is the best reason to always try to list someone's name rather than simply stating "estate" under a beneficiary listing. Property that bypasses probate is simply called Non-probate Property. It is no surprise that property going through probate is called Probate Property. The Gross Estate includes all rights to all property, both probate and non-probate. The Probate Estate is all property, which will go through the probate process.

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To Recap: The gross estate includes all property in the estate, even if it does NOT go through the probate proceedings. The probate estate includes only that which WILL go through the probate proceedings.
Chapter 23 – Property Transfers     

Probating a will proves that the will is valid. It will include only the property covered by that will. Each state governs the laws concerning probate. Probate laws do vary from state to state and will occasionally change in any given state. What is true for California may not necessarily be true in Oregon or Wyoming. Therefore, it is best to try to use attorneys in the state where probate will occur for the best results.

United Insurance Educators, Inc. Page 191

When no will is in existence. In many states. On top of that. A fireproof safe is recommended. accompanied by a representative of the state taxing authority. However. This restriction causes an unnecessary court maneuver. In this situation. Intestate means there is no valid will in existence. There is no right to select specific heirs. but may not be the best choice. and a probate judge is called in to settle the estate. all property within the state is distributed by that state. A safe-deposit box is one place that often comes to mind. Many situations will not permit access except by a delegate appointed by the court. the cost may be fairly modest. All property which did not have a listed beneficiary. A will is of little value if no one knows of its location. it should be remembered that fire is the will's enemy. and which was not covered by a will. or even it's existence. Page 192 . Inc. then the property goes to the state of legal domicile in most cases. the testator should make a point of alerting his or her children to its location. There is a rigid order of distribution to surviving relatives with the spouse receiving at least one-third to one-half. If there are no living relatives. a safe-deposit box is not easily accessed. Wherever one's will is kept. be sure to have another person authorized to open it independently of the testator. It may also cause problems in coordinating schedules of attorneys and court appointees. Transfer by intestacy does not distinguish between real and personal property. paperwork and guardianship of property necessitate endless frustration. the effect on the survivors is often tragic. If a safe-deposit box is one's choice of location. shall be disposed of under the laws of intestate succession.Retirement Planning  Chapter 24 – The Will      24    The Will  It is wise to keep your will in a place where it can be easily located. If a will is to be kept at home. Wishes that were well known to family members may not come even close to being carried out. United Insurance Educators.

as most people might expect. Certainly it makes sense to have a will. Page 193 . with the remaining estate going to the parents. Legislatures enact whatever they feel should be done. Usually. anything acquired after the trust was written or anything left out of the trust will be provided for. or other relatives of the deceased person. it is vital to still have a will in existence. the handicapped or the aged. it is still necessary to draft a will. That way. the surviving spouse receives onethird to one-half of the estate (the actual amount is determined by state statutes). The balance will go to the children. if both parents die together? In this case. Even when a living trust is used. as seen fit by the deceased person. Even when a living trust is part of estate planning. Chapter 24 – The Will      A Human Document A will is a human document able to distribute property. or perhaps even to relatives he or she disliked. not all of it. when no will exists) cannot be personalized the way a will can. This can cause the necessity of selling the home of the surviving spouse in order to properly distribute the estate. the court appointed guardian might not be the person that the mother and father would have wanted.Retirement Planning  When a person ignores his or her legal right to distribute their property. during the postmortem period. When a spouse dies leaving a surviving spouse along with minor children. however. brothers and sisters. Again. Of course. Instead of appointing a person that is trusted. If there are no children. Inc. the court is most likely to appoint that surviving parent as guardian. a will or trust would have probably prevented this situation. What happens. There is flexibility as needed to suit each person's needs or desires. the law must assume what that person would have done. the will is also a legal document. By contrast. a stranger is appointed by a judge to manage the estate to the best of their ability. the spouse may still only receive one-third to one-half of the estate. United Insurance Educators. without knowledge of the individual. it's substitute (the laws of descent and distribution. The "human" aspect of it deals with the will's ability to carry out a person's desires after his or her death. provide for minor children. In many cases. portions of an estate go to relatives the decedent did not know well. even if they are minors living with a past spouse.

a decedent may also specify the estate's share of any tax burden. a will is subject to change at any time. it may be made by writing an entirely new will or by adding a codicil. Guardians for minor children or other incompetent dependents can be named. Even the states that do not require witnesses to execute a will still require witnesses when the will enters probate. To execute a will. Writing a will is often called the Last Will And Testament. No witness may also be a beneficiary. Unless a will is frozen by contract. They are called attesting witnesses. Inc. or modify a term of the existing will. When writing a will. the testator must have a legal ability to do so. A codicil is a method of altering a will without having to completely rewrite it. The word "last" is simply a conventional word put there by an attorney. or it can be multiple pages. Two or three witnesses also sign and then the document is dated appropriately. The creator of the will is called the testator. Aside from that tax benefit. He or she must also be of "sound mind. In other words. delete from it. A codicil may be only one page." That means that the testator must understand what he or she is doing. a will should also exist. That requires that he or she be of legal age. When a change is made. the testator is the one who owns the property and is stating how he or she wants it distributed after their death. although generally they are still used. a will also assures the maximum marital deduction for the surviving spouse. not all states require witnesses. Trust provisions in a will can protect beneficiaries from their creditors in some cases. United Insurance Educators. It can add to the will. Any will needs to be reviewed periodically. Chapter 24 – The Will      Besides those two obvious advantages. Page 194 . Even when a living trust is put into effect. What is considered to be "legal age" will vary from state to state. which will be valuable to the other beneficiaries. The person writing the will gets to make his or her own choice of an executor and to give his or her property to those they wish to receive it.Retirement Planning  The advantages of a will are easy to see. be able to recognize the property owned and have a basic understanding of it's value and be fully aware of who the will would give the property to. Charitable organizations can be granted property by the decedent as he or she chooses. To create a will. "Last" really means nothing more than the latest will that was written. but generally he or she must be at least 18 years old. the owner of the property listed in the will must sign the end of the document.

" The second one. Inc. is a modification made in a will. A codicil must be signed according to the same requirements the original will was signed under. To be considered valid. This is an oral will given in front of witnesses who must submit affidavits. Some states do not fully recognize them. Living wills set forth the person's desire not to be kept alive on life support systems when recovery is very unlikely. which involves minor changes. Sometimes attorneys are not used when a will is written. when drafting a will would likely be impossible." means that the property will be equally divided among the stated living beneficiaries. or "per head. it may not be considered valid by the courts. rather than listed as numbers (twenty-first instead of 21). United Insurance Educators. per stirpes. None of the inheritance would pass on to the deceased beneficiary's family. however. this type of will is only considered valid when it is found with the decedent's other personal papers. as previously stated. A few states allow what is called a Nuncupative Will. No witnesses are necessary. Otherwise. Even the date must be written out. Many wills and living trusts also now include what is called a Living Will. The reason not all states accept a living will is the problem this causes doctors who are responsible for any liability in such a situation. Chapter 24 – The Will      A holographic will must be completely handwritten. Generally. This type of will is done during an illness or just before death. especially when family members disagree with the patient's request. Page 195 .Retirement Planning  There are two ways to distribute property: (1) Per Stirpes (2) Per Capita." means that if one of the beneficiaries is deceased. per capita. If one has died. although most states now do. Per Stirpes is also translated as meaning "through the blood. The person must have signed the end of the document as well. The first one. A codicil. then that person's share of the inheritance would go to their children or successors. This type of "self-written" will is called a Holographic Will. it must be completely hand written. A person may legally draft his or her own will in some states. or "by the roots. their portion is simply divided among the specified living beneficiaries.

Of course. it could be contested. This would generally happen if another person misled the testator. the disadvantaged person must be given an opportunity to protest in court. an outdated one (even if it were only a copy) may end up being followed. such as someone who is senile. or any legal document. When a new will is written. If the testator was wrongly influenced. Page 196 . by operation of the law. or any other significant event. new moral duties infer that the testator would have changed the will had he or she thought of it. taking this "forced share" must be done within six months of the spouse's death. Circumstances that may greatly affect a will include marriage. any forgery of signatures would certainly invalidate a will. If fraud was involved in writing the will. a new will should simply be written. The rule of revocation implied by law is based upon the theory that because of any significant change. This can be done if the will was improperly executed meaning a vital part is missing. In some states. In some states. it is important that all other wills be destroyed. Often redoing the entire will also avoids causing hurt feelings among the beneficiaries. A hazard that may go unrecognized is that a will may be revoked in whole or in part. the birth of a child. the death of a principal beneficiary. this common law rule is preserved by statute. If family members were not aware of a new will. An incompetent testator. including all copies of outdated wills. That would generally involve someone who had financially benefited directly or indirectly by having the testator write the will in a certain way. A surviving husband or wife has the right to take one-third to one-half of the estate even if the will states a lesser amount. Generally. When this happens. The exact amount of mandated inheritance depends upon the state involved. Therefore. Anyone who is considered to be an interested party can contest a will. often called a citation. One may appear to overshadow another. will also invalidate a will. a new will would perhaps be a better choice. this would also be grounds to contest the will.Retirement Planning  Too many codicils can cause confusion in a will. when property has been moved by codicils from one person to another. Contesting the will means having it set aside through legal channels. Inc. when a codicil eliminates or reduces a legacy. A legally married spouse (at the time of death) cannot be disinherited. An interested party is a person who would financially gain by overturning the will. Chapter 24 – The Will      United Insurance Educators. divorce. That means the person must be located and served a notice.

Retirement Planning 
When a will is contested, it destroys the entire will. It is not possible to contest only certain portions of it, since any reason that invalidates one section of the will would apply equally to all sections. Some wills contain a Testamentary Trust. This is where the will creates a trust as part of the probate estate. It becomes effective at the testator's death. It is also irrevocable at the testator's death. There can be many reasons for incorporating a testamentary trust into a will. The trust provides security for beneficiaries and can also be set up to mange the assets for them. If a life income was set up, then the assets avoid taxation when the income beneficiary dies. A testamentary trust gives the testator much more control, even after his or her death, of the assets he or she accumulated during their lifetime. It can save taxes through income splitting and accumulated income, also. A Pour-Over Trust transfers assets from one estate or trust into a pre-existing estate or trust. Typically, a pour-over trust needs to be executed prior to the will. A will that directs that specifically named assets or all residuary property passes into an already established trust, revocable or irrevocable, is called a pour-over will.
Chapter 24 – The Will     

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Chapter 25 – Selecting Trustees & Other Representatives     

25 
 

Selecting Trustees &  Other Representatives

Selecting a trustee is a major decision if you choose an estate vehicle such as a living trust. Choosing a trustee will affect your entire family since how that trustee handles your trust directly affects the beneficiaries. DO NOT choose any person who pushes him or herself forward (volunteers, as it were) to be the trustee. This includes your attorney. If he suggests himself as trustee, go elsewhere. If your attorney volunteers and you feel he is, indeed, a good choice, then assign a co-trustee (perhaps your bank representative or a relative) to balance any decisions made. Also the attorney who draws up the document should never be the trustee of it, too. The temptation to draw up the document in their favor is simply too great. At the very least, if you choose your attorney as trustee, have his fees for this service in writing and made part of the living trust document. Banks generally have trust departments. It may sometimes be argued that a bank's fees are high (and they may be), yet they are sometimes the most effective trustees available. A bank is immortal (goes on indefinitely) and, generally speaking, interested in doing the best job possible. Their trust officers generally have specialized training that a friend or relative would not have. A bank's procedures are also audited by accountants, then by state and federal bank examiners. Do not select a bank solely on one or two people who work there. There is no guarantee that those trusted bank employees will stay with that particular bank. If a bank is desired to act as a trustee or co-trustee, select one that meets the following tests: 1. Is the bank financially sound? 2. Is there a trust department within the bank that has a sound reputation? 3. Does the bank trust department have experience in the type of assets your estate will contain?
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4. Do you feel comfortable with the bank personally?
Chapter 25 – Selecting Trustees & Other Representatives     

Anytime a trustee is chosen, be careful not to select one that stands in a position to gain personally. Regardless of how good the person is and how much they care about the testator, it would invite too much temptation to do something that should not be done. Again, if there may be ANY question about a trustee, then it is wise to appoint a co-trustee or not use the person at all.

It is unwise to select anyone to be a trustee that could gain financially from the position. Often the testator's attorney is a wise choice as a trustee or as a co-trustee if he or she did not write up the original document. If this is the case, fees should be openly discussed with the testator and then put in writing. After the testator's death is certainly not the time to be negotiating prices. An eminent lawyer who handles estates routinely feels a trusted family attorney is the best choice for a fiduciary or trustee. He does add, however, that the trust department of a bank would likely best handle any estate of real magnitude and of long duration. If you feel you do wish to use an attorney as your trustee, do not simply name one blindly. The attorney, like the bank, needs to meet certain requirements. This includes, but may not be limited to: 1. Their record in business and trust affairs must be impeccable. 2. The legal office must be structured to handle the mechanics of estate and trust matters. As stated earlier, always seek out a specialist. Just as a doctor sometimes needs to be a specialist to best serve your needs, an attorney also sometimes needs to be a specialist in order to do the best job possible. Even with all the good reasons to choose an attorney as a trustee, it is still often felt that lawyers are better suited to overseeing trustees; not being trustees. Each person will need to personally assess his or her own situation. Whoever is named as trustee, it should not be sprung upon them when the testator dies. Being named trustee can be a big responsibility; one which may not be desired by the person named. A trustee needs to be given the chance to accept or decline before the testator's death. Even after the death of the testator, a nominated trustee can decline the position. Some trusts do allow beneficiaries to change trustees. That is, the trust gives the RIGHT to change trustees. Any trustee may be recalled, however, if he or she does not
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display a responsible fiduciary attitude towards the role. In that event, the courts will make the necessary change.
Chapter 25 – Selecting Trustees & Other Representatives     

When a beneficiary has the right to make changes in trustees, there are simple provisions regarding notices and windup accounting procedures. One should not change trustees without good reason. If a person changes trustees too often, or without valid reasons, he or she may find that no one is willing to take on the task of being their trustee or co-trustee. Although wise estate planning can give a testator control of his or her assets even after death, if the estate is large, it is not always wise to attempt total control. Too many conditions change from year to year. So many conditions can affect the circumstances of the estate. An estate is subject to both the federal government and the state government. Both the federal government and the state government will: 1. Enforce the directions of the testator to settle his or her estate as he or she desired. 2. Protect the rights of any creditors. 3. Safeguard the interests of minors and any person who is considered to be incompetent. 4. Collect any taxes due. The agencies and bureaucrats who will be involved in completing those four goals include: 1. The probate court in one or more states 2. The Internal Revenue Service (IRS) a. The estate tax division b. Federal Income tax personnel in some cases 3 The tax collectors of the state where probated for estate taxes, inheritance taxes (if applicable), and perhaps income taxes. The types of taxes due will depend upon the state where probated. In some situations, no tax will be due at all. 4 The tax collectors of another state if more than one state is involved in probate due to the decedent's residency status or assets. 5 Bureaus (if any) with supervisory powers over a continuing business.

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Chapter 25 – Selecting Trustees & Other Representatives     

If there was a will, the person responsible with fulfilling the desires of the testator is called an executor, or, if a female, an executrix. If there is no will, the person responsible for the estate is called an administrator or, if female, an administratrix. All of these are personal representatives of the deceased person. Their duties divide naturally into two sections: 1 The in-court probate proceedings, and 2 The actual postmortem management of the decedent's affairs and distribution of the property. The second duty, postmortem management, is by far the most important. The in-court proceedings are often merely a matter of having to take the time to be there. The term, probate, is a Latin word, and means: “to prove." That actually is what probate is all about. Probate "proves" the will is valid. The proceedings include petitions, notices, hearings, and orders. Many states have made these proceedings quite brief. Probate proceedings are mostly ministerial. States can vary, but typically the probate proceedings go in this order: 1 Give notice, if required, by whatever method is necessary. 2 Prove the will is valid, or perhaps prove that there is no will at all, as the case may be. 3 File the oath of the personal representative and, if required, file bond as well. 4 Publish a notice to creditors and send personal notices to the heirs as the state may require. 5 Secure an order authorizing a family allowance. 6 If the estate is solvent, secure an order to give the executor maximum authority. 7 An accounting record is filed by the personal representative, which shows what he or she has done. This is called a Final Report and Petition for Distribution. 8 Notice is given to those with a financial interest in the estate and a hearing is held at a specified date and time.

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9 Once the activities of the personal representative are approved, a Decree of Distribution is entered. In addition, receipts from beneficiaries and others are filed and the court proceedings are closed.
Chapter 25 – Selecting Trustees & Other Representatives     

When a person dies, the estate must receive immediate attention so that the assets are conserved and managed. What is involved in conserving and managing an estate does, of course, vary with each family, and with the types of assets involved. Who dies and who lives (husband or wife) may also affect choices made for the family by the fiduciary. If the person who always ran the family business and who understood that business dies, then a director may be needed for that business to protect the beneficiaries. If the person who dies had no direct contact with the business, then no director is likely to be needed.

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and so forth. Inc. Immediate funds for the family's living expenses are the next concern. A responsible executor will be quick to dispel such fears. This will make additional funds immediately available to the beneficiaries. It would be foolish to list "estate" as the beneficiary. Still. Again.Retirement Planning  Chapter 26 – Settling the Estate After the Testator’s Death      26    Settling the Estate After  the Testator's Death  Realizing that different situations may cause different courses of action. This will require copies of the death certificate. the following steps are those most often taken: 1. Note that the family's immediate financial needs were handled even before the will. as long as specific beneficiaries were named in the policies. More often than not. Next the will needs to be proven and court proceedings started. there is the fear on the part of the family that probate will freeze all funds leaving the family in a desperate situation. 4. 3. rather than by the executor. since that would then throw the proceeds into the probate process. United Insurance Educators. 2. An inventory is required in some states and that formal inventory must be filed in the court proceedings. this is the duty of a responsible executor. This is often a good idea even if not required by the state. Insurance policies need to be collected and the companies notified of the decedent's death. this business will also need to be managed until a family member is both able and willing to take it over. Often. This often includes funeral arrangements and the related items concerning death certificates. the executor needs to be available in case he or she is needed. Page 203 . Very personal matters are handled first. If a business is active. since anything with a stated beneficiary does by-pass probate. these items are handled by the immediate family. 5.

The basis for future capital gains is something that may affect beneficiaries.000 in assets are exempt). If the will was current and properly written.Retirement Planning  6. If directed in the will. the appraisers are going to be mainly concerned with items of value. Tax returns need to be prepared and all supporting documents collected. the executor uses opinions of specialists (that are accepted by the Internal Revenue Service) to determine values of items in the estate. A few states do not have state death taxes. Normally. generally appointed by the court or a state taxing authority. Generally. Old. if applicable. preliminary distribution of property begins. 13. the estate must first be proven to be solvent. liquidating assets to meet any cash needs. Any obligations owing the estate must be collected. Certainly. state inheritance taxes. 11. figuring tax requirements as soon as an approximate estate value is known. Some states require that an official appraiser. For example. Properties owned by the estate must also be retrieved. Fiscal management may be among the most time consuming parts of the probate proceedings. Inc. outdated wills may prove to be less simple. preparing an estate budget. In other states. and generally just the use of good common sense in managing the estate. the vast portion will be clearly stated. Taxes may include income taxes. Any claims against the estate can also begin to be settled in whole or in part. The final distribution and the closing of the estate may often be very simple. and gift taxes Exorbitant tax demands by taxing authorities need to be carefully examined by an independent specialist before being paid. This often includes managing current businesses. Some of the steps may not even be applicable. all taxes must be paid. 10. as determined desirable or necessary. federal estate taxes (the first $675. it is recommended that all appraisals be in writing. Of course. The executor should advise each beneficiary of the basis of the assets he or she receives. 9. appraise assets. these thirteen steps may sometimes overlap or come in a somewhat different order. This protects both the estate and the executor. Chapter 26 – Settling the Estate After the Testator’s Death      7. Generally. if that is selected). except for current household expenses (such as electricUnited Insurance Educators. Any clouded titles need to be cleared. Property subject to federal estate tax gets a new tax basis equal to the date of death value (or alternate valuation date value. This needs to be balanced against the proper applications of the assets to the various claims. there may be no claims against the estate. Page 204 . 12. 8.

trusts cannot escape the legal system itself. it would be foolish to advise a small estate to go into a living trust. It needs to be further pointed out that a living United Insurance Educators. when delays occur in probate proceedings. Unfortunately. Since all citizens have the right to their day in court. even if obtained free of charge. Since certain family members are entitled to participate in a will. we will discuss only the more common delays. Since there are so many possibilities of delay. the term "small" may have vastly different meanings to different people and to different organizations. The principal asset is one that is very difficult to apprise. Of course. Tax litigation follows if the beneficiaries do not agree with the IRS.Retirement Planning  ity). Generally. These include. the will is left open to contest by a possible beneficiary. Inc. The major beneficiary (typically a spouse) the executor resist payment of an enormous claim made against the estate. 2. Small. When delays occur during probate. it is important to realize that probate procedures themselves do not cause the delays. Since a trust is more expensive to set up (and small estates could better use the money elsewhere) and since taxation is certainly no problem to the estate. A poorly written legal document (of any type) is too expensive. Small estates generally always work best with a will versus a living trust. The claim is fought for several years through the courts before a decision is handed down and the estate can be settled. All transactions need to be thoroughly documented. It is sometimes said that living trusts avoid delays of probate. but may not be limited to: 1. this possibility cannot be ignored. it is wise to have an accountant prepare an audit for the estate. 3. A well-written legal document is always worth the money spent. its consequences touch the lives of many people. trust. Perhaps five or six years go by before estate is finally settled. The decedent (testator) made a major mistake when making out his or her will. Therefore. This may especially be true if postmortem expenses must be met and there are several beneficiaries to be remembered. While they certainly do by-pass the probate procedure. or any number of assets. Perhaps the Internal Revenue Service (IRS) takes two or three years to make up its collective mind. Page 205 Chapter 26 – Settling the Estate After the Testator’s Death      . Lawsuits may be brought by any legally interested party against a will. in many cases. It is most important that meticulous records be kept by the executor throughout the probate process. simple estates may require as much thought and planning as large estates. or any type of legal document. Its impact can be seen in all types of legal procedures besides probate. Many times. There are many things that can delay the settling of an estate. It may be real property (real estate). those delays are caused by the judicial system as a whole. the failure to include one member in some manner can cause delays. an ongoing business.

