From cybercpa@prodigy.com Sun Sep 20 16:52:27 1998 Return-Path: Received: by me with id QAA05371 for ichudov@algebra.com; Sun, 20 Sep 1998 16:52:24 -0500 Received: from pimaia2y-ext.prodigy.com (pimaia2y-ext.prodigy.com [207.115.58.95]) by www.video-collage.com (8.8.5/8.8.5) with ESMTP id RAA06614 for ; Sun, 20 Sep 1998 17:46:42 -0400 (EDT) Received: from mime4.prodigy.com (mime4.prodigy.com [192.168.254.43]) by pimaia2y-ext.prodigy.com (8.8.5/8.8.5) with ESMTP id RAA19586 for ; Sun, 20 Sep 1998 17:49:29 -0400 Received: (from root@localhost) by mime4.prodigy.com (8.6.10/8.6.9) id RAA09404 for ichudov@algebra.com; Sun, 20 Sep 1998 17:44:11 -0400 Message-Id: <199809202144.RAA09404@mime4.prodigy.com> X-Mailer: Prodigy Internet GW(v0.9beta) - ae01dm04sc03 From: cybercpa@prodigy.com ( SUSAN WASSERMAN) Date: Sun, 20 Sep 1998 17:44:11, -0500 To: ichudov@algebra.com Subject: Updated FAQ for website, Part 1 Status: O FAQ: MISC.INVEST.FINANCIAL-PLAN PART ONE LAST UPDATED 7/6/98 TABLE OF CONTENTS Section 1: Introduction and Disclaimer Section 2: Future Topics Section 3: General Financial Planning Questions Q3.1. Why is a financial plan needed? Q3.2. What are the typical financial uncertainties? Q3.3. What does a financial planner do? Q3.4. What does the typical financial plan consist of? Q3.5. Do I need a financial planner? Q3.6. How do I choose a financial planner? Q3.7. What are the institutions that provide financial planning designations? Q3.8. Could I get referrals from professional organizations? Q3.9. How do I choose the other members of my "financial planning team"? Q3.10. How much will a financial plan cost? Q3.11. What are the pros and cons of dealing with a fee-only planner versus a planner who earns commissions? Q3.12. Where are some financial planning web sites? Q3.13. What financial planning books are recommended by newsgroup readers? Section 4: General Investing Questions Q4.1. What is the "Rule of 72" and the "Rule of 115"? Q4.2. What is the Investment Pyramid? Q4.3. What are the different types of mutual funds? Section 5: General Tax Questions Q5.1. What is the tax treatment for capital gains and losses? Q5.2. What are passive income and losses and how are they treated? Q5.3. What is tax basis? Section 6: Insurance Questions Q6.1. What are the purposes of life insurance? Q6.2. What are the different types of life insurance? Q6.3. What are the tax implications of group health insurance? Section 7: Real Estate Questions Q7.1. What are the different types of mortgages? SECTION 1. INTRODUCTION & DISCLAIMER This is the FAQ for misc.invest.financial-plan and is posted to the group bi-weekly. It is also available on the World Wide Web at: http://stump.algebra.com/~mifp This FAQ is maintained by Susan Wasserman and other volunteers. Comments and contributions should go to the author at [cybercpa@prodigy.com]. DISCLAIMER: This FAQ is presented as general information only. It is not intended to provide financial advice. Any mention is this document to any Internet site or link is for reference purposes only and does not imply agreement or endorsement by the author with any information or product the site or link may contain. No responsibility can be assumed for any changes in sites or links. This FAQ is provided as is without any express or implied warranties. While effort has been taken to ensure the accuracy of the information contained in this article, the author/maintainer/contributors assume(s) no responsibility for errors or omissions, or for damages resulting from the use of the information contained herein. Please contact your financial advisor to discuss your specific financial situation and questions. SECTION 2. FUTURE TOPICS Below is a list of topics that could be added to the FAQ: [Section 3] List of financial planning software [Section 6] Disability Benefits [Section 7] Types of Ownership [Future Section 8. Retirement Planning Questions] Long-term care Pension alternatives Social Security Retirement Benefits IRAs Qualified Retirement Plans Retirement "nest egg" alternatives [Future Section 9. Business Planning Questions] Types of business organizations [Future Section 10. Estate Planning Questions] The need for estate planning Estate Taxes Basic Estate Planning Types of Trusts Living Wills Uniform Gift to Minors Act SECTION 3. GENERAL FINANCIAL PLANNING QUESTIONS Q3.1. WHY IS A FINANCIAL PLAN NEEDED? A financial plan is needed in order to better handle the financial uncertainties that occur in everyday life. Having a plan for the future helps insure the quality of life for yourself and your family. Q3.2. WHAT ARE THE TYPICAL FINANCIAL UNCERTAINTIES? Over ones lifetime, the following problems may occur: 1. Cash Flow: This includes budgeting problems, credit overload, as well as paying too much in taxes. 