Ken Himmler.com

Your need for life insurance changes as your life changes. When you're young, you typically have less need for life insurance, but that changes as you take on more responsibility and your family grows. Then, as your responsibilities once again begin to diminish, your need for life insurance may decrease. Let's look at how your life insurance needs change throughout your lifetime.

Footloose and fancy-free

As a young adult, you become more independent and self-sufficient. You no longer depend on others for your financial well-being. But in most cases, your death would still not create a financial hardship for others. For most young singles, life insurance is not a priority.

Some would argue that you should buy life insurance now, while you're healthy and the rates are low. This may be a valid argument if you are at a high risk for developing a medical condition (such as diabetes) later in life. But you should also consider the earnings you could realize by investing the money now instead of spending it on insurance premiums.

If you have a mortgage or other loans that are jointly held with a cosigner, your death would leave the cosigner responsible for the entire debt. You might consider purchasing enough life insurance to cover these debts in the event of your death. Funeral expenses are also a concern for young singles, but it is typically not advisable to purchase a life insurance policy just for this purpose, unless paying for your funeral would burden your parents or whomever would be responsible for funeral expenses. Instead, consider investing the money you would have spent on life insurance premiums.

Your life insurance needs increase significantly if you are supporting a parent or grandparent, or if you have a child before marriage. In these situations, life insurance could provide continued support for your dependent(s) if you were to die.

Going to the chapel

Married couples without children typically still have little need for life insurance. If both spouses contribute equally to household finances and do not yet own a home, the death of one spouse will usually not be financially catastrophic for the other.

Once you buy a house, the situation begins to change. Even if both spouses have well-paying jobs, the burden of a mortgage may be more than the surviving spouse can afford on a single income. Credit card debt and other debts can contribute to the financial strain.

To make sure either spouse could carry on financially after the death of the other, both of you should probably purchase a modest amount of life insurance. At a minimum, it will provide peace of mind knowing that both you and your spouse are protected.

Again, your life insurance needs increase significantly if you are caring for an aging parent, or if you have children before marriage. Life insurance becomes extremely important in these situations, because these dependents must be provided for in the event of your death.

Your growing family

When you have young children, your life insurance needs reach a climax. In most situations, life insurance for both parents is appropriate.

Single-income families are completely dependent on the income of the breadwinner. If he or she dies without life insurance, the consequences could be disastrous. The death of the stay-at-home spouse would necessitate costly day-care and housekeeping expenses. Both spouses should carry enough life insurance to cover the lost income or the economic value of lost services that would result from their deaths.

Dual-income families need life insurance, too. If one spouse dies, it is unlikely that the surviving spouse will be able to keep up with the household expenses and pay for child care with the remaining income.

Moving up the ladder

For many people, career advancement means starting a new job with a new company. At some point, you might even decide to be your own boss and start your own business. It's important to review your life insurance coverage any time you leave an employer.

Keep in mind that when you leave your job, your employer-sponsored group life insurance coverage will usually end, so find out if you will be eligible for group coverage through your new employer, or look into purchasing life insurance coverage on your own. You may also have the option of converting your group coverage to an individual policy. This may cost significantly more, but may be wise if you have a pre-existing medical condition that may prevent you from buying life insurance coverage elsewhere.

Make sure that the amount of your coverage is up-to-date, as well. The policy you purchased right after you got married might not be adequate anymore, especially if you have kids, a mortgage, and college expenses to consider. Business owners may also have business debt to consider. If your business is not incorporated, your family could be responsible for those bills if you die.

Single again

If you and your spouse divorce, you'll have to decide what to do about your life insurance. Divorce raises both beneficiary issues and coverage issues. And if you have children, these issues become even more complex.

If you and your spouse have no children, it may be as simple as changing the beneficiary on your policy and adjusting your coverage to reflect your newly single status. However, if you have kids, you'll want to make sure that they, and not your former spouse, are provided for in the event of your death. This may involve purchasing a new policy if your spouse owns the existing policy, or simply changing the beneficiary from your spouse to your children. The custodial and noncustodial parent will need to work out the details of this complicated situation. If you can't come to terms, the court will make the decisions for you.

Your retirement years

Once you retire, and your priorities shift, your life insurance needs may change. If fewer people are depending on you financially, your mortgage and other debts have been repaid, and you have substantial financial assets, you may need less life insurance protection than before. But it's also possible that your need for life insurance will remain strong even after you retire. For example, the proceeds of a life insurance policy can be used to pay your final expenses or to replace any income lost to your spouse as a result of your death (e.g., from a pension or Social Security). Life insurance can be used to pay estate taxes or leave money to charity.