Therefore. Living trusts are certainly good for some situations and some individuals. Consider this small. Nearly everyone would consider over a million dollars to be a sizable estate. do not necessarily advise a living trust. A well written will should do a very good job (for a lot less money and time) for the small. the Internal Revenue Service (IRS) considers any estate under that amount too small to tax. Inc. no one particular estate plan is right for everyone either. Even large estates fall under this category if the assets are simple in their nature.000 $220. Therefore. No estate is small in the sense of being unimportant. Since the current tax laws will not federally tax estates under the federal figure (which has changed over time. but taxes will always be paid by someone. A trust may change WHO is responsible for paying taxes. Page 206 Chapter 26 – Settling the Estate After the Testator’s Death      $160. Just as no one insurance policy is right for everyone.000 . so consult a tax specialist for the current limitation). However. simple estate. It has become increasingly popular to utilize living trusts in the last few years. personal property. federal taxation is not to be feared by many. So.000 25. simple estate: A home (no mortgage owing): Savings account with Rights-of-Survivorship: Certificate of Deposit with a listed beneficiary: Tangible personal property: Total Value: United Insurance Educators. Some would say it is more a matter of not mismanaging it. Every state may be different and a testator will want to consult with a specialist in the state where probate occurs. A trust may not be in the client’s best interest. Realize that a couple (husband and wife) could each use the allowable amount.000 30.Retirement Planning  trust never avoids taxation.000 5. When working with this amount of assets. Every estate is important to those involved with it. as stated. exempting a very large estate. living trusts are often advertised as the way that every estate should be settled. size is important only in the sense of how to best manage it. They do by-pass the probate proceedings. Because there is profit to be made here by some individuals and organizations. the probate process will never harm the small simple estate. These small estates generally need not fear delays since only if someone were to contest the will would there be a problem. No federal taxes occur on any estate with a value of less than the amount designated (now over a million dollars). regardless of size or circumstance. the term "small" may have vastly different meanings to different people or organizations. If only the family home. it is highly recommended that one see a tax attorney or a specialized accountant for the best planning possible. as well as offer other advantages. and a few thousand dollars are involved in the estate.

then it is not covered under that trust. The things that needed to be done would have been the normal course of events whether a will or living trust was in place. Depending on the probate state. there will be virtually nothing in them. A will did the job very well. As previously stated. If only a husband and a wife are concerned as beneficiaries. or veterans’ benefits. Pay current household bills. If you are using a living trust for small estates. Medicare if applicable. but generally the term Non-funded Trust is used. for instance. The client would have spent funds that would have been more useful elsewhere. When a living trust is written. These may be called a variety of things. Go to the bank and arrange for a new Certificate of Deposit with a new listed beneficiary. When a will is written. it must be assumed that you have also arranged a living trust for those you love in similar situations. If the family is not properly advised (including possible beneficiaries of the trust). An attorney will do this for a nominal sum and it will do as well as anything else in transferring their property to the other spouse. That is. Page 207 . funeral and internment. The ending statement can only be one thing: do for your clients what you would want done for yourself or your own parents or grandparents. Change bank accounts to survivor and successors. they may select only a Community Property Agreement in those states where such an agreement would apply. There will always be those who still argue that the trust is a valid tool even in such small. Obviously. simple estates. 2. pay a nominal tax (on amounts over the limit allowed for state death taxes). union. Pay expenses of last illness. it covers all that the testator legally owns. it covers only those assets that are properly transferred into that trust. settling this small. The fact that living trusts have become a moneymaker for insurance agents and organizations marketing them will mean that many simple estates will be put into living trusts. Only those who charged the client to set up the living trust would have benefited to any degree. If property.Retirement Planning  Chapter 26 – Settling the Estate After the Testator’s Death      The survivor need only: 1. simple estate required very little effort. Be sure to utilize all medical insurance policies. This would not apply in states where no taxes of this nature exist. Items with a stated beneficiary need United Insurance Educators. these trusts will possibly end up as Empty or Non-funded Trusts. is not deeded over to the trust. 5. 3. lodge. anything with a listed beneficiary already bypasses the probate proceedings. Inc. To use a living trust in the estate we illustrated would have been "overkill" at the very least. 4.

it is unlikely that these statements will save the agent from the lawsuits. When such situations occur. a will is still necessary to back it up. United Insurance Educators. If the will that person had prior to the trust was destroyed (leaving no will in existence). This would include savings and checking accounts with Rights-of-Survivorship. Therefore. Organizing the duties and problems of postmortem management will save hours of work by the executor and that saves money for the estate. It was not properly deeded to the trust. not die. which may be purchased through the mail. life insurance policies. The fact that the insurance agent was the personal contact and that the trust ended up being an "empty" or non-funded trust will be the outstanding facts. In other words.Retirement Planning  not be put under the trust because it will pass outside of the probate proceedings already. Page 208 Chapter 26 – Settling the Estate After the Testator’s Death      . leave it up to the creator of the trust to list the assets to be covered under the trust. Most of the organizations marketing these trusts do have what might be termed a "no-fault" statement for the agent to have the creator sign. and many other items. it can easily be assumed that he or she will be liable to some degree. While it is true that first wills typically are written by young couples who will likely live. postmortem is still part of every well thought out will. that property is not covered under the trust under many state laws. Certificates of Deposit. then that property not covered legally under the trust may well end up in intestacy. The state may not do as the decedent would have done had the trust been properly set up (funded) or if a will had existed. Yet. Therefore. if no will existed and with the trust being empty or non-funded. the state will step in to disperse the property as they see fit. The best way to avoid such a situation is simple. little importance is often put on postmortem management. It may also prevent a lawsuit against the agent or organization representing and selling the trust. The will covers any and all assets not properly transferred to the living trust. Some of the "do-it-yourself" trusts. Since past courts have established that an insurance agent is a "contract specialist" by the very nature of his or her business. the beneficiaries will certainly file lawsuits. It will also cover any and all assets acquired after the trust was written. When this comes to court. the fact that it is listed will not make any difference in most cases. Preparing for postmortem management needs to begin at the earliest written will. If property is one of the items and that creator fails to deed the property over to the trust. Inc. we know that people do sometimes die young. These no-fault forms state that the creator did not receive legal or accounting advice from the agent. Most early wills do tend to be written out of a sense of duty rather than a feeling of imminent death. If an insurance agent was the creator’s only personal contact. Anytime a living trust is put into effect. including annuities. he or she will most certainly also be named in that lawsuit. Many of the creators of trusts will fail to do what is necessary. The will prevents state intervention.

Frequently. Chapter 26 – Settling the Estate After the Testator’s Death      United Insurance Educators. means a brief explanation of assets. Regarding the other categories. not instructions. The executor is required by law to do a thorough search to determine their value. (2) Liquidate or identify all unlisted securities. When preparing postmortem management.Retirement Planning  Once the first postmortem notes are written. The point here is obvious. Still. (3) Sell small. Preparation for postmortem management falls into seven categories: (1) Consolidating holdings (2) The homeland (3) Furnishing information (4) Anticipating appraisals (5) Liquidity (6) Fees of the executor and counsel (7) Various suggestions. Inc. anyway) and clear your safedeposit box of any worthless securities. When examining your assets: (1) Take your losses (an income tax savings. Realize that number seven states suggestions. When we wait until late in life to do this. which will be appreciated by the will's executor. the process really is much easier. The variations of this scene are endless. no matter what your age. If actual directions are to be given. stock certificates or other items are found in a safe-deposit box that bears unknown names. consolidating holdings. it is good to review what is held on a yearly basis. take stock of the assets to determine what actually is worthwhile keeping. odd lots and buy one issue when possible. then it needs to be made a part of the actual will. Page 209 . it is generally harder to put together. When we add the facts as they occur. It is not unusual for the cost of the search to exceed the certificate's actual financial value. number one. it actually is much easier to keep them updated thereafter. Some of these types of items are more likely to be held by older people rather than by younger people.

refers to the testator's residence. Most people could even use a loan application form from their local bank as their list of assets. Any item with a listed beneficiary bypasses probate proceedings. the testator could have simplified the process. disability. along with the account number. By prudent planning. they won't do anyone much good. or any other type of policy one may have. Number three. It is not unusual for a person to own more than one home. including life. (4) Life and other insurance policies. state the location and the box number. furnishing information. State where they are located. Simply put. List where the deed is located. All insurance policies need to be listed. While these properties can be allocated easily enough through the will. Inc. one might want to consider using them as tax-free gifts to those who would be the beneficiary of them eventually anyway. the homeland. Page 210 Chapter 26 – Settling the Estate After the Testator’s Death      . a partial share is owned in a third residence. List all of them. A simple list in a spiral notebook will be greatly appreciated by the family and the executor. give the name and address of the lender. his or her actions may cloud where that place actually is. Any other pertinent papers should also be listed as to their location. even if they seem small or unimportant. stating where each document can be found. the cost of postmortem management is certainly increased. if no one is aware of the policies. Perhaps a winter home is occupied more than six months out of the year. (3) Mortgages. This could produce an advantage tax wise. Number two. is an easy thing to do. Some of the things you will want to list include (but may not be limited to): (1) Real estate. a person should not casually act in a manner that might cause a new domicile or a confusion of which home is the legal domicile. including the branch and account number. If they are in a safe-deposit box. The executor ends up spending endless hours (at a cost to the estate) compiling a list of assets. health. auto. notes and cash. Be sure to inUnited Insurance Educators. since that may a bearing on whether or not they are taxable to the estate. List the source of the funds. To further complicate matters. List each parcel by the commonly used address. fire.Retirement Planning  If sale of the sound odd lots would involve irritating capital gains. has a telephone number listed in the local directory. Give the name of each bank. If any of the accounts are joint accounts. Also state who has access to the safe-deposit box. but it is rarely done. which provides immediate funds for those listed beneficiaries. List each item. If a mortgage is owed. Of course. (2) Stocks and bonds. state that also. Although the testator clearly views one place as home. and perhaps they have even opened up a local checking account in the town where the winter home is located.

names of persons who jointly own the assets with you. If a person has been given the right to designate a beneficiary under another person's will. Take off items that have been sold or lost or simply given away. what your percentage of ownership is. if available. such as the first week of each new year. (6) Other miscellaneous property. household furnishings. Describe the property and ventures of any kind that may not be listed elsewhere. If income is being taken. Consumers may purchase forms for their own use. (5) Jointly owned property. antiques. It might include furs. Many professionals. This may already have been listed under the life insurance policies.Retirement Planning  clude policies provided by your employer. (8) Powers of appointment. You will want to list mortgages and other long-term obligations that would still exist at the time of your death. list the company's name and address and the policy number. use specific forms for gathering information. Legal descriptions are helpful. Do not list normal household bills. Add items that have been acquired. do include the information. While these forms often vary in setup. It is not necessary to provide values since generally these items would be appraised at your death. Page 211 . Give the company name. Again. but if not. It is best to specify a time that this is done. however. the company address. the following is an example of a typical one: Chapter 26 – Settling the Estate After the Testator’s Death      United Insurance Educators. (9) Annuities. It is wise to also list what is owed to others. anyway. By specifying a time to yourself to complete the update. and the agent's name and telephone number. the policy number. state the amounts. if available. and where the property is located. such as electricity. this should be identified. do not overlook them. (7) Gifts that must be reported. lodge or the military. If gifts have been made which may be tax deductible to the estate. be sure to list them. including attorneys. jewelry. water or food. List as many details as possible since all may be useful to your executor. Completely spell out what the property is. Inc. This can include virtually anything. and so forth. Every year this list should be updated. it is more likely to be done. union. If past appraisals have been done.

Page 212 .S.Retirement Planning  Chapter 26 – Settling the Estate After the Testator’s Death      The Gross Estate Types of Property: Liquid Assets Cash on hand Checking Accounts Savings Accounts Certificates of Deposit Corporate stocks Mutual funds Corporate bonds U. Treasury Bonds Municipal bonds Receivables Other Quick Assets Real Estate Equity in homes Income-producing realty Unimproved realty Personal Property Automobiles Sporting Equipment Furniture/household Apparel/personal items Art objects Jewelry & Silverware Collections Hobby equipment Types of Property Personal Insurance On Testator's life On lives of others Annuities Employee/Retirement Plans Pension Profit-Sharing Other deferred plans Stock options Savings & thrift plans Keogh retirement plans IRAs Other Husband's: $________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ $ ________ ________ ________ $________ ________ ________ ________ ________ ________ ________ ________ Husband's: $ ________ ________ ________ $ ________ ________ ________ ________ ________ ________ ________ ________ Paid for by Husband: $________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ $ ________ ________ ________ $________ ________ ________ ________ ________ ________ ________ ________ Paid for by Husband: For: ________ ________ ________ For: ________ ________ ________ ________ ________ ________ ________ ________ Paid for by Wife: $________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ $ ________ ________ ________ $________ ________ ________ ________ ________ ________ ________ ________ Paid for by Wife: For: ________ ________ ________ For: ________ ________ ________ ________ ________ ________ ________ ________ Wife's: $________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ $________ ________ ________ $________ ________ ________ ________ ________ ________ ________ ________ Wife's: $________ ________ ________ $ ________ ________ ________ ________ ________ ________ ________ ________ United Insurance Educators. Inc.

Miscellaneous Expectancies Powers of Appointment Interests in trust funds Royalties & Patents Oil. Inc. Page 213 . Funeral & last illness expenses _________ 3. One.Retirement Planning  Chapter 26 – Settling the Estate After the Testator’s Death      Business Interests Sole proprietorships Partnerships Closely Held Corps. Personal & Joint debts & liabilities _________ 2. should be filled out on both husband and wife individually. gas & mineral rights Other Current Value of Total Assets Husband's approximate gross estate (1 & 2): Wife's approximate gross estate (3 & 4): $ ________ ________ ________ $ ________ ________ ________ ________ ________ ________ $ ________ (1) $________ $ ________ ________ ________ $ ________ ________ ________ ________ ________ ________ $ ________ (2) $ ________ ________ ________ $ ________ ________ ________ ________ ________ ________ $ ________ (3) $ ________ ________ ________ $________ ________ ________ ________ ________ ________ $________ (4) $________ $________ $________ Gross Estate Valuation: Types of Property Husband's Paid for by Husband Paid for by Wife Wife's $________ ________ ________ $ _______ Deduct: $_________ 1. Probate & administration expenses Total: Approximate Adjusted Gross Estate (Gross estate less above deductions) $ _________ $ ________ $ _______ Few people seem to realize how important a current balance sheet can be to a professional estate planner. such as illustrated here. United Insurance Educators.

Any special information. Legal domicile (home address). (11) All of the testator's children's full names. Page 214 . anticipating what will need to be appraised. and all other names used in previous marriages. Number four. (13) The full names of the testator's parents and siblings. will greatly aid the executor of the estate. if applicable. List dates of death for any brother or sister that has died. Social Security number. Business or occupation. This will simplify greatly any possible confusion as to whom the testator meant to inherit. it saves the estate money to have it readily available to the executor. the name of the testator's deceased spouse and the date of their death. The testator's date and place of birth. the testator's former employer. Inc. While this information is typically easily attained. If the United Insurance Educators. if applicable. Values will be fixed by the date of the testator's death. The children's married names b. Their current addresses c. such as adoption dates and so forth. If retired. The testator's maiden name. (10) If widowed. (14) Complete names and addresses of any people or organizations that the testator has named in his or her will. their dates of birth and places of birth. It may also be helpful to include: a. Some of the things that should be listed include (but may not be limited to): (1) (2) (3) (4) (5) (6) (7) (8) (9) The testator's full name and any nicknames used. Give both the maiden and married names. Date of the testator's marriage and. Citizenship. Military record. your executor will need to answer many questions concerning you and your affairs. (12) Any illegitimate children the testator may have who might wish to make claims on the estate. the date of divorce.Retirement Planning  Chapter 26 – Settling the Estate After the Testator’s Death      Still under the heading of furnishing information.

so it would be unwise for the testator to state his or her own opinions regarding the value of items in the estate. If the estate is modest in size. suggestions. The IRS generally realizes the time required to liquidate assets to pay federal taxes and allows the estate that time. Number Seven. It allows the executor to do his best to carry out the testator's wishes. that would probably require lots of time to manage. It may involve looking for a lawyer to draw up the documents or a bank to act as a trustee. the testator would be the one most likely to be aware of possible solutions for placement. in which case a "percentage" basis might be the best buy. if a continuing business. a copy of them should be included. for example. Number six. fees of executors and counselors. such as special collections. If past appraisals are available. It simply depends on the complexity of that estate and how well planned it was at the point of death. they should be listed by name and address. In many states. Inc. While it is true that you get what you pay for. it is just as true that there are a million ways to put yourself in a position to be overcharged. Either way can benefit the estate. will especially affect estates over $600. computed in respect to each estate. If the testator is aware of specialized appraisers. it would be wise to buy a life insurance policy to provide liquid funds at death. Telephone numbers would also be useful to the executor. The tax appraiser will want to use the highest opinion available. for example. On the other hand. For estates that are well thought out and require little management. If a person realizes their estate will have this problem. liquidity. Life insurance policies. such as household pets. as well as other debts and expenses. are generally one of two basic philosophies when figuring fees: (A) On a percentage basis. is generally supplied for the benefit of the executor of the estate. is included in the estate. United Insurance Educators. Estates that are "land poor" may run into problems if the land is not easily sold. Page 215 .Retirement Planning  testator happens to have unusual items. Chapter 26 – Settling the Estate After the Testator’s Death      Number five. The estate will not benefit from over inflated opinions. Price shopping is commonly overlooked by the testator. or (B) On a fair value of services rendered. easily sellable securities or savings accounts may be used to supply these funds.000 in value. If it concerns special situations. Some liquidity will be required for federal taxes. yet it is a wise thing to do whether utilizing a will or a living trust or trustees. try to give as much information as possible. legal time should be at a minimum. this will also be true for state death taxes. a "fair value of services rendered" would be the best financial choice.

you will save yourself money by having everything laid out on paper beforehand. since he or she is probably in the best position to know the proper avenues to take. and the legal wording. The more you do. if possible. Some attorneys now use some type of form or questionnaire to gather complete information from their clients.Retirement Planning  Chapter 26 – Settling the Estate After the Testator’s Death      When seeking legal advice. bring in property tax statements and. This would include all children. etc. even if no actual inheritance will be involved. If property is involved. trustees and so forth. What the body of the will contains is up to the testator. that should be up to the attorney. United Insurance Educators. A person should place in their attorney's hands: (1) A complete list of their assets (2) Full personal data (3) An approximation of personal obligations (4) The roster of people and organizations that will be named in the will or trust. Be prepared with FULL names and addresses. (5) An outline of objectives as to each beneficiary. the less the lawyer will need to do (at a price for his or her time). legal descriptions. Page 216 . Anything you do to be prepared will save time and money. since he or she will have a more complete base of information from which to work. legal or illegitimate. Inc. the tax implications. As to the technicalities. addresses. Besides saving time and money. Include account numbers. Include all who will need to be mentioned. including zip codes. chances are the lawyer will also be able to do a better job with the will. Know ahead of time who you wish to have for beneficiaries.

The New American Webster Dictionary While the study of ethics is actually a complex matter with many shades of right and wrong. When it comes to insurance ethics. When ethical behavior is not deemed important by our immediate bosses and peers. Originally. as individuals. (2) accepted rules of conduct. if the agency in which we were trained stressed SALES. a concentration camp. pertinent to morals. We cannot allow others to set them for us. Regardless of our personal circumstances. Inc. Ethics help us to set goals that will bring about pride in ourselves and in our achievements. no matter how well intentioned those "others" may be. Even those in dire circumstances have reported this. It is the abstract view of what is right and wrong. then it is likely that we will have the same attitude in our work and play. As insurance representatives. discovered that even in the brutal confines of Auschwitz. we do not have the answers to the big problems in America. SALES without any other input. people could still choose to have a moral basis to their lives. (1) the principles of honor and morality. ethics involved the questioning of why certain things should be done or thought. Page 217 . we are surrounded by people who are primarily concerned with themselves. (3) the moral principles of an individual. author of Man's Search For Meaning. Much of the issues that America or her citizens wrestle with daily have to do with one simple question: What is the right thing to do? That one simple question does not always have one simple answer. pl. but we are often a mirror of what is going on in our neighborhoods and cities. As individual insurance agents (and as individuals) we must determine our own goals in life. SALES. it is not surprising that problems eventually materialize. ---eth'ic. basically ethics is about an individual's perception of life. Therefore. it is likely that we will lose sight of the role that ethics should play. United Insurance Educators. adj. There may be few absolutes and many varied definitions. Viktor Frankl. If. many of the views of right and wrong are dictated by law or state requirements. it is always possible to have a moral code (a code of ethics).Retirement
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 Eth'ics (eth'iks) n.

we do learn it over our entire lifetime. There are few absolutes and many varied definitions. realizes that their daily actions (and even lack of actions) pronounce who they are perhaps ethical behavior will once again be "in style. but ethics goes beyond what is simply mandated by state or federal authorities. since morality is about the way we live. Controlling a person's behavior may. he would still like to. Even so. Although he does not steal. It is the abstract view of what is right and what is wrong. Technically. In fact. A person who would like to steal may not do so because of the consequences such behavior would bring about.Retirement
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 It has been said that legal authorities may be able to mandate behavior. even if they do not desire to be. Therefore. A wise insurance agent will certainly follow state and federal regulations. Although the states may be able to control an agent's behavior. it is true that most of our ethical behavior is learned during childhood and adolescence. A person who acts ethically. In fact. is it possible to make a GOOD living in commission sales and still be ethical? While the study of ethics is actually a complex matter with many shades of right and wrong. this is probably correct. Page 218 . it is probably not possible to control their code of ethics. however. United Insurance Educators. may eventually soak in the ethical behavior and adopt some of that potential. Ethics define who we are. it could go the other way as well. It is not unusual for an individual to become the person they pretend to be." Defining Ethics What are ethics? Who determines what is or is not ethical behavior? Must religious beliefs be a part of ethical behavior? Is it possible to make your living in commission sales and still be ethical? Perhaps more to the point. The person who is behaving ethically today may not do so tomorrow. basically ethics is about the meaning of life. in any line of work. eventually lead them to an understanding of ethical behavior. To think that a person who is not ethical today will never be ethical is simply wrong. his behavior is controlled. Once a person. but not ethics. but not his ethics. Inc.

From the time that humans began living together. but also everyone around us. Mary Mahowald. such codes of unwritten rules were necessary simply to survive. which means "character. it seems to be a way of avoiding some issues. legal ethics. religious ethics. Plato and later Plato's student. so we must not do so). calls this added ethical stand virtues. Virtues might be referred to as going beyond the call of duty." Ethics involved the questioning of why certain things were done or thought. These choices affect not only ourselves. Some types of ethics tell us what NOT to do (it is wrong to steal.C. as a subject. societies have argued over what is ethical or moral. even though there will be no financial rewards at all. Such moral excellence would include those who have no legal or moral duty to another. in Greece that the philosopher Socrates gave ethics it's formal beginning. Others tell us what we OUGHT to do (be kind to animals). but ethics actually goes beyond what is simply mandated by state or federal governments. Ethics define WHO we are. Because ethics. medical ethics and so forth. For centuries. Ethical neutrality is not possible. further developed Socrates' philosophy of ethics. In today's lawsuit prone society. Rather. Page 219 . Ethics determine how we treat those we know and how we treat strangers. Ethics belong in every profession and are especially needed in some. Inc. there are those ethics or morals that actually take us beyond the basics of moral obligations. It may also be referred to as moral excellence. It refers to the person who gives their life for a stranger or goes to other countries to work for people they do not know. Virtue is going beyond what we are obligated to do. The word "ethics" comes from the Greek word ethos. It might be said that ethics are a recipe for living.Retirement
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 Ethics began as society's code of unwritten rules. These rules established the way in which others were to be treated. a medical ethicist at the University of Chicago. but goes to extremes to help them anyway. Aristotle. A man who tells constant lies is known to others as a "liar" (although studies show that 90 percent United Insurance Educators. Some say that their thoughts on ethics was so profound and complete that nothing new has been said since Plato or Aristotle on this subject. It is part of everything we do and everything we say. is so broad and complex. the wise insurance agent or brokerage will make a point of following state regulations. Ethics is never a separate part of our lives. professional ethics. Ethics determine our actions in financial and public matters. In addition. We will explore the role ethics plays as it relates to the insurance field and to personal actions in general. Our code of ethics gives each of us our personal rules and values that determine the choices we make each day of our lives. It was during the fifth century B. it may sometimes be divided into sections such as personal ethics. Socrates' student.

the father of communism. children from those homes are very likely to act in the same manner. Eventually. good or bad. he explained. each of us has shades of each. Children also tend to imitate the behavior they see. As a result. In homes where prejudice. Children learn from what they see. but the firm would United Insurance Educators. especially if it is coming from the adults that are close to them. Page 220 . if we have been poorly educated on ethical conduct. sexism and other immoral codes are practiced by the parents. Dan knew very little about living trusts. In fact. he ended up working for a firm that sold Living Trusts (primarily to retired individuals).Retirement
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 of us lie regularly). Unfortunately. when Mahatma Gandhi. An insurance agent who is unethical will also earn a reputation for such. the Bible sets down many prescriptions for ethical behavior. A man who steals is known to others as a "thief". Inc. we might be faced not only with leaning the basics of ethical behavior. EXAMPLE #1 Dan. Having a wife and small children. he sought out a company that might be able to offer him more financially. was asked why he had changed his views over the course of a week. parents who set good moral or ethical examples are teaching their children to do the same. Even so. tend to be very good at seeing adults as they really are. called religion the "opiate of the masses. We continue to learn as new ideas are presented and new experiences encountered. The Bible is probably the best-known source of sound ethical advice. Children. racism. Let us look at some examples of behavior and then examine each situation for what may or may not be perceived as ethical behavior. was having a hard time selling enough insurance to make ends meet. "Because I have learned something since last week. India's beloved leader in the struggle for independence from England. Karl Marx. not as I do. Unfortunately the reverse is also true." Even Sigmund Freud. that the children will do as they do. but unlearning bad conduct as well. We have all heard adults say "Do as I say. like animals. moral or ethical conduct is continually learned. Children learn from what they see and hear. an insurance agent. such as parents." It is doubtful that any person is only good or only bad." The chances are. regarded organized religion as institutional "wish-fulfillment. Susan Neiburg Terkel reported in her book titled Ethics. not all have agreed with the concepts stated there. Many Americans at least partially arrive at their code of ethics through their religion. however. the father of modern psychology." As we stated.

