Smarter Bear Newsletter November 2024

For clients and friends of Smarter Bear

The limited purpose of life insurance and annuities

Unlike some large financial companies, Smarter Bear does not absolutely dismiss life insurance and annuities as potentially having a useful role in a financial plan. It is 100% true that highly commissioned agents massively and inappropriately oversell life insurance and annuities to consumers who don't fully understand what they are buying, the expenses, waiting periods, withdrawal limits, exclusions, and alternatives. They often pitch cash value life insurance and annuities as great, tax-advantaged investment vehicles - which is rarely, if ever, true.

Here are a few appropriate reasons to purchase a no-commission, low-expense life insurance policy or an annuity:

• The need for the maximum guaranteed lifetime income stream from a fixed pool of money. Insurance companies take advantage of a pool of many buyers who will die at different ages to offer a larger income stream than an individual can obtain by investing to meet their maximum potential life expectancy.

• A person with dependants may need protection against premature death.

• Partners in a business may each need protection against another partner's premature death and the need to fund the payout to the deceased's estate without liquidating the business.

• Very wealthy people may desire to shield some wealth from estate taxes upon death.

We highly recommend seeking expert advice from someone not financially involved in the transaction before purchasing an annuity or life insurance policy.

Tax system anomalies to consider

Our tax system is generally progressive but non-linear and patchwork. This means that there are both pitfalls to avoid and opportunities to seize with detailed tax planning. Understanding these anomalies can help you make informed financial decisions and ensure that you're not caught off guard by unexpected tax implications.

• Many tax rules are based on Adjusted Gross Income or one of many types of “Modified” Adjusted Gross Income, not Taxable (after deductions) income

• Itemized deductions only matter if, in total, they exceed the standard deduction

• Some income sources get preferential treatment (qualified dividends and long-term capital gains)

• A dollar of extra income can trigger:

  • many dollars of tax on social security benefits

  • Higher Medicare premiums

  • Loss of Affordable Care Act subsidies

• Net Investment Income tax @3.8%

• RMDs force income to be recognized even if not needed or spent.

Access to tax planning software is required to accurately project and minimize lifetime taxes and assess the implications of potential actions like selling assets, making charitable contributions, exercising stock options, or making a Roth conversion.

Medicare Open Enrollment for 2025

Open enrollment runs from October 15 through December 7. It's always recommended that folks review their coverage and options annually as things change. It's even more important for 2025 as the Inflation Reduction Act included a cap on out-of-pocket drug costs. This change has had a ripple impact on what the Insurance companies are offering, including:

• Premiums

• Plans offered and discontinued

• In-Plan Networks

• Fomularies (what drugs are covered)

• Deductibles, copays, and out-of-pocket maximums

Signing up for a Medicare Advantage plan or Traditional Medicare plus a Medigap policy is a big decision. The number of people choosing Medicare Advantage has been growing and is at 56% for 2024. In year 1 and over the policy's lifetime, Medicare sales agents have a strong financial incentive to sell Medicare Advantage plans.

It's important to get unbiased information and advice when making these choices. Medicare.gov is a good place to start, and there are other free and paid sources of information and advice.

College savings options

The primary tax-advantaged options are 529 plans—offered by every state—and pre-paid tuition plans. Pre-paid tuition plans have become less popular as the financial benefit is greatly reduced if prospective students do not attend an in-state college. The number of states offering pre-paid tuition plans is down to 18, and one private company. Of the 18 states, only 7 are open to new accounts.

Smarter Bear is always available for a free consultation to answer questions and discuss whether our services can help address your needs. You can reach us at smarterbear.net. We also offer no-cost second opinions for DIYers or people working with another investment or financial advisor. 

We write our own newsletter, so we know these topics well.  Many advisors and firms employ marketing departments, generative AI, or third-party content services to produce their newsletters.

If you know others who would like to be added to our list, feel free to add them at https://smarterbear.substack.com. We aim to write short, helpful, and easy-to-read items on financial topics of interest. We welcome any suggestions for topics to cover in future newsletters.

None of the above is intended as a substitute for tax or legal advice.  Your personal situation will determine what's best for you, and we recommend you consult an appropriate professional advisor.