In December 2015, the Federal Reserve raised the federal funds target rate to a range of 0.25% to 0.50%, the first rate increase from the near-zero range where it had lingered for seven years. Many economists viewed this action as a positive sign that the Fed had finally deemed the U.S. economy healthy enough to withstand slightly higher interest rates. It remains to be seen how rate increases will play out for the remainder of 2016. In the meantime, try taking this short quiz to test your interest rate knowledge.

 

Quiz

 

1. Bond prices tend to rise when interest rates rise.
a. True
b. False

 

2. Which of the following interest rates is directly controlled by the Federal Reserve Open Market Committee?
a. Prime rate
b. Mortgage rates
c. Federal funds rate
d. All of the above
e. None of the above

 

3. The Federal Reserve typically raises interest rates to control inflation and lowers rates to help accelerate economic growth.
a. True
b. False

 

4. Rising interest rates could result in lower yields for investors who have money in cash alternatives.
a. True
b. False

 

5. Stock market investors tend to look unfavorably on increases in interest rates.
a. True
b. False

 

Answers

 

1. b. False. Bond prices tend to fall when interest rates rise. However, longer-term bonds may feel a greater impact than those with shorter maturities. That’s because when interest rates are rising, bond investors may be reluctant to tie up their money for longer periods if they anticipate higher yields in the future; and the longer a bond’s term, the greater the risk that its yield may eventually be superceded by that of newer bonds. (The principal value of bonds may fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost.)

 

2. c. Federal funds rate. This is the interest rate at which banks lend funds to each other (typically overnight) within the Federal Reserve System. Though the federal funds rate affects other interest rates, the Fed does not have direct control of consumer interest rates such as mortgage rates.

 

3. a. True. Raising rates theoretically slows economic activity. As a result, the Federal Reserve has historically raised interest rates to help dampen inflation. Conversely, the Federal Reserve has lowered interest rates to help stimulate a sluggish economy.

 

4. b. False. Rising interest rates could actually benefit investors who have money in cash alternatives. Savings accounts, CDs, and money market vehicles are all likely to provide somewhat higher income when interest rates increase. The downside, though, is that if higher interest rates are accompanied by inflation, cash alternatives may not be able to keep pace with rising prices.

 

5. a. True. Higher borrowing costs can reduce corporate profits and reduce the amount of income that consumers have available for spending. However, even with higher rates, an improving economy can be good for investors over the long term.

Many differences exist among baby boomers, Generation Xers, and millennials. But one thing that brings all three generations together is a concern about their financial situations.

According to an April 2016 employee financial wellness survey, 38% of boomers, 46% of GenXers, and 51% of millennials said that financial matters are the top cause of stress in their lives. In fact, baby boomers (50%), Gen Xers(56%), and millennials (60%) share the same top financial concern about not having enough emergency savings for unexpected expenses. Following are additional financial concerns foreach group and some tips on how to address them.

 

Baby boomers
Baby boomers cite retirement as a top concern,with 45% of the group saying they worry about not being able to retire when they want to. Although 79% of the baby boomers said they are currently saving for retirement, 52% of the same group believe they will have to delay retirement. Health issues (30%) and health-care costs (38%) are some of the biggest retirement concerns cited by baby boomers. As a result, many baby boomers(23%) are delaying retirement in order to retain their current health-care benefits.

Other reasons reported by baby boomers for delaying retirement include not having enough money saved to retire (48%), not wanting to retire (27%), and having too much debt (23%).
Generation X
While baby boomers are concerned about retiring when they want to, Gen Xers are more specifically worried about running out of money in retirement, with 50% of the surveyed group citing this as a top concern. More Gen Xers(26%) than baby boomers (25%) or millennials(21%) have already withdrawn money held in their retirement plans to pay for expenses other than retirement.

Besides worrying about retirement, 25% of GenXers are concerned about meeting monthly expenses. Forty-four percent find it difficult to meet household expenses on time each month,and 53% consistently carry balances on their credit cards.

Being laid off from work is another financial worry among Gen Xers, cited by 22% of those surveyed–more than cited by baby boomers or millennials.

Gen Xers (26%) report that better job security would help them achieve future financial goals, which may help explain their worry about both future (retirement) and current (living) expenses.