The instructor of the class encouraged the agents to also present them to their present insurance clients. The people put whatever they have into it and when they die the trust distributes it." Joe: "There's not much to them. The money is needed. Dan: "Joe." Dan: "I don't mean to sound stupid. is he free from any ethical liability? Is it really Dan's obligation to further investigate the validity of Living Trusts? Is it Dan's responsibility to understand where a United Insurance Educators. Inc. Another agent in the training class seemed to know a great deal about trusts." Joe (laughing): "Don't believe everything you hear. Are you biting on their pitch?" Dan: "Do you mean am I going to sign on?" Joe: "Yeah. so after the training class Dan made a point to talk to Joe. Dan has a fair amount of clients and has mentally calculated how much money he could bring in if only a fifth of his clients purchased the trusts." Dan now realizes that something must have been left out of the training class. I've got to go.Retirement
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 pay him $300 to $600 for every trust he brought in. Page 221 . however. but isn't that exactly what a will does? They said in the class that these trusts will protect the people from probate and taxation. at least not those that you'll be selling. Where does "ethics" fit in here? As long as Dan states the presentation as it was taught to him. you seem to know a lot about these Trusts. Dan felt that he would probably learn all that he needed to know to feel right about selling the Living Trusts. so he decides to go ahead and market the Living Trusts. The leads will be good for other things if nothing else. Look. What the training session actually did was lay out the techniques to get people to buy. His pay depended upon what he charged his clients. In his first training session. Aren't you going to?" Joe: "Maybe. Dan is now visualizing how he will spend the money. are you going to pitch these Trusts?" Dan: "I guess so.

" Dorothy: "I know your boys are honest. in effect. even though the cost seems high to you." Mr. James. You just don't know my family or me. an insurance agent. who will pay for the costs? United Insurance Educators. They simply cannot do it. Dorothy was having a difficult time getting a 76-year-old man and his 73-year-old wife to realize the need for such a policy. She knows that the product is a good one. My boys have already told us that they will take care of us and I believe they are honest. Your boys. I know this is probably a good company. Did that several years ago. You are honest and I'm sure they learned it from you and Mrs. Recently. Addie [his wife] will take care of me and if she gets sick. If both of us get sick. Won't it be great having your daughter-in-law give you a bath? How will you feel when you hear your sons arguing in the next room about whose turn it is to stay all night? You've given your home to the oldest son. I've already put the place here in the oldest boy's name. already paid him to do so. too. and perhaps even their wives. I guess the other boys will feel it is his responsibility to do the primary care. sells long-term care policies. Page 222 . What if his wife becomes angry about the time he has to spend taking care of you? As your medical condition worsens and he becomes tired of taking care of you. having investigated the company and it's policies completely. I am not going to go to any nursing home and neither is my wife. Since Dorothy's own mother is in a nursing home. James. Inc. James: "Look. If I get sick. The point is. It makes no difference at all that they have told you they would be willing to take care of you. After all. You've already told me that neither your boys nor their wives are medically trained. we are not talking about honesty. I'm sure they'll try to at first. our boys will step in. I will take care of her. We are talking about health issues. The thing is. You seem honest to me and I'm sure you believe in what you are doing.Retirement
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 trust does or does not fit? Or is it the responsibility of the firm who trained Dan to make that determination? EXAMPLE #2 Dorothy. Oh. Dorothy: "Mr. she certainly understands very well that such policies are needed. Sometimes Dorothy does get frustrated because so few people seem to understand the need of having such a policy. you have. the cost will be even higher if you or your wife go to a nursing home. will take turns coming by your home to do all the necessary things.

The point is. Is Dorothy "brow-beating" Mr. He is behind in many of his financial obligations. Taking out a Medicare supplemental insurance plan can be a confusing matter." Myrtle Todd: "Actually. so I know you must have lots of questions. Inc. I believe I understand Medicare fairly well. is it ever ethical to treat others in the manner she treated Mr. Why should we pay for two more when you could have averted the entire situation? Mr. and Mrs. it is a health care plan. you called the right person.Retirement
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 The taxpayers? We already have enough to pay for. Since I am a specialist in the field. A Medigap policy supplements Medicare. I just got your name out of the telephone book because I am shopping around. I have been reading the information sent out by our state insurance department." Mike: "I appreciate your call." Dorothy appears to be very tough. Federal legislation standardized Medigap policies in 1992. Mike's state also set limits on the commission earned by Medigap salespeople. sells Medigap policies. The ethical question here has to do with that toughness. As you know. James. This is about being a responsible person. James? EXAMPLE #3 Mike. he has an appointment with a woman who is just turning 65 years old next month. Page 223 . and Mrs. I noticed that your office is fairly close to me. of course. so to speak. Myrtle Todd: "Thank you for coming by Mike. is such behavior ethical? Even if Dorothy believes in what she is selling. which drastically cut into his yearly income. James? It is possible that her verbal attack may simply make them angry or it may push them into buying. This is about taking care of yourself. She knows she will need to get a Medigap policy (Medicare supplemental plan) before her birthday arrives. Mike has been fighting to keep the wolves from his door. Since the mandated cut in his commissions. this is not about who you are now. On this day. but I don't believe I can afford United Insurance Educators. but rather who you will be when illness arrives. It would be nice to get one of the plans with prescriptions. Nor is it about what your sons have promised you. an insurance agent. I already know I want Plan F.

Mike does send in the balance of the year the next month. she will have problems with her claims. but it is just a matter of time. Eventually. you want an agent in your area. Can I have the payments taken out of my bank like my medical plan is currently done?" Mike: "Yes.when you are sick. she is lucky. Your Medicare starts soon and I don't want your policy delayed. when you have a major illness. My neighbor. Mike feels confident that he will be able to make up the balance for Mrs. I haven't." Myrtle Todd: "Perhaps you are right. It is much better to pay for a year at a time. the thing is. you could but I don't recommend it." Mike: "Well. Betty. you are also on your own when it comes to any claim problems. My medical has been through my husband's work and they always handled everything. Mrs. You'll save money and you won't have to worry about mix-ups." Myrtle Todd writes out the check for the year and asks: "Who do I make this out to?" Mike: "Make it out to me so I can make sure this is done right away. so she bought it after they came out with their Plan F. Since United Insurance Educators. he deposits the check into his account and sends in a quarterly payment to the company. Inc. If your neighbor has not had any problems. If you have any problems." Mike: "Well. Todd within the next month when he receives his renewal check. Otherwise. Have you ever handled health care claims?" Myrtle Todd: "No. I never was very good at such things and you are close by. AARP is a mail-order plan so they do not have to abide by our state's legislation." Mike: "When did she get her AARP? Was it before 1992?" Myrtle Todd: "No. In fact. they simply cannot help you." Because Mike is having financial problems.Retirement
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 that. Todd. you are going to be swamped with paperwork at the worst possible time . unless you want to learn how to do claim work. Because there are no representatives here. Page 224 . has Plan F with AARP and she seems very happy with it. she is only a year older than I.

It is true that Mike did square everything financially. it is certainly illegal to deposit insurance funds into a personal account. has just returned to the agency she works for. The main one we are going to focus on is the depositing of the check into Mike's personal account." Since Shirley does not wish to drive back to her client's house. each for their own part in it? United Insurance Educators. Jerry. Everyone does it. would we suggest to our child that he or she forge our own signature or that of a teacher? If the insurance agency truly does know that its agents are forging signatures on insurance forms. is Jerry behaving unethically for suggesting that Shirley forge the client's signature. While going through the paperwork. neither Mrs. Even this company knows that. Jerry: "It's easy.Retirement
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 he was able to do so. Any agent reading this probably thought of many things that could have gone wrong that would have caused Mike multiple problems (not only with the state regulatory agency. She is completing her paperwork for the sales she has made that week. so Mrs. a coworker. suggests that she simply forge the signature. as well). but the question goes deeper than that. is that agency then acting in an unethical manner? Is the agency setting the scene for other unethical behaviors? Looking at the conversation between Jerry and Shirley. The ethical question is simple: Is it ever acceptable to forge another person's signature? This would be an ethical question for anyone in any circumstance. an insurance agent. but with the insurance company. As a parent. not just an insurance industry question. Inc. The ethical question is simple: Is it ever OK to deposit funds into a personal account or commingle funds? We know that regulatory agencies say it is illegal to commingle funds. This example has several potential questions on ethical behavior. However. or is Shirley the unethical person for acting upon his suggestion? Or are both guilty of unethical behavior. Page 225 . she does as Jerry suggests. Just put it against the windowpane over the top of another signature. she realizes that she forgot to get a signature on a replacement form. Is it ethical to do so even when there are extenuating circumstances? EXAMPLE #4 Shirley. Todd nor the insurance company ever find out what Mike did. Todd was never actually injured by his actions.

It should be noted that no single act defines our personal character. does this free us from our ethical duty of paying taxes? A Matter of Character Ethics are not always merely a matter of how we think and act. Inc. A bad person can do something kind for another and yet remain basically a bad person. So many things come together to form our character that all must be taken into consideration. is this behavior ethical? In the past year. Jean states that they use the entire garage area plus an upstairs bedroom for their office in order to get a larger deduction. They jointly own their own agency and they work out of their home. does our responsibility to pay taxes void itself of ethical concepts? In other words. We. for each path chosen.Retirement
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 EXAMPLE #5 Jean and George Wren are insurance agents. principles. our ethical guidelines. are of course shouldering the burden for the unethical behavior of our politicians. In addition. They try to show less income than actually exists. plus many other factors all contribute. A good person can do something unkind. Part of our character is. self-serving political ways. That one action does not define our total character just as one kind act does not build our entire character. or destroy our own character. Character is more a matter of adding and subtracting our actions and thoughts. United Insurance Educators. we alone must take responsibility. They use part of their garage that George converted into a room as their office. Page 226 . the American people have become painfully aware of the excessive spending habits and abuses of our politicians. Often it is also a matter of character. as taxpayers. When they do their year-end taxes. Each of us has likely participated in an act that was wrong. Even so. Knowing that our tax dollars are used in greedy. of course. change. There is little doubt that each of us are influenced by others. emotions." An action that is not consistent with normal behavior is not likely to form or change the character of a person (although that single action can affect another in either a positive or negative fashion). since we are aware that our tax dollars are being wasted. Jean and George "hide" income. Each of us has the ability to build. yet still be a good person. when ever possible. We refer to these isolated deeds as being "out of character. Values. Since so many people try to lessen their payments to the IRS.

the reason we need to do so goes beyond that. Every type of profession tends to have an informal code of ethics. is likely a selfish act with personal recognition sought. as we United Insurance Educators. Inc. When we do something for another. It is a means of measuring performance and acknowledging outstanding individuals. without any self-interest involved. regardless of our occupation. A truly ethical person realizes that their behavior is their loudest statement about themselves and those they associate with. Only behavior. To help others. it is also about others. It is very difficult to mandate ethics. and loudly proclaim the deed. The true giver helps others quietly. that add an element of trust to many industries. anyone in an occupation that has a "public interest" is especially faced with ethical issues. rather than true giving. it is feeling a commitment to each client. It would be hard to imagine doing business with anyone that we knew to be unethical. Making ethical decisions addresses four basic issues: (1) Is it possible to teach ethical behavior? (2) What is the scope of ethics? (3) What does it take to be a moral person? (4) What are a person’s responsibilities to other moral persons? There is no doubt that each of us.Retirement
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 Why Be Ethical? Probably every religion stresses our need to give to the poor. which may sometimes be more understood than written. Can you imagine turning over the control of your financial affairs to an attorney that had been convicted of stealing from his clients? Would you buy a car from a person who had knowingly lied to others about the cars he represented? Would you deal with an insurance agent who had repeatedly misrepresented the products he or she sold? Ethics are the only element. faces ethical issues on a daily basis." Ethics are standards to which an insurance agent or broker must aspire to. What does this have to do with ethical behavior? Ethics is not entirely about oneself. but rather what he or she understands. Insurance has a "public interest. While it is certainly true that the poor do need help. Ethics are a means of creating standards within any given profession to upgrade it and give it honor. Page 227 . However. Ethics are often a means of providing priorities and building traditions based on integrity. our personal gain is often much higher than any gain realized by others. other than legal mandates. It is not so much what one knows that makes an individual ethical.

the person must want to achieve the goal at hand. depends upon multiple factors. Ethical questions often have multiple answers. then perhaps it will not be possible to teach ethical behavior. "It just doesn't feel right. such as How much should I give to the poor? Is it wrong for me to take drugs? Should I report someone who is cheating (whether that happens to be in school or elsewhere)? These types of ethical questions are all around us. for example. While this course cannot instill ethics in anyone who has none. but sharing begins as children. If however. each of us faces ethical issues each day. then we could also state that it must be unethical as well. If other goals are more important to the individual. it may provide the tools for determining the more complex issues. It should be noted that different conclusions may be reached to the same ethical question. We have all said or heard someone else say. decisions may be made on the basis of reason. Some are very simplistic in nature while others are complex and may have many sides (and many correct answers) to them. Even if we do not distinctly remember being taught that a particular action is either right or wrong. We face issues that are personal. By using basic concepts and theories and by having an appreciation of what constitutes an ethical solution." That feeling of right and wrong is probably the result of our childhood upbringing. we learn to share in numerous ways. of course. but it is. all of which may be correct. Sometimes the answers can be found in our legal system. If a person is ethical. ethics may be taught. Inc. It does not mean that one solution is right and the other wrong. As adults. as individuals. If our state or federal government says commingling funds is illegal. First of all. ethical behavior is important to the individual. does the person desire to be ethical? As with all things. Sharing is the opposite of greed. The shift from securing our own interests to sacrificing on behalf of others is an essential part of what is United Insurance Educators. We asked the question: Is it possible to teach ethical behavior? This. even if other goals are also sought. some decisions may be based solely on facts. Probably few parents think of this as "ethics". No matter what our profession may be. Sometimes. Many ethical questions involve multiple hues. One of the first lessons taught to children by their parents is sharing. may actually be mandated.Retirement
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 previously stated. we have received such teachings. somewhere in our upbringing or past experiences. that is something within themselves that simply adds to their trustworthiness. while others may be based less on facts and more on emotional factors (or what simply feels right). Page 228 . Some types of ethical or moral questions can be directed to our religious institutions for support in determining the right answer. determining what is ethical is simply a matter of what feels right emotionally.

each person receives what they have given. she will not share her toys with you. the insurance agent who is not ethical will. Some who reject the idea of other's interests and desires are egoists. desires and needs of others. Our interests are tied to the interests of others. talking too much about oneself or conceit. however. The selfish person cannot routinely make such moral decisions. It is necessary to understand that one of the general features of taking an ethical point of view is a willingness to take into account the interests. desires and needs. the best salespeople do not need to behave unethically because they have mastered their trade through the development of communication skills and professional training. We are better able to achieve our goals when we recognize the goals and interests of others. most people believe that. since it does have a bearing on their theories of ethical behavior. feed and house ourselves and our families). Not everyone believes it is in their own self-interest to be ethical in their behavior. Rather it attempts to explain why people behave in certain ways. While the con artist may not believe this and some unethical people do seem to prove the point. or perhaps more correctly will not make such decisions. Page 229 .Retirement
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 meant by "ethical decision making. Even commission salespeople are able to make a very good living while still maintaining ethical behavior. In fact. Plato argued that immorality (unethical behavior) is ultimately self-defeating. When a child asks his or her parent "Why do I have to share my toys?" the reply may be "Because if you don't share your toys with your sister. find making a living impossible because no client will wish to deal with him. The Bible says we will reap what we sow. Webster's dictionary defines egoism as the doctrine that self-interest is the basis of all behavior whereas egotism is the habit of being too self absorbed. United Insurance Educators. Psychological egoism is not an ethical theory since it does not tell people outright how to behave. Do not confuse this with egotism. Psychological egoism maintains that people are always motivated to act in their own perceived best interest. These people make poor egoists. most people would agree that it is easier to be happy with ourselves when we feel we have done the right thing. taking our own interests into account need not mean making unethical or immoral decisions regarding others. Ethical theorists consider this theory. at some point in time. Inc. An egotist is a person who is self-absorbed or stuck on themselves. at some point. Just as the man who is known as a liar or a thief will find others unwilling to trust him. The choice to make a sale and earn a commission in any way necessary rather than sacrificing the sale in behalf of honesty is an ethical decision. While this is certainly true to a point (we must cloth." This may especially come into play for insurance agents. Even if we do not get back what we give others (whether that be good or bad)." This simple logical answer teaches the child a valuable lesson. A person may argue that it is necessary to look out for one's own interests.

That is certainly an attempt to pursue our own self-interest. This is not likely. This is where the greater interest comes into play. not a theory. an example of this belief. whereas ethical egoism is a theory of behavior. ethical egoism can be substantiated by those who prescribe to it. nor does the seller worry about the buyer when selling high. That is how laws manage to control behavior even if they are unable to control ethics. The passenger who survived the plane crash in the Potomac River only to drown because he repeatedly handed the rescue rope to others could not possibly have been acting in his own behalf. If we were to fully believe in psychological egoism. Our American economy is. the interests of individuals come into conflict with others whose interests are different. The English philosopher. He felt that people. In many ways. Perhaps it could be said that he was not being heroic so much as he was avoiding guilt which he would have felt had he left the others behind. created good for society as a whole. since those he saved were strangers to him. it is in the individual's best interest to follow the established laws because the fines or penalties imposed are not desired. Smith felt that economic conditions were created and expanded when people acted in their own behalf. It is unlikely that the buyer worries about the seller when buying low. Inc. An ethical egoist argues that people should act in their best interest at all times because it is good for the general economy (providing industry and jobs. they are often meshed together by writers and speakers. Traditionally named "ethical egoism. however. Under the theories of ethical egoism. for instance). Even though this may be an excellent example of ethical egoism. while being interested in their own needs and desires. This points out that this theory has positive dimensions to it despite the selfish basis. which one may wish to avoid. Individual self-interest is at work. A political economist. in many ways. There is more day-to-day heroism than one might realize. Page 230 . it tends to be both orderly and productive to our society. Even while pursuing our own personal interests. was a well-known believer in ethical egoism. Of course. many of the acts of heroism that we see could not be explained. the woman who gives her last dollars United Insurance Educators. Thomas Hobbes." it maintains that people ought to act in their own perceived best interest. which states that humans automatically act in their own behalf. it is possible for those interests to be swayed or checked by the interests of others because of possible consequences. believed in ethical egoism. Adam Smith. Psychological egoism is an explanation of behavior. In the marketplace we all try to buy low and sell high.Retirement
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 Another version of egoism is a genuine ethical theory. Although ethical egoism and psychological egoism are separate and distinct. Such simple things as the child who shares his lunch with another student.

This is not surprising since a 25 year old is more likely to have the ability to make sound judgments in comparison to a 75-year-old person. according to Stephan R. If unfair advantage (a con job) exists. Kinder have jointly United Insurance Educators.Retirement
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 to a homeless person. On the other hand. the man who donates his only day off for a food drive are all acts of kindness that consider the needs and desires of others. As a result. Domini and Peter K. one might be surprised at the extent to which it could be taken. That would typically be older people. Therefore. An agent who has never considered ethical behavior might suddenly begin to do so if the agency where he or she works begins a strong ethics campaign." Sometimes. however. If a 25 year old were taken advantage of. Leimber of the American College where he is a professor of taxation and estate planning. which may be mandated by law on either a local or federal level. The insurance industry that deals with senior products is one section that has received bad publicity fairly often. Usually what we find is not an industry as a whole without ethics. In many industries. publicity is sure to follow. Page 231 . Part of this has to do with the age of the victims. We should also ask ourselves why society seems to consider it less offensive to take advantage of a 25-year-old person. Amy L. It was the potential for abuse of power that provided a set of rules for what is commonly called "ethical behavior. If a salesperson (in whatever industry) is greedy and unethical. Also. Question number two asked: What is the scope of ethics? This is a massive question that could be carried to great depths if we choose to. a feeling of ethical standards must exist. Parts of the insurance industry have been labeled (often unfairly) as lacking ethical standards. This still brings us back to the basic question: Is it possible to teach ethical behavior to others? There is no clear answer. If a 75 year old is taken advantage of. is that power must be exercised in the interest of the clients who seek the professionals out and may not be exercised solely in the best interest of the professionals themselves. One thing is certain: the effort must be made to emphasize ethical behavior because there will always be those agents who will respond favorably to such efforts. the professionals have knowledge that the general population does not have. our older population controls most of the nation's wealth. Inc. he or she is most likely to hit those with money. including the insurance industry. many would think he was simply stupid or uneducated to have allowed it. but rather some individuals who have received much publicity. an agent might continue to act unethically even if threats are made to recall his or her license to sell insurance. The premise upon which practical ethics must be based. ethics are written standards. why does it matter how old or young the victim is? When we look at what the scope of ethics is or could be. those individuals who seek out the professionals must rely upon their honesty and integrity.

The ethical person realizes this possibility. Without a standard of values. should he or she invest in any type of investment that is detrimental to the environment? Sometimes. that greeted my opening words: 'Everything you've heard today is wrong. At some level. In a book titled "Everything You've Heard Is Wrong" Tony Campolo recites this experience: "I had spent the afternoon at a sales conference sponsored by a large insurance corporation. Mr. if not the shock. our religious background may set the standard of values by which we make our choices. people or cultures do not agree on what is ethical behavior. Surefire sales pitches were demonstrated that. if an agent were an animal activist. Campolo feels manipulating people shows a lack of respect for who they are. push the right emotional buttons. What one culture or society may consider ethical another may not. For example.Retirement
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 written a book called "Ethical Investing" which looks at how our standards may even be brought into the field of investing. United Insurance Educators. In choosing his or her actions and goals. Page 232 . Since ethics is a code of values to guide man's choices and actions. according to the speakers. You can imagine the surprise. the ethical person will bypass their own greed and do what is perceived as best for the majority of people or best for the person they are dealing with. We often see these differences between religions as well. The executives of the company had brought in an array of top-flight speakers to teach the sales force the most successful techniques for marketing their product. people may disagree on what is and is not ethical. What they heard were the best insights about marketing that the experts in the field of behavioral psychology could provide. Inc. ethical choices would be very hard to make. However we arrive at it. would it be ethical for them to represent companies that use animals in the laboratory or for testing? If a client is an environmentalist. and close the deal. constant alternatives are faced. Every person probably has some degree of greed or selfishness within them.' " He went on to say that he felt people were not things to be manipulated by techniques and sales pitches. It is not always easy to decide which choice is best and ethical. I was supposed to get the audience's juices flowing so that they would be enthused about doing the things they had been taught all day long. an understanding of how others feel determines many of our ethical decisions. at some point. Even within the same culture or society. The presentations were brilliant! It was my task to end the day with a motivational talk that could "psych up" the sales teams to get the job done. The audience listened with riveted attention as they were instructed how to "set up" clients. were certain to elicit the desired responses from even the most reluctant prospects.

who was white and from the South. The "ethical" person simply believes in right and wrong and chooses to do right. Page 233 . Finally Mr. Who we are is defined everywhere we go and in everything we do. Perhaps you cannot have one without the other. we cannot say. did buy life insurance from Mr. valuing others is an aspect of ethical behavior. is probably more simple than any of the other questions asked. it is said. King was killed by an assassin. What does it take to be a moral person?. was not adequately covered by life insurance. he earned a commission. it is necessary to be well prepared and to understand good communication techniques. but what he gave the King family was much more valuable than what he earned. They make no apology for accepting God and religion into their lives and work.Retirement
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 Most salespeople would probably prefer to work with Tony Campolo's perspective. Three questions must be addressed: United Insurance Educators. they do not believe it is necessary to tell half-truths or leave out needed information. The point is. While what is right may not always be agreed upon. In fact. but think how much worse it would have been had his family also been left destitute. he was so concerned that Mr. it would seem that good communication skills would be more important than manipulative skills. He learned that Martin Luther King. that was not an easy task. Whether or not this is true. It is unfortunate that so many people in the insurance sales force perceive their industry to be one of disdain. he was understandably alarmed. but ethical people do certainly seem to place a value on others. It is not possible to be one person off work and another person on work. In the process. As you can imagine. It is often stressful to feel that selling is a combative situation. Martin Luther King. Of course. Insurance is something that people really do need for the security of themselves and their families. his death was difficult on his family. Our third question. Realizing the dangerous job Mr. Only a short time later. Inc. then they are acting ethically. but any job requires certain types of skills. as long as a person acts on what they perceive to be right. King was performing. Ethical people tend to be warm and caring by nature. King to sit down with him and allow him to present the situation as he saw it. The ethical insurance agent does not believe it is necessary to trample their potential clients in order to get the sale. England. Of course. if you are representing a product that you believe in and the consumer needs. Jr. Jr. It is common for ethical people to have some form of religion in their lives. Most people do know right from wrong. An ordinary insurance man went to un-ordinary lengths to help another. In fact. England did succeed in getting Mr. There is a remarkable story about an insurance salesman named Martin England. Mr. England began to try to contact Martin Luther King.

as long as the error is corrected. it should also be pointed out that they are very good at defining who we are. misstating health conditions. Page 234 . True professionals simply feel their integrity is worth more to them than a quick commission. Some may not care about this point. but little is missed. It will also demonstrate to your children what path in life they might take. Most of us probably do wish to be remembered in a favorable light. Sometimes. omitting information for the sake of a sale. The leaders are nearly always United Insurance Educators. then again that reflects on the type of work performed. Sometimes. competency is merely a matter of obtaining required or necessary education within any given industry. Coming to terms with the basic philosophical questions about what we are doing with our lives may be the most practical of all possible ventures. How do we want ourselves defined? Answering such questions cannot be avoided. determines your quality of work. even we are defined by our every day activities. Even when we try to ignore them. and a thief is defined by his actions. the industry itself must remove those within it that are not competent. and so forth. anyone can make an error and that may not be a reflection of their professionalism. If we have children. If an error is made (even an honest error). The question What do I want my legacy to be? refers to how others will remember you. most people would not view themselves as incompetent even if they were. Can you imagine being remembered for the quantity of errors made or for the dishonest and unethical actions taken? Good business requires that you know what you are doing. When we ask What kind of work do you want to do? we are referring to the quality of your work. Forging signatures. Certainly. Children may not voice the image they see. and no effort is made to correct it. Sometimes this involves competency. Inc. but it will be important to those who love you. We do not necessarily have to be a liar or a thief to define ourselves as less than honest. How do you wish your children to view you? What you do in your everyday lives will form their opinions. Many of our political figures are not actually dishonest and yet they are not perceived to be honest either. we are still answering the questions by our actions. It must be realized that the questions are asked in the minds of every person we come in contact with. Of course.Retirement
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 (1) What kind of person am I? (2) What kind of work do I want to do? (3) What do I want my legacy to be? Just as a man is defined by the lies he tells. They look at us and they form opinions to these questions. It is always interesting to note the amount of sincere education acquired by the leaders in an industry.

