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Personal Umbrella Personal Umbrella Policy ​ $1–$10 million limits ​ Protects against a catastrophic personal lawsuit or judgment (Jet Ski Driver) (Intoxicated Driver) ​ Excess coverage over homeowners and auto ​ Broader coverage than homeowners and auto ​ Minimum underlying lim...

Personal Umbrella Personal Umbrella Policy ​ $1–$10 million limits ​ Protects against a catastrophic personal lawsuit or judgment (Jet Ski Driver) (Intoxicated Driver) ​ Excess coverage over homeowners and auto ​ Broader coverage than homeowners and auto ​ Minimum underlying limits required under home and auto policies ​ Personal umbrella premiums usually range from $200 - $250 annually per $1 million limit Umbrella Insuring Agreement ​ Pays damages in excess of the retained limit for ​ BI, PD, or PI for which the insured is legally liable ​ Provides legal defense in addition to policy limits Retained Limits Under Umbrella ​ Umbrella retained limits are specified in the ​ Umbrella Policy for the underlying HO or PAP ​ If the umbrella policy provides broader coverage than the HO or PAP, the retention is stated in the declarations as $1,000 ​ Problem if actual underlying policy limits are less than the minimum required limits Underlying Coverage Limits Required for Personal Umbrella Policy ​ Auto limits of $250,000/500,000/50,000 ​ Homeowners' liability limits of $300,000 ​ Large watercraft-liability limits of $500,000 Example of Underlying Policy Limits ​ Dan and Lori, a married couple, have a $1 million umbrella, with minimum required underlying limits for auto of $250,000/500,000/ 100,000. A $300,000 umbrella loss occurs and their actual underlying auto policy limits at the date of the loss are $100,000/300,000/100,000. ​ In this case, Dan & Lori, would have to pay an additional $150,000 out of pocket before the umbrella would respond. ​ Best practice is to write primary and umbrella with the same insurance company and check limits at each renewal date. Umbrella Provides Broader Coverage than Underlying Policies ​ Broader coverage examples: ○​ Personal Injury (e.g., false arrest, libel, slander). PI must be covered by endorsement under primary HO. ○​ Non-owned watercraft (not owned or rented) ○​ Worldwide automobile ​ Umbrella policy excludes expected or intentional injury, business liability, communicable disease, professional services (doctor, nurse, lawyer), and directors & 0fficers liability Umbrella Provides Excess Liability Limits ​ Based on an AAA study, the average cost of a fatal auto accident is $3.8 million, ​ Injury-only crash is $126,000 per person. Injuries include property damage, loss of earnings, medical, rehab, pain and suffering, and lost quality of life. Umbrella Claims Examples ​ Insured is at fault in auto accident involving school bus with several children injured ​ Insured slanders a public official ​ Insured has an auto accident while driving in Europe ​ Jet Ski accident with serious injury to operator/passenger of the other watercraft ​ An intoxicated driver crosses the median and collides with another Personal Financial Planning Best Practices for Financial Success ​ Create Assets - not Liabilities ​ Manage Total Compensation – Earnings + Benefits ​ Budgeting ​ Savings & Investing ​ Credit Score – Strive for 720 ​ Risk Management Programs ○​ Insurance – LI, DI, Health Insurance, HSA, LTC, Home, Auto ○​ Financial - Will, Powers of Attorney, Revocable Trust, 401K, Roth IRA, Investments Favorable Tax Treatment for Retirement & Health Care Benefits Paid by Employer ​ Employee and Employer 401K Contributions-Tax Deferred ​ Employee and Employer Roth IRA Distributions at Retirement- Tax-Free ​ Employer-paid health insurance Premiums–Tax-Free ​ Employee and Employer Health Savings Account-Tax Free Savings & Investing ​ Savings ○​ CD’s, Money market ○​ Safety & Liquidity (low return) ○​ Health Savings Account (HSA) ​ Investments ○​ Equity & Bonds ○​ Risk appetite- Conservative, Moderate, Aggressive ○​ Diversification – Large Cap, Small Cap, International, Sector ○​ Dollar-cost averaging – Consistent investing ○​ Start with 401k and Roth IRA Investments – Tax Strategy ​ Tax-deferred ○​ 401k – payroll deduct with employer contribution ○​ Traditional IRA – $6,500 - $7,000 (age 50) annual maximum ○​ Life Insurance Cash Value ○​ Annuity ​ Tax-free ○​ State 529 College Savings Plan ○​ Roth IRA - $6,500 - $7,000 (age 50) annual maximum ○​ Health Savings Account - $3,650 (single)-$7,300(family) annual max. ○​ Life Insurance Death Benefit ○​ Municipal Bonds ​ Taxable at a reduced rate:15% if total income $441,450 or less ○​ Capital Gains and Offset Gains & Losses ○​ Dividends Major Tax Changes Affecting Individuals and Families (2018-2025) Individual & Family Rates ​ Overall decrease *Standard Deduction Increased ​ $6,350 to $12,000 (Single) $12,770 to 24,000 (Joint) *Personal Exemptions ​ Repealed Child Tax Credit ​ Increased Alternative minimum tax Exemption ​ Increased *State & Local Taxes (SALT)​ Deduction Limited to $10,000 Mortgage Interest Deduction ​ Maximum mortgage for interest deduction is $750,000, Limited deduction for Home Equity Loan Managing Your Credit Score ​ Impacts employment, insurance, credit eligibility (mortgage, auto loan) ​ Establish a credit history; Know your Score ​ Credit cards (2), mortgage, vehicle loan. Prompt monthly payments. ​ Keep credit card balances below 50% of credit limit ​ Check credit reports once a year. Report fraud or errors. ​ Credit report freeze to protect against fraud ​ Your score needs to be at or above 720 Life Insurance Principal Uses of Life Insurance ​ Create an instant estate ​ Fund children’s education ​ Provide survivor’s income ​ Pay debts (mortgage, auto loan, credit cards) ​ Pay final expenses and taxes Life Insurance Advantages ​ Face amount paid immediately at death ​ Income tax-free death benefit ​ Not part of the probate estate ○​ No delay in payment, no probate fees ​ Protected from creditors ​ Permanent insurance provides living values: ○​ Cash surrender and Loan values ​ Accelerated death benefits during life ○​ Terminal or chronic illness (Long Term Care) expenses Taxation of Life Insurance ​ Death benefits are income tax-free ​ Policy dividends are income tax-free ​ Policy premiums are not tax deductible Taxation of Life Insurance: Cash Value Accumulation ​ Gain on cash value (interest accumulation) is tax-deferred ​ Cash value withdrawals are taxed on interest element only ○​ The interest element (interest income) is the difference between current cash value accumulation and premiums paid ○​ Cost Recovery rule - Premiums paid are withdrawn first and not subject to tax ○​ Interest is taxed only after all premiums have been withdrawn ​ Policy loan not taxable ​ Dividends not taxable Term Life Insurance ​ Pure Death Benefit ​ No cash value ​ Must die during the term period Elements of Premium Pricing ​ Mortality and the Law of Large Numbers ○​ Mortality based on probability of death ○​ Law of Large Numbers: As the number of exposure units increases, the more closely the actual losses will approach the expected losses (mortality table) ​ Insurance Company investment income ○​ Bonds, stock, real estate ​ Expenses ○​ Sales commissions, underwriting, and other operating expenses ​ Policyholder dividends are a return of excess premiums if actual experience is better than projected. ○​ Dividends are not guaranteed. Permanent Life Insurance ​ Death benefit provides lifetime protection ​ Cash value accumulates and can be paid during life or at death ​ The policy can become paid up at a specific time such as 20 years or age 65 Policy Loan ​ Policy loan is guaranteed-not subject to credit score ​ Policy owner pays interest on loan ○​ Necessary to meet underlying actuarial assumptions ​ CV, which secures the loan, continues to earn interest at a minimum rate: ○​ Ex. $5,000 loan @5% rate = $250 loan interest ○​ $5,000 (CV which secures loan) continues to earn interest at 3% minimum or $150 ○​ The net annual cost is 2% or $100 Health Insurance Deductible ​ Deductible is the amount you pay for covered health services before your insurance starts to pay ​ The higher the deductible the lower the premium ​ Applies per individual or per family on a calendar year basis (Ex. $2,000(Ind.) / $3,000 (Fam.) ​ Affordable Care Act (ACA) provides that deductible is waived for preventive check-ups or vaccination ​ Some plans will have a separate deductible for prescription