 

 

Millennials
Unlike baby boomers and Gen Xers who worry about future financial needs, millennials seem to be more concerned about meeting current expenses. This concern has grown substantially for millennials, from 23% in the same survey conducted in 2015 to 35% in2016. Millennials are also finding it increasingly difficult to pay their household expenses on time each month, with the number jumping from 35% in 2015 to 46% in 2016.

Considering the amount of debt that millennials owe, it’s probably not surprising that they worry about making ends meet. Specifically, 42% of the millennials surveyed have a student loan(s),with 79% saying their student loans have a moderate or significant impact on their ability to meet other financial goals.

In an attempt to make ends meet, 30% of millennials say they use credit cards to pay for monthly necessities because they can’t afford them otherwise. But 40% of those who consistently carry balances find it difficult to make their minimum credit-card payments on time each month.

 

 

How each generation can address their concerns
Focusing on some basics may help babyboomers, Gen Xers, and millennials address their financial concerns. Creating and sticking to a budget can make it easier to understand exactly how much money is needed for fixed/discretionary expenses as well as help keep track of debt. A budget may also be a useful tool for learning how to prioritize and save for financial goals, including adding to an emergency savings account and retirement.

At any age, trying to meet the competing demands of both short- and long-term financial goals can be frustrating. Fortunately, there is still time for all three generations to develop healthy money management habits and improve their finances

The right answer for you will depend on your situation. First of all, don’t underestimate the psychological impact of early retirement. The adjustment from full-time work to a more leisurely pace may be difficult. So consider whether you’re ready to retire yet. Next, look at what you’re being offered. Most early-retirement offers share certain basic features that need to be evaluated. To determine whether your employer’s offer is worth taking, you’ll want to break it down.

 

Does the offer include a severance package? If so, how does the package compare with your projected job earnings (including future salary increases and bonuses) if you remain employed? Can you live on that amount (and for how long) without tapping into your retirement savings? If not, is your retirement fund large enough that you can start drawing it down early? Will you be penalized for withdrawing from your retirement savings?

 

Does the offer include post-retirement medical insurance? If so, make sure it’s affordable and provides adequate coverage. Also, since Medicare doesn’t start until you’re 65, make sure your employer’s coverage lasts until you
reach that age. If your employer’s offer doesn’t include medical insurance , you may have to look into COBRA or a private individual policy.

 

How will accepting the offer affect your retirement plan benefits? If your employer has a traditional pension plan, leaving the company before normal retirement age (usually 65) may greatly reduce the final payout you receive from
the plan. If you participate in a 401(k) plan, what price will you pay for retiring early? You could end up forfeiting employer contributions if you’re not fully vested. You’ll also be missing out on the opportunity to make additional
contributions to the plan.

 

Finally, will you need to start Social Security benefits early if you accept the offer? For example, at age 62 each monthly benefit check will be 25% to 30% less than it would be at full retirement age (66 to 67 , depending on your
year of birth). Conversely, you receive a higher payout by delaying the start of benefits past your full retirement age–your benefit would increase by about 8% for each year you delay benefits, up to age 70.

Many members of the “sandwich generation”–a group loosely defined as people in their 40s to 60s who are “sandwiched” between caring for their own children and aging parents–find themselves in the position of raising a family and looking after the needs of aging parents. If the time has come when you and your parents think that it may be in their best interest to live with you, you should discuss the implications and how it will impact your entire family.

 

Your first topic should be to have all your family members share their expectations for living together. No doubt your parents will want to feel part of your household. However, you’ll want to know how much they want to participate in day-to-day activities in your home. For example, if able, would they be willing to take on some responsibilities, such as babysitting and transporting kids to school or other activities? Will they participate in other family activities, such as meals and social events?

 

Next, consider whether your home can properly accommodate your parents. Do you have adequate privacy/space for your parents, or will you need to remodel or renovate an existing area of your home? Will your parents be able to move around your home easily, or do you need to install appropriate safety devices? Common modifications and repairs for aging family members may include grab bars in bathrooms, an automatic chair lift for stairs, and a ramp for wheelchair access.

 

You will also need to explore the financial impact. Will your parents contribute to household expenses, or will you cover their portion? Do they have enough money to help support themselves during their retirement? If not, will you be able to support them financially?