 Recent legislation introduced a new, but perhaps temporary, estate planning concept–exemption "portability." In short, the estate of a deceased spouse can transfer to the surviving spouse any portion of the federal estate tax exemption that it does not use. The surviving spouse's estate can then add that amount to the exemption it is entitled to, increasing the total amount that can be passed on to heirs tax free. This new feature makes it easier for married couples to minimize the potential impact of estate taxes.

The federal estate tax exemption defined

The federal government imposes a tax on the value of your property when you pass it along to your descendants at your death. Any amount that is passed to a surviving spouse is generally fully deductible. The estate is also allowed to exclude a certain amount that passes on to nonspouse beneficiaries. That amount is called the "basic exclusion amount," which is $5 million in 2011.

How the exemption works for married couples

Prior to the new tax law, if a spouse died without having planned for his or her exemption, the deceased spouse's estate would have passed tax free to the surviving spouse under the unlimited marital deduction (assuming all assets passed to the surviving spouse), and the deceased spouse's exemption was lost or "wasted." The surviving spouse's estate could then only transfer an amount equal to his or her own exemption free from federal estate tax. To solve this dilemma, married couples typically set up what is commonly referred to as a credit shelter trust (aka "bypass" or family trust) that sheltered or preserved the exemption of the first spouse to die.The following example illustrates how portability can achieve a similar result without the use of a credit shelter trust.

Example: Result without portability

Assume Henry and Wilma are married, have all of their assets jointly titled, and have a net worth of $10 million. Henry dies first, when the federal estate tax exemption is $5 million and there is no portability. Henry's estate passes to Wilma free from federal estate tax under the unlimited marital deduction and does not use any of his $5 million exemption. Assume that at the time of Wilma's death, the exemption is still $5 million, the federal estate tax rate is 35%, and Wilma's estate is still worth $10 million. With Henry's exemption completely wasted, Wilma can pass on only $5 million free from federal estate tax. Assuming no other variables, Wilma's estate will owe about $1,750,000 in federal estate tax: $10 million estate – $5 million exemption = $5 million taxable estate x 35% estate tax rate = $1,750,000.

Example: Result with portability

Assume Henry and Wilma are married, have all of their assets jointly titled, and have a net worth of $10 million. Henry dies first, when the federal estate tax exemption is $5 million and there is portability. As above, Henry's estate passes to Wilma free from federal estate tax under the unlimited marital deduction and does not use any of his $5 million exemption. Even though Henry's estate owes no tax, Henry's executor files a timely return on which he elects to transfer Henry's unused exemption to Wilma. Assume that at the time of Wilma's subsequent death the exemption is still $5 million, the federal estate tax rate is 35%, and Wilma's estate is still worth $10 million. Since Wilma has "inherited" Henry's unused exemption, she can pass on the entire $10 million estate free from federal estate tax. Portability of the estate tax exemption saves Henry and Wilma's heirs $1,750,000 in estate tax.

Portability does not eliminate the benefits of credit shelter trusts

Even with portability, there are still tax and nontax considerations that may lead you to use a credit shelter trust, such as:

1.    The portability feature is in effect for only two years and will expire after 2012, unless Congress enacts further legislation.

2.    The trust can help protect assets against creditors of the surviving spouse or future beneficiaries (typically children and grandchildren).

3.    The trust gives the first spouse to die control over the ultimate distribution of his or her assets. For example, in a second marriage situation, one spouse may wish to ensure that any assets remaining after his or her spouse's death pass to his or her children from a previous marriage.

4.    Appreciation of assets placed in the trust will escape estate taxation in the survivor’s estate.

5.    The portability feature applies only to estate tax; it does not apply to the generation-skipping transfer (GST) tax. Without a trust, any unused GST tax exemption of the first spouse to die will be lost.

Some technical information

To use the exemption portability, the first spouse to die must elect to use portability on his or her estate tax return. An estate tax return must be filed by the first spouse to die to use portability even if the return is not otherwise required to be filed.

Many states have state estate tax exemptions that are less than the federal estate tax exemption. So, while your surviving spouse might not be subject to federal estate tax upon your passing, your surviving spouse may have to pay state estate tax if you rely solely on the federal exemption portability.