Jeb Magruder announced that he became involved because he had misplaced his "ethical compass. The truth is. Education and ethics do tend to go together. that one's "ethical compass" cannot only be misplaced. It is also important to know why you are doing what you do. that it is a very fitting way to describe the situation. In our business. if surrounded by only one type of morality. it may end up being connected if the company does not deem ethical behavior important. Inc. How does an agent know. If their agency has lost sight of ethics chances are their agents will not know why they are doing the job (beyond making money for the agency). It should be noted that success and education also go hand-in-hand. there are always those who attend simply because they must. sat in an educational seminar and observed the quantity of others who are obviously not interested in learning. However. for that matter) feels that their role day-in. but set off its direction as well. Few of us could do an outstanding job at something we hated. the job will be done poorly. Constant learning is very important in the insurance industry and those who realize this will be better equipped to do a good job.Retirement
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 more concerned with educating themselves to a greater degree than are those at the bottom. this constitutes unethical behavior. as an insurance agent. We have all known an agent who seemed to just be going through the motions of their job (selling insurance) without any pleasure being received from it. One would not expect an agency or brokerage to be outright unethical. However. it is also the responsibility of the educators to make the seminars interesting. How many times have you. if their agency lacks ethics? It may not always be a black-and-white situation. That is not to say that. day-out is primarily connected to making money without any regard as to how the money is made. In the midst of the Watergate investigation. there must be pleasure derived from what they are doing. Page 235 . It is unlikely that most agents would consider whom they work for to be a matter of ethics. except in the extreme cases. The majority of people do know what is right and what is wrong. Each state has mandated certain procedures that a company must follow which usually prevent such outright un- United Insurance Educators. Whether a person is an insurance agent. For insurance agents. Often the reason an agent is not enjoying their job is simply because they do not understand why they are doing it. ethics may easily take a back seat. Of course. When an agent (or anyone. a plumber or a teacher." Newspaper columnists grabbed on to that phrase and many jokes evolved from it. however. Unless there is some pleasure in the job. Sometimes the decision can only be a personal one if the agency is not noticeably to one extreme or the other. that means it is important to understand why your industry and services are valuable.

she discovers that Matt was correct. it was an easy way to perform below necessary levels of competence. Rather. Another agent in the room." As Joan asks around. It is more likely that the company would ignore unethical or questionable actions of their agents that would. Matt. is sitting in the agent's room of the agency where she works. therefore. While we know Joan was unethical in copying the signature. should she report the behavior to the State Insurance Department and perhaps to the insurance companies as well? Since Joan had developed several good friendships among the agents. If you're not. suggests: "Don't worry about it. Inc. Just put one of his signatures against the window pane and copy over it onto the one you need. so it was not a matter of purposely omitting them. copied signatures where one was forgotten. is the agency condoning it? If Joan had decided against forging the signature would she then be free of any other agent's ethical behavior? Or. but everyone does it. Page 236 . Several agents even mentioned that the management had sometimes been present when signatures were copied. Is Matt unethical for advocating that another person forge a signature? Is the agency unethical by ignoring the behavior going on? By ignoring the behavior. having the knowledge of what was going on. there are additional ethical questions involved. Joan found that nearly every agent intended to get all required signatures.Retirement
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 ethical behavior. then you're the only one who isn't. an insurance agent. They simply left the room and acted as though they had not seen it. would she be unethical to remain at the workplace? Should she go elsewhere to work and leave it at that or. condone such actions. As she is completing her paperwork on the business she has written that week. in the interest of ethical behavior and responsibility. too. she notices that she forgot to have one form signed. Some examples of this might include: EXAMPLE #1 Joan. how does loyalty to those friends and her responsibility to ethical conduct correspond? United Insurance Educators." Joan: "Isn't that illegal?" Matt: "Maybe. Virtually everyone she spoke to about it confirmed that they.

Marge and Herb. there is no doubt that Jerry lied in order to get the sale. an insurance agent. currently has is also with a well-rated company.Retirement
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 As you can see." Jerry: "I don't want to alarm you. the agency that employs him will help them." Jerry: "It might have been at the time. is in the home of a retired couple. So many companies that were previously strong have had problems in the last few years. Most states require that an agent truthfully represent the financial status of an insurance company (theirs and othUnited Insurance Educators. Page 237 . There would be no problem with preexisting conditions. Do your standards of what is ethical apply only to yourself or to others as well? If your views do not correspond to the views of others. is that right?" Marge "Yes." Herb: "That is certainly a surprise. Inc. Luckily both of us do enjoy excellent health. Even so. was Jerry justified in replacing their policy? Jerry is basically a responsible person who will keep in touch with Marge and Herb. The company he gave them was also sound and did give the couple basically the same coverage they already had. Jerry knew that their policy was actually safe because the company was not in any financial trouble. They purchased the policy several years before and have not used it very much since both Marge and Herb have enjoyed good health." Jerry does replace the policy owned by Marge and Herb. ethical behavior is not a simple matter. Even the price was approximately the same. We were told it was an A-rated company when we bought it. Jerry: "You said you haven't used your policy very much. The company that the couple. who is right? EXAMPLE #2 Jerry. If they need any help with claims. Of course. so that was not a concern in the replacement. but the policy you have probably would not have done a very good job. we watch what we eat and we do exercise during the week. He is there representing a Medigap policy from a well-rated company. I'm sure you've seen that in the news. Since he did Marge and Herb no harm. The company is in financial trouble and we don't know yet if it will make it or go under.

has a lead card for a couple regarding life insurance. Jenny does not call. United Insurance Educators. she discovers that they think she is from a company who had called them on the phone and set up an appointment. When she does so." Glenda: "Since you're here. The next morning she calls the company and cancels the appointment using Glenda Maxwell's name. Page 238 . No one seems alarmed at her call to the other company (pretending to be their prospect). however. I thought it was for tonight. Marge and Herb. Inc. we may as well go ahead. I'm so sorry. was what he did serious? Is it ever acceptable to misrepresent another company? If the couple. is this merely an aspect of the selling game. In fact. Aside from that. no longer had an agent representing them or if they never had any contact from their agent. an insurance agent. many agents seemed to appreciate her ingenuity. everyone tells her how lucky she was to happen into the situation. would Jerry be justified in taking over the business? Jerry will keep in contact and will give good service. Jenny notes the company name on the calendar along with their phone number and the agent's name. Since Jenny supplied the couple with the insurance they were looking for.Retirement
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 ers). It really doesn't matter anyway. Ted is in the garage. but stops by their home unannounced. seems alarmed that she did not straighten out the misunderstanding." Jenny: "Oh. including the management staff. No one. having nothing to do with ethics? When Jenny relays what happened at her agency's office. does it matter that they thought she was representing the agency that called them? Should Jenny have given the couple a chance to hear the other agent's presentation which would have allowed them to compare products? Since selling is so competitive. I'll go get him. They sent it in about 60 days earlier. Glenda Maxwell: "Aren't you a day early? I thought we set this up for tomorrow night. so it is likely that what he did was illegal. Can the misrepresentation be rationalized from that standpoint? EXAMPLE #3 Jenny." While Glenda goes to the garage.

Because of his beliefs. John seldom allows his clients to see any investment that he does not agree with. Inc. all of these concepts or questions bring us back to the original point. If his business is down. he will not refer any client to any stock or company that John feels harms the environment. does it only concern Jenny? Is the company she works for responsible for guidance in such situations? Since this is not something that would routinely come up. the client’s. In the case of selling insurance. The company says nothing as long as John brings in a good quantity of business. John's company knows that John will not present any company that he does not agree with.Retirement
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 If there is an ethical question here. it would be very easy to lose track of important ethical elements. is it ethical of the company he works for to only be concerned about it if his sales are down? Could John ethically represent companies that he opposes? Which set of ethics should come first: his own regarding the companies or his responsibility to his clients to allow them to make their own choices? If the company that employs John should require that he show all options to their clients. or the employer's? Different people or groups often do not agree on what is or is not ethical. they do bring up the matter. Who should decide which ethics come first? This question might come under the heading of "What is a person’s responsibility to other moral persons?" Basically. A person must know why they are doing a particular thing. John is a strong believer in environmental issues. if the agent does not understand the reasons why insurance policies are important to own. is John ethically bound to follow his employer’s requirements? Whose ethics come first? John's. Page 239 . The lack of this understanding might eventually force the agent to deal with the basic inquiries that come about when ethics are pushed to the background. Is it ethical of John to only show those companies that he agrees with? Secondly. is there any need for the company to address this situation at all? EXAMPLE #4 John works for a large investment company. United Insurance Educators. however.

It goes beyond the obvious situations (if you smack someone. Since each of us is responsible for our actions. Inc. Since his clients are themselves ethical. there is a reaction. If we act in a responsible manner and a reaction occurs that hurts or offends others. What we did was deliberate and the "reaction" should be no surprise. He would not present any investment to his clients that he did not personally agree with. is John wrong in making such investment choices for them without giving them a chance to bring out their own sets of ethics? What is John's responsibility to other moral or ethical persons? It is unlikely that choosing to be ethical is ever a single choice. Therefore. This is especially true when it involves emotions. they may smack you back). but one will surely follow. More likely. What a person does in every day life is the result of multiple decisions made over their lifetime. In sales. our actions are then directly tied to the reactions that occur. we cannot be responsible for the reactions. it is a continual chain of decisions. In other situations. we often hear the statement "For every action. The reactions may not always be noticeable to others. If we lie in order to obtain money. we will look only at what an ethical person's responsibility is towards other ethical persons. If we assume that our children are basically moral people. Moral or ethical responsibility is not a single choice. If you are rude to a person. Such choices are made daily in many things that we do. then what are our responsibilities towards them? This may also be said of our peers at United Insurance Educators." This is generally true in life as well.Retirement
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 Most people realize that they are responsible for their actions. we may not necessarily have any responsibility. Let us assume that most of John's clients are themselves ethical people. In such situations. we are responsible for the reactions. The irresponsible person will not care what his or her responsibility to other moral people may be. the question then is "Are we responsible for the reactions that follow?" Some reactions are directly tied to our actions and are predictable. Page 240 . Let's look at the example of John. the investment counselor. Those decisions include our perception of who and what we are.

the agents at XYZ Company would be affected by an unethical agent even though the other agents were very ethical in their behavior. In the case of the agency being investigated. or any other aspect involved in the sale. In this context. Opinions will be formed. People believe in the old saying "It only takes one bad apple to spoil the whole barrel. In fact. every agent has a moral or ethical responsibility to all the other agents. While sales are certainly promoted. that agency had a moral or ethical responsibility to all of its agents. it is made clear that the sales must be honestly come by. In this same context. if it hits the evening news or the newspapers.Retirement
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 work. simply being connected by virtue of employment caused credibility problems. It did not matter whether the agency had actually done anything wrong. Training and education is given a top priority by the company as well. how would this affect the other ethical agents? An agent once relayed this true story. XYZ Company. it was distressing to see the agency she worked for on the evening news. they probably feel it will benefit them financially. If the majority of the agents at the firm we work for are ethical people. It would probably be safe to say that XYZ Company has invested not only time. Therefore. Chances are. Page 241 . Inc. do we then owe it to them to also be ethical? Agency XYZ prides itself on being ethical. however. The owners and managers stress such behavior at all company meetings. That certainly does not mean that anyone is actually guilty of doing something wrong. United Insurance Educators. If an unethical agent came to work there and misrepresented the products (theirs or others). She had been building a client base for about two years when the agency she worked for became the subject of an investigation by the state's insurance department." Therefore. Given this scenario. Since they have stressed ethical behavior. one unethical agent will affect how others in the same agency are viewed. each insurance agent and each insurance agency has an ethical responsibility to act in a way that will not cast doubt on themselves or others. Of course. it is the job of the state's insurance department to investigate any complaint. it will not matter whether there is any guilt or not. but money into their company and their sales force. XYZ Company seeks out the very best products available so that their agents can present a superb policy to their potential clients. Since she had always prided herself on giving her best efforts to her job and her clients. It did not matter whether she had done anything wrong. it is also probably safe to say that they do not feel such behavior will hurt them financially. XYZ Company has probably attracted those insurance agents who also give a high priority to ethical behavior.

Objectivist Ethics. This is why it is so important that agencies and management staffs make ethical behavior a priority in the workplace. Those who simply repeat the actions of those around them seldom make an effort to understand their own work. They are the people who are most likely to be copied by others. there are two basic points to becoming the person we choose to be: thinking and actions. most of whom and what we are. Those who use brute force to steal or loot. Probably every person has some "purpose" or goal in life. we are influenced by many things. It all comes back to those who do use logic and conscience choice. We decide who we will be and our actions carry out those thoughts. Even those who survive by using brute force. As a result. "Standard" is an abstract principle that serves as a measurement or gauge to guide a person's choices in his or her achievements or specific goals. Pete was born very poor. Inc. Since reason is man's basic means of survival. it is not surprising that we have the ability to form who and what we are. Since everything man needs has to be discovered by his own mind and produced by his own efforts. Unfortunately. can be important. in effect. and then productively work towards it. Page 242 . but not every one would have a "standard" of life. The goal itself or the achievements obtained become the "purpose". The difference between "standard" and "purpose". we determine ourselves. This is called Objectivist Ethics. spoil the barrel. Certainly. remain the main force. He obtains his accumulating wealth by whatever means necessary.Retirement
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 Ethics In Action Sociologists have contended that determining our own identity is not an easy thing. survive off the thinking efforts and the hard work of others. choose to be so. Even so. however. or by making others their victims in some capacity. as a theory of ethics. To be an ethical person. con men survive off the thinking efforts and hard work of others. In other words. This poverty made such an impact on him in his childhood that he now strives to become wealthy. as used in this context. who is imitated is seldom a concern to these individuals. survive only because someone else was thinking and working productively. we must. Those who do choose to think out their actions and work productively towards a goal still do. holds man's life as the standard of value and his own life as the ethical purpose of every individual man. one bad apple can. If some people do not choose to make any conscience choice. they will develop by imitating and repeating the actions of those around them. through our thinking. Although Pete definitely has a goal or purpose in life (becoming United Insurance Educators. some of which are beyond our control. Many people never realize that we are able to choose who we are by the choices that we make.

his mood instantly changes. sometimes. The other driver whips along side of Tim's car. For example: Tim is driving to work and the traffic is very congested. Perhaps he feels Tim has cut him off. or maybe he is just a sour person in general. we may often feel that we have little control over others. financial turmoil and. Along the way. When no explanation came. his secretary greets him cheerfully. Page 243 . The angry driver also gives Tim a few well-known hand signals. While many of them did not agree on many points. her stress mounted. his mood is bright and he is humming along with the radio. What does Ethics in Action mean? Our history is full of wise men who wrote about the philosophies of life. This is true to a certain extent. Pete would be surprised (and perhaps even laugh) if someone told him that ethics are a part of finding happiness. the man he pulls in front of becomes angry. There is little doubt that what we do on a day-in. the driver is angry. but we do actually have more control than we might realize. she expected some explanation from Tim about what she had done that was upsetting to him. He has not thought out the goals he has established. most did agree on one: lack of ethics promotes disorganization. He no longer hums with the radio. For whatever reason. Others also impact us in the same manner. but Jane was still affected. As individuals. Even so. his secretary. but he does not understand why he is doing it. however. Had she forgotten to do something yesterday? Jane spent her morning feeling worried and stressed. rolls his window down and shouts angry explosive words full of the four-letter type. Pete knows what he is doing. even the demise of governments. Tim's response is short and bleak. As he merges into another lane in anticipation of an upcoming freeway exit. Although Tim did not feel that he had done anything wrong. Inc. By the afternoon. he does not have any standards. There is little doubt among those who know Pete that he will become very rich. That Chapter
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 United Insurance Educators. As the day progressed. day-out basis affects everyone we come in contact with. Although he did not actually say anything bad to Jane. Tim had forgotten about the driving incident (or simply put it behind him). When he arrives at work. she felt that he must be angry with her for some reason.Retirement
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The question becomes: of value to whom and for what? To be selfish is to be motivated by one's own self-interests. Page 244 . It was just one more incident that confirmed to Susan that she would never amount to much. the clerk miscounted her change. Jane stopped to get her car filled with gas. After Jane left. It was obvious to her that Jane thought she was trying to cheat her by keeping an extra dollar. but she did feel stupid and inferior. Inc. Jane began to wonder if Tim was simply unhappy with her work in general. he or she must have a standard of values. they must United Insurance Educators.Retirement
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 evening on her way home. she curtly pointed out the error to the clerk. In choosing one's own actions and even goals. Ethical behavior can also be connected to how we treat others. Susan never became angry. we must face constant alternatives. What is the end goal or purpose? Who is the perceived or intended beneficiary of the action: others or ourselves? The term "value" presupposes that the standard used has a value to someone. felt humiliated. That night she barely slept. On her way to work the next morning. Even such things as the manner in which we speak to others are a part of our daily alternatives. Human Nature Some have argued than man's nature is to be selfish. When she handed the clerk a twenty-dollar bill. the clerk. When Jane noticed she was short a dollar. Are these examples of how we affect others an extension of our code of ethics? Often we forget that ethical behavior is not only connected to such things as paying our taxes fairly. Insurance agents are often accused of this. The term "value" presupposes an answer to the question: of value to whom or for what? This is where an inborn selfishness might be considered. Susan figured she would probably always work for minimum wages because she simply did not have the ability to do any better. For an individual to center on their own self-interests. In order for a person to choose various alternatives on a daily basis. Ethics is a code of values to guide man's choices and actions. Susan. following the laws or telling the truth.

When a person knows some- United Insurance Educators. Soon after he became an agent. Selfishness is seldom a matter of emotions or feelings. He has spent time thinking out his approach to sales. His initial intent was simply to bring in new business in the annuity field. Of course. but it should also be noted that ethics IS hard work. he does not miss a chance to replace business (his own or someone else's) anytime the chance arises. Who among us would not enjoy an extra $5 (even if it were not due us)? If our boss thought we were the one who did something wonderful. Inc. rather they tend to be thought out actions. It might be argued that specific training might have made a difference in how Nathan looked at his sales practices. Because a selfish person chooses his goals by the guidance of reason. That is not to say that selfish people are not emotional in nature because they may be. If we feel strongly about something that no one else seems to. Most of what Nathan knows. Nathan. it is hard to believe that selfishness is an accident (or a lack of training in the case of insurance salespeople). Recently. he was told that replacing his own business could bring added advantages in the commissions earned. has been in the business for only a year. his sales practices are well thought out. What we are saying is that a selfish person determines their goals on a thinking or reasoning basis. but Nathan learned how to justify not only the penalties. Even so. Nathan realized that annuity sales could bring in good commissions. that is precisely what gets "followers" in trouble. Nathan received very little training from the agency where he works. Although Nathan continues to work to build up his clientele size.Retirement
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 have considered what constitutes their own self-interests and how to achieve it. from an ethical context. However. After awhile. We have been talking about ethics in the workplace. he has been able to build up a fairly good-sized clientele in the health market. but the new surrender period as well. who would not like to take that credit. Page 245 . he found that it was not particularly difficult to replace annuities. an insurance agent. the client generally had early surrender penalties. it is very easy to keep quiet. The public standpoint is often overlooked. however. even if it belonged to someone else? Being ethical can be very difficult when being unethical is sometimes more rewarding from a financial or public standpoint. he learned on his own or from other agents. In fact. Although Nathan is fairly new to the occupation of insurance. it seems fairly obvious that Nathan is not acting irrationally. Nathan was not above misrepresenting other companies to achieve his goals.

most people that he talked to within the company seemed to be viewing Greg as a potential troublemaker. Over the years Greg simply found that keeping quiet was easier.Retirement
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 thing is not right. After all. as did several other coworkers. Page 246 . One day in the field Greg ran across one of Mike's clients. "I would not have even attempted it. he reasoned. I didn't write it. As time went by Greg found mounting evidence that Mike was "clean sheeting" his applications. it is easy for the individual to simply go along with the group. If she didn't say it. Inc. The company's manager told Greg that it was not his concern. Greg voiced his concern to Mike: "You know those people won't be covered if something comes up. what others did was their own business. "I simply stated what she told me. took much teasing from others regarding his so-called "prudish" outlook. Greg found similar circumstances in Mike's business. does he have more obligations towards Mike or Mike's clients? Greg was still concerned so he went to his manager. Since Greg is not involved and is behaving in a way that he perceives to be ethical personally. Greg works for a very large insurance agency. Mike replied. Greg has always had very strong religious convictions and. The company will simply rescind their policy. does he have any moral obligation to the clients of Mike? Since Greg considers Mike to be a friend. She was an elderly woman who obviously had some mental disorder. Greg asked Mike how he ever got her on that policy. as a young man. She could not remember simple things and was under a doctor's care. Back at the office. which was issued only 6 months previously. Greg had heard United Insurance Educators." On two other occasions." stated Greg." It became obvious to Greg that Mike did not intend to change his practices. as long as he personally held his moral ground." Mike: "You worry too much. but no one else is saying anything. given her medical situation. In fact. Mike was also an agent with the same agency as Greg.