 

While having multiple generations living together in the same home can be a rewarding experience, it can also be challenging at times. As a result, it’s important to keep the lines of communication open between you, your spouse, your children, and your parents. Doing so can help ensure a happy and healthy home environment for your entire multigenerational family.

 

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It’s been around since 2013, but many are still struggling to come to grips with the net investment income tax. The 3.8% tax, which is sometimes referred to as the Medicare surtax on net investment income, affected approximately 3.1 million federal income tax returns for 2013 (the only year for which data is available) to the tune of almost $11.7 billion.1 Here’s what you need to know.

 

What is it?

 

The net investment income tax is a 3.8% “extra” tax that applies to certain investment income in addition to any other income tax due. Whether you’re subject to the tax depends on two general factors: the amount of your modified adjusted gross income for the year, and how much net investment income you have.

 

Note: Nonresident aliens are not subject to the net investment income tax.

 

What income thresholds apply?

 

Modified adjusted gross income (MAGI) is basically adjusted gross income–the amount that shows up on line 37 of your IRS Form 1040–with certain amounts excluded from income added back in.

 

The net investment income tax applies only if your modified adjusted gross income exceeds the following thresholds:

filing-magi

 

What is net investment income?

 

Investment income generally includes interest, dividends, capital gains, rental and royalty income, income from nonqualified annuities, and income from passive business activities and businesses engaged in the trade of financial instruments or commodities. Investment income does not include wages, unemployment compensation, Social Security benefits, tax-exempt interest, self-employment income, or distributions from most qualified retirement plans and IRAs.

 

Note: Even though items like wages and retirement plan distributions aren’t included in net investment income, they are obviously a factor in calculating MAGI. So higher levels of non-investment income can still make a difference in whether the net investment income tax applies.

 

Gain from the sale of a personal residence would generally be included in determining investment income. However, investment income does not include any amount of gain that is excluded from gross income for regular income tax purposes. Qualifying individuals are generally able to exclude the first $250,000–or $500,000 for married couples filing jointly–of gain on the sale of a principal residence; any of the gain that’s excluded for regular income tax purposes would not be included in determining investment income.

 

To calculate net investment income, you reduce your gross investment income by any deductible expenses that can be allocated to the income. So, for example, associated investment interest expense, investment and brokerage fees, expenses associated with rental and royalty income, and state and local income taxes can all be factored in.

 

How is the tax calculated?

 

You know your modified adjusted gross income. You know your net investment income. To calculate the net investment income tax, first subtract the threshold figure (shown above) for your filing status from your MAGI. Then compare the result with your net investment income. Multiply the lower of the two figures by 3.8%.

 

For example, assume you and your spouse file a joint federal income tax return and have $270,000 in MAGI and $50,000 in net investment income. Your MAGI is $20,000 over the $250,000 threshold for married couples filing jointly. You would owe $760 (3.8% multiplied by $20,000), because the tax is based on the lesser of net investment income or MAGI exceeding the threshold.

 

How is it reported?

 

If you’re subject to the net investment income tax, you must complete IRS Form 8960, Net Investment Income Tax–Individuals, Estates, and Trusts, and attach it to your federal income tax return (you must file IRS Form 1040). The instructions for IRS Form 8960 provide an overview of the rules that apply and can be a good source of additional information. If you think you may be affected by the net investment income tax, though, it’s a good idea to consider discussing your individual situation with a tax professional.

 

  1.  IRS Statistics of Income Bulletin, Spring 2015

In 1981, the Nobel Prize-winning economist Robert Shiller published a groundbreaking study that contradicted a prevailing theory that markets are always efficient. If they were, stock prices would generally mirror the growth in earnings and dividends. Shiller’s research showed that stock prices fluctuate more often than changes in companies’ intrinsic valuations (such as dividend yield) would suggest.1

 

Shiller concluded that asset prices sometimes move erratically in the short term simply because investor behavior can be influenced by emotions such as greed and fear. Many investors would agree that it’s sometimes difficult to stay calm and act rationally, especially when unexpected events upset the financial markets.