2. Savings Goals: Savings are needed for education and the purchase of a home or property. 3. Risk Management: Insurance helps to buffer life's catastrophes. Life and disability insurance protects a family from the loss of a life or loss of a family member's ability to earn a living. Property and casualty insurance can protect against perils such as hurricanes, flood, fire, or theft. 4. Retirement Planning: There is no guarantee that social security will support us during our retirement years. Since life spans are increasing, it is important to put aside additional funds as soon as possible. 5. Estate Planning: Planning for the transfer of assets to one's heirs, with as little tax and financial burden as possible. Q3.3. WHAT DOES A FINANCIAL PLANNER DO? Basically, financial planning encompasses an evaluation of one's current financial situation, an identification of one's financial goals, and the presentation of a integrated plan in order to achieve those goals. Planners do not substitute for tax preparers, accountants, or estate attorneys. Instead, the planner formulates a plan with a specified goal or goals, and, if needed, coordinates with others so that everyone is working toward the same goals. This is called assembling a financial planning team. A team may consist of professionals such as your financial planner, CPA, life insurance agent, investment broker, and attorney. In most cases, financial planners double as CPAs, insurance agents, investment brokers, or attorneys. Q3.4. WHAT DOES THE TYPICAL FINANCIAL PLAN CONSIST OF? A typical financial plan will include the following: 1. A balance sheet and analysis: An overall financial picture of one's assets, liabilities, net worth, income, insurance, taxes, business interests, wills, etc. Also included in this analysis will be an asset allocation breakdown that relates to the risk preferences and needs of the individual. 2. Income tax projection 3.Cash flow projection 4.Long-term accumulation plans: This includes education planning, retirement planning, and a statement of the individual's goals. 5.Insurance analysis 6.Estate and tax planning Also, the plan should identify weaknesses in the individual's financial picture, such as inadequate cash flow, unnecessary tax liability, and inadequate or incorrect insurance or investments. Methods of improvement should be recommended for these weaknesses. Lastly, the plan should include recommendations for implementing the individual's and/or family's goals. Q3.5. DO I NEED A FINANCIAL PLANNER? According to the International Association for Financial Planning, there are a number of reasons why one would seek the services of a financial planner: 1.A lack of knowledge even in relatively basic areas of finance. 2.A specific problem has cropped up and they are not sure of the overall ramifications; an example would be a lump-sum distribution from a pension or profit sharing plan. 3.A complex financial picture with the need of a single, objective source to sort it out. 4.A lack of time or desire to do it themselves. 5.A need for a third party observer to objectively review a person's own plan and help determine if the assumptions and goals are reasonable. Q3.6. HOW DO I CHOOSE A FINANCIAL PLANNER? The checklist below is mentioned in most guides to choosing a financial planner. Most of this is common sense. 1.Write to the various associations for lists of planners in your area; in some instances, the planners must meet certain requirements to be listed (these associations are listed below). 2.Find out the planner's background and credentials: education, professional experience, and other qualifications. Experts recommend at least a four year college degree in a financially related field (accounting, economics, business administration or finance); and a financial planning designation (listed in the next question below). 3.Get references, including clients whose situations are similar to yours and professionals such as bankers and lawyers with whom the planner has worked.Find out in which areas he or she is knowledgeable. This should include knowledge of investments, insurance and tax strategies. However, the planner should also be working with other professionals, including accountants and tax attorneys. 4.Ask to see a sample financial plan-one that would be similar to your own. 5.Find out who does the work-the planner should not rely on a uniform plan applied to everyone. 6.Find out if the person you are talking to is the one who will be actually doing the work for you-and if not, who will? 7.Find out how investment solutions are researched-is it independent analysis or does the planner depend on some other company? 