 In the past nine years there have been seven temporary legislative AMT-related "patches," designed to forestall a sudden dramatic increase in the number of individuals who are affected by the AMT. The latest one-year patch, included as part of the American Recovery and Reinvestment act of 2009, is effective through December 31, 2009. That means you can expect additional AMT legislation in late 2009 or in 2010. 

What is the AMT?

The AMT is essentially a separate federal income tax system with its own tax rates, and its own set of rules governing the recognition and timing of income and expenses. If you're subject to the AMT, you have to calculate your taxes twice–once under the regular tax system and again under the AMT system. If your income tax liability under the AMT is greater than your liability under the regular tax system, the difference is reported as an additional tax on your federal income tax return. If you're subject to the AMT in one year, you may be entitled to a credit that can be applied against regular tax liability in future years.

How do you know if you're subject to the AMT?

Part of the problem with the AMT is that, without doing some calculations, there's no easy way to determine whether or not you're subject to the tax. Key AMT "triggers" include the number of personal exemptions you claim, your miscellaneous itemized deductions, and your state and local tax deductions. So, for example, if you have a large family and live in a high-tax state, there's a good possibility you might have to contend with the AMT. IRS Form 1040 instructions include a worksheet that may help you determine whether you're subject to the AMT (an electronic version of this worksheet is also available on the IRS website), but you might need to complete IRS Form 6251 to know for sure.

Common AMT adjustments

It's no easy task to calculate the AMT, in part because of the number and seemingly disparate nature of the adjustments that need to be made. Here are some of the more common AMT adjustments:

• Standard deduction and personal exemptions: The federal standard deduction, generally available under the regular tax system if you don't itemize deductions, is not allowed for purposes of calculating the AMT. Nor can you take a deduction for personal exemptions.

• Itemized deductions: Under the AMT calculation, no deduction is allowed for state and local taxes paid, or for certain miscellaneous itemized deductions. Your deduction for medical expenses may also be reduced, and you can only deduct qualifying residence interest (e.g., mortgage or home equity loan interest) to the extent the loan proceeds are used to purchase, construct, or improve a principal residence.

• Exercise of incentive stock options (ISOs): Under the regular tax system, tax is generally deferred until you sell the acquired stock. But for AMT purposes, when you exercise an ISO, income is generally recognized to the extent that the fair market value of the acquired shares exceeds the option price. This means that a significant ISO exercise in a year can trigger AMT liability. If ISOs are exercised and sold in the same year, however, no AMT adjustment is needed, since any income would be recognized for regular tax purposes as well.

• Depreciation: If you're depreciating assets (for example, if you're a sole proprietor and own an asset for business use), you'll have to calculate depreciation twice–once under regular income tax rules and once under AMT rules.

AMT exemption amounts

While the AMT takes away personal exemptions and a number of deductions, it provides specific AMT exemptions. The amount of AMT exemption that you're entitled to depends on your filing status.

Your exemption amount, however, begins to phase out once your taxable income exceeds a certain threshold ($150,000 for married individuals filing jointly, $112,500 for single individuals, and $75,000 for married individuals filing separately).

AMT rates

Under the AMT, the first $175,000 of your taxable income is taxed at a rate of 26%. (If your filing status is married filing separately, the 26% rate applies to your first $87,500 in taxable income.) Taxable income above this amount is taxed at a flat rate of 28%.

The lower maximum tax rates that apply to long-term capital gain and qualifying dividends apply to the AMT calculation as well. So, even under AMT rules, a maximum rate of 15% (0% for individuals in the lower two tax brackets) applies. However, long-term capital gain and qualifying dividends are included when you determine your taxable income under the AMT system. That means large capital gains and qualifying dividends can push you into the phase-out range for AMT exemptions, and can indirectly increase AMT exposure.

Summing up

Owing AMT isn't the end of the world, but it can be a very unpleasant surprise. It also turns a number of traditional tax planning strategies (e.g., accelerating deductions) on their heads, so it's a good idea to factor in the AMT before the end of the year, while there's still time to plan.

If you think you might be subject to the AMT, it may be worth sitting down to discuss your situation with a tax professional.

Federal agency hopes to squeeze plan sponsors and custodians for leaner fees and more disclosure on qualified retirement accounts. Experts warn that Washington retirement plan cops won't tolerate schemes to hide fees any more. After the disasters of the recent recession, the regulators are cracking down on retirement plans that trick workers into buying more expensive mutual funds or paying big hidden administration fees.