 

Researchers in the field of behavioral finance have studied how cognitive biases in human thinking can affect investor behavior. Understanding the influence of human nature might help you overcome these common psychological traps.

 

Herd mentality

 

Individuals may be convinced by their peers to follow trends, even if it’s not in their own best interests. Shiller proposed that human psychology is the reason that “bubbles” form in asset markets. Investor enthusiasm (“irrational exuberance”) and a herd mentality can create excessive demand for “hot” investments. Investors often chase returns and drive up prices until they become very expensive relative to long-term values.

 

Past performance, however, does not guarantee future results, and bubbles eventually burst. Investors who follow the crowd guarantee future results, and bubbles eventually burst. Investors who follow the crowd can harm long-term portfolio returns by fleeing the stock market after it falls and/or waiting too long (until prices have already risen) to reinvest.

 

Availability bias

 

This mental shortcut leads people to base judgments on examples that immediately come to mind, rather than examining alternatives. It may cause you to misperceive the likelihood or frequency of events, in the same way that watching a movie about sharks can make it seem more dangerous to swim in the ocean.

 

Confirmation bias

 

People also have a tendency to search out and remember information that confirms, rather than challenges, their current beliefs. If you have a good feeling about a certain investment, you may be likely to ignore critical facts and focus on data that supports your opinion.

 

Overconfidence Individuals

 

often overestimate their skills, knowledge, and ability to predict probable outcomes. When it comes to investing, overconfidence may cause you to trade excessively and/or downplay potential risks.

 

Loss aversion

 

Research shows that investors tend to dislike losses much more than they enjoy gains, so it can actually be painful to deal with financial losses.2 Consequently, you might avoid selling an investment that would realize a loss even though the sale may be an appropriate course of action. The intense fear of losing money may even be paralyzing.

 

It’s important to slow down the process and try to consider all relevant factors and possible outcomes when making financial decisions. Having a long-term perspective and sticking with a thoughtfully crafted investing strategy may also help you avoid expensive, emotion-driven mistakes.

 

Note: All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost.
1. The Economist, “What’s Wrong with Finance?” May 1, 2015
2. The Wall Street Journal, “Why an Economist Plays Powerball,” January 12, 2016

In the financial world, there are a lot of rules about what you should be doing. In theory, they sound reasonable. But in practice, it may not be easy, or even possible, to follow them. Let’s look at some common financial maxims and why it can be hard to implement them.

 

Build an emergency fund worth three to six months of living expenses

 

Wisdom: Set aside at least three to six months worth of living expenses in an emergency savings account so your overall financial health doesn’t take a hit when an unexpected need arises.

 

Problem: While you’re trying to save, other needs–both emergencies and non-emergencies–come up that may prevent you from adding to your emergency fund and even cause you to dip into it, resulting in an even greater shortfall. Getting back on track might require many months or years of dedicated contributions, leading you to decrease or possibly stop your contributions to other important goals such as college, retirement, or a down payment on a house.

 

One solution: Don’t put your overall financial life completely on hold trying to hit the high end of the three to six months target. By all means create an emergency fund, but if after a year or two of diligent saving you’ve amassed only two or three months of reserves, consider that a good base and contribute to your long-term financial health instead, adding small amounts to your emergency fund when possible. Of course, it depends on your own situation. For example, if you’re a business owner in a volatile industry, you may need as much as a year’s worth of savings to carry you through uncertain times.

 

Start saving for retirement in your 20’s

 

Wisdom: Start saving for retirement when you’re young because time is one of the best advantages when it comes to amassing a nest egg. This is the result of compounding, which is when your retirement contributions earn investment returns, and then those returns produce earnings themselves. Over time, the process can snowball.

 

Problem: How many 20-somethings have the financial wherewithal to save earnestly for retirement? Student debt is at record levels, and young adults typically need to budget for rent, food, transportation, monthly utilities, and cell phone bills, all while trying to contribute to an emergency fund and a down payment fund.

 

One solution: Track your monthly income and expenses on a regular basis to see where your money is going. Establish a budget and try to live within your means, or better yet below your means. Then focus on putting money aside in your workplace retirement plan. Start by contributing a small percentage of your pay, say 3%, to get into the retirement savings habit. Once you’ve adjusted to a lower take-home amount in your paycheck (you may not even notice the difference!), consider upping your contribution little by little, such as once a year or whenever you get a raise.