8.Find out how a planner charges, and discuss fees during your first visit. Financial planners will charge clients one of three ways: on a fee-only basis, a fee and commission basis, or on a commission basis. Fee-only financial planners are thought to be the most objective, as his or her income is not dependent on the sale of financial products. Q3.7. WHAT ARE THE INSTITUTIONS THAT PROVIDE FINANCIAL PLANNING DESIGNATIONS? The American Institute of Certified Public Accountants 1211 Avenue of the Americas New York, NY 10036-8775 Phone (212) 596-6200 Fax (212) 596-6213 Offers a Personal Financial Specialist (PFS) designation to CPAs with considerable professional experience in financial planning. This designation is issued after the completion of six requirements, including a comprehensive technical exam, and 250 hours of experience per year for three years. CPAs who have earned the PFS designation must also complete 75 hours of continuing education in financial planning subjects over three years. Certified Financial Planning Board of Standards Inc. 1600 Lincoln Street Suite 3050 Denver, CO 80264-3001 Phone (303) 830-7543 The CFP board licenses CFPs who have completed their educational program (given at any one of several approved institutions), and have passed their comprehensive exam. The American College 270 Bryn Mawr Ave. Bryn Mawr, PA 19010 (215) 896-4500 Offers the Chartered Financial Consultant program that leads to the ChFC designation. It also offers the program leading to the Chartered Life Underwriter (CLU) designation, programs leading to masters degrees in financial services and management; and continuing education. Q3.8. COULD I GET REFERRALS FROM PROFESSIONAL ORGANIZATIONS? Yes. Below are best known financial planning organizations: 1.National Association of Personal Financial Advisors (fee-only planners) 2.International Association of Financial Planning (800) 945-4237 3.The Institute of Certified Financial Planners (303) 751-7600 4.American Society of CLU and ChFCs (800) 392-6900 Q3.9. HOW DO I CHOOSE THE OTHER MEMBERS OF MY "FINANCIAL PLANNING TEAM"? Money Magazine had a good article called "Financial Advice You Can Trust". In that article were some very good checklists on how to choose professionals such as your broker, insurance or real estate agent, and accountant. These checklists are below: Stockbroker: Credentials: His or her firm must be registered with the SEC, and the broker must personally be registered with the National Association of Securities Dealers. Checkpoints: For information on past disciplinary actions, start by contacting your state securities commission (you can get the number by calling the North American Securities Administrators Association hotline at (800-942-9022). Follow that up with a letter to the NASD Public Disclosure Program (P.O. Box 9401, Gaithersburg, MD 20898), which will provide a report on the individual or firm for $20.00. Finally, write to the Securities and Exchange Commission's freedom of information branch (450 5th St. N.W., Mail Stop 2-6, Washington,D.C. 20549) for any federal records of complaints. Good Sign: He or she asks, "Are you investing this money for a rainy day, or do you need it for your children's education?" Bad Sign: He or she says, "Let's put everything you've got into municipal bonds." Money Manager: Credentials: Investment advisors with assets under management of less than 25 Million are required to be registered with the state(s) in which they are conducting business. Those with over 25 Million must be registered with the SEC. Checkpoints: Contact the SEC Freedom of Information Branch (address above) or your state securities commission. If he is now or has ever been a broker-dealer, also contact the NASD (address above). Good Sign: He or she shows you a written trading history to substantiate the claims of solid past performance. Bad Sign: He does not deduct his management fees or trading commissions from total return on that statement, thus inflating his success. Insurance Agent: Credentials: The abbreviations CLU (meaning Chartered Life Underwriter) or CPCU (Chartered Property/Casualty Underwriter) indicate a solid working knowledge of insurance. Checkpoints: Contact the state insurance commission (see state listings in your phone book) for records of any disbarment. But note: disbarred agents can start fresh in another state. Good Sign: He or she asks what medical, life and casualty insurance your company already provides, in order not to duplicate that coverage. Bad Sign: He or she tries to shame you into buying more life insurance than you need by implying that you are shirking your responsibilities as a parent or spouse. Accountant: Credentials: He or she should be a certified public accountant (CPA), licensed by the state. Checkpoints: For records of disciplinary or licensing