Are Greg's self-interests more important when no one really seems to care other than himself? Is it the management's responsibility (rather than Greg's) to mandate ethics? On the surface it would be easy to say that right is right no matter what. It is likely that most people would. One wonders if those men simply could not find a reason to continue living without an identity they were secure in. if great enough. When retirement comes for those individuals. When success in the workplace means compromises in personal ethics and values that often means we are allowing our employers or coworkers to define who we are. There is a song that states "You've got to stand for something. however. However. it is unlikely that their jobs will completely define who they are. Men seem to be particularly vulnerable to this situation and often die shortly after retirement. Studies have shown that people are more likely to voice ethical behavior than follow it. These individuals spent so much time becoming who they were within their jobs that they neglected to define who they were away from their work. While we hope it will be through retirement. our identity is established by our actions (a liar is known for his lies. an extreme crisis may occur when that work place is no longer there. Our "becoming" is a gradual and natural thing. but not following them. So gradual that people seldom notice what is happening themselves. The truth is. Page 247 .Retirement
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 about "whistle-blowers" and he knew he could be putting himself in a precarious position with the company if he became too vocal. A common pitfall to proclaiming ethics. being an ethical person IS hard work. it may also happen due to layoffs or other means. When we allow ourselves to be defined by whatever we happen to fall into. etc. or you'll fall for anything. a code of ethics must be a daily goal that we deliberately choose to follow. Who we are is established by what we do and even by what we do not do. As we stated. Seldom are we formed by one single experience although one single experience. one can slip into a pattern of behavior that ends up being the ultimate basis by which we are judged by others.). Who we become is a gradual thing. When a person's identity (which includes ethical behavior) is wrapped up primarily in their work. when a person learns to base who they are upon a distinct code of ethics. is that an identity is established. Without even noticing it. that in itself is a choice. can change our direction or focus in life. Therefore. a thief is known for his stealing. United Insurance Educators. We have all known someone who allowed their job to be the ultimate basis for who they were." There is a great deal of truth in that lyric. suggest a different course for others than they would suggest for themselves. Sooner or later all of us will lose our jobs. they have nothing in their life to fill the void left by retirement. Inc.

Since moving across the country to this small rural town." Obviously Betty simply was not a person who would have said: "Everyone is stupid here" even though she was actively thinking it. It could be said that Betty was being an actress.Retirement
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 A sociologist. In commissioned sales this may especially be true. Many take the short cut and. actors and actresses. and just plain hard work. the ideal way to do this is through education. Each of us generally desires to be accepted by those around us. As she is introduced to people. Of course. We want you to feel welcome and enjoy everyone. she finds herself thinking that most seem to be very ignorant individuals. church activities and so forth. Sales meetings often point out that sales people are." Betty: "You have wonderful people in your town. Her past living experiences in the big city did not prepare her for the rural living she is now a part of. Goffman calls those who aspire to be successful at any cost as "con artists" because they do not learn the business skills but rather they develop a way to act and present themselves in a manner. chooses to develop an outward appearance of education and understanding (when none actually exists). In view of this desire. Even such things as politeness may." Betty is at a party given by one of her neighbors. Irving Goffman. in some ways. we tend to put on the "front" that we feel will be accepted by those in our company. as Irving Goffman states. Being fairly new to the neighborhood. Betty knows few people. comes up to Betty and warmly holds her hand: "I hope you are meeting everyone. their children. communication skills. her next-door-neighbor." Sarah: "Don't worry about that. Page 248 . Everyone is talking about weather. Since commissioned salespeople are not guaranteed a paycheck each week. Mr." Betty: "Oh yes. Sarah. in some ways. small school plays. touches upon a troubling image of those who establish themselves only through their work identities. I'm so glad I moved here. Inc. playing a part that was not truthfully she. I just hope I can remember all the names. United Insurance Educators. product understanding. which is convincing to others. be described as "acting. The hostess. The same of course may be said for most people. it becomes very important to present a professional and appealing image to others. Betty has been lonely.

Even so. such as the mild kind Betty told to Sarah. Common ground. too. At the same time. Betty was actually lying about her views on the people in the small rural town. such as sparing another person's feelings. especially in sales. Which is worse? Which set of values or ethics should be followed? It is likely that every person. was the captain of a slave ship. will be caught smacking at the cat that attempts to climb on her lap. Being the person the prospective buyer wants the salesman to be. The song written by John Newton was Amazing Grace. each given person also tends to develop levels of ethics. but it comes down once again to acting. the words of the song gain a greater meaning: United Insurance Educators. Betty would say that she feels it is unethical to be cruel to others. Page 249 . it is likely that the salesperson's true identity will be exposed. are often called "white lies. It is never too late to begin to act in an ethical way. we are told. or "mend our ways" as it is often referred to. Attempts to conceal our true nature will eventually come into the light." It should be pointed out that it is possible to discontinue acting in an unethical manner. How do we draw the line between being a graceful "actress" or "actor" and being a "con artist?" Just as people will have different views on what is and what is not ethical. Death of a Salesman.Retirement
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 Each of us does this on a day-to-day basis because our ethical standards do not allow us to be unkind to others. do not always tell the truth. In fact. It is simply too difficult to keep what was told to who straight. if the buyer would like to travel. Inc. then the salesman loves children. If asked. chances are that we will blow our cover. Willie Loman. he used his experiences to bring this same understanding to many others. believes that the secret of success lies in the salesman's personality. For example." The term likely originated to describe lies which were told with a good intent. sooner or later who we are "will be declared from the rooftops. Sooner or later. is a dangerous part to play. Is there ever such a thing as an ethical lie? In Arthur Miller's famous play. is vital to the sale. The man who weaves a tall tale about his traveling experiences will say something that proves him to be a liar. even the most ethical. the man who wrote one of our most famous songs. Sooner or later. the main character. Knowing this. Lies. The woman who tells the elderly client that she loves cats. Betty would say that lying is unethical and she does not believe in it. As the Bible says. John Newton. This might involve many aspects of the personality. a lie is still a lie. This is especially true in small towns where your clients often know each other and will compare notes. then the salesman either has traveled or wants to travel also. Being an actor or an actress. As he came to realize that slavery was wrong. If the buyer loves children.

Possess integrity and personal courage. (5) Spend less time managing and more time leading. but now I see. Of course honesty and fairness were ranked at the very top. our community and of ourselves. but it does happen). Just as a follower may follow the cheater. Page 250 . he or she may also follow ethical behavior. When you define the "inner" character as someone you are proud of. which will ultimately benefit you in many ways. Chapter
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 Of course. our families and our communities will be affected by our actions and we. They were looking for traits that were valued most by the leaders. must live with who we are yesterday. (8) Accept blame for failures and credit others with success. even on minor issues. Lead by example. Our children will copy us (that's hard to believe during their teen-age years. including financially. These are the other character traits that were listed: (1) Never compromise on matters of principle. today and tomorrow. This will bring self-assurance. Personal integrity radiates confidence and everyone prefers to deal with people who seem confident. (7) Have confidence in yourself and in those around you. our families. (6) Bring out the best in others. (2) Be persistent and never give up. and don't be afraid to take on tough problems despite the risks. In fact.Retirement
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 Amazing grace. then delegate authority and responsibility. and trust others. (3) Have a vision of where you are going and communicate it often. the most important reason to be ethical is not hard to understand. it will show in your daily behavior. including our coworkers. A few years ago. ourselves. which includes your work. the Howard Fischer Associates (one of New York's top executive search firms) conducted a survey of CEOs of the top one hundred companies in the New York area. Inc. We are a reflection of our lives. but stay in touch. United Insurance Educators. how sweet the sound That saved a wretch like me I once was lost But now I'm found Was blind. Hire the best people you can find. set high standards. those around us. (4) Know what you stand for. are affected by our values (ethics). nor standards of excellence.

Often. do we want to make that money at the expense of our families and ourselves? In an effort to become the super-salespeople that the company. So often. Yes. often the "psychology" listed is more apt to resemble manipulation. is really all about. becoming a superb team player. When an agent does understand the role they are playing in another person's life. It seems that psychology is the current rage in selling.Retirement
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 There is much so-called "sound" advice circulating for achieving financial and business success. each method that is promoted contains a certain amount of useful advice because they contain certain truths. Page 251 . these methods. or motivational skills. that before accepting such advice. Very often the why simply is not addressed. Why is an individual selling insurance? Only to make a living? Does the agent understand where his or her products fit? Does the product do an outstanding job of meeting another person's goal? If not. we all want to make a good financial living for our families and ourselves. That might include optimum time usage. Or. also have their limitations. This may especially be true if the concerned salesperson is not the "star" of the agency. individuals lose track of their true goals (such as rearing happy children. or coworkers happy. spouse. one might wish to consider what they actually wish to accomplish during their lifetime. writing a book. Usually. they are more likely to become followers rather than thinkers. Often motivational speakers are concentrating on goals that may actually be secondary to our main desires. whatever they may be. etc. That is precisely why these books tend to sell well. Agents have complained that there seems to be something "missing" even when they have followed the methods precisely.) and become sidetracked with making a living in a manner that makes their boss. When an individual loses track of their own goals. It is true. the satisfaction gained goes hand-in-hand with ethical behavior. When such techniques are encouraged. an individual may feel their job is not secure enough to question the techniques being pushed on them by their employer. aggressive sales techniques. if the salesperson is not the super producer of that agency. We are not here to say whether that advice is accurate or not. Certainly all of these avenues can have advantages in one way or another. Even so. While it may give an air of being scientific. agency or management staff promotes. Each method does have its place in the business and sales world. people tend to embrace a variety of role models. Inc. they may simply feel that they United Insurance Educators. however. and their work in particular. The question is. Clearly defined goals and purposes are essential if people are to understand what their lives in general. individual employees may feel inadequate to challenge the validity of them. he or she may have missed the why of their job. It is in the why that ethics or values often play an important role.

ethics belong to everyone. in some cases. After being laid off from her job in Seattle. many negative circumstances can develop. Nearly every insurance agent has. This brings us to another area of ethics. Page 252 . commissioned sales are something to be feared. There is certainly much truth to the concept that self-worth is tied in to many of our successes in life. A person must feel they can succeed even to enter into such work.Retirement
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 have not earned to right to speak out. It takes much more than that. The majority of workers do not enter commissioned sales. not just the superstars of sales. It is probably safe to say that some amount of high selfesteem likely exists for those who enter the commissioned sales field. In this case. Sometimes this belief can cause problems. Their "ethical compass" may become misdirected. had a company or person promise the world. amount to more than she would earn if she took some of the available jobs. When selfesteem is tied to financial rewards. In fact. financial rewards are essential. low self-esteem may be tied to many of the under-achievers in our country. However. In actuality. Yet personality tests have revealed that the Japanese people traditionally have very low self-images. Of course. They are often depressed because they do not feel good about themselves. Some of the most effective workers in the world are the Japanese people. high self-esteem in itself will not accomplish anything. everyone would be doing it. There must be a reason. at some time or another. In fact. As it turned out. United Insurance Educators. If financial success were so easy. There are those who believe that attempts to build self-esteem in the work place will result in successful (financial) payoffs for the company. Sally has been unemployed for nearly 6 months. Self-esteem is important to have for many reasons. It has become commonplace for insurance companies and other industries to shower their salespeople with prizes. We are often told that merely feeling very good about ourselves will accomplish much in the sales field. It seems that companies believe their employees will work only for material gratification. Inc. For many people. but it is not likely to insure economic success. her unemployment benefits would. Totally fulfilling work probably does not exist. the why of the work can again become lost. it involves those who recruit commissioned sales staffs. Employees may begin to do their work for the wrong reasons. plaques and medals for selling their products. but when ethical behavior is not tied into those financial rewards. the only jobs she could find paid about half of what she had been earning. she thought she would easily find another one.

These people work smarter. because they gain an understanding of what they are doing. you get paid what you are worth! Aren't you tired of having someone else tell you what you are worth? Aren't you tired of having someone else determine what hours of the day and week you will work? Isn't it time that you took your destiny into your own hands? Make life work for you instead of against you. The gentleman. You make the determination yourself based on how much time you are willing to devote to your work. a well-dressed man enters the room and introduces himself as the Regional Manager for an insurance agency (not an insurance company). Randall: "Welcome to the world of excitement and money. she sits down. Inc. Mr. She makes an appointment for an interview. but since she has already gone to the trouble to come. Isn't it time that you do the same? We will teach you how to earn up to your potential. The difference is.Retirement
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 Finally. Sally sees a newspaper ad that promises high income for "selfmotivated" people.000 while working less than 40 hours a week. not harder. begins his sales presentation: Mr. these top professionals are able to work less." "We offer the most comprehensive benefits around. It is very likely that you will earn in excess of $50. your potential is unlimited. You will be invited into people's homes as a guest because you will be offering these folks something they want and need. At the appointed time. All you do is explain those benefits to people who need them.000 in the first year alone. And you will continue to earn additional income on every sale you make even after the policy is in place." United Insurance Educators. Do you need an extra thousand dollars one month? Then you simply work a couple of Saturdays. Most people need the crutch of a weekly paycheck paid to them whether they put forth any effort or not. Randall. In fact. not more. Selling is work. Page 253 . because those who enter this world must be prepared to manage themselves and not everyone can do that. Sally's first impulse is to leave. as time goes on. When Sally arrives she is surprised to see a roomful of people there for the "interview". That does not mean that you won't be working. As your renewals accumulate and you also continue to make new sales." "Last year our top producers earned well over $100. It can be as low or as high as you desire. In this job you will be responsible for your own paycheck. It's that simple. This is not for everyone.

but would you expect that in other industries? Can you imagine a new car salesman saying: "Oh. now that they are in the business. Inc. Sally knew she could discipline herself to be on the job and she liked the idea of being in charge of herself: her own boss. And yet. they do enjoy their work. We felt that cigarette companies." Should Mr. Alcohol companies show young beautiful people drinking. there are times that the job seems extremely fulfilling and there are other times when the job seems absolutely terrible. promotional advertising is all around us. we must be aware that glamour and excitement also carries simple hard work and frustration. Can ethics be a part of promotional selling? At what point does reality need to be interjected? Should the fail rate be stated? It might be easy to state that the "dark side" should also be stated. jobs are totally satisfying. Certainly it is desirable to find fulfilling work. Looking around. or other mundane tasks.Retirement
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 As Sally listened. strenuous marches. Randall be expected to tell the audience all the difficulties of commission sales right up front? Should it be disclosed that only one top producer earned more than $100. As viewers of this. it sounded like high income was common. Even fields of work that seem to be glamorous to others generally carry with them a certain amount of negatives. They'll be wear and tear and the paint job will dull. United Insurance Educators. Look at the ads for joining the armed forces.000? Or is it the listener’s responsibility to make sound decisions for themselves? It is common for agents to say that they would never have gotten into the business if they had known everything. but most things in life is a mixture of things. standing on the decks of mighty ships. Even the ads for smoking came under fire for such one-sided promotional activity. And yet. if any. Should these aspects be discussed with new recruits? Few. sure. They do not show kitchen duty. Page 254 . These ads show handsome men flying planes or jets. Five years from now you'll be glad to just get rid of the car. In other words. but it won't in a few years. or visiting exotic foreign places. and lately alcohol companies as well. the car looks great now. There are many aspects of commissioned sales that can scare a person out of ever entering it. should not show smoking or drinking as glamorous or exciting. she began to feel an excitement. Best of all. The rugged cowboy who always lit up a cigarette now has cancer. she could see others getting the same excitement. Even jobs that promise excitement carry stretches of boring mundane tasks.

the most successful salespeople state that patience and kindness is necessary in their line of work. Some might tie it in to their religion (in fact. develop the necessary skills for their jobs. motives. Even though it may seem to come effortlessly to a few. in some cases. Let's look at the difference: Sympathy (noun): (1) fellow-feeling. Alcohol companies do not show the car accidents caused by drunk drivers. Empathy. on the other hand. accord. Page 255 . (2) condolence. They tend to "go the extra mile" for their clients even when that extra mile does not overtly bring them any financial rewards. compassion. Those people who do possess such qualities often have no desire to be promotional tools for businesses. (3) agreement. In fact. tends to be aimed at correcting a given situation. of course. etc. There are many differing views regarding the need for sympathy or empathy. the question still lingers: Can ethics and promotional campaigns be integrated? It would be wonderful if every industry were blessed with an individual whose inner greatness or qualities were able to inspire those around them with their vision and energy. In truth. whatever the career line. Some state this quality as a "love of people". and may be what is sometimes described as "tough love". Sympathy may not necessarily help a person and may. Topnotch salespeople do. increase the problem that exists. Ethical people typically have a moral reason for being such. approval. So. Perhaps one of the major reasons why ethical behavior is something that must be constantly stressed is simply the fact that being ethical is hard work. but their love of people motivates them to do a better job than the average person. We also find that people who consider ethical standards to be a high priority also value such personality traits as patience and kindness towards others. few industries are graced with such people. That is not to say that a kind person always sympathizes with others in every situation.Retirement
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 laughing and having a good time. Sometimes being kind means withholding sympathy. the majority must make a conscience effort to be ethical. Inc. United Insurance Educators. Empathy: (noun): (1) the complete understanding of another person's feelings. It does mean that empathy must be involved. the majority of people who place high regard on ethical behavior state their religion as a major factor). An individual who is naturally kind towards others tends to have a sensitive awareness of them. Kindness generally takes into account how another person might feel as a consequence of what we do.

there is no single answer to this situation. Kind people try to prevent someone else from hurting. As time goes by. It is likely that when Cheryl learns of the affair. Jackie will be forced by the company to leave her job. is the supervisor for a large insurance division. Inc. Her boss. Jackie is single. Marsha does empathize with Jackie. but Craig is married with two young children. Furthermore. Marsha is worried that Jackie might never forgive her if she somehow took the relationship away from her (even out of concern). After all. Understanding how it happened. The easiest course of action would be to say nothing despite the vicious rumors that are circulating. would be very hurt by the affair. a romance develops. however. he probably has the power to have her fired. Craig's wife. The risks are great for Marsha and she is aware of them. but not Jackie.Retirement
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 Jackie is a secretary at the XYZ Corporation. After all. they are adults. Marsha could even tell herself that what Jackie and Craig do is their own business. although they are not close friends. On the other hand. but in fact. Marsha also understands how Jackie became involved. if Marsha does confront the issue (even out of concern). Marsha also knows Craig's wife and children. If Marsha delays the confrontation. It can be seen in how positive she has become about her day-to-day life. does not mean that she sympathizes with Jackie's lack of judgment. most of the office and field agents are aware of it. she knows that the hurt will eventually be even deeper than it already is. Marsha knows it is only a matter of time before Cheryl learns of the situation. Marsha does understand how Jackie became involved and she realizes that it could easily have happened to her under the same circumstances. Marsha. It is a matter of judgment and perception. Craig is likely to become angry and he has the ability to make Marsha's job miserable. Cheryl. Jackie has been a basically lonely person who has always had trouble making friends. Craig. Page 256 . If Marsha does not confront the situation. if Craig wanted to. Both Jackie and Craig are basically nice people who would not intentionally hurt anyone. Bad news sometimes only gets worse as time goes by. Jackie has had even more trouble finding a comfortable male relationship. This affair is obviously making Jackie happy. They think they are keeping their affair secret. Obviously. Jackie might lose possible opportunities that would give her lasting United Insurance Educators. In fact. Craig probably has enough position to keep his job. Yes. One of the field agents. considers Jackie a friend. the risks are multiple and real. many of the office and field staff knows Cheryl.

how is the job going? Is it as tough as I hear in the welding trade?" United Insurance Educators. I'll give you some flower starts. He likes people and people basically seem to like him. While she does value Jackie's friendship (and she wants to be liked by Jackie). You (interrupting Sherry): "Marv. I guess you could say that it is my hobby. Since he is your friend. The husband." Dale is obviously flattered. Marsha does eventually face Jackie with her feelings about the situation. ages 5 and 8. rather than temporary happiness. Dale: "Your home is beautiful. Your first appointment is at a middle-class home with a well-groomed lawn and beautiful flowerbeds. you agree to accompany him on a few of his appointments with potential clients. As Sherry and Dale continue to talk about the flowers. I suppose I put too much money into it. Who does the gardening?" Sherry: "I do. Jackie might also simply tell Marsha to mind her own business and a valuable friendship might be damaged or lost entirely. The couple has two children. At least that is where I seem to spend every spare moment. Before you leave. Marsha decides that it is more important to her to do what she feels is right. Marv has medical insurance supplied by his union. you notice that Marv is becoming bored and glancing at the television in the next room where the kids are watching a program. Even so. Page 257 . Marv. the same principles could be applied to other situations. but they do not have any life insurance. Although our example looked at a personal relationship. The young man is friendly and outgoing.Retirement
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 happiness. he is struggling financially because he seldom makes a sale. He has earnestly studied all the company's products and seems to have a good understanding of them. Dale. Sometimes the kindest thing is also the toughest thing (as every parent knows). not condemnation. Marsha decides that the kindest thing to do is to be honest. Sherry. is a welder and his wife. Inc. but a person has to have some pleasure in life. Let's say that you are friends with a fellow insurance agent. All Marsha can do is hope that Jackie realizes that she is speaking from concern. works part-time as a waitress at a local cafe.

Dale allowed Sherry to misdirect the conversation." You: "Gosh. the other potential clients seemed confused as to why you were there. I guess you are the one who realizes the financial pitfalls and obviously you care about your family. we barely make our bills. but seemed to be drawn away from it at every opportunity. however. I don't believe I have. The next day. Two other appointments went equally bad." Dale opens his brief case and pulls out a yellow legal pad and several brochures. Sherry opens to a page. They are beautiful. "Have you ever seen these colors before in the Iris?" Dale: "No. but never getting down to the actual business at hand. and a napkin full of cookies to take home to his children. During the evening Dale collected several friendships. Inc. "Put that damn book away. outgoing person. always listening and joining in.Retirement
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 Marv: "You bet it is. Dale made no insurance sales. I finally get to enjoy some conversation and you act like that. you think you know exactly why Dale seldom makes a sale. Sherry. It is obvious immediately that Sherry is not interested. agitated." Once again. Page 258 ." Marv becomes visibly Sherry: "You are so selfish. you know you need to give Dale some guidance. Dale made no attempt to steer the conversation into the life insurance. Eventually. Even when you brought the talk back to it. with Marv becoming interested. Some months. why don't you show them the information they requested. United Insurance Educators. While only Marv outwardly acted agitated about that. he did not appear to have any concept of sales. Last month I only worked two full weeks. some flower starts. While Dale was a friendly. the conversation turns to flowers. that would be a worry. Since you mailed this card in asking for some life insurance information. but in such an unorganized manner that you doubt anyone really understood what he was trying to do. you must feel lucky that Marv is concerned. Dale. Dale did run over the brochures." By the end of the appointment. She pulls out a seed catalog and lays it in front of Dale over the brochures. He allowed the conversation to go in all directions.

Certainly. those deficiencies and mistakes cannot be corrected and are likely to be repeated. The hairstylist. as the saying goes. Such evasions of the truth may do more harm than good. however. but not insulting. Page 259 . She also was concerned about her clients and their wellbeing. A person who does not know what changes need to be made. Most of the people she encountered made no attempt to help her in any way. It is not always kind to deny the truth to a person who truly needs to hear it. gently explained to Leslie that the hair style she wanted would not be right for her ample figure. they often do not tell the next potential employer about them. in such a situation. She was a hairdresser that Leslie Lampert went to while in her "fat suit". Unless the person knows and understands the deficiencies and mistakes that led to the loss of his or her job. knew how to be both kind and ethical (honest). United Insurance Educators. . but it may also lead that person (such as Dale or Leslie as an overweight woman) into the possibility of success. on his own? When a person is discharged. personnel managers report that they often try to soften the blow by being less than honest about the person's shortcomings. . reporter Leslie Lampert did a story on overweight people. In addition. To do the story. the hairstylist was probably very good at her trade since she understood what style would work best. As a result. she was fitted with a specially made "fat suit" which instantly made her appear to add 150 pounds. however. the same mistakes will be repeated over and over again. will never make any changes at all. You fear he will end up in bankruptcy unless he gets into another line of work . Certainly. Rather than do a hairstyle that would not aid her appearance. Leslie stated that she was honest.Retirement
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 You doubt that Dale has the ability to ever be a successful salesperson. It goes beyond that. Inc. most people treated her with disgust and sometimes even open antagonism. Sometimes being liked is simply not as important as being kindly honest. One particular person. the woman used honesty and caring to suggest a style that would be right for her. In fact. and soon! The ethical question: Is it kinder to be honest and suggest that Dale leave sales or would it be better to offer a few suggestions and allow him to sink or swim. but honesty is still the best option. The truth. who was very thin. In an issue of the Ladies' Home Journal magazine. may leave you disliked by the person. kindness needs to be used when relaying the information.