drugs ​ The key strategy is to increase the deductible and create a Health Savings Account (HSA) Coinsurance ​ The percentage of costs you pay for covered health services after paying the deductible ​ Typical coinsurance percentages are 20% and 30% ​ Example: Assume total medical expenses of $5,000 for a knee injury: the deductible is $1,000, and the coinsurance percentage is 20%. $5,000-1,000 = 4,000 x 20% = $800. ​ Total out-of-pocket is $1,800. ​ Insurance company pays $5,000-1,800 = $3,200 Copay ​ A copay is a flat dollar amount paid for doctor’s visits and prescription drugs ​ Copay is designed to discourage overutilization ​ This does not apply to vaccinations Annual Stop Loss ​ Stop loss is the maximum amount you will pay out-of-pocket for deductible and coinsurance. ​ The deductible applies first and then the coinsurance percentage ​ Once you have met the annual stop loss, the insurance company will pay 100% for the remainder of the plan year. ​ The Stop Loss is equivalent to self-insured retention and should be funded with a Health Savings Account Common Health Care Provider Organizations ​ PPO – Preferred Provider Organization Policyholder may use a provider in or out of the approved network, but deductible and coinsurance are higher if out of network. A referral is not required to see a specialist or out-of-network doctor.  ​ POS - Point of Service Must use a doctor in the network. Covers out-of-network doctors but deductible and coinsurance will be higher. A referral is required to see a specialist or out-of-network doctor. ​ HMO – Health Maintenance Organization The Patient must select a doctor within the HMO. Premium is usually less than other types of provider plans. A referral is required to see a specialist. Employer-Sponsored Group Health Insurance Advantages ​ Employer pays a percentage of the total premium ​ Employee’s payments excluded from employee’s taxable income ​ Employer provides incentives for participation in health and wellness programs Employer-Sponsored Group Insurance Best Practices ​ Avoid “autopilot” of your health insurance program ○​ Conduct annual review of deductible, coinsurance, stop-loss ​ Select the best PPO or HMO Option based on your personal circumstances ​ Participate in Assessment, Screening, and Wellness Programs ​ Create a Health Savings Account Health Savings Account ​ A personal tax-free account for paying qualified medical expenses ​ IRS Publication 502 ​ Eligibility: ○​ Must have high deductible health policy (HDHP) ○​ Must not be covered by Medicare ​ HSA balance may accumulate if not exhausted during the previous year Health Policy Required for HSA Eligibility Single ​ Family Minimum Deductible​ $1,600 ​ $3,200 Maximum Stop Loss (Deductible & Coinsurance) ​ $8,050 ​ $16,100 Maximum Annual Contribution to HSA Single ​ Family $4,150 ​ $8,300 Health Care Reform (ACA) ​ Affordable Care Act was effective in 2010 and is the current federal law that governs health insurance ​ Key provisions and effective date: ○​ Dependents may be covered under their parent’s policy to age 26 (2010) ○​ No deductible or copay for preventive services (2010) ○​ No lifetime limits on policies (2010) ○​ Policy cancellation is not permitted based on illness or claims (2010) ○​ Insurers can not exclude pre-existing conditions (2014) ○​ The individual mandate to purchase Health Insurance was eliminated (2017) Health Care Exchanges Created in 2010 ​ State or Federal (NC uses Federal Exchange) ​ Four tiers – 40, 30, 20, and 10% Co-insurance (amount paid by the policyholder) ​ Individuals and small employers (2-100 employees) are eligible ​ Enrollment deadline for 2025 is December 15, 2024 ACA Premiums Based On: ​ Plan Category (Bronze, Silver, Gold, Platinum) ​ Age ​ Geographic Location ​ Tobacco Use ​ Individual or family Premium Subsidies for Individuals and Families Purchasing Insurance Through Exchange. ​ Premium subsidies are up to 50% for individuals and families with individual incomes of up to $47,250 and families with 4 incomes of up to $97,200. ​ Individual and family subsidies may be available if the employer plan is not acceptable and/or not affordable and the individual or family defaults to the exchange. Retirement Planning Need to