Interested in Some Free Life Insurance?

If you are employed at least part time and make less than $40,000 per year then you may qualify for free life insurance by MassMutual. The free life insurance program is called LifeBridge. Here are some details according to their website:

"MassMutual's LifeBridge Program provides free life insurance. It is designed to help you protect your dream of providing an education for your children if you die before they complete their schooling.

Under the LifeBridge Free Life Insurance Program, Massachusetts Mutual Life Insurance Company (MassMutual) will issue a $50,000 life insurance policy to a trust for a period of 10 years and at no cost to you. If you die within that time period, the $50,000 is used to cover the educational expenses of your children. And your children have 10 years after your death or until age 35 (whichever is later) to use this $50,000 educational benefit."

A New Federal Tax Reform Panel

Obama has appointed Paul Volcker to head a panel that will make recommendations for reforming our nation's tax laws. Volcker is also the head of the President's Economic Recovery Advisory Board.

The advisory panel will consider ways to simplify the tax code and reduce tax evasion, and will make recommendations to the President by December 4th, 2009, according to a White House briefing.

The last time we had any serious consideration for tax reform was in 2005 when President Bush appointed a panel of advisors to come up with simplified tax systems. Those recommendations were never implemented. There is a strong suspicion that recommendations coming out of this new tax reform panel might not fare any better. Rosanne Altshuler, who worked as the chief economist on the 2005 panel, fears that Paul Volcker and his team might be too constrained,

"President Obama has said that no one making less than $250,000 could pay higher taxes under any new reform. That means ninety-five percent of taxpayers can’t pay additional tax, even if it would result in a more efficient system, decrease inequities, or make their lives much simpler. At a time of monster deficits, that pretty much rules out any sensible reforms." Tax Reform 2.0 (TaxVox blog)

There's no sign of any Web site where we can see what's going on with this advisory panel. The Web site for the 2005 panel, located at www.taxreformpanel.gov, has been removed. Perhaps it will be resurrected for the new panel? I also hope the panel solicits recommendations from the public and holds meetings. This would gives all of us a chance to voice our ideas for tax reform.

By William Perez, About.com Guide to Tax Planning since 2004

Black Swan Theory in Insurance

Black swan theory was bound to show up in the insurance industry, but so far there has been limited discussion. Do you know what a black swan is? Black swans are important in assessing future insurance losses, but are they adequately represented in the models?

The term originates from a book called The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb (also see here, or see Recent Books on the left of this blog). Wikipediahere): provides a good definition (see

a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations

The book was written from the perspective of investing (Taleb was a hedge fund manager), but the concepts are particularly important for the insurance industry. A central thesis of his book is that models are defective and lead to incorrect conclusions because black swan events are not contained in the data and are therefore assigned a probability of zero outcome – obviously incorrect.

While there has been quite a bit of discussion of insurance modeling, there has been little discussion of black swan events and the ability of predictive models to adequately assess severe catastrophes for insurance purposes (see here and here for two such articles).

However, two articles came to our attention recently. The first (see here) is a response to some comments made by Taleb in an interview (see here). Taleb notes:

My idea in The Black Swan is to make people think of the unknown and of the potency of the unknown, particularly a certain class of events that you can’t imagine but can cost you a lot: rare but high-impact events.

The author makes an excellent pitch for combining predictive modeling techniques with outcomes not envisioned in historical data, and makes 4 suggestions for planners (see here).

In the second (Risk & Insurance commentary, see here) the author is concerned that the black swan theory may result in less risk management and assumes that because black swan events occur we should or will not consider past history.

I fear they may increase paralysis in risk management and further promote inaction.

But black swan theory is telling us that modeling, which relies on historical data, is only part of the story. In fact, the future will be a combination of prior history, reflected in historical data, and new events, which can and at some point will lead to more volatility – sometimes better, sometimes worse.

The important point is that black swan events are not contained in historical data, and therefore traditional predictive models cannot provide complete picture of the future. The second piece is equally important: these events can be so large that they will dwarf other outcomes if they occur, although the probability of occurrence is extremely small.