actions, contact the state board of accountancy, listed in the state government pages of your phone book. Good Sign: He or she attempts to find out whether your problem could be resolved less expensively by a tax practitioner (such as an enrolled agent) or, say, a financial planner. Bad Sign: He says: "I always get my clients a refund." Translation:I let them take risks that might trigger an audit. Real Estate Broker: Credentials: He or she must be licensed by the state, either as a broker or sales agent, and should also be a member of the National Association of Realtors or the local board of realtors. Checkpoints: The state real estate commission (in the state government listings of your phone book) can alert you to any problems. Good Sign: He produces a list of houses in your area that he has sold in the last 60 to 90 days, along with the sales prices. Bad Sign: He says he can represent the seller and the buyer. Q3.10. HOW MUCH WILL A FINANCIAL PLAN COST? Financial planners charge one of three ways: on a fee-only basis, fee plus commission basis and on a commission only basis. Fee-only planners usually charge either by the hour or on a flat fee basis. Some fee only planners base their charges on the value of the client's assets or income. Commission only planners earn their money from the sale of financial products recommended to the client in order to implement the financial plan, and the client is usually not charged for the plan itself. Fee and commission planners use a combination of the two, with the fee-to-commission ratio varying from planner to planner. The actual cost of a financial plan varies as well. The IAFP estimates custom-developed plans at between $750 and $2000 dollars. Another financial planning industry official estimates a typical plan for someone with income from $75,000 to $200,000 and a portfolio of $250,000 and up, to cost from $2,000 to $5,000. Q3.11. WHAT ARE THE PROS AND CONS OF DEALING WITH A FEE-ONLY PLANNER VERSUS A PLANNER WHO EARNS COMMISSIONS? Planners who are compensated through commissions can charge little or nothing for the basic financial plan, but the overall bill for the plan is not necessarily less. For example, fee-only planners tend to recommend no-load products. In addition, fees from fee-only planners are tax deductible, whereas commissions are added to the basis of the financial products purchased, and notdeductible until these products are sold. And, of course, there is the question of conflict of interest: Can a planner who earns income through commissions be truly objective in preparing a financial plan? Some financial planners have organized to promote fee-only financial Planning as the only way that the industry can be fully professional. Fee and commission planners argue that they can provide a good lower- cost service, designed for the middle class, and that the integrity of the planner matters over the way that a planner is compensated. The IAFP and ICFP have not taken a position regarding which type of planner is the best, since both fee-only and commissioned financial planners are members. However, both organizations believe that clients should know in advance how the planner is compensated. Q.3.12. WHERE ARE SOME FINANCIAL PLANNING WEB SITES? Here are some of the best ones that have been suggested: http://money.com/ The Money Magazine site includes investment headlines from their current issue as well as some good guides to investing. Their retirement savings calculator is very good. http://kiplingers.com/ A lot of great information. It has a very comprehensive set of financial calculators which cover everything from mutual funds to budgeting. http://www.wallst.com/cnbc/ The CNBC web site features a free stock portfolio manager and a database of over 500,000 financial reports which can be sent to you by PDF or fax. http://www.forbes.com The Forbes magazine site includes a searchable archive of current and past issues. Q3.13. WHAT FINANCIAL PLANNING BOOKS ARE RECOMMENDED BY NEWSGROUP READERS? 1. "The Wealthy Barber" Applies mostly to Canadians. Very entertaining. Contains the basics of saving and succeeding in our economy. 2. "Bogle on Mutual Funds" by Vanguard Chairman John Bogle. Good for teaching expected returns. Selection of historical graphs- modeled after "The Intelligent Investor. 3. "A Random Walk Down Wall Street" covers stocks and derivatives. An excellent reference. 4. " The Millionaire Next Door" causes some interesting discussion among newgroup readers, but is recommended often. 