 

Start saving for college as soon as your child is born

 

Wisdom: Benjamin Franklin famously said there is nothing certain in life except death and taxes. To this, parents might add college costs that increase every year without fail, no matter what the overall economy is doing. As a result, new parents are often advised to start saving for college right away.

 

Problem: New parents often face many other financial burdens that come with having a baby; for example, increased medical expenses, baby-related costs, day-care costs, and a reduction in household income as a result of one parent possibly cutting back on work or leaving the workforce altogether.

 

One solution: Open a savings account and set up automatic monthly contributions in a small, manageable amount–for example, $25 or $50 per month–and add to it when you can. When grandparents and extended family ask what they can give your child for birthdays and holidays, you’ll have a suggestion.

 

Subtract your age from 100 to determine your stock percentage

 

Wisdom: Subtract your age from 100 to determine the percentage of your portfolio that should be in stocks. For example, a 45-year-old would have 55% of his or her portfolio in stocks, with the remainder in bonds and cash.

 

Problem: A one-size-fits-all rule may not be appropriate for everyone. On the one hand, today’s longer life expectancies make a case for holding even more stocks in your portfolio for their growth potential, and subtracting your age from, say, 120. On the other hand, considering the risks associated with stocks, some investors may not feel comfortable subtracting their age even from 80 to determine the percentage of stocks.

 

One solution: Focus on your own tolerance for risk while also being mindful of inflation. Consider looking at the historical performance of different asset classes. Can you sleep at night with the investments you’ve chosen? Your own peace of mind trumps any financial rule.

 

It might not always be possible to follow some common financial wisdom.

 

Note: All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.

A traditional grantor retained annuity trust (GRAT) or a traditional qualified personal residence trust (QPRT) can be used to obtain a valuation discount for federal gift tax purposes while removing the trust property from your estate for federal estate tax purposes (if you survive the trust term). By modifying a few trust provisions, a step-up GRAT or QPRT can be used instead to obtain a stepped-up income tax basis for appreciated property, regardless of whether you or your spouse dies first. If you are considering a GRAT or a QPRT, you should consult an estate planning attorney.

 

What is income tax basis?

 

Income tax basis is the base figure used to determine whether capital gain or loss is recognized on the sale of property for income tax purposes. Initially, basis is typically equal to the amount you paid for property, but adjustments may be made. If the property is sold for more than its adjusted basis, there is a gain. If the property is sold for less than its adjusted basis, there is a loss.

 

What is a stepped-up basis for inherited property?

 

When your heirs receive property from you at your death, they generally receive an initial basis in property equal to its fair market value (FMV). The FMV is established on the date of your death, or sometimes on an alternate valuation date six months after your death. This is often referred to as a “stepped-up basis” because basis is typically stepped up to FMV. However, basis can also be “stepped down” to FMV.

 

There is no step-up (or step-down) in basis for income in respect of a decedent (IRD). IRD is certain income that was not properly includable in taxable income for the year of the decedent’s death or in a prior year. In other words, it is income that has not yet been taxed. Examples of IRD include installment payments and retirement accounts.

 

A step-up in basis is not available if you give appreciated property to anyone within one year of that person’s death and the property then passes to you (or your spouse).

 

Both spouses’ shares of community property qualify for a step-up (or step-down) in basis upon the death of the first spouse to die.

 

So how can you and your spouse be fairly certain of a step-up in basis for appreciated property (excluding IRD, which cannot be stepped up), regardless of who dies first? Except for community property, whether there is a step-up in basis when the first spouse dies generally depends on that spouse owning the appreciated property at death. A couple of step-up trusts may help provide for a step-up in basis for appreciated property no matter which of you dies first.

 

What is a traditional GRAT or QPRT?

 

In a traditional GRAT, you transfer property to the trust and retain a right to a stream of payments from the trust for a term of years. After the trust term ends, the remaining trust property passes to your beneficiaries (such as your children). The gift of the remainder interest is discounted (possibly to zero) because it will be received in the future.