We may end up depressed or irritable as a result. The ethical person can take pleasure in other's happiness or successes. but we do have complete control over how we react to the recognition others receive. that means someone is going to say mean things that are supposed to be for our own good. after all. and so forth. Sometimes what is necessary is so against our feelings of right and wrong that we do not enjoy the sale or the commission. Maybe we could role play and see if that helps. We do whatever is necessary to get that signature and check. we can ours. one needs to assess their personal motivation. As previously stated.Retirement
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 The next question: Are you being kind in telling someone the truth. There was a sale laying on every table waiting to be picked up. lying) can reach epidemic levels. The question: Are there some sales that simply are not worth the price we pay personally and emotionally? United Insurance Educators." Learning To Be Ourselves In sales. Most of us have had someone say to us. but I wonder if perhaps you are too concerned with having them like you. it is obvious that people like you. If the client gardens. "I don't want to hurt you. we are often told to "be just like the client". or are you getting some type of power or pleasure personally by pointing out their failure? As the Bible says. we pretend to completely like those that we can barely stand. You did everything wrong. but you just walked away from it." To be a truly kind person. Page 260 . Before speaking "constructively"." OR "Dale. but I must offer some constructive criticism. You had no ability to control the conversation. insincerity (which is. We seldom have control over what recognition we receive from others. "love envieth not. I don't know where to begin. For Example: "Dale. It seemed like you were avoiding getting down to the sale. We laugh at the client's jokes even when they insult others or us." Usually. then we garden. Inc. if the client cans their own vegetables. what you say must not be a reflection of your own insecurities or envy.

They refuse to sign written contracts because they feel that. whatever is promised will be delivered. insurance companies themselves may "red flag" some agents if problems of "misunderstandings" seem commonplace in their client's applications. Unfortunately. problems occur not because something was specifically stated. or services. their word should be good enough to guarantee any agreement that is sealed with a handshake. As insurance agents. the consumer simply failed to understand them.Retirement
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 Salespeople are traditionally thought of as untrustworthy. If it happens once or even twice. We are warned daily to "read the small print. In fact. whether that is an insurance agent misleading a client. United Insurance Educators. but in our personal lives. Misleading another. the agent may say that he or she asked the medical questions. we want people to believe we are as good as our word. Inc. we commonly call on people who feel that other agents before us have misrepresented products. but because something was implied. Implying that which is not true is a form of manipulation. will eventually come face to face with credibility problems. People may make serious mistakes financially on the basis of what is implied. Why do you suppose this image developed? Most of us want to be trusted. Page 261 . as well. This is unfortunate since most are good honest people. it simply means that people learn to mistrust them. If we say something is so. the less we find ourselves trusting others. companies. In some cases. In fact. More often. agents themselves have sometimes been misled by companies they represented. If an agent continually seems to leave out pertinent medical information. this can cause serious legal problems for the agent. The more we are in the business world. we want others to believe it. the insurance company will probably take the explanation. as Christians. but if it happens repeatedly the insurance company surely will not. or an agency misleading their agents. To be viewed as person of integrity is not only important in business. there are few groups of people or organizations that are honored with such high reputations. Salespeople who allow their clients to assume something that is not true will be viewed as badly as someone who openly lied. The Amish are known for their strength of character." Often. The Amish people hold their word in high regard.

and Aaa by Moodys. Business Week magazine addressed the issue of company ratings following the collapse of four companies: Executive Life. Unfortunately. AAA by Standard and Poor as well as Duff and Phelps. companies and agents often simply choose the company that presents their products and companies in the best light and disregard the rest.Retirement Planning  Chapter 28 – Selecting Safe Insurers      28    Selecting Safe  Insurers  It is. It was not until July 16th. Insurance company ratings can be very confusing. another insurance industry rating firm. It will be expressed as an A+ by both A. of course. consumers seldom check out companies for themselves. even to some experienced insurance agents. 1991.M. United Insurance Educators. Inc. Best gave them no rating at all because they had been seized by New Jersey's regulators. First Capital Life. Monarch and Mutual Benefit Life Insurance Company in Newark. When different companies use such different rating systems. A. Best was listing them as an A+ company. that A. showed only a "C" rating as early as March of 1991. It is easy to understand the consumer's confusion. Inc. always important to select an insurance company that is safe financially. New Jersey. Page 262 . Some rating companies criticize their competition and all of them have taken criticism at one time or another from the insurance companies. We want to specifically mention Mutual Benefit Life Insurance Company because as late as July first. Some insurance companies have suffered severe financial losses in recent years.. From there the ratings become much more confusing with a system that utilizes an assortment of numbers and letters.8 billion in assets.M. Weiss Research. Mutual Benefit Life became the largest insurance failure in history with $13. The very best ratings used vary from company to company. 1991.M. Best and Weiss.

Their index (which did not consider all companies) listed only New York Life with the highest available rating. So is the approach to the data they use to determine the ratings given. Inc. Best has been rating companies for more than 90 years while Weiss Research.M. Weiss tends to be the toughest company to receive a high rating from. slightly variable risk Good: High claims paying ability Adequate: Less protection against risk Below Average: Higher risk factor Financially Weak: Very high risk factor Nonviable or soon to be * Standard & Poor ** Duff & Phelps The Assigned Value (the last column) was used to calculate the Business Week composite index. It should be noted that A. Best: A+ A+(C) A. Inc.M.A(C) AA-(C) B+ B+(C) B B(C) BB-(C) C+ C+(C) C C(C) Cno rating *S&P: **D&P: AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBB+ B BCCC CC D Moodys: Aaa Aa1 Aa2 Aa3 A1 A2 A3 Bbb1 Bbb2 Bbb3 Bb1 Bb2 Bb3 B1 B2 B3 Caa Ca C Weiss: A+ AAB+ B BC+ C CD+ D DD+ E EF Assigned Value: 1 2 2 2 3 3 3 4 4 4 5 5 5 6 6 6 7 7 Excellent: Small. they are also the easiest company to get a high rating from. Not only are the rating symbols different from company to company. Page 263 . Although A.Retirement Planning  Chapter 28 – Selecting Safe Insurers      Refer to the following chart: Rating: Superior: Negligible risk A. Best rates the largest number of insurance companies (over 3800). has only been rating companies since United Insurance Educators.M.

Weiss uses only public data that is the statutory information insurers must supply to their state commissions. they do not necessarily arrive at the same conclusion regarding a company's rating. a wise agent or consumer will not rely on one company rating. although that does not mean that one is better or worse than the other. Inc. Weiss studies each company's balance sheets and makes a determination based on a severe recession.M. A. since their approach is similar. is an optimistic forecaster.M. Inc. It is easy to understand how a consumer might see a B3 rating from Moodys and assume it was a United Insurance Educators. It is probably best for the insurance agent to simply understand the differences between these companies and consider the ratings of all of them. As stated. Page 264 . but rather view each of them and make a logical decision. work in cooperation with the companies they rate.M. Although S&P. Best. Best evaluates based on both quantitative analyses of profitability. Chapter 28 – Selecting Safe Insurers      A. Best. One might say that A. One might say that Weiss Research. These companies. it does provide a "worse case" scenario. A. is a pessimistic forecaster of insurance company strength. Inc. Weiss uses a report card style of ratings that many consumers find easier to understand. Weiss Research. The differences in A. Their similarity to bond grades reflects their history as raters of debt issues and preferred stocks. uses the saying "It is better to be safe than sorry.M. like A. Best does work with the insurance companies and takes a long-term view of each company's relationship with their policyholders." Standard and Poor. by comparing the three. Best and Weiss have each been criticized: A. while Weiss Research. The other companies often tend to be more middle-of-the-road. However.M. Best is an "optimistic" forecaster. One might say that the company. Best makes the assumption that a company will survive several economic cycles in any 20 year period or longer. Best for being too slow and also too easy on the companies and Weiss for actually fueling consumer panic. leverage and liquidity and on the qualitative study of companies' risk diversification. and Moody's are specialists in hard-core financial analysis. They use nearly identical rating scales. Duff and Phelps. one may be able to get the clearest comparison of opinions. most professionals feel it is the agent's responsibility to represent only financially stable companies. Because consumers rarely understand the rating systems.M. Inc. While this is not necessarily true. asset quality and management ability.M.Retirement Planning  1989. D&P and Moody's use similar approaches. Their assumption is that during the life of each policy a severe recession will occur. is on the opposite end in that they tend to automatically take a pessimistic view.

To many consumers. Sometimes it may be something that is not immediately noticeable on the surface. Sometimes this might even involve telephone calls to the company's home office for answers to questions or clarifications on contract points. United Insurance Educators. in fact. There can be differences in annuity products that may be critical to the needs of the client. if annuitized for that purpose. the freedom to dispose of taxable assets (while enjoying the pleasure such gifts bring) can virtually eliminate taxation. Since annuities give the ability to have a monthly income." Chapter 28 – Selecting Safe Insurers      Due diligence is essential when recommending any product to a client. Perhaps they simply have greater peace of mind. Annuities can also cut down the expense and delay of probate if the contract names beneficiaries other than the estate. An ethical agent will be certain to investigate all new products before presenting them for sale. Inc. Annuities are an extremely useful estate-planning tool. if so desired. Recent trends are definitely bringing this investment tool into view. they allow other forms of wealth to be distributed. No one knows why. other times it may involve a new product that the agent is not totally familiar with. relatively few understand any of the features involved. In some of the larger estates. for the pleasure of giving or to reduce taxable assets.Retirement Planning  stable company. perhaps these individuals have been savers all of their lives and that bring greater comfort and therefore better health. Retirement savings are focusing on annuities in growing numbers as workers become more and more fearful of inadequate pension funds at their workplace. It is interesting to note that the experience of insurance companies show that those who purchase annuities do. As one consumer was heard to say. the term "annuity" is a hazy concept. Annuities are a form of capital that the individual cannot outlive. "Gosh. While they have heard the word and may even know that it has to do with an insurance company. whether that product is a universal life insurance contract or an annuity. however. tend to live longer than the general population. Many people are not sure whether to classify an annuity as an insurance policy or an investment. I thought a B was pretty good when I was in school. Page 265 .

This statement is often the result of court actions. It is vital to those clients that the company is able to keep those promises they are making. agents are being told that due diligence is their responsibility. due diligence was something done by broker-dealers. due diligence. this is often done to determine whether or not there is a reasonable expectation that the illustrated values presented can actually be achieved. and the companies they represent. is primarily derived from the securities industry. this may not always be the case.Retirement Planning  Chapter 29 – Due Diligence      29    Due Diligence  It is common for an agent to go to work for an agency and simply accept whatever companies and products are given them to work with. in fact. As little as ten years ago. while for the company it is the ongoing process of working with agents and consumers. While we would like to assume that an agency has done their homework. In addition. Inc. For the agent. the business of making long-term promises to clients. In other words. people selling securities and by some home offices. Seldom was due diligence thought to be an agent's responsibility. In more recent times. actually mean? For the agent. What does the term. What responsibilities actually do fall on the selling agent? The answer to this question will certainly vary depending upon whom you ask. Due diligence is the agent's analysis of whether or not the company can. due diligence. meeting the needs of both. in some measure. Page 266 . The term. Where life insurance is concerned. United Insurance Educators. it is now being legally determined that individual agents are responsible for the recommendations they give. due diligence is the analysis of a particular company's strength. Life insurance is. the products they sell. performance and financialstanding. due diligence is the analysis of a particular company's products. keep their promises. it is possible that the agency viewed the companies and products only from a profit point of view.

We no longer accept the view that the agent represents only the company. As agents and the general public have become more educated on the variety of options available. Consumers want to know if the company they are considering can manage its overhead expenses. While price has always been considered. the role of the agent has changed. as well as their policyholders. In many cases. only the strength and the integrity of the company involved can ensure that projected. the level of service and quality of the advice given are linked directly to the insurance company and that company's performance. and that integrity and consistency of internal procedures are being maintained. he or she is also protecting their own financial future. on the agent. Lawsuits are common and it is reasonable to believe that even a good agent can experience one. one of which is financial protection of the agent. due diligence is an ongoing process which insures that pricing objectives are being realized. This change in the general perception of an insurance agent places greater responsibility. Whereas the agent was typically thought of as only the salesperson. sometimes more favorable parameters. It must be noted that practicing due diligence makes sense from many standpoints. as well as the consumer. The factors more often used these days also tend to be more volatile. Company due diligence also means making investments that are sound and prudent. both legal and ethical. an ongoing process since companies can and do change how they operate. Due diligence is. When an agent takes the time to investigate his companies (and document that investigation). to preserve fairness in all parts of the operation. insurance has seen a change in how it is perceived. An insurance company that is concerned with due diligence will treat its sales force and back-up members as well as they treat their policyholders. In the public's view. United Insurance Educators. nonguaranteed elements of the policy are actually realistic. Inc.Retirement Planning  Chapter 29 – Due Diligence      For the insurance company. mortality expenses and investment returns in a way that allows the company to make good on it's promises in the contract. It is working with the agents and agencies. of course. due diligence is not a new concept. even though it is for many agents. consumers now consider the agent to be someone who must give reliable information for the good of the policyholder. additional elements are now commonly looked at as well. Due diligence might be considered as a method of self-protection through knowledge. In addition. This means the consumers have taken on more risk. It must be noted that the life insurance industry has moved their product design away from fully guaranteed values and benefits towards a dependency on current. Page 267 . For life insurance companies.

To prevent lawsuits from angry consumers who feel they have been taken. and 3. If an agent bases his or her company affiliations on commission levels. Find out about the speed of the company's claim service since this is often an indicator of company solvency. 2. Anytime an insurance company seems reluctant to provide information to their own agents. he or she is in for a few surprises down the road. It should brighten their day to know that there are more answers than one might imagine at their local library.Retirement Planning  Many agents groan when due diligence is brought up. a red flag should go up. Talk to your immediate manager or regional manager. To determine if the people associated with the companies they sell have the level of integrity desired. How many complaints from consumers has the company experienced in the past year? You may also wish to look at complaints over a three-year period to see if any pattern seems apparent. In fact. correct and on time. Find out if commission checks seem to be consistent. To protect the trust they have spent hours building up with their clientele. The agent may also want to watch for any shifts in the management of the company since this can change the philosophy of the company. They picture hours of work put into a schedule that is already difficult. an agent can learn more than you might imagine from simply asking other agents who have been with the insurance company for a relatively long period of time. such information is readily available. There are several reasons to do so: 1. or are considering. Often. Page 268 Chapter 29 – Due Diligence      . is a morning well spent. United Insurance Educators. perhaps too little to ensure continuance? Compare the surplus in relation to the amount of business being produced. how long does the company take to correct it? The agent should collect the three most recent sets of financial statements and study them. The agent should not overlook another simple way to gather information: ask questions. Generally. leads provided. or where the next convention will be held. An agent needs to begin his due diligence process by gathering information on the major components of the company from as many sources as possible. Does the company seem to be making excessive profits? Does the company seem to be making minimal profits. Ask the state Insurance Department to see if there are any watches or cautions outstanding. An agent should request a copy of the insurer's annual statement and pay particular attention to the interrogatories. the home office (especially the underwriting department). Inc. This would include seeking information directly from the company. this is probably the first place to seek information. because they are brief and speak to short-term changes from the previous report. A morning spent looking up the companies they are representing. If a financial error is made. and even the company's competitor.

A.Retirement Planning  Chapter 29 – Due Diligence      Once a measure of information is gathered. Best was incorporated in 1899 and became the first rating agency for insurance companies. Although there are many ways to consider what constitutes strength of a company.M. A. These financial statements are prepared in accordance with statutory accounting requirements established by the NAIC. It should be pointed out that the ratings still reflect a certain amount of opinion regarding each company's financial strength and operating performance. Rating services have not always given the public indications of trouble in a timely manner. according to A. they provide their opinion of the company's financial strength. there is no federal insurance program for insurers. Best states that the primary source of the information presented in their publication is obtained from each insurance company's sworn NAIC annual financial statement as filed with the Insurance Commissioner of the state in which the company is domiciled and licensed to conduct business.M. A. unlike the banking industry. such as A. Neither do rating companies give any recommendations for any particular companies. It is important to realize that the strength of a company is very important because. which affect the overall performance of the insurance companies. There are several ways to assess this information. United Insurance Educators. it is important to seek out the information that they offer. A. there is no need to represent any carrier that does not feel comfortable. The objective of the rating services is to evaluate the factors.M. Even so. Best. By doing so. Best.M. includes quantitative and qualitative evaluations of the company's financial condition and operating performance. The procedure. but often the agent simply looks at it from the standpoint of "Does it feel right?" With so many carriers to choose from. which protect the consumers in those states. the agent must assimilate it in a manner that is easily understood and assessed. Other sources of information that the agent should consider are the rating services. Page 269 .M. Best is not the only rating source and others should be considered also. Inc. Best is certainly not attempting to give any type of warranty.M. Some states do have guaranty funds. operating performance and ability to meet its obligations to the policyholders. one common sense method is simply considering whether or not the agent feels comfortable representing the insurer and their products.

the reduced certainty of future cash demands and growing policyowner and public perception. Page 270 . In the life insurance industry. as policyholders feel less secure about major institutions. evaluating the financial condition of a company is subject to variations depending upon the person or company doing the analysis. All of these factors have affected even well established major life insurance companies (some of which have ended up on the "watch" list). The insurance companies have the potential of much larger losses in today's world than was present in the past. United Insurance Educators. Today's world is simply more complex than was yesterday's. This is especially true for the property and casualty companies because of liberalization of insurance contract interpretations and the expansion of theories of tort liability.Retirement Planning  As we all realize. Inc. The following pages will list the rating guides. including life insurance companies. Chapter 29 – Due Diligence      It has become increasingly difficult to predict the amount of loss reserves that must be held in order to maintain financial security. This is especially true when it comes to evaluating insurance companies because so many of their assets are interest and economic sensitive investments. which should be an important part of the process an agent uses to select the companies they wish to represent. interest rate volatility. the cash flow and liquidity necessary to meet policyholder obligations has also seen an increase in the complexity of investment oriented life and annuity products. Many of these investments are based predominantly on actuarial projections of future claim payments. The banking systems financial problems have added additional stress.

.... but those are noted below: A++.. B-.Revised Rating w .Excellent B++......Pooled Rating r ... FPI 8& 6& 4& 2& 1 Description 9 7 5 3 Strong Above Average Average Below Average Not Assigned There were some changes to the 1992 rating structure of A..Qualified Rating x .Parent Rating g .. C. which is the one we are illustrating...Reinsured Rating q ..Good C++..M..Rating Watch List RATING "NOT ASSIGNED" CATEGORIES NA-1 NA-2 NA-3 NA-4 NA-5 Special Data Filing Less than Minimum Size Insufficient Operating Exper....... Best. Very Good Chapter 29 – Due Diligence      Level Category B....Below minimum standards E.......In liquidation Level Category RATING MODIFIERS e .M. B++ and C++ rating levels were added... Rating Procedure Inapplicable Significant Change NA-6 Reinsured by Unrated Insurer NA-8 Incomplete Financial Information NA-9 Company Request NA-11 Rating Suspended FINANCIAL PERFORMANCE INDEX (FPI) The financial Performance Index (FPI) is assigned to companies with Rating "Not Assigned" categories of NA-2 and NA-3. A+...Contingent Rating Modifier was discontinued. NA-7 Below Minimum Standards was replaced by a D rating...Consolidated Rating p ...Under State Supervision F..Retirement Planning  A.... B+... United Insurance Educators. C+.Group Rating s ........Marginal Level Category D. Page 271 .. A... C-.Superior A.. Inc.Fair C.. BEST'S RATING GUIDE RATING LEVELS AND CATEGORIES A++........ The FPI measures the financial strength of small or new companies and is based on the following numerical scale.

M. The tests that they use measure each company's performance in three critical areas: (1) Profitability. Best The A. Best company reports that they use an analysis of each company's financial performance for at least the past five years. Best's published reports. The quantitative analysis is performed at two levels: (1) The first utilizes NAIC (National Association of Insurance Commissioners) statement data as submitted by the individual companies. utilizing over 100 key financial tests and supporting data. (2) Leverage. marketing or reinsurance agreements in order to perform the most appropriate quantitative evaluation. Chapter 29 – Due Diligence      Quantitative Evaluation From A. This data is used to calculate many of the resulting tests and ratios that appear in A. NA-11 Rating Suspended category was added. and (c) The company's affiliation with other insurers through investment. United Insurance Educators. Inc. and (3) Liquidity.M. (2) The second level of quantitative analysis uses NAIC statement data which is adjusted for two factors: (b) Policyholders' surplus which is a key denominator for many of the quantitative tests.M. Page 272 . These standards are adjusted annually taking into account changes in underwriting. economic and regulatory conditions. pooling. These standards are based on an evaluation of the performance of insurance companies for the past 20 years. Company data must be adjusted to present affiliated insurance companies on a consolidated basis to evaluate the financial condition of an affiliated group of insurance companies on the same basis according to how the business is actually managed.Retirement Planning  NA-10 Under State Supervision is replaced by either an E or an F rating.

or economic conditions. This would include such things as pyramiding.M. Page 273 . Chapter 29 – Due Diligence      (1) Profitability: It should come as no surprise that profit is a measure of the competence and ability of the management of any company. equity in unearned premiums. Profit is the result of the management to provide viable insurance products at competitive prices. There are adjustments made which take into consideration many factors that might affect these analyses. Leverage measures the exposure of an insurance company's surplus to the various operating and financial practices.Retirement Planning  There are several areas that must be looked at in order to understand a quantitative analysis of a company. To measure each company's exposure to unpaid obligations. Operational profitability (underwriting and investment income) is the single most recurring and important source of surplus growth for an insurance company. Best reports that they analyze the ratio of net liabilities to surplus. This is certainly true of insurance companies as well. A highly leveraged company can show a high return on their surplus.M. gross and net of reinsurance. there tends to be four typical ones: (a) Current writings (b) Reinsurance (c) Policy or loss and loss adjustment expense reserves (d) Investments These types of leverage are reviewed by A. inadequacy or redundancy of policy or loss reserves. Best for a five-year period to analyze changes in trends and magnitudes. While leverage may be generated from several different sources. This list is not inclusive and may also include other factors. This is generally at the cost of lower returns on surplus. unearned premiums and exposure to reserving errors. A conservative level of leverage enables an insurer to better withstand adverse changes in such things as underwriting results. which maintains a financially healthy company. Surplus represents additional security for the policyholders. differences between statement and market value of assets and potential asset default risks. In order to measure each company's exposure to pricing errors in its book of business. A. United Insurance Educators. It is protection against events that negatively affect the company. they review the ratio of direct and net premiums written to surplus. regulatory. but may also be exposed to a high risk of instability. investment returns. (2) Leverage: A company typically has exposure to some risks. Inc.

and (4) Adequacy of loss or policy reserves. Liquidity measures a company's ability to meet its anticipated short and long-term obligations. (4) Adequacy of policy or loss reserves. (7) Management's experience and objectives. Best also performs a qualitative analysis. Chapter 29 – Due Diligence      (3) Liquidity: We are all familiar with the term liquidity. Page 274 . (3) Quality and diversification of assets. (5) Adequacy of surplus.Retirement Planning  It should be noted that leverage is a relative measure. Each company may have unique features that affect the end result. or sell long-term investments too soon. which includes policyholder claims. Each company must have liquidity to some degree. (2) Soundness and appropriateness of the reinsurance program. Qualitative Evaluation By A. (3) Quality and diversification of the assets. The level of a company's liquidity depends upon the degree by which it can satisfy its financial obligations by holding cash and other investments that are sound. Best Besides the quantitative analysis of the company's financial performance. United Insurance Educators. it might then be forced to sell other less liquid assets at a bad time which might result in investment losses. Inc. A. diversified and liquid. A high degree of liquidity enables the company to meet those unexpected obligations without adverse effects on their general investment portfolio. If a company experiences unexpected obligations and does not have enough liquid assets on hand to meet those obligations. This includes such things as the company's: (1) Spread of risk.M.M. and (8) Policyholders' confidence in the company. (2) Quality and appropriateness of the reinsurance program. Some of these features may include such things as: (1) Spread of risk. The company might also be forced to borrow funds. (6) Capital structure.

we recommend that all company-rating services be looked at. ratings are released on a weekly basis as they are assigned.M. The annual and first quarter review and assignment of Best's Ratings begin in the spring of each year. these ratings may be released more frequently if there seems to be a situation that warrants it. Official notification of the assigned rating is sent to the chief executive officer of each insurance company for acknowledgment before its release for publication. one of the best-known rating companies. It is. there are three new rating categories that hopefully will simplify and complete the structure. Beginning in April. Those new categories are D. Best revised their rating structure in 1992 to add finer distinctions among the letter ratings used.M. Inc. Ratings are subsequently reviewed based on a company's six and nine month quarterly financial results. Page 275 . he or she is at a disadvantage when selecting which insurance carriers they wish to represent. E and F. If an agent does not understand the rating procedures. Best in the September and December issue of Best's Rating Monitor and are updated on BestLink and BestLine publications. It should be noted that A. Sometimes. Even so. or necessarily the best company at rating insurers. We are not implying that A. United Insurance Educators. Interim rating changes are released immediately in Best's Insurance Management Reports publication. B++ and C++.M. It is also after the first quarter statements that are due on April fifteenth. Three rating levels were added: A++. however. They may not necessarily give the same performance rating to the insurers so it does give the agent a better perspective if other rating firms are also considered.Retirement Planning  Chapter 29 – Due Diligence      There may be additional elements studied if other factors seem to apply. In addition. The ratings are released to subscribers of A. Best rates insurers. Best is either the only company. For our purposes we are going to examine how A.M. That is after the receipt of the annual NAIC statement that is due on March first. Understanding the Rating System It should be pointed out that there are several companies that rate insurance companies.

