February Newsletter 2009

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The Pros & Cons of Reverse Mortgages

By Rob Follansbee

A reverse mortgage lets homeowners take a portion of the equity from their homes and convert it into cash. The homeowner receives money from the lender and this money is generally paid back to the lender upon death, upon the home’s sale, or upon changing primary residence. These days, many seniors are turning to reverse mortgages to help supplement their retirement income, pay for healthcare expenses, finance home improvement, or even to pay off a current mortgage. A reverse mortgage differs from a traditional mortgage in numerous ways and, consequently, its appropriateness depends on a borrower’s circumstances. Below we’ve assembled a list of the major advantages and disadvantages of reverse mortgages so you can decide if it’s right for you.

Pros:

• Your loan provides non-taxable income without having to sell your home
• You can never owe more than your home is worth even if your home value drops below the amount you borrowed
• You pay no monthly loan payments
• Your loan is due after you pass away or sell your home
• You can use a portion of the loan to pay off existing debt on the home.
• You can receive your loan amount as monthly income, a lump sum distribution, or as a credit line
• Your heirs can inherit the home provided that the loan is repaid
• Your monthly income, if that is the method that you choose to receive your loan proceeds, cannot be lowered even if your home value drops
• You cannot apply for a Home Equity Conversion Mortgage until you receive a counseling session from a HUD-approved counselor

Cons:

• Closing costs are higher and may result in additional thousands spent on fees
• Low maximum loan amounts and conservative loan-to-value ratios limit the amount of money you can receive from a reverse mortgage
• Lump sum loan proceeds may affect your eligibility in need-based government assistance, such as Medicaid
• Real estate taxes and conventional homeowners insurance still must be paid
• Mortgage insurance must be purchased.

For more help with reverse mortgages, you can contact Steve Wittholt at 800-515-6743.

The Future of Medicare Advantage

by Jenny Rose

Medicare Advantage enrollment has grown from 13% of all Medicare recipients in 2004 to approximately 20% today. These plans provide seniors access to a variety of private health plan choices and affordable care. The rapid growth of enrollment in the program is partially due to some Medicare Advantage providers offering additional benefits beyond those found in Medicare Part A and Part B. Seniors considering a Medicare Advantage plan can compare plans with prescription drug coverage, disease management, and care coordination programs for those with chronic medical conditions.

Currently there are various debates among politicians regarding the future of Medicare Advantage. Some critics of the program do not want to build reform on a model of competition and consumer choice, and some argue that Medicare payments to Medicare Advantage plans need to be reduced because they exceed the traditional Medicare payments. Advocates for the Medicare Advantage program counter that these higher payments are justified by added benefits and lower out-of-pocket costs of certain plans. Under traditional Medicare, seniors are forced to pay an additional premium for supplemental coverage to obtain many of the benefits that may be included in a Medicare Advantage plan. Congress members are currently discussing possible solutions which may include cutting back on Medicare reimbursements to insurance companies.

Due to these debates over Medicare Advantage’s future, some policyholders are concerned that they will lose their benefits if the program is discontinued. It is important to balance these concerns with the knowledge that the number of enrollees in Medicare Advantage would suggest that it is unlikely that any future transitions would be sudden and the 1997 Balanced Budget Act included a provision assuring Medicare beneficiaries a smooth and uninterrupted transition in their healthcare coverage should Congress mandate any program changes in the future. Accordingly, should Congress decide to change the funding structure of Medicare resulting in insurance companies discontinuing their Medicare Advantage plans, the Medicare beneficiaries will still be afforded a transition to other Medicare options that does not endanger the ability to retain continuous coverage.

If you are in the process of shopping for a Medicare Advantage plan and have questions you need answered, visit www.PlanPrescriber.com.

An Insiders Guide to Types of Life Insurance

By Ross Blair

There are a bewildering number of options when it comes to selecting a life insurance plan. The wrong choice could cost thousands over the life of an insurance policy and have consequences that your heirs will have to endure. In order to make your decision more informed and less complex, we've put together a brief summary of the benefits and disadvantages of the most popular life insurance plans.

Term Life Insurance

Term life insurance covers policyholders for a specified period of time (e.g. 20 years). Since your premium is dependent on your likelihood to die during that period, term life typically has lower premiums than whole life insurance for the same death benefit. The affordability of term life has made it an attractive option for young and middle-aged consumers. Many financial advisors suggest purchasing low-cost term life as opposed to whole life and using the savings for investments.

Benefits:

• Lower premium than whole or universal life insurance for the same death benefit amount
• Tax-free death benefit
• Partial payout by some plans upon diagnosis of a terminal disease
• High coverage can be purchased for term during mortgage and children's education and lower coverage can be purchased during retirement
• Conversion of term life policy to a whole life policy may be possible with some insurance companies.

Disadvantages:

• Premiums increase as you get older
• Term life plans expire, so if you cancel or outlive your policy, you won’t get any money back.
• Policies must be renewed at the end of each term
• Renewal may be denied if you develop a serious medical condition
• Conversion of term life policy to a whole life policy may be possible with some insurance companies.

Whole life:

Whole life insurance covers the entire life of the policyholder and is the most basic type of cash value life insurance.

Pros:

• Covers the span of your entire life
• Forces you to save money
• Savings grow tax deferred
• Cash that builds through the savings may eventually be enough to pay premiums
• Can be a good estate-planning tool, as the death benefit is tax-free.

Cons:

• Expensive
• High fees and administrative costs
• No control to choose investment accounts
• Policy returns fluctuate with the market
• No flexibility in the premium or face value

Universal Life

Universal life insurance is a more flexible version of whole life insurance, allowing the policyholder to control how much money is in insurance versus savings. Universal life is also different from whole life in that the cash value investments grow at a variable rate that is adjusted monthly.

Pros:

• Flexibility to pay smaller or larger premiums
• Flexibility to shift money between the insurance and savings depending on external factors
• Large early contributions to the fund may pay your premium in later years
• Returns on investments can offset the costs of premiums or simply grow in the account
• Guaranteed minimum return on your money
• Inner workings of the investment process are transparent to the policyholder

Cons:

• Policy can expire if premium payments are too small for too long
• Returns on the cash portion of the policy are subject to the success of investments
• Paying too little on premiums in the policy’s early years may result in high charges later on

Variable life

Variable life insurance is a version of whole life that allows investors to be in control of the savings portion of their policy. There are two types of variable life: one demanding a fixed premium payment, the other has a flexible premium like universal life

Pros:

• Flexibility of investment options
• Earnings are not taxed until you cash in the policy
• Interest earned can be applied to premiums, which can lower the amount you pay
• Returns on investments can offset the costs of premiums or grow in the account
• Death benefits will not drop below a set minimum

Cons:

• Policy holder assumes investment risks instead of the insurance company
• Variable returns can fluctuate with the market
• Poor investment performance translates into a decreased death benefit
• Withdrawing from the cash value during your lifetime is not allowed
• Fees are typically higher than in other policies

For more information or to get a quote on a life insurance policy, visit www.planprescriber.com.