 

With a traditional QPRT, you transfer your personal residence (it can be a vacation home or a second residence) to the trust, while retaining the right to live in the residence for a term of years. After the trust term ends, the personal residence passes to your beneficiaries (such as your children). The gift of the remainder interest is discounted because it will be received in the future. If you wish to live in the residence after the trust term ends, you need to pay rent at fair market value.

 

How do you turn a traditional GRAT or QPRT into a step-up GRAT or QPRT?

 

In order to turn a traditional GRAT or QPRT into a step-up GRAT or QPRT, a few trust provisions must be changed when the trust is created. First, the trust should terminate upon the earlier of the death of you or your spouse (rather than at the end of a term of years). Second, the trust should provide that when that death occurs, the trust property would pass to your spouse, or to your spouse’s estate if your spouse predeceases you (rather than to other beneficiaries). Your spouse provides in a will that the property in his or her estate passes back to you if your spouse predeceases you.

 

The initial transfer of a remainder interest in the trust to your spouse generally qualifies for the marital deduction for gift tax purposes.

 

If you die first, all or a substantial portion of the property in the step-up GRAT or QPRT will generally be included in your estate and receive a step-up in basis. If your spouse dies first, all of the property in the step-up GRAT or QPRT will be included in your spouse’s estate and will generally receive a step-up in basis. In either case, the property passes to the surviving spouse and should generally qualify for the marital deduction and avoid estate tax.

 

Caution: If your spouse dies first and within one year of your transfer to the trust, a step-up in basis is not available because the property passes back to you.

 

If you are married, a step-up GRAT or QPRT can be used to obtain a stepped-up income tax basis for appreciated property, regardless of which spouse dies first. A higher basis can reduce or eliminate the amount of gain recognized for income tax purposes on a subsequent sale of the property.

 

Note: Appreciation and gains are not guaranteed; depreciation and losses are possible. Payments from trusts are not guaranteed. There are fees and expenses associated with the creation of trusts.

Life insurance can serve many valuable purposes during your life. However, once you’ve retired, you may no longer feel the need to keep your life insurance, or the cost of maintaining the policy may have become too expensive. In these cases, you might be tempted to abandon the policy or surrender your life insurance coverage. But there are other alternatives to consider as well.

 

Lapse or surrender

 

If you have term life insurance, you generally will receive nothing in return if you surrender the policy or let it lapse by not paying premiums. On the other hand, if you own permanent life insurance, the policy may have a cash surrender value (CSV), which you can receive upon surrendering the insurance. If you surrender your cash value life insurance policy, any gain (generally, the excess of your CSV over the cumulative amount of premium paid) resulting from the surrender will be subject to federal (and possibly state) income tax. Also, surrendering your policy prematurely may result in surrender charges, which can reduce your CSV.

 

Exchange the old policy

 

Another option is to exchange your existing life insurance policy for either a new life insurance policy or another type of insurance product. The federal tax code allows you to exchange one life insurance policy for another life insurance policy, an endowment policy, an annuity, or a qualified long-term care policy without triggering current tax liability. This is known as an IRC Section 1035 exchange. You must follow IRS rules when making the exchange, particularly the requirement that the exchange must be made directly between the insurance company that issued the old policy and the company issuing the new policy or contract. Also, the rules governing 1035 exchanges are complex, and you may incur surrender charges from your current life insurance policy. In addition, you may be subject to new sales, mortality, expense, and surrender charges for the new policy, which can be very substantial and may last for many years afterward.

 

Lower the premium

 

If the premium cost of your current life insurance policy is an issue, you may be able to reduce the death benefit, lowering the premium cost in the process. Or you can try to exchange your current policy for a policy with a lower premium cost. But you may not qualify for a new policy because of your age, health problems, or other reasons.

 

Stream of income

 

You may be able to exchange the CSV of a permanent life insurance policy for an immediate annuity, which can provide a stream of income for a predetermined period of time or for the rest of your life. Each annuity payment will be apportioned between taxable gain and nontaxable return of capital. You should be aware that by exchanging the CSV for an annuity, you will be giving up the death benefit, and annuity contracts generally have fees and expenses, limitations, exclusions, and termination provisions. Also, any annuity guarantees are contingent on the claims-paying ability and financial strength of the issuing insurance company.