M.M. in the opinion of A. but their financial strength is vulnerable to unfavorable changes in underwriting and/or economic conditions.M. have achieved superior overall performance when compared to the standards established by A. These companies have a strong ability to meet their obligations to their policyholders. in the opinion of A.M.M. in the opinion of A. C++ and C+ (Fair) C++ and C+ are assigned to insurance companies that.Retirement Planning  A++ and A+ (Superior) Chapter 29 – Due Diligence      These letter and symbol ratings are assigned to companies that. Best. have achieved excellent overall performance when compared to the standards established by A. in the opinion of A. Best. Best. The companies in this rating category have a very strong ability to meet their obligations to the policyholders over a long period of time. United Insurance Educators. have achieved good overall performance when compared to the standards A. but their financial strength may be susceptible to unfavorable changes in underwriting or economic conditions. B and B. but their financial strength is susceptible to unfavorable changes in underwriting or economic conditions. Companies with these two ratings generally have an adequate ability to meet their obligations to their policyholders.(Good) Assigned to companies that. have achieved very good overall performance when compared to the standards established by the A.M.M. Best has established. Best.M. A and A. B++ and B+ (Very Good) These two ratings are assigned to insurance companies that. have achieved fair overall performance when compared to the standards established by the A. Inc. Best. These companies generally have a reasonable ability to meet their obligations to policyholders. Best.(Excellent) This rating is assigned to companies that. Best Company.insurance companies have a strong ability to meet their obligations to their policyholders over a long period of time. Best company. Page 276 .M. in the opinion of A. A and A. Best.M.

D (Below Minimum Standards) This rating is assigned to companies which.rating. Best company. This would include conservatorship or rehabilitation. Best company. These companies have a current ability to meet their obligations to policyholders. Page 277 . Inc. control or restraint. but their financial strength is very vulnerable to unfavorable changes in underwriting and/or economic conditions. F (In Liquidation) Assigned to companies that have been placed under an order of liquidation or have voluntarily agreed to liquidate.Retirement Planning  Chapter 29 – Due Diligence      C and C. in the opinion of A. but do not meet the minimum standards established by the A. This rating could be assigned to a company under a cease and desist order issued by a regulator from a state other than its state of domicile. have achieved marginal overall performance when compared to the standards established by the A.M. United Insurance Educators. This is a new rating category for A. meet their minimum size and experience requirements. E (Under State Supervision) This rating is assigned to companies that are placed by a state insurance regulatory authority under any form of supervision. It would NOT include liquidation.M.M. This rating category was formerly the NA-10 Rating "Not Assigned" category.M.(Marginal) Marginal ratings are assigned to companies that. Best company for a C. This rating category was formerly called the NA-7 Rating "Not Assigned" category. Best.M. in the opinion of A. Best that was created in 1992 to distinguish between companies under state regulatory supervision (E) and those in the process of liquidation (F).

The Rating Modifier gives interested parties a quick reference to the technical basis of the assigned rating.M. the agent will want to make note of the technical basis of the rating. or (2) Payments that is due from mandated state residual market programs or reinsurance facilities equal to. The lower-case "e" is the modifier. The evaluation by A. affiliation or contractual obligations with one or more other insurance companies. which indicates the company's assigned rating has been qualified to identify those insurers whose financial strength could adversely be affected by: (1) Existing or pending state legislation which mandates rate restrictions or surcharges that cannot be passed on to the policyholders. "q" = Qualified Rating. Page 278 . Anytime one of these modifiers appears.M. The company's current rating does not reflect the potential impact of these programs as they represent a future circumstance which could not be quantified when the rating was assigned. For example.M. However. Best's evaluation may be based on the availability of more information and/or contingent on the successful execution of a program of correction action by the company's management.M. their policyholders' surplus. Best may also reflect situations involving matters of a more subjective nature. "w" = Watch List. Best adds a Rating Modifier to the ratings A++ through F to identify a company whose assigned rating has been modified because of performance. A. The modifier appears as a lower-case (small) suffix to the rating. There are different types of modifiers: Performance Modifiers "c" = Contingent Rating. which was eliminated in 1992. Inc. Best's watch list during the year to advise interested parties that the company is under close surveillance because it has experienced a downward trend in its current financial perUnited Insurance Educators. or in excess of. you might see a rating of Ae. indicates there has been a modest decline in the company's current financial performance.Retirement Planning  Chapter 29 – Due Diligence      Rating Modifiers A. the decline has not been significant enough to warrant an actual reduction in the company's assigned rating. which indicates the insurance company was placed on A.

which indicates the rating assigned by A. and have interim leverage and liquidity performance comparable to that of its parent company. which indicates the rating is assigned to an affiliated group of property/casualty companies. The rating is based on the consolidated performance of the parent company and its subsidiaries. United Insurance Educators. based on the consolidated performance of the group. pool a substantial portion of their net business.M. "x" = Revised Rating.Retirement Planning  formance or may be exposed to a possible legal. the subsidiary must be eligible for a rating based on its own performance after attaining five consecutive years of representative experience. "g" = Group Rating. All members are assigned the same rating and Financial Size Category by A. the companies in the group must be affiliated by common management and/or ownership. expenses and losses are prorated in accordance with specified percentages that reasonably relate to the distribution of the policyholders' surplus of each member of the group.M. "e" = Parent Rating.M. which indicates the rating assigned to companies under common management or ownership which pool 100 percent of their net business. based on the consolidated performance of the group. To qualify for a Parent Rating under A. and have only minor differences in their underwriting and operating performance. Best. Chapter 29 – Due Diligence      Affiliation Modifiers Affiliation Modifiers are used by A. underwrite similar lines of business.M. Best company. which indicates the rating shown was revised during the year.M. Page 279 . To qualify for a Group Rating. Best to identify a company whose assigned rating is based on an affiliation or contractual relationship with one or more other insurers. financial or market situation which may adversely affect its performance. Best Company. "p" = Pooled Rating. Inc. All premiums. Best is actually that of the parent company of a domestic subsidiary in which ownership exceeds 50 percent. All members participating in the pooling arrangement are assigned the same rating and Financial Size Category by A. have common management with its parent.

This is assigned primarily by A. Best requires a company to have a minimum policyholders' surplus of $1. has no significant premium volume.M.M. or has no net insurance business in force. but do not meet A.M. Best with a copy of their NAIC statement. Page 280 .M. Best (Life/Health 1992 Edition of Best's Agents Guide) are not assigned a Best's Rating of A++ through F. they are referred to in the full report in the A. It is comprised of 11 categories to identify the reason why the company was not assigned a letter designation by A. NA-2 = Less than Minimum Size. United Insurance Educators.M. The primary reason is identified by the appropriate numeric suffix. Rating "Not Assigned" Categories About 52 percent of the companies reported on by A.5-million. which is abbreviated NA. This rating category is also assigned to a company that is effectively dormant. which indicates the rating and Financial Size Category assigned to the company are those of an affiliated carrier which reinsures virtually all of the company's net premiums written. Chapter 29 – Due Diligence      "s" = Consolidated Rating.M. as subsidiaries are normally rated on the basis of their own financial condition and performance by A. Those companies not receiving an A++ through F rating are assigned to a Rating "Not Assigned" category. Also an exception is the company that is a member of a group participating in a business pooling arrangement or a company writing stable lines of business that has demonstrated a long history of above average performance when compared to Best's Rating standards. Inc. If additional reasons apply. The reports on these small companies are based on selected financial information which is collected by A.Retirement Planning  "r" = Reinsured Rating. This is assigned to companies that file the standard NAIC annual statement.M. The rating applies only to the parent company. In order to assure reasonable financial stability. Best's Insurance Reports publication. Best. NA-1 = Special Data Filing. A. Best Company.M. which indicates the rating is assigned to a parent company and is based on the consolidated performance of the company and its domestic property/casualty subsidiaries in which ownership exceeds 50 percent. Best to small companies that are exempt from the requirement to file the standard NAIC annual statement or have not provided A. Best's minimum size requirement. A company that is 100 percent reinsured by a Best's rated company would be an exception. Best or which is purchased from the NAIC (Life/Health only).M.

An example of this would be a property/casualty company that is writing a line of business that does not commonly come in that line of coverage. but may not be limited to. Page 281 . substantial growth in premium writings or a significant redirection of marketing emphasis.Retirement Planning  Chapter 29 – Due Diligence      NA-3 = Insufficient Operating Experience. such things as mergers. Best if the company exhibits substantial growth in new business or changes in product mix whereby the development of the company's business or reserves may not be sufficiently mature at the end of five years to permit a satisfactory evaluation. Best Company to life/health companies whose sole operation is the acceptance of business written directly by a parent. Best may require a period of one to five years before the company is again eligible for a rating. This would include. Depending on the nature of the change. This requirement pertains only to the age of the company's financial performance and does not relate to the actual experience of its management team. A. Best anticipates will meet. which is assigned to any company by A. or A. sale to a new owner. but has not accumulated five consecutive years of representative operating experience. non-Best's rated reinsurers which represent a substantial portion of United Insurance Educators.M. Best. Additional years of operating experience may be required by A. NA-6 = Reinsured by Unrated Reinsurer. or has reinsurance recoverables from. but there are many more situations that would also apply. A.M.M. This is only one example. which has a substantial portion of its book of business reinsured by. or whose writing predominantly property/casualty insurance under a dual charter.M. Inc. Best when the nature of its business and/or operations is such that Best's normal rating procedures do not properly apply. which is generally assigned to a previously rated company which experiences a significant change in ownership. Best's operating experience requirement requires consistency in both the types of coverages written and the relative volume of gross and net premium writings. Best may assign this rating to any relevant event that has or may affect the general trend of a company's operations. NA-5 = Significant Change. their minimum size requirement. NA-4 = Rating Procedure Inapplicable.M. A. management or book of business whereby its operating experience may be interrupted or subject to change. which is assigned to a company which meets. by A.M.M. subsidiary or affiliated insurance company.M. This is assigned to a company. This rating is also assigned by A.

Best normally requires a minimum of two years to elapse before the company is again eligible for the assignment of a rating. It should also again be pointed out that there are other companies that also rate the financial stability of insurance companies. but cooperate with our request for financial information in order that a report can be prepared and published on their company. NA-8 = Incomplete Financial Information. it should provide a basic guide to their rating systems.M.M. In this situation. Best. The majority of the companies that make such a request operate in markets that do not require a rating. Best's reporting requirements and satisfy their financial performance standards. The classification is also assigned to a company that request its rating not be published because it disagrees with either A. of which the impact cannot be evaluated due to a lack of timely or appropriate information. but fails to submit complete financial information for the current five-year period under review. by A. This category was discontinued in 1992 and was replaced with the Best's Rating of D.M. This designation was discontinued in 1992 and replaced by A. NA-11 = Rating Suspended. However. United Insurance Educators. Best with a rating of either E or F. Inc. Best's rating assignment or their rating fee. NA-10 = Under State Supervision.M. which would be assigned to an insurance company that is eligible for a rating by A. This requirement includes all domestic insurance subsidiaries in which the company's ownership exceeds 50 percent. Best.M. A. Often the ratings assigned are not in agreement. It should be noted that this is not a complete explanation of everything that goes into the process used by A. but requests that the rating not be published. which is assigned to a company that is eligible for A. Page 282 .Retirement Planning  its policyholders' surplus. This is a newer rating in the Rating "Not Assigned" category.M. Best to rate the individual insurance companies.M. Best's rating.M. NA-9 = Company Request. which is assigned. Chapter 29 – Due Diligence      NA-7 = Below Minimum Standards. to a previously rated company which has experienced a sudden and significant event affecting the company's financial position and/or operating performance. Exceptions are non-Best's rated foreign reinsurers that do comply with A.

when a person dies without a will. Of course. Seldom is that division done the way the deceased would have wanted. If all of the heirs are of legal age. to end up in heated arguments over who will be the administrator. then all of them must agree upon the operation or sale of the assets. once again. the real estate cannot be sold without a court order. any real estate holdings will go by statute to the heirs and not to the administrator. to do nothing is to "choose" to die intestate. Most states do have a statute that establishes the order of preference for selecting an administrator. the court will appoint an administrator to serve the individual's estate. the laws of the particular state will determine exactly how assets are to be distributed. When a person dies intestate. when powers of administration are derived from state statute. Generally speaking. efficiently or economically. If minor children or dependent individuals exist. To die intestate means to die without a will. Generally. These expenses far outreach what the cost of a will would have been. seldom is the estate settled quickly. in most states they cannot be sold without first incurring the expense of obtaining a court order. United Insurance Educators. However. for example. one would not think that any sane individual would choose to die under these financial circumstances.Retirement Planning  Chapter 30 – Choosing to Die Intestate      30    Choosing to Die Intestate It certainly would be foolish to "choose" to die intestate. but that is not to say that disputes do not happen. If securities exist in the estate. as has been stated. Inc. Every administrator appointed by a court must give bond with surety thereon to guarantee their performance of their duties. Page 283 . It is common for children. a bond must be posted. these actions will mean additional expense for the estate. a guardian must be qualified for each and. Of course. Where minors are involved. When a person has exercised their option to do nothing.

as well as other laws of intestacy. Only by choosing to exercise that control does it belong to each of us. This includes no existing spouse. It is certainly better than most other intestacy laws. Page 284 . an individual's property would pass on to the surviving spouse if there were neither issue nor surviving parents. Illegitimate children are treated with enormous variation among the states. It gives the impression that only the wealthy have anything relevant to say about their deaths. parent. In fact.000 plus one-half of the balance would go to the spouse and the other half to the issue. but it still does not replace a properly drafted will. Chapter 30 – Choosing to Die Intestate      United Insurance Educators. the first $50." Hopefully. it is the smaller estates that especially need a will since there are less assets to distribute. If an individual should die with issue of their marriage. or sister surviving. the general public realizes that this saying is not only false. Some states give adopted children the same rights of inheritance as natural children. Inc. Some states give a preference to relatives of the whole blood over relatives of the half blood. but also sad. If there is issue. attempts to cover all of the possible variations of an estate. It is comforting to know that we do have some measure of control over our assets during death. Under the Uniform Probate Code. but one or more of them are not also issue of the surviving spouse. brother. There is a saying that "Only the wealthy need wills.Retirement Planning  Some states have adopted the Uniform Probate Code. No legal entity can design an estate settlement that fits all individuals. If we do nothing we are then choosing to allow others to take control. The Uniform Probate Code. So many things in our lives are beyond our control. however. Only by careful estate planning can an individual be assured that his or her assets will go to those individuals desired. issue. then the estate would go equally to the surviving spouse and to all of the issue without the first $50.000 passing to the surviving spouse.

of course. as selected. These are charges that are deducted from the annuity accumulation on an annual basis. the policyholder may no longer withdraw funds or do as he or she pleases with the money. it is the individual who is given the authority to act on another person's behalf. Annuity: the word annuity means "a payment of money.Retirement Planning        Glossary  Accumulation Phase: the period of time in which funds are accumulated by periodic contributions or interest earnings. Agent: as used in relation to powers of attorney. Page 285 . These funds are often accumulated for use during retirement. Administrative Charges: some annuity contracts contain administrative charges. The reasons the bequest is no longer possible will vary. a woman who is responsible for the estate. The amount of the charges varies so it is necessary to consult the contract. Administratrix: when there is no will. though not all of them. on how much money was paid into the annuity during the accumulation period (also see accumulation period). begin. Once an annuity is annuitized. Administrator: when there is no will. Inc. Age Discrimination in Employment Act (ADEA): legislation that forbids companies from forcing their workers to retire due to age. How much money is paid out will depend. the person who is responsible for the estate. although the person is not required to actually be an attorney. payments begin being made by the insurance company to the annuitant or contract owner. The majority of annuities are never annuitized according to insurance company records." Annuities are designed to do exactly that at the appropriate time. Ademption: when a specific bequest of a will is no longer possible. payments. It may also be referred to as an attorneyin-fact. Once this takes place. Annuitize: an irrevocable bargain with the insurance company. United Insurance Educators. When an annuity is annuitized.

Average Indexed Monthly Earnings (AIME): the Social Security administration averages the highest earnings for the number of years an individual needs and divides this by 12 to arrive at the AIME. These witnesses are called attesting witnesses. The benefit formula is then used with the AIME to arrive at the Primary Insurance Amount. It may be any person of legal age. under specific conditions. their property reverts to their own children or grandchildren rather than to their spouse. This would be a civil and a criminal breach of duty. with the testator being the first and the trust being the second. Bail-Out Clause: this clause allows the annuitant or policy owner. Attorney-In-Fact: also referred to as an agent. it is the person given the authority to act on another person's behalf through a Power of Attorney document or a Durable Power of Attorney document (both legal documents). Breach of Duty: when the trustee fails to act appropriately. United Insurance Educators. Often. to cash in their annuity early without paying the surrender penalties that would otherwise be due. In many other situations. Assumed Interest Rate (AIR): used by insurance companies to calculate the number of units a policyowner will receive under a fixed annuity payout. Page 286 . the beneficiary is the second entity involved. In a living trust. prevents property from being commingled. they are often used to protect the assets for children or grandchildren. Beneficiary: a person or organization that has been named to receive assets from another person or organization. the bail-out clause is tied to the current rate of interest being paid. Therefore. for example. when either spouse dies. Attesting Witnesses: even states that do not require witnesses to execute a will still require witnesses when the will enters probate. It can occur if the trustee takes funds from the trust for an unauthorized reason. with the grantor being the first entity. the beneficiary is the third entity involved. the person given this power does not actually have to be an attorney.Retirement Planning      Antenuptial Agreements: generally used by individuals who have previously been married. Despite the name. An antenuptial agreement keeps the husband's and wife's property separate. Inc.

Page 287 . A contingent interest is not absolute. it is called a concurrent ownership. it may be made by writing an entirely new will or by adding a codicil. This occurs when banks and trust companies combine investment funds from many trusts to get better returns.Retirement Planning      Bypass Trust: a type of testamentary trust (also see testamentary trust). Cash Surrender Value: the total accumulation after the insurance company deducts surrender charges or penalties (also see Surrender Penalties). not absolute. Concurrent Ownership: when there are two or more people who own a share of property. a contingent interest is dependent upon a set occurrence (or even nonoccurrence) and is. it is subject to change at any time. There may be many reasons why this might occur. When a change is made. but does not become effective until the testator has died. A codicil may be a brief paragraph or multiple pages. Insurance trusts are often Combination Trusts. Contingent: dependent upon another event or nonevent. There are four types of co-ownership of property. like the inter vivos trust. It is this cash value that may be borrowed from a life insurance policy. therefore. tentative. Contingent Interest: some wills may put a condition upon receiving property at a specified time. like the testamentary trust. Codicil: A change or modification (usually minor) that is made in an existing will. Cash Value: cash value is the accumulating cash portion of a life insurance policy. Therefore. United Insurance Educators. It is tentative. The most common form is Joint Tenancy With Right of Survivorship (JTWRS). so it may or may not occur. Common Trust Funds: a corporate trustee may invest and reinvest in common trust funds. Inc. it is designed to take advantage of the federal unified estate and gift-tax credit. Unless a will is frozen by contract. Citation: a notice that is served to a person who was written out of a will or had property that would have otherwise been inherited changed to another person by use of a codicil. Contesting the Will: this means having it set aside through legal channels. Combination Trusts: a trust which is created while the testator is still living.

It involves helping the patient with routine daily activities. Custodial Care: also referred to as "maintenance care". it is care that may be given by a person with no professional training or skills in the medical field. because it would be impossible to know what current rates would be before they occur. The current settlement-option rate is not written into the contract. It is designed to take advantage of the federal unified estate and gift-tax credit. Daily Benefit: as referred to in long-term care policies. depending upon contract terms. This rate is one of two factors used by the actuary when figuring out the settlementoption rates. bathing and taking oral medications. At death. United Insurance Educators. The other factor is the guaranteed settlement-option rate. eating. The "current" settlement-option rate is merely the rate paid at the current time. A deferred annuity may be purchased by either a lump sum investment or by installment contributions. under law.Retirement Planning      Contingent Remainderman: an individual who receives property only under certain conditions. Community Property: property that is acquired during marriage and is owned equally by both the husband and the wife. Credit Shelter: also called a Bypass Trust. Also see Remainderman. it is the amount per day that the insurance policy will pay for a covered nursing home confinement. Deferred Annuities: an annuity that draws interest for a period of time before the annuitant or contract owner withdraws benefits. Page 288 . toileting. it is a type of testamentary trust (also see testamentary trust). as stated in the contract. be left to him in his wife's estate. This interest rate will change periodically. such as walking. Inc. the husband's portion which must. Current Settlement-Option Rate: a settlement-option rate is expressed by insurance companies as dollars of monthly income per thousand dollars of accumulated value. Courtesy: in common law states. neither one can will more than half of the joint property to another person. Current Rate: the rate of interest that is posted monthly or yearly.

performance and financial standing. Domicile: the permanent residence of an individual. The amount of benefits will depend upon several factors.Retirement Planning      Defined Benefit Plan: a pension plan that is controlled by the employer. this is often done to determine whether or not there is a reasonable expectation that the illustrated values presented can actually be achieved. Dowager: in common law states. Due Diligence: the analysis of insurance company products. Donor: the person who gives a gift to another. Defined Contribution Plan: a pension plan where the contributions are "fixed" although the actual benefit that an individual will receive is not known until retirement arrives. Dower: in common law states. It is different from an individual's legal residence. which is simply where they live at any given moment. the wife's portion. these plans generally do NOT have any benefit formula. Upon her husband's death. Often the contributions made are stated in a percentage amount. Also see "Power of Attorney. Generally a "durable" power of attorney begins only when the grantor becomes mentally incompetent." Durational Residence: means having to reside in a state for a specified period of time in order to qualify as a residence. years of service to the company and employment compensation. as required by law that must be left to her upon her husband's death. the wife's portion. Where life insurance is concerned. Inc. such as 6 percent of an individual's salary. as required by law. The employer determines in advance what monthly benefits the worker will receive in retirement. Direct Gifts: the most common type of gifts. Page 289 . Durable Power of Attorney: a legal document granting another person the ability to act in behalf of the grantor. These plans generally have a benefit formula. including age. Donee: the person who receives a gift from another person. Unlike Defined Benefit Plans. it is property that is simply transferred to another. she became a dowager. United Insurance Educators. they may have only one legal domicile. was traditionally called Dower. Although a person may have several residences.

