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Although the latest employment statistics show a drop in the number of people claiming benefit, there’s little real improvement in the availability of work. It’s still tough to find and keep a job. Curiously, both the GOP and the Democrats see the need to encourage small business, believing new entrepreneurs will lead us out of the recession. The problem with this view is we are less entrepreneurial than we used to be. Many other countries have a higher percentage of people prepared to risk their capital in starting new businesses. The majority of our younger adults are just sitting back waiting for jobs to come along. That said, the Government is encouraging small business with tax breaks. All of which brings us to the Affordable Care Act.

Ignoring the usual politics and second-guessing what the Supreme Court will rule in 2012, let’s focus on what will happen between now and 2014 when the whole Act’s program is supposed to be in force. If you are a one-person business, you will be caught by the mandate just like any other individual. That means you buy cover or pay a penalty. For the record, the penalty is $695 or 2.5% of your income whichever is the greater unless the actual cost of the premium will be more than 8% of your income. You do the math to weigh up where you interests lie.

There’s no mandate for businesses, but there are penalties for failing to put a plan in place. If you have up to 25 employees, there’s a tax break to set off against half the cost of group cover. But you only get the maximum benefit if you are really small, i.e. you do not have the equivalent of 10 full-time employees and the average of their pay is less than $25,000. Your right to the tax break reduces as your size and the average pay increases. If you are small but your employees earn an average of $50,000 or more you lose the tax credit. In 2014 every state should have a Small Business Exchange in operation and, if you decide to buy through your local exchange, the tax credit will increase. However, these tax credits are only to prime the pump. Once you have a plan for your business, the credit will phase out over five years and only for two years after the exchanges are running. (more…)

An increasing number of companies advertise their willingness to buy your policy, but is this always a good idea?There’s news from Britain where some of these companies are based. It seems some have run into financial difficulty and the national regulator is imposing new limits on the right of British-based companies to buy US life policies. The problem is these companies are forced to guess how long you will live after the deal is made. Put simply, if the buyer makes a good guess, there is a good return on the money invested. But if medical science keeps you alive for more years than expected, the buyer may make a loss.

It will help understanding to put numbers on this. Suppose you are aged 72 and, looking at the current life expectancy statistics, you are expected to live for a further ten years. The guaranteed minimum payment is $500,000 and the annual premium is $18,000. In today’s market, you would expect to sell at around $220,000. If the estimate is correct and you live for a further ten years, this means the buyer will pay $180,000 in installments and make a profit of at least $100,000 less the cost of financing and administration. But if you live for more than fifteen years, the buyer has paid out more than it will receive unless there is a good cash value.

As average life expectancy increases, this makes the decision for the potential buyers much more difficult. Will you be one of the many who will die young or will you be the less common person who lives until more than one-hundred? This decision is easier when the buyer has a medical report prepared, but it is not always convenient and cost-effective to pay for a full report. Faced with this uncertainty, there is increasing pressure on buyers to offer less. Indeed, many informed observers are beginning to describe some of the offers as so low they are potentially fraudulent. All of this should encourage you to approach the life settlement market with some caution. Always know exactly what the insurance company will offer as the surrender value. Then remember it is not a good reason to sell on the secondary market just because you are offered a few thousand more. You should be looking for a substantial improvement over surrender value. (more…)

This is something of a rarity: a tax provision that actually works in your favor. So it is worth knowing what it is and how it can help you. As the title to the article suggests, this is all about Section 1035(a) to (d) of the IRS Code and it allows you to avoid paying tax when you sell an asset. Take the example of shares on which you have made a good profit. You decide you would like to take that profit and reinvest the original capital. So you sell the shares and then discover you have to pay tax on the realized gain. Indeed, almost all rollovers with this purpose will result in a bill from the tax office unless you are exchanging insurance assets. What is wrong with paying tax in this situation? In a capitalist society, the government is supposed to encourage people to invest their money in assets likely to grow in value. If tax interferes with the decisions of when and how many assets to sell, this is an artificial deterrent to commercial decision-making. Indeed, some people may deliberately sell some shares at a loss to set off against gains in other shares. You cannot get more irrational than that when everyone is supposed to be working to maximize their profits.

In this instance, the IRS is encouraging competition between different insurance products by removing the tax incentives from changing one for another. This allows fair competition. So, for example, you may start off with a moderate guaranteed minimum life policy but find competing products are offering a better minimum payout for the same premium payments. More importantly, it allows policyholders to change policies to reflect changes in circumstances. This could be financial problems in the insurer. If the policyholder loses confidence in the insurer and fears it may go into bankruptcy, there should be no penalty to changing. Similarly, if the policyholder is struggling to pay the premium, it should be possible to switch to another insurer who will carry a similar benefit for a lower premium.

Section 1035 allows a transfer between “like-kind” insurance assets. This means you could exchange a health for a life policy, or convert to an annuity or endowment. However, nothing this simple in principle can ever be allowed to remain simple in practice. So you have to get an agreement from the new insurance company to act as your trustee in holding the capital value of your existing assets. The new insurer then writes to the existing insurer to request a transfer of the funds to its possession so that this is a business-to-business transfer and not a cent passes through your hands. You should be warned, some less than responsible insurers can take up to six months to make the transfer. (more…)