 

Long-term care

 

Another potential option is to exchange your life insurance policy for a tax-qualified long-term care insurance (LTCI) policy, provided that the exchange meets IRC Section 1035 requirements. Any taxable gain in the CSV is deferred in the long-term care policy, and benefits paid from the tax-qualified LTCI policy are received tax free. But you may not be able to find a LTCI policy that accepts lump-sum premium payments, in which case you’d have to make several partial exchanges from the CSV of your existing life insurance policy to the long-term care policy provider to cover the annual premium cost.

 

A complete statement of coverage, including exclusions, exceptions, and limitations, is found only in the policy. It should be noted that carriers have the discretion to raise their rates and remove their products from the marketplace.

Buying considerations Leasing considerations
Ownership When the vehicle is paid for, it’s
yours. You can keep it as long as you
want, and any retained value (equity)
is yours to keep.
You don’t own the car–the leasing
company does. You must return the
vehicle at the end of the lease or
choose to buy it at a predetermined
residual value; you have no equity.
Monthly payments You will have a monthly payment if
you finance it; the payment will vary
based on the amount financed, the
interest rate, and the loan term.
When comparing similar vehicles
with equal costs, the monthly
payment for a lease is typically
significantly lower than a loan
payment. This may enable you to
drive a more expensive vehicle.
Mileage Drive as many miles as you want; a
vehicle with higher mileage, though,
may be worth less when you trade in
or sell your vehicle.
Your lease will spell out how many
miles you can drive before excess
mileage charges apply (typical
mileage limits range from 12,000 to
15,000).
Maintenance When you sell your vehicle, condition
matters, so you may receive less if it
hasn’t been well maintained. As your
vehicle ages, repair bills may be
greater, something you generally
won’t encounter if you lease.
You generally have to service the
vehicle according to the
manufacturer’s recommendations.
You’ll also need to return your
vehicle with normal wear and tear
(according to the leasing company’s
definition), so you may be charged
for dents and scratches that seem
insignificant.
Up-front costs These may include the total
negotiated cost of the vehicle (or a
down payment on that cost), taxes,
title, and insurance.
Inception fees may include an
acquisition fee, a capitalized cost
reduction amount (down payment),
security deposit, first month’s
payment, taxes, and title fees.
Value You’ll need to consider resale value.
All vehicles depreciate, but some
depreciate faster than others. If you
decide to trade in or sell the vehicle,
any value left will be money in your
pocket, so it may pay off to choose a
vehicle that holds its value.
A vehicle that holds its value is
generally less expensive to lease
because your payment is based on
the predicted depreciation. And
because you’re returning it at the end
of the lease, you don’t need to worry
about owning a depreciating asset.
Insurance If your vehicle is financed, the lien
holder may require you to carry a
certain amount of insurance;
otherwise, the amount of insurance
you’ll need will depend on personal
factors and state insurance
requirements.
You’ll be required to carry a certain
amount of insurance, sometimes
more than if you bought the vehicle.
Many leases require GAP insurance
that covers the difference between
an insurance payout and the
vehicle’s value if your vehicle is
stolen or totaled. GAP insurance may
be included in the lease.
The end of the
road
You may want to sell or trade in the
vehicle, but the timing is up to you. If
you want, you can keep the vehicle
for many years, or sell it whenever
you need the cash.
At the end of the lease, you must
return the vehicle or opt to buy it
according to the lease terms.
Returning the vehicle early may be
an option, but it’s likely you’ll pay a
hefty fee to do so. If you still need a
vehicle, you’ll need to start the
leasing (or buying) process all over.

 

After declining dramatically a few years ago, auto sales are up, leasing offers are back, and incentives and deals abound. So if you’re in the market for a new vehicle, should you buy it or lease it? To decide, you’ll need to consider how each option fits into your lifestyle and your budget. This chart shows some points to compare.

 

Buying or leasing tips

 

  • Shop wisely. Advertised deals may be too good to be true once you read the fine print. To qualify for the deal, you may need to meet certain requirements, or pay more money up front.
  • To get the best deal, be prepared to negotiate the price of the vehicle and the terms of any loan or lease offer.
  • Read any contract you’re asked to sign, and make sure you understand any terms or conditions.
  • Calculate both the short-term and long-term costs associated with each option