5. "Making the Most of Your Money" by Jane Bryant Quinn. Updated version of the 1991 best seller. A good reference for common sense advice. CONTINUED ON PART TWO From cybercpa@prodigy.com Sun Sep 20 16:52:26 1998 Return-Path: Received: by me with id QAA05370 for ichudov@algebra.com; Sun, 20 Sep 1998 16:52:22 -0500 Received: from pimaia2y-ext.prodigy.com (pimaia2y-ext.prodigy.com [207.115.58.95]) by www.video-collage.com (8.8.5/8.8.5) with ESMTP id RAA06612 for ; Sun, 20 Sep 1998 17:46:42 -0400 (EDT) Received: from mime4.prodigy.com (mime4.prodigy.com [192.168.254.43]) by pimaia2y-ext.prodigy.com (8.8.5/8.8.5) with ESMTP id RAA19580 for ; Sun, 20 Sep 1998 17:49:29 -0400 Received: (from root@localhost) by mime4.prodigy.com (8.6.10/8.6.9) id RAA20980 for ichudov@algebra.com; Sun, 20 Sep 1998 17:46:38 -0400 Message-Id: <199809202146.RAA20980@mime4.prodigy.com> X-Mailer: Prodigy Internet GW(v0.9beta) - ae01dm04sc03 From: cybercpa@prodigy.com ( SUSAN WASSERMAN) Date: Sun, 20 Sep 1998 17:46:38, -0500 To: ichudov@algebra.com Subject: Updated FAQ for website-Part 2 Status: O FAQ: MISC.INVEST.FINANCIAL PLAN PART TWO SECTION 4. GENERAL INVESTING QUESTIONS Q4.1. WHAT IS THE RULE OF 72 AND THE RULE OF 115? The "Rule of 72" is a formula used to estimate the amount of years needed for an investment to double in value at a specified rate of return. The formula is 72/annual interest rate. For example, if the annual interest rate is 8%, the time required for an investment to double in value is 72/8 or nine years. Similarly, the "Rule of 115" gives you an estimate of how long it would take for your investment to triple. For example, at a 10% rate of return, it will take your investment 11.5 years to triple in value. These rules are also handy in computing how long before a given item will double or triple in price, at the estimated rate of inflation. For example, using an average inflation rate of 9%, a gallon of milk will double in price every 8 years. Q4.2. WHAT IS THE INVESTMENT PYRAMID? An investment pyramid is a four tier graphical depiction of an investment plan, where the higher the investment risk, the higher the potential reward. The bottom of the pyramid is the "foundation" of your investment portfolio, where a larger percentage of your investments should be, and the top of the pyramid is the "speculative" portion of your portfolio, where the smallest percentage of your investments should be. The bottom tier of the pyramid should consist of the following: Savings accounts, T-Bills, Fixed Annuities, Money Market Funds, and Cash Value Life Insurance. The second tier of the pyramid is the secure section of the portfolio, and should be funded after the foundation tier has been completed. This consists of Conservative Equities (Utility stock or other blue chips, Convertible Bonds, Balanced Funds), your residence, G.N.M.A. funds, Retirement Plans, Corporate Bonds,Municipal Bonds, and U.S. Govt. Notes and Bonds. The third tier of the pyramid is the growth tier, which should begin only after the foundation tier and the secure tier are funded. This will be a smaller percentage of the overall investment portfolio and should consist of: Investment Real Estate, Growth Stocks and Mutual Funds, and Variable Life Insurance and Annuities. The top tier of the pyramid, the speculative tier, should begin after the remaining tiers have been completely funded. This should be the smallest portion of your overall investment portfolio, and should consist of: Art, Metals, Gem Stones, Options, Commodities, Exploration and Venture Capital. Q4.3. WHAT ARE MUTUAL FUNDS? A mutual fund is a carefully selected and managed portfolio of securities. They offer the investor diversification for a relatively low initial investment ($500.00 to $1000.00). Subsequent purchases can be as little as $50.00, and automatic reinvestment of dividends and capital gains can increase the investment even more. There are many types of mutual funds, designed to meet the needs and investment risk of many types of investors. If the needs of an investor changes, exchange privileges exist within a "family" of mutual funds, where an investor can switch to a different type of mutual fund for a nominal fee. For more information about mutual funds, visit the newsgroup misc.invest.mutual-funds. Below are the general types of mutual funds: Money Market Funds: The fund managers invest in short-term money market instruments. The yields fluctuate daily, which makes this a good investment during periods of high interest rates. Municipal Bond Funds: Invests only in municipal bonds, where dividends are exempt from federal and maybe state taxes. Dividends may be subject to the Alternative Minimum Tax. Bond Funds: Invest in relatively high yield debt instruments. The market value usually fluctuates inversely to interest rates. Income Funds: Seek maximum income by investing in bonds, preferred or high yield stocks. Sector Funds: Concentrates on a specific area of the economy, such as technology, health, energy, utilities, or