Develop a Comprehensive Retirement Program Budgeting ​ Saving & Investing ​ Will ​ Trust ​ Health Care Power of Attorney ​ General Power of Attorney ​ Living Will ​ Risk Management – Life Ins., Disability Income, Health Insurance, Long Term Care, Social Security, Medicare Retirement Income Objective ​ Assume salary begins at $60,000 at age 22 with 3% annual growth ​ Assume salary ends at $220,287 at age 67 ​ Retirement income objective is 85% of age 67 salary $187,244 annually or $15,604 monthly. ​ Monthly income of ($15,604 - 7,050 (SS)) = $8,554. ​ Total amount required at age 67 to fund $8,554 monthly for life with 20 years certain is $1,445,372 Retirement Funding Options ​ Participate in an employer sponsored qualified retirement plan ​ Establish a tax-exempt Roth IRA ​ Establish a personal investment account in addition to the Roth IRA Savings & Investing ​ Savings ○​ CD’s, Money market ○​ Safety, low return ○​ Emergency Fund ​ Investments ○​ Stocks & Bonds ○​ Risk appetite- Conservative, Moderate, Aggressive ○​ Diversification – Large Cap, Small Cap, International, Sector ○​ Dollar cost averaging – Consistent investing ○​ Start with Employer Sponsored 401k and/or Roth IRA ○​ REIT – Real Estate Investment Trust Investments – Tax Strategy ​ Tax deferred  ○​ 401k – payroll deduct with employer contribution ○​ IRA – personal account with $7,000 annual maximum ○​ Annuity ​ Tax free ○​ State 529 College Savings Plan ○​ Roth IRA - $7,000 annual maximum ○​ Health Savings Account - $3,600 (self)-$7,200(family) annual ○​ Life Insurance Death Benefit ○​ Capital Gains & Dividends ○​ Personal Investment Account Investments – Tax Strategy Tax Deferred - (401k, Annuity, Traditional IRA, LI CV) Tax-Free - ( Roth IRA, Life Insurance, 529 Savings Plans, HSA, Muni-Bonds) Taxable- Capital Gains & Dividends (Stocks, Bonds) Federal Insurance Contributions Act (FICA) Tax ​ FICA tax from monthly paycheck split between employer and employee ​ Revenue from FICA tax finances the Social Security and Medicare A (Hospital Insurance) programs ​ FICA does not fund Medicare B (Physicians Insurance). Medicare B premiums are deducted from each person’s Social Security monthly benefit at retirement Social Security Financial Crisis ​ OASDI (Social Security) ○​ Benefits paid exceeded tax revenue in 2020 ​ HI (Medicare) ○​ Benefits paid exceeded tax revenue in 2008 Financial Crisis ​ HI ○​ Trust Fund projected to be exhausted in 2029 (5 years) ​ OASDI ○​ Trust Fund projected to be exhausted in 2034 (10 years) Revocable Living Trusts Revocable Living Trust (RLT) ​ An important tool for Estate Planning ​ Created during lifetime ​ The attorney creates a trust document to comply with State law ​ A grantor can revoke the trust at any time, until death ​ Trust can be a beneficiary of life insurance ​ No impact on income taxes – not an income tax shelter Property Eligible for Trust ​ Life Insurance ​ Cash ​ Stocks ​ Bonds ​ Residence ​ Any other personal assets Why Set Up a Revocable Living Trust? ​ Management of assets ​ Conservation of assets ​ Distribution of assets ​ Estate Planning Management of Assets ​ The grantor of RLT retains lifetime control of the property ​ A grantor is usually the trustee ​ The successor trustee manages the property if the grantor incapacitated or deceased ​ Unification of assets: LI, Real Estate, and Investments combined in a single trust for management and income distribution ​ Privacy-Unlike the Will, the terms of the Trust document are not public knowledge Conservation of Assets ​ Avoid the cost of probate ○​ Property owned at death must be inventoried and is subject to probate fees ○​ Property placed in Trust is not subject to probate fees ​ Trustless likely than a Will to be successfully challenged ○​ Trust provides greater protection from claims by unhappy heirs Distribution of Assets  ​ The trustee will invest and manage life insurance proceeds for the policy beneficiaries ​ Greater flexibility in the distribution of life insurance proceeds than with life insurance settlement options ​ Unification and income distribution from diverse assets (LI, Real Estate, Investments, Shares of stock in family-owned business) LI Settlement Option vs. Trust ​ LI Settlement Options ○​ Lump sum