Inc. the right to possess the property for the rest of the term will be determined by the conditions of the will. under which the spouse of the worker would receive the same dollar benefit that the worker received. his or her duty is. but not funded. This is not the same as an egotist. Estate Planning: the art of designing a program for the effective management. enjoyment and disposition of property while minimizing taxation. The tenant has no right to transfer the property during their life or at the close of the term. also see the definition of real property. Final Report & Petition for Distribution: an accounting record filed by the personal representative that shows what he or she has done in the probate proceedings. Fiduciary Duty: a fiduciary occupies a position of trust. If the tenant dies before the end of the specified period of time. then to the heirs forever. Fifty Percent Joint-And-Survivor Annuity: Another name used for the Qualified Joint-And-Survivor Annuity. the woman who is responsible will fulfill the desires of the testator. therefore. There are also 100 percent joint-and-survivor annuities. Egoist: those who reject the idea of other's interests and desires. For the best understanding. Page 290 .Retirement Planning      Elimination Period: a deductible expressed as time not covered. This is usually a term used in long-term care nursing home policies. Empty or Non-Funded Trust: a trust that has been written. Estate for a Term of Specific Years: this sets an individual's interest in a piece of property for a set amount of time. Executor: when a will does exist. Executrix: when a will does exist. United Insurance Educators. Egotist: one who is self-absorbed or "stuck" on themselves. the person who is responsible will fulfill the desires of the testator. also one of responsibility towards the position held. Fee-Simple Estate: this means that there is an interest in the real property that belongs to an individual.

whereas a variable annuity provides a fixed number of annuity "units. A fixed annuity provides a set number of dollars each month. It is hoped that this will keep the investor ahead financially. Fixed Annuities: an annuitization option that "fixes" the amount of monthly income at a set level. accepted rules of conduct. The grantor retains the right to receive an annuity or percentage payment from the trust for a specific time period. A gatekeeper "closes the gate" on payments that might otherwise be due under the terms of the policy. this type is usually referred to by the acronym GRIT. This type of irrevocable trust is created solely to save taxes. Grantor Retained Interest Trusts: An irrevocable living trust. If an individual needs 40 quarters. the moral principles of an individual." Four Percent Strategy (4% strategy): the expectation that the rate of return will equal about four percent more than the rate of inflation. Equitable Title: the person who receives the income from a trust. it refers to a stated clause or requirement that prevents payment under the terms of the policy. Ethics: the principles of honor and morality. This might be through a trust where the trustee is vested with legal title. but the income from the trust goes to someone who has equitable title. Page 291 .Retirement Planning      Equitable or Beneficial Owner: the person entitled to all the benefits of a specific piece of property. Everyone first eligible to retire in 1991 or later will need to use 35 years for the average. for example. Gift: any gratuitous transfer of property. The probate estate is all property that will go through the probate process. which will not increase to offset inflation or other financial needs. Gatekeeper: a term often associated with medical insurance policies. Beyond United Insurance Educators. Taxation occurs when the value of the gift is over a certain dollar figure. Fully Insured: relates to Social Security benefits. Inc. both probate and non-probate. Those retiring earlier will use a different number. though generally no more than ten years. It is the amount needed to receive maximum or full payments from the Social Security program. 35 years would be the average needed (40 minus 5 equals 35 years). Gross Estate: the gross estate includes ALL rights to ALL property.

Also see guardian ad litem and special guardian. but in some states. Guaranteed Settlement-Option Rate: one of two factors used by an insurance actuary when figuring out the settlement-option rates. such as California. it is written into the annuity contract and represents a minimum payout. Different policy types will determine the length of time involved in the guarantee period. Guardian: a person who is responsible for another person or another person's assets. Guarantee Period: the period of time for which the current interest rate is good for. A person may be assigned as guardian of one or the other or even both. GRIT: see Grantor Retained Interest Trusts. the individual has the right to be represented by an attorney. In every state. No witnesses are necessary. it is a completely handwritten will which is generally drafted without the help of an attorney.Retirement Planning      the specific time period stated for receiving payments. it is the "current settlementoption rate that applies at the time of annuitization. Homeland: the testator's residence. The attorney is then called the guardian ad litem or special guardian. a guardian may only be assigned if permission is given to do so by the ward. the grantor retains no further interest in the trust. However. the court will appoint one. they give another specified person the legal authority to make decisions on the behalf of their ward. conservators. it must be signed by the testator. Guardianships: often used to protect minors or handicapped individuals. United Insurance Educators. Gross Estate: includes all property in an estate. When this rate is guaranteed (guaranteed settlement-option rate). Page 292 . In many states the courts assign guardians. Inc. Guardian Ad Litem: when a person does not have an attorney. A settlement-option rate is expressed as dollars of monthly income per thousand dollars of accumulated value. and committees. if it is higher than the guaranteed settlement-option rate. even those assets which bypass the probate proceedings. as stated in the contract. Of course. Holographic Wills: a self-written will which is recognized in less than half of our 50 states.

include the right to change the beneficiary. It has reference to the rights of the insured to any economic benefits of the policy. An irrevocable living trust would complete the gift transaction before death. or otherwise benefit or affect the policy in any way. United Insurance Educators. Inc. Only death actually completes the gift transfer. Those rights. Intermediate Care: care that must be prescribed by a doctor and given by a skilled medical professional. These types of annuities are often utilized by older investors who wish to receive a long-term payment on a monthly basis. it is a legal document that is drafted during the lifetime of the trust creator. take out a policy loan. Integrated Benefit Plan: a pension plan where the employer has considered the amount the individual would receive from Social Security when designing the pension plan. Also see living trust. surrender or cancel the policy. intermediate care is given on an intermittent basis. Inter Vivos Trust: also simply referred to as a living trust. Incomplete Gifts in Trust: given through a revocable living trust. These accounts are funded solely by the individual with the contributions being tax sheltered if certain financial conditions exist. Page 293 . An indirect gift is any property or property rights that are shifted from one person to another without financial compensation. assuming the donor did not revoke the gift during their lifetime." but more than the level called "custodial care." Generally. The combination of both the retirement plan and Social Security is used to formulate a certain percentage of the worker's pre-retirement income. Individual Retirement Account (IRA): a savings plan used by individuals to accumulate cash for retirement benefits. according to the IRS. Interested Party: any person who would financially gain by overturning an existing will. This type of pension plan is often used to give more pension benefits to the company's higher-paid employees. The medical care is less than that deemed "skilled care.Retirement Planning      Immediate Annuities: annuities that immediately begin to pay benefits to the annuitant or contract owner. Indirect Gifts: these happen much more often than people realize because often such gifts are not thought of as gifts. "Any" is the key word here. it is not limited to meaning ownership in the technical sense. the donor has the right to change his or her trust at any time. Incidents of Ownership: an IRS term.

Retirement Planning   
 

Intestate: when there is no valid will in existence. In this case, all property which did not have a beneficiary designation and which was not covered by a will, shall be disposed of under the laws of Intestate succession. Intestate Succession: when there was no valid will in existence, so all property within the state is distributed by that state. Transfer by intestacy does not distinguish between real and personal property. There is a rigid order of distribution that is followed regardless of what the deceased would have wanted. Irrevocable Living Trust: created during one's lifetime, it is unlike the revocable trust where the trust creator has the power to change or even terminate the trust. An irrevocable trust gives up the power to do so. An irrevocable trust is often used to minimize estate taxation. When an individual cannot change the terms of the trust and retains virtually no power over the assets, the trust is then irrevocable. There are different types of irrevocable trusts. Joint Account With Right of Survivorship: passes assets, which are held jointly by two or more people, on to the survivors even if no will exists. Such accounts are commonly used by husbands and wives. Joint-and-Survivor Annuity: a payout option that is most often utilized by husbands and wives, it guarantees that the insurance company will make monthly payments for as long as either of two named people survive. It can be used by any two people, not only married couples. Joint Tenancy With Right of Survivorship (JTWRS): the most common form of co-ownership, it means that the tenant's share cannot be transferred by will. When a joint tenant dies, that tenant's share goes to the surviving tenants. Joint Will: where the same document is made to will of two or more people and is jointly signed by them. Also see Mutual Will. Last Will and Testament: merely a conventional statement indicating that this will is the latest one written and that it contains the desires of the testator (more of a legal term than anything else). Legal Owner: one of two types of property owners, the legal owner has legal title to the property. Also see Equitable or Beneficial Owner. The legal owner has absolute ownership with all the related responsibilities of ownership.

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Level Premium Policy: a policy that does NOT increase its rates due to increasing age. This does not mean that the premium rates will not increase; simply that they will not increase due to advancing age. Leverage: measures the exposure of an insurance company's surplus to the various operating and financial practices. Life Annuity: a payout option that guarantees a monthly payment to the annuitant or worker for their lifetime. Their spouse or beneficiaries, however, do not receive any payment after their death (even if the annuitant or worker fails to use all that was paid into the annuity). The Life Annuity is the most common form of pension payout used, although there are generally other options available. Life and Period Certain Annuity: a payout option that may also be called "Life and Installments Certain Annuity." The vital difference between the Life-and-Period-Certain annuity and the Single Life annuity has to do with the leftover funds after the annuitant or policyowner dies. A Life annuity does not pay any leftover funds to any beneficiary, whereas this annuity guarantees payments will be made to someone for the stated period of time. The "period certain" states the period of time that payments will be made to someone; either the annuitant or a beneficiary. Life Annuity With a Period Certain: like the life annuity payout, the annuitant or worker is guaranteed to receive payments for his or her lifetime, but unlike the life annuity, this payout option guarantees a minimum period of time that payments will be made to someone; if not the annuitant or worker, then to his or her beneficiaries. Often that specified time period is ten years. Then it would be called a Life Annuity With a 10-Year Period Certain. Life Estate: where an individual has the absolute right to possess, enjoy and profit from the property specified for the duration of his or her life. The individual's legal interest in the property ends at their death. Liquidity: this measures a company's ability to meet its anticipated short and longterm obligations, which includes policyholder claims. Living Trust: also called an inter vivos trust, it is a legal arrangement under which one entity (the testator) transfers ownership of assets to another entity (the trust). The beneficiaries are the third entity involved in a living trust. The trust is generally drafted to either manage assets or minimize taxation. There are both revocable and irrevocable trusts. Only the irrevocable trust is able to accomplish tax minimization. Trusts come

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in many forms and should only be written by an attorney who specializes in estate planning. Living Will: a legal document used to avoid prolonging one's life by artificial means. Lump-Sum Payments: when the accumulation phase of the annuity ends, many people elect to simply draw all of the funds out of the account in a lump sum. In other words, they close the account by removing all the funds in it. Market-Value Adjustments: in theory, this is a way for an insurance company to share both their profits and their losses with their policyholders. Not all agree with the concept. Theoretically, it works because when interest rates fall, the market value of the insurance company's assets, which are commonly bonds, rises. Market Value Adjustments may give an insurance company more flexibility to invest in areas that promise a higher return. Moral Excellence: virtues that go beyond the call of duty. Multi-Employer Plan: one in which two or more employers contribute to a collectively bargained pension plan. Mutual Will: when two or more people make separate wills containing mutual provisions in favor of each other. Net Worth: Assets minus liabilities equals an individual's net worth. Net worth is the value of the estate after all bills have been paid. No-Contest Clause: included in some wills, it is a clause or two providing that if anyone contests the will, he or she will receive a trivial amount or perhaps even be cut out of the will entirely. Non-Funded or Empty Trust: a trust that has been written, but no assets have been put into it to fund the trust. Non-Probate Property: property that bypasses the probate procedures. probate property and gross estate. Also see

Nuncupative Will: an oral will given in front of witnesses who must submit affidavits. This type of will is often done during an illness or just before death, when drafting a will would likely be impossible. Not all states will accept nuncupative wills.

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Objectivist Ethics: the human ability to form who and what we are by reason and logic. As a theory of ethics, it holds man's life as the standard of value and his own life as the ethical purpose of every individual man. One Hundred Percent Joint-And-Survivor Annuity (100 % Joint-And-Survivor Annuity): annuity plans which pay the surviving spouse the same dollar benefit that the worker received. Partial Withdrawals: although annuities are designed to be long-term investments, many of them do allow partial withdrawals from non-qualified annuities. Qualified annuities may be borrowed against, but this is not true of non-qualified ones. These partial withdrawals, when used according to the contract terms, do not impose surrender penalties against the funds withdrawn. Partition Sale: when a joint tenancy is created, the person giving the most money to buy the property has made a fit to the other joint tenants. Should a co-tenant wish to sell his or her interest and the property cannot be divided, the entire property must be sold and the sale proceeds then distributed among the co-tenants. It is this action that is called a partition sale. Payout Phase: the time during which income is withdrawn. Pension Benefits: refers to benefits which come from all employee plans that defer income or provide payments after retirement. This includes such things as 401(k) plans, Keogh plans, profit sharing through employers and employee stock ownership plans. Pension Benefit Guaranty Corporation (PBGC): the government's pension agency that monitors pension benefit plans. Per Capita: a method of distributing assets where each grandchild receives an equal portion of the grandparent’s estate. Per Capita means "per head." As the testator's children die, the grandchildren inherit in a trickle effect. Personal Property: may be either tangible or intangible. Personal property is anything that is NOT real property (see real property). This would include such things as clothing, furniture, rights to organizations and so forth. Per Stirpes: a method of giving assets to grandchildren that does not attempt to be fair or equal. Per Stirpes means "by the roots" or "through the blood." The grandchildren will get their parent's share if the parent becomes deceased. Even though this
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method does not distribute to the grandchildren equally, it is still the most common method used. Persistency Bonus: used fairly often in contracts, this clause encourages their policyholders to keep their annuities for longer periods of time by offering an increased return at set time intervals or at some specific time period. Pour-Over Trust: a transfer of assets from one estate or trust into a pre-existing estate or trust. Typically, a pour-over trust needs to be executed prior to the will. Pour-Over Will: a will which directs that specifically named assets or all residuary property pass into an already established trust, revocable or irrevocable. Power of Attorney: a legal document that allows another person to act on behalf of the grantor. Typically, it states certain conditions under which this may take place and tends to end should the person become mentally incompetent. A durable power of attorney begins when the grantor becomes mentally incompetent. Preferential Beneficiary: those people who, in the eyes of the law, have legal rights to designated portions of an estate or, at the least, to be mentioned in the will as proof that they have not been forgotten. Primary Beneficiary: a member of the immediate family, which would include parents and siblings. The first and foremost primary beneficial, however, is the spouse. Primary Insurance Amount (PIA): relates to the amount of money each person receives from Social Security. PIA is the base used to figure exact payments. The PIA is adjusted for changes in the cost of living, although it does not necessarily keep up with the actual cost increases. Probate: Latin meaning "to prove." That is precisely what probate is all about: proving the will is valid. The proceedings include petitions, notices, hearings and orders. Probate Property: all property that must go through the probate process. Also see non-probate property and gross estate. Profitability: profit is the measure of competence and reflects the ability of management. Profit results when the management provides viable insurance products at competitive prices, which maintains a financially healthy company.

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Property: is anything that is capable of being owned. There are only two classes of property: real and personal property. Prudent-Man Rule: a layperson is expected to handle responsibilities according to this rule. The Prudent-Man Rule means that the trustee must act in a manner, which can be reasonably expected of a prudent man. A professional, such as an attorney or insurance agent, would be held to a higher standard. Qualified Joint-And-Survivor Annuity: a payout method which provides an annuity for as long as the retired employee lives and then continues to provide a payment to the retiree's spouse until he or she dies. The benefit must be at least equal to 50 percent of that received by the worker. Qualified Pension Plan: means contributions are not taxed until they are withdrawn and spent. Most employer sponsored pension plans are "qualified." In a non-qualified plan, the contributions would be taxed. Qualified terminable interest property trust (Q-TIP): a type of testamentary trust (also see testamentary trust), all the income from it must be paid to a spouse and the executor of the estate is responsible for making sure that the trust is eligible for the marital deduction, thus exempting it from the gift or estate taxes. The assets in the OTIP trust are taxed in the spouse's estate. The Q-TIP trust is commonly used and most likely to be recognized by name. Qualifying Domestic Trust (Q-DOT): a type of testamentary trust (also see testamentary trust) is used when an individual's spouse is not a United States citizen. The Q-DOT preserves the marital deduction for the spouse that is not a citizen; otherwise this deduction would not be allowed for spouse's who are not citizens. This type of trust prevents the portion of the estate that exceeds the unified credit from being subject to federal estate taxes. Real Property: land and all things that are permanently attached to that land, such as a home, garage, trees, shrubs, growing crops, and so forth. It does not include a mobile home, unless it has been put on a permanent foundation. Remainderman: an individual who receives ownership of property only after a specified time interval has passed.

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Page 300 . Retirement Planning: whereas estate planning refers to death planning. Reversionary Interests: as it applies to wills. uncles. which pertains to what remains after the rest of the estate has been distributed or paid out. The witnesses swear under oath that the testator signed the will in their presence and was competent and not under any duress. Inc. new moral duties infer that the testator would have changed the will had he or she thought of it.Retirement Planning      Residuary Clause: a tightly drawn will contains this clause. sisters. Generally. Secondary Beneficiaries: this includes brothers. they seldom minimize taxation. this common law rule is preserved by statute. United Insurance Educators. Rule of Revocation: implied by law. Separate Property: property that is owned solely by one person. In some states. This clause is a paragraph in the will that directs the state in the event that all of the family is wiped out together. The affidavit is completed at the time the will is signed. Revocable Trust: unlike an irrevocable trust. Usually there is only one residuary trust that reduces trust fees. revocable trusts are used to manage assets. it means the property owner transfers the property while still living. cousins. Often a charity is named to then take possession of the assets remaining. A residuary trust is used to take the remaining funds. Self-Proving Wills: this type of will has an affidavit attached to it that contains a sworn statement by each of the witnesses. but reserves the right to have all or part of the property returned. This term is usually used when referring to property owned by a married person. The trust is then tailored to meet the needs of the family. it is based upon the theory that because of any significant change. a revocable trust gives the individual creating it the ability to change or even terminate the trust. Reversionary interests may be either vested or contingent. Residuary Trust: "residuary" means the funds remaining in the estate after deducting specific bequests and other liabilities. often from life insurance policies. aunts. This type of will removes the need to locate witnesses at a later date (when the testator has died). and may also include special friends. retirement planning refers to life planning since one will be using the funds during retirement (in life).

this withdrawal method has actually been around for a long time. given by a skilled medical professional and be available for 24 hours a day. Split-Funding Techniques: although not used widely until recent years.Retirement Planning      Settlement-Option Rate: a figure computed by insurance actuaries regarding the size of monthly payments. Sham Gift: this is not considered to actually be a gift. would still be liable for any tax due. Settlement-option rates depend on how long the actuary believes the insurance company will be making payments to the policyowner and on how well the insurance company believes they can invest funds during that period. Page 301 . including the spouse. United Insurance Educators. Under this option. Spendthrift Clause: this clause is used under beneficiary designations and is designed to prevent claims by third parties from touching trust assets. The spendthrift clause prevents individuals. Specific Bequests: when the will specifically states what an individual is to receive. the court will appoint one. Under this withdrawal method. Special Guardian: when a person does not have an attorney. Situs: the place where property is located. in this case. Inc. an individual takes a sum of money and divides it into two separate annuity funds: an immediate annuity for immediate flow of funds and a deferred annuity that will continue to grow at the designated rate of interest. such as salespeople or creditors from reaching trust funds while still allowing the trustee to provide for necessary living expenses. The donor. after the annuitant dies. Single Life Annuity: also simply referred to as a "life annuity. The attorney is then called the guardian ad litem or special guardian. It means that the transfer of property was done solely to shift the income tax burden from a person in a high tax bracket to a person in a lower paying tax bracket. This is often used to recognize favorite people or reward special behavior. No further payments will be made to any beneficiaries. Skilled Care: medical care that must be prescribed by a doctor." It is a form of annuity payout that guarantees the annuitant a lifetime income that can never be outlived. he or she will receive a set amount of money each month. which is expressed as dollars of monthly income per thousand dollars of accumulated value.

Inc. without ever actually annuitizing the account. the survivor will only receive the half he or she already owned (not the entire account). Surrender penalties are used to discourage investors from withdrawing funds before a stated time period. as required by law. Tenancy by the Entirety: similar to a JTWRS. If the annuitant does not live long enough to complete this time period. Tenancy In Common: a device for transferring assets. Ten-Year Certain Annuity: there are payout options that specify a specific time period during which benefits will be paid out. Annuities are not intended to be short-term vehicles. it states that each person owns half of the assets. including the principal. Page 302 . if it is a defined benefit plan (see Defined Benefit Plan). the formula that is being used. Once withdrawn. Tenant-In-Common: the owner of property in a tenancy-in-common. The death of either spouse would put sole ownership with the remaining spouse. it is limited to the co-ownership of property by a husband and wife only. A JTWRS may be owned by people who are not related to each other. The amount of the penalties and the length of time involved will vary from contract to contract. then his or her beneficiaries will continue to receive payUnited Insurance Educators. The other half will go into the estate of the deceased. The Tenancy by the Entirety would automatically terminate should a divorce occur. but at the death of either owner. Systematic Withdrawals: this plan is based on the policyowner's life expectancy. Summary Plan Description: a summary outlining the type of pension plan being offered and. gender and the amount of money that has been paid in. the insurance company calculates a monthly payout amount. It is calculated by the insurance company based on gender and other factors.Retirement Planning      Statutory Share: a word that has primarily replaced the terms Dower and Courtesy. It is important to note that under this payout option. Tax Deferred: means that taxes are not paid on the interest earnings until those earnings are withdrawn from the account. Annuities routinely have surrender penalties for early withdrawal. it means the portion that must go to specific heirs. Surrender Penalties: the amount of money that an investor will lose for withdrawing funds before the stated time period allowed in the contract. the annuitant withdraws all of the accumulated value. the earnings must be reported to the IRS for the year withdrawn. Using life expectancy.

There are specific requirements that must be met in order to transfer one's assets and then qualify for Medicaid. There are different types of testamentary trust. because they are irrevocable once effective. can save estate taxes and preserve assets. Inc. it includes charities. projects. Any time period may be specified. It does not necessarily have to be ten years." Annuity units are not fixed in value. Third Party Transfers: these involve three people or three groups of people. The first party typically provides a gift to the second party who agrees to provide a service for a third party. Trustee: a person or organization who is responsible for overseeing a trust. nor the monthly payment received during the payout phase is fixed (thus the name. A testamentary trust does not actually become effective until death occurs. Tertiary Beneficiaries: the third class of beneficiaries. This is true whether the shares are equal or unequal. Where a fixed annuity provides a set number of dollars each month. Testator: the creator of a will. Testamentary Trust: created under an individual's will. Neither the rate of interest paid during the accumulation period. and people where there is no push of duty. meaning the payment could go either up or down each month. a variable annuity provides a fixed number of "units. The third party is the donee. which is "set" in the payment amount. variable annuity). United Insurance Educators. Transfer of Assets: this usually applies when a person is trying to qualify for Medicaid benefits (Medi-Cal in California). Testamentary trusts. The actual payment received each month will vary as interest rates vary. Page 303 . it is a trust that has been set up before death occurs and contains instructions from the insured regarding his or her assets. The creator of the trust may also be a trustee.Retirement Planning      ments until the predetermined period of time has been reached. unlike a fixed annuity. The first party is the donor. Variable Annuity: an annuitization option that gives a varied dollar payment each month. organizations. Vested or Vesting: a stated time period of employment which must pass before pension plan benefits for eligible employees are guaranteed. Undivided Interest: each person who has a share in a Tenancy In Common (also see Tenancy In Common).

Waiting Period: Many types of insurance have "waiting periods. The term is defined by the Encyclopedia Britannica as the declaration of a man's mind and interests relating to the disposition of his lands. Page 304 . there is a maximum amount of earnings that are counted for an individual each year. Vested Interest: an individual's right to receive property at a specified time that is fixed and absolute. goods or other estate." Ward: the person the guardian cares for.Retirement Planning      Wage Base: relating to Social Security payments. It is not necessary for the witness to read the contents of the will or legal document. or of what he would have done after his death.com www. have a period of time which must pass before benefits are payable. Anything over this maximum will not apply.com United Insurance Educators. It is this period of time that is called the "waiting period.uiece. Witness: as this term applies to a will or other legal document. a guardian is needed because the ward is under the legal age or is handicapped in some way. Generally. Social Security disability benefits. since they are merely witnessing the signatures and not the document contents. Vested: endowed with the authority to receive interests in property. Inc. it is simply the person who witnesses another person's signature. 98328-8638 (253) 846-1155 Website: www. Thank you for ordering from United Insurance Educators.CheapCE.com mail@uiece. WA. The wage base is the amount up to this maximum. Will: a legal document that distributes the testator's assets upon his or her death. for example. A will is also considered to be a human document because it allows an individual to distribute his or her property as desired. Inc." This is also true of Social Security benefits. A vested interest is absolute. 8213 – 352nd Street East Eatonville.

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