The opening salvo: business owners who sponsor 401(k) plans now have until next June to itemize every cent their employees pay third-party service providers and prove that it was the best deal they could get. Otherwise, they're looking at audits and potentially crippling fines.
 

As a result, service providers who were traditionally unwilling to break down their opaque "bundled" pricing — the all-in-one administrators, record keepers and custodians — are now staring down the barrel of a gun. "New fee disclosure regulations will erase much of the advantage on bundling fees," says Louis Harvey, head of financial industry benchmarking firm DALBAR.
 

The new rules requiring 401(k) sponsors to know and disclose what their participants pay were initially set to take effect on July 16. But the Labor Department had to keep pushing back the deadline because the service providers spent most of their time arguing that the transition would take too much work.

The most recent extension, issued just three days before the rules were originally set to take effect, pushes the formal start date all the way to April 1 of next year and gives everyone — vendors and employers alike — an extra 60 days after that to roll out their new account statements
 

 Click HERE to read more.

In light of recent developments, we wanted to update you on the debt-ceiling issue. To quickly summarize our views:

• We continue to believe that Congress will raise the debt ceiling by the August 2nd deadline, avoiding technical default.
• However, we think that the risk of a credit downgrade has risen. In our view, it is now likelier than not that the credit-rating agencies will downgrade U.S. long-term debt, even if a deal is struck.
• With respect to portfolio positioning, we are still taking a wait-and-see approach. This reflects both our belief that Congress will reach a compromise and the reality that any changes we'd make at this juncture court their own set of risks and potential opportunity costs.

We will continue to monitor the situation closely, making any necessary adjustments to the portfolios we manage. For further information regarding the latest developments in the debt-ceiling standoff, as well as our thoughts on what to look for next, see the sections below.

Recent Developments
Late Thursday, leadership in the U.S. House postponed its scheduled vote when it was unable to round-up the 216 GOP congressmen needed to pass the Boehner-sponsored bill. Because the Senate had held off taking up its own bill pending the House vote, the postponement has brought the process to a halt, squandering precious time. If House leadership is unable to pass a bill, it will also potentially weaken its hand in subsequent negotiations and narrow the legislative path to a compromise.

This lack of progress appears to have further unsettled global markets, as Asian stock markets sold-off on the news of the postponement, with European indexes following suit. Major U.S. indexes look poised for a lower open.

Credit markets, after largely brushing off the debt-ceiling issue, are also beginning to show signs of strain. Funding costs have reportedly risen as banks and other sources of short-term financing have pulled back and money-market funds have experienced heightened asset outflows. Prices of credit-default swaps on U.S. sovereign debt (a derivative that pays-off in the event that the borrower fails to pay interest or principal) have risen to their highest level since March 2009. Meanwhile, the dollar continues to sell-off versus most other currencies.

The economic impact of the standoff remains difficult to quantify, though anecdote (culled mainly from corporate executives in connection with quarterly earnings commentary) suggests that the uncertainty is beginning to chill trade and commerce as well.

In recent days, representatives of credit-rating agency S&P have largely reiterated the criteria that they'd previously laid-out in placing the U.S. on watch for downgrade. Namely, that in determining whether to affirm the AAA rating, S&P would seek a bi-partisan, detailed, and actionable plan that shaves roughly $4 trillion off the deficit. In making this assessment, S&P indicated it would not look favorably on a plan that defers cuts or is subject to subsequent votes or legislative ambiguity. Given that the bills under consideration are smaller, phased, and highly partisan in nature, it is increasingly questionable whether they will satisfy S&P's concerns, making a downgrade likelier than before.

What to Look for
All eyes will be trained once again on Capitol Hill. If the House GOP leadership is unable to produce a bill, then attention will turn to the Senate, which will attempt to craft a compromise bill that is moderate enough to pass both chambers.

Reports suggest that Senate majority leader Harry Reid will try to broker a compromise that combines elements of the Reid and Boehner plans, as well as an approach that Senate minority leader Mitch McConnell had pushed recently (only to abandon it in the face of House GOP resistance). That plan would probably entail significant, phased spending cuts, but would give the president the authority to push through the second round of cuts (over the disapproval of Republican members of Congress) next year without the melodrama and uncertainty of a second debt-ceiling vote. It also would contain triggers that mandated certain spending cuts, a concession designed to bring wavering deficit-hawks aboard.

The key is winning passage. To do so, the bill must wend its way not just through the Senate, but also the more-fractious House. This likely will require House leadership to deliver votes from all but the most-extreme wing of its caucus.