precious metals. Aggressive Growth Funds: These are high risk/high return funds, which invest in volatile, high performing stocks. Growth Funds: These invest for capital growth, usually high capital gains rather than high income. Growth and Income Funds: These seek both capital appreciation and dividend income. Another name for these funds are balanced funds. Foreign Funds: Concentrates on investing in foreign countries. SECTION 5. GENERAL TAX PLANNING QUESTIONS Q5.1. WHAT IS THE TAX TREATMENT FOR CAPITAL GAINS AND LOSSES? Under the Taxpayer Relief Act of 1997, the capital gains tax ratehas been lowered to 20% from 28%. Additionally, a new 10% capital gains rate has been created for those in the 15% tax bracket. These new rates are retroactive to May 7, 1997 and affects the profits from the sale of stocks, bonds and most other investments. The holding period to qualify for long term capital gains treatment lengthens to 18 months from 12 months, effective July 29, 1997.Beginning in 2001, a new top rate of 18% takes effect for assets purchased after the year 2000 and held at least five years. Gains on the sale of collectibles continue to be taxed at 28%. Capital losses are used to offset capital gains for the year, with the excess offsetting ordinary income, up to $3000.00 per year. There are special rules for the sale of a residence. Under the new law, profits from the sale of a principal residence up to $500,000 ($250,000 if single) are exempt from taxes. This is retroactive to May 7, 1997. If a residence is sold before May 7, the old laws apply. Tax is deferred if a new home is purchased for greater value within a two year period. Also, persons aged 55 or over, who lived in their home three out of the last five years, can take the one time exclusion of $125,000. Q5.2. WHAT ARE PASSIVE INCOME AND LOSSES AND HOW ARE THEY TREATED? Losses from limited partnership interests (as well as other business investments where the investee is not considered active) are considered "passive losses". In the Tax Reform Act of 1986, losses from these ventures could not offset or reduce "earned income" or "portfolio income" (interest, dividends, etc.). Passive losses may be used to offset any passive income. Because of this, investors are buying into limited partnership programs that produce taxable income. Excess passive losses over passive income can be carried forward and can possibly be disposed of in the year that the investment is sold. Some exceptions exist to this rule. Taxpayers who "materially participate" in real estate activities can deduct their passive losses against earned income. "Materially participating" means that the taxpayer should spend more than 750 hours per year or over 50% of his or her personal services in real estate activities. Also, taxpayers who "actively participate" in rental real estate activities may deduct up to $25,000 per year from non-passive income. This exception phases out when income exceeds $100,000,and is disallowed when income exceeds $150,000. Active participation means approving leases, capital improvements, hiring a management company, etc. In addition, credits from low-income housing and historic rehabilitation can be applied to taxes on up to $25,000 of non-passive income, even if the taxpayer was not personally active in these ventures. Q5.3. WHAT IS TAX BASIS? Tax basis is the value of an asset, used to determine the amount of gain or loss upon it's sale or disposal. Below are some definitions: Cost Basis: The amount paid for an asset Adjusted Basis: Cost basis plus improvements less depreciation Capital Gain: Sale price less adjusted basis Capital Loss: Adjusted basis less sale price FMV: Fair market value The amount of basis will vary, depending on the circumstances involved: Purchase: The basis to the purchaser is the amount paid for the asset. Lifetime Gift: For purpose of a gain, the donee takes the donor's basis. For purpose of a loss, the donee's basis is the FMV at the time of the gift, or the donor's basis-whichever is lower. Transfer at Death: The beneficiary's basis is equal to the value at decedent's death, or an alternate valuation date of six months thereafter. Like Kind Exchange (IRC Section 1031): Basis in the new property will be the same as the property transferred, plus any recognized gain, minus any cash received. SECTION 6: INSURANCE QUESTIONS Q6.1. WHAT ARE THE PURPOSES OF LIFE INSURANCE? Life insurance can be used for the following purposes: 1. To provide for loved ones in the event of death. 2. To pay estate taxes and other settlement costs, which can decrease an estate by as much as 50%. 3. To create a college fund for children and grandchildren. Cash values can be used to accumulate funds for college. 