Unfortunately, we have seen a number of these black swan events in the insurance business in the last few years, 9/11 and Katrina being two such examples. Maybe a more flexible approach to modeling and a focus on risk management could be beneficial to the insurance industry.

Brought to you by MercatorPro.

The Rule of 72 for Doubling Your Money

Compound interest is an amazing thing, and the Rule of 72 is a simple way to quickly estimate how long it will take your investment to double. The only piece of information you need for this calculation is the annual rate of return. While most investments don’t have a fixed rate of return over a long period of time, you can use an average estimate to get a pretty good idea.

How to Use the Rule of 72

To estimate how long it takes for your money to double, simply divide 72 by the interest rate. The result is how many years it will take for your money to double at that rate. For example, let’s assume you can earn a 6% rate of return. How long will it take $1,000 to grow into $2,000?

72 / 6 percent = 12 years

In this example, if you invested $1,000 into an account that earned a flat 6% annual rate of return, after 12 years, your investment would be worth around $2,000. To save a little time, here are some interest rates and the corresponding amount of time to double:

1% - 72 years
2% - 36 years
3% - 24 years
4% - 18 years
5% - 14 years
6% - 12 years
7% - 10.3 years
8% - 9.0 years
9% - 8.0 years
10% - 7.2 years
11% - 6.5 years
12% - 6.0 years

Remember, It’s Just an Estimate

Keep in mind that this is just a quick estimate. Depending on changes in the rate of return over time, what you’re invested in, how you invest it, how interest is applied, and possible tax implications, the actual amount of time needed to double your money will vary. Even so, the rule of 72 can be helpful when you quickly want to compare the rate of growth of two investments.

The rule of 72 also works in reverse and can be helpful in understanding the power of inflation. If you consider the average long-term rate of inflation is between 3 and 4 percent, you’ll notice that something worth $100 today will cost $200 in about 20 years. This can help illustrate the power of inflation and the importance of realizing a rate of return over time that can not only overcome inflation, but also taxes.

By Jeremy Vohwinkle, About.com

New Information in Your IRMI Library

For decades, farm insurers had essentially two choices when it came to selecting insurance forms and rating procedures for insuring farms and agribusinesses: to use "farmowners" forms and rating developed for family-owned and operated farms or to select components from commercial property and liability programs and modify them to fit agricultural risks. That changed in 2001 when the American Association of Insurance Services (AAIS) developed and filed its Agricultural Output Program (AgOP), a standardized program providing a wide range of commercial property and inland marine coverages designed for large agricultural operations. In 2008, AAIS followed up on the liability side by filing its new Agricultural General Liability Program (AgGL), the first standardized general liability program specifically designed for farms, ranches, and other agricultural operations.

The May 2009 issue of The Risk Report provides a detailed review of this new portfolio of specially designed policy forms and how they work to provide tailored liability protection for agribusinesses. If you subscribe on IRMI Online, you can learn all about the AGL program here.

All the best,
Jack

Jack Gibson, CPCU, CRIS, ARM
President
International Risk Management Institute, Inc.

Retirement Deductions for Self-Employed

Type of Deduction:

Above-the-line tax deduction (you don't need to itemize). The deduction reduces the income tax, but does not reduce the self-employment tax.

Basics of Self-Employed Retirement Plans:

If you have self-employment income, then you can take a tax deduction for contributions you make to a SEP, SIMPLE, or solo 401(k) retirement plan. You can set up the retirement plan with a financial institution of your choice. Each plan has different deadlines and funding limits. If you are a sole proprietor, you'll need an Employer Identification Number to set up the plan.

SEP-IRAs:

SEP-IRAs can be established and funded as late as October 15th for the previous year, provided that the taxpayer filed an extension. The maximum contribution is 20% of the person's net self-employed income, with a maximum dollar limit of $46,000 for 2008. "Net self-employment income" means self-employed income minus one-half of the self-employment tax. More about SEP-IRAs.