distribution ○​ Life income with period guarantee ○​ Joint & Survivor Income ​ Revocable Trust ○​ Policy proceeds to Trust ○​ Investment management by trustee ○​ Distribution by trustee ○​ Ultimate flexibility ○​ Match beneficiary’s needs ○​ Unification of assets (LI, real estate, stocks and bonds) ○​ Privacy Disadvantages of a Revocable Living Trust ​ Legal and accounting fees ○​ A separate Fiduciary Tax Return is not required if the grantor and trustee are the same person ​ Fees to corporate trustee (if applicable) ○​ 1.5% or 2% of trust assets ○​ A corporate trustee is not necessary if the Successor Trustee is named in the Trust Agreement ​ Administrative issues ○​ Transfer of assets to trust ○​ Transfer of residence and mortgage to trust Trust Document ​ Specifies how assets are to be invested and managed ​ Who receives income and principal ​ How income and principal are paid ​ When income and principal are to be paid to beneficiaries What is the Job of the Trustee? ​ Manage and invest assets of trust  ​ Make appropriate payments to beneficiaries ​ Any natural person or corporation can be a trustee ○​ Grantor, during a lifetime, can be a trustee ○​ Co-trustees can be named ○​ Successor trustee(s) should be named ○​ A corporate trustee is named if no successor trustee Who Can Be the Beneficiaries? ​ Grantor ​ Other primary beneficiaries: ○​ Named beneficiaries (spouse, child) ○​ Class beneficiaries (children and grandchildren) ○​ Charity or other institution “Pour-Over” Will with Property to Trust at Death ​ A specific bequest of property not yet placed in trust ○​ “I give all furniture, furnishings, jewelry, and other personal effects to my spouse” ​ “Pour-Over” provision to trust ○​ All property not subject to specific bequest goes to the trust ​ Will appoint executor of the estate, who administers assets not in the trust General Power of Attorney ​ Authorizes an agent to transact business for you should you become incapacitated ○​ Pay bills ○​ Manage checking account ○​ File & monitor health insurance claims ○​ Manage credit card accounts ○​ Assist with Tax Return Health Care Power of Attorney ​ Authorizes an agent (family member or other designated person) to communicate for you concerning medical treatment ○​ A physician will determine when others need to make health care decisions on patients' behalf Living Will ​ Declaration of your wishes regarding resuscitation, quality of life, and end-of-life treatments Estate Planning Federal Estate Tax ​ All property owned at death, including Life Insurance is included in Estate for Estate Tax purposes. ​ A properly structured Trust Document with a compatible ​ Will can reduce the impact of the Estate Tax. Estate Taxes ​ U.S. Estate tax repealed in December 2009 but reinstated in January 2011 with $5.0 million exemption per person and 35% estate tax rate ​ Estate tax revised January 1 2013 to 40% tax rate. Exemption increased to $11.2 million per person in 2018. ​ Exemption resets to $5 million on January 1, 2026, and tax rate continues at 40%. Gift Tax ​ Each spouse may gift $15,000 annually per person, to an unlimited number of donees, with no gift tax. Annual gifts in excess of $15,000 per person and excess of the lifetime estate tax exemption are taxed at the estate tax rate. Use of Trust for Estate Planning ​ Marital Deduction Trust A - outright distribution to surviving spouse ​ Family Trust B - life income for spouse; income to children and distribution of assets to children at death of surviving spouse. ○​ Also, referred to as Credit Equivalent Bypass trust ○​ Purpose is to minimize estate tax at death of surviving spouse Steps in Estate Planning 1.​ Meet with attorney and establish a Will 2.​ Attorney will create a Revocable Living Trust with Grantor as Trustee 3.​ Attorney will create General Power of Attorney, Health Care Power of Attorney, and Living Will 4.​ Annual review with Financial Advisor to monitor size of the estate 5.​ Children and Successor Trustee are kept informed through meetings and provided copies of Will, Trust Agreement and Powers 6.​ Establish a plan for making gifts to help manage size of estate 7.​ A-B Trust is executed at death of first spouse Revocable Trusts 1.​ Martial Trust A 2.​ Family Trust B