4. To keep a business intact upon the loss of a key employee. 5. To accumulate a retirement fund. Insurance products provide competitive, tax deferred returns. 6. To equalize inheritances. For example, if the family business passes to one heir, life insurance can provide an equal amount to other heirs. 7. To pay off loans upon death, such as a mortgage. 8. To replace the value of donated assets, given to a charitable remainder trust. Q6.2. WHAT ARE THE DIFFERENT TYPES OF LIFE INSURANCE? The type of policy that you choose is dependent on your reason for purchase, as in the reasons listed in Q6.1. Decreasing Term: Has a level premium (does not change with time), decreasing coverage over time and no cash value. This type of policy is appropriate for mortgage loans, and other financial obligations which reduce with time. Annual Renewable Term: Has an increasing premium over time, level coverage and no cash value. Appropriate for financial obligations which remain constant for a short or intermediate period, such as providing for a minor. Whole Life: Has a level premium, level coverage and cash value. The cash value usually increases based on the insurance company's portfolio performance. Good for long term obligations, such as providing for a surviving spouse, estate costs, and funding retirement. Universal Life: Has level or adjustable premium and coverage, as well as cash values-which increase based on the performance of assets in the company's general account. Best for long term obligations. Variable Life and Variable Universal Life: Has level or adjustable premium. It also has level coverage, which can be increased by positive investment performance. The cash values can be directed to a choice of investment accounts (stocks, bonds, money market) by the policy holder. Good for active investors with long term obligations. Single Premium Whole Life: The entire premium is paid upon purchase. It has cash values and level coverage. It provides life insurance protection, as well as competitive rates for asset accumulation. Q6.3. WHAT ARE THE TAX IMPLICATIONS OF GROUP HEALTH INSURANCE? Health insurance premiums paid by the employer for the benefit of employees are deductible by the employer, for both individual and group policies [Reg. Section 1.162-10(a)]. Additionally, the employee does not report these premium amounts as gross income. If the employee pays the premium and is reimbursed by the employer,the amount rembursed is also not reportable as income [IRC Sec.106]. Also, benefits paid under the policy for medical and hospitalization expenses is not reportable as income.Employer paid policies are an attractive fringe benefit because deductions are limited for premiums and medical expenses paid personally. Medical expenses are deductible only if they exceed 7.5% of adjusted gross income. Moreover, this deduction can be further reduced or eliminated for high income individuals. Self-insured plans are are subject to certain eligibility requirements, which are designed to prevent discrimination in favor of officers and other highly paid employees [IRC Sec. 105(h)]. SECTION 7: REAL ESTATE QUESTIONS QUESTION 7.1: WHAT ARE THE DIFFERENT TYPES OF MORTGAGES? (This answer is not yet complete) 1. Fixed Rate Mortgage This is usually a long-term mortgage with a fixed rate of interest, and has equal payments of principal and interest until debt is paid in full. This offers stability and long-term tax advantages, however the interest rates are usually higher than other types of mortgages. 2. Fifteen-Year Mortgage There is a fixed interest rate which is usually lower than a 30 year loan. Down payment and monthly payments are higher, but there is faster accumulation of equity. 3. Adjustable Rate Mortgage The starting interest rate is slightly below market, but it changes over the life of the loan resulting in possible changes in payments, loan term and principal. Payment caps prevent wide fluctuations in payments but may cause negative amortization. 4. Renegotiable Rate Mortgage (Roll-over) A long-term mortgage where interest rate and monthly payments are constant over several years with a possible changes thereafter. It offers a little more stability than the adjustable rate mortgage. 5. Balloon Mortgage A short term mortgage where the payments cover interest only with principal due at term end. The payments are low, but there is no equity accumulation until the loan is paid. When the term ends, principal must be paid in full or refinanced at possibly a higher interest rate. 6. Graduated Payment Mortgage Payments start out low but rise gradually over five to ten years; then level out over the duration of the loan. With an adjustable interest rate, payments may increase beyond the graduated payments, causing negative amortization. END