SIMPLE IRAs:

Simple IRAs can also be funded as late as October 15th (with an extension), but the plan needs to be established by the taxpayer no later than October 1st of the tax year for which the contributions will apply. SIMPLE plans consist of a salary deferral portion with a maximum of $10,500 for 2008, plus a matching contribution of up to 3% (but not to exceed $4,600 for 2008). Taxpayers age 50 or older can defer up to $20,000 for 2008. More about SIMPLE IRAs.

Solo 401(k) Plans:

Solo 401(k) plans combine a deferral portion with a matching portion. The maximum elective deferral is $15,500 for 2008 (or $20,500 if age 50 or older). The maximum matching portion is 20% of net self-employment income. The total of both the deferral and the matching cannot exceed $46,000 (for 2008). Solo 401(k) plans need to be set up by December 31st, but contributions can be made as late as October 15th of the following year with an extension. More about solo 401(k) plans.

Qualifications to Take the Deduction:

You must have self-employment income. Self-employment income for the purpose of this deduction means net profits from a Schedule C or Schedule F, self-employed income from a partnership, or wages as a shareholder-employee in an S-corporation. Additionally, you must set up and fund a qualified retirement plan by the required deadline.

Where to Claim Deduction:

You must use the worksheets found in IRS Publication 560 for figuring your allowable tax deduction for SEP, SIMPLE, and 401(k) contributions. The allowable deduction is then reported on your Form 1040 Line 29. S-Corporations report SEP contributions on the corporation's Form 1120S.

Explanation from the IRS:

"SEP, SIMPLE, and qualified plans offer you and your employees a tax-favored way to save for retirement. You can deduct contributions you make to the plan for your employees. If you are a sole proprietor, you can deduct contributions you make to the plan for yourself. You can also deduct trustees' fees if contributions to the plan do not cover them. Earnings on the contributions are generally tax free until you or your employees receive distributions from the plan." (from IRS Publication 560)

Relevant Tax Laws:

The deduction for SEP, SIMPLE, and other retirement plans is found in Internal Revenue Code Section 62(a)(6) and Section 404.

By William Perez, About.com

Coastal Risk Management

Coastal Risk Management

Insurance exposures within coastal communities are rising from climate change and development. Increasing populations and property values, higher sea levels and more violent weather are all working to threaten insured property and challenge property insurers. The insurance industry response has been focused on financing the aggregation of coastal exposure in a manner that does not risk insurer solvency. Most of the political response has been focused on affordable insurance options, and one such result, which nobody in the insurance industry believes is effective or reasonable, is Citizens in Florida (see here & here).

Very little attention has been paid to risk management and the impact a risk management approach can have on adverse outcomes. Both pre-loss and post-loss risk management tactics are critical components of successfully financing risk, yet there is little will within the industry or political segments to promote risk management.

A recent paper by The Heinz Center and Ceres has brought a group of diverse organizations (sponsors) together to generally agree on an approach to address the coastal threat that includes a heavy emphasis on risk management (see here, and here for the entire report). Some key points:

Over half the U.S. population lives in coastal counties and almost half of the nation’s gross domestic product – $4.5 trillion – is generated in those counties and in adjacent ocean waters. Further, insured property values along the Gulf and Atlantic coasts have been roughly doubling every decade.

Wharton has demonstrated that homeowners in Florida could reduce losses from a severe hurricane by 61 percent, resulting in $51 billion in savings, simply by building to strong construction codes. Putting this in perspective, the same cost reductions applied to Katrina damages would have reduced the $41.1 billion worth of insured property losses to about $16.1 billion. Similarly, the National Institute of Building Sciences showed that every dollar spent on mitigation saves society about four dollars on recovery costs. Despite this evidence, nearly all U.S. coastal cities and towns lack adequate land use requirements and building code standards to realize these savings.

Five hundred commercial clients of the insurer, FM Global, experienced approximately 85 percent less damage from Hurricane Katrina as similarly situated properties. This significant reduction in the amount of damage was directly attributable to hurricane loss prevention and preparedness measures taken by these policyholders. The return on investment is striking – a $2.5 million investment in loss prevention resulted in $500 million in avoided losses.

While risk management will not eliminate the exposure, it can go a long way towards making the cost of insurance reasonable.

Brought to you by MercatorPro.