More Rich People Are Choosing to Rent Than Ever Before — Here’s Why

Renting a home or condo has become a status symbol for some wealthy Americans.

Karen Rodriguez, an Atlanta, Ga., real estate agent, says people frequently contact her who are interested in condos renting for $10,000 to $15,000 a month in properties such as the Ritz-Carlton Residences, which have floors of condos above upscale hotel rooms.

“I do see a lot of high-net-worth renters,” says Rodriguez, with Berkshire Hathaway HomeServices Georgia Properties. “They have the disposable income to pay top dollar.”

Renter households increased by 9 million during 2005-2015, reaching nearly 43 million in 2015, according to the State of the Nation’s Housing report, an annual study by Harvard University’s Joint Center for Housing Studies that analyzes U.S. Census Bureau data. Of those, 1.6 million renter households earn $100,000 or more, representing 11% of all renters.

“Indeed, renter households earning $100,000 or more have been the fastest-growing segment over the past three years,” the report stated.

Here are four reasons why high earners are choosing to rent.

They’re frustrated with market trends.

stock market numbers and graph

Rob Austin, a biotech account manager in the Los Angeles area with a household income of over $350,000, rents a 1,700-square-foot townhome with his wife and two children.

In the last 10 years, 1.2 million households that earn $150,000 became renters, up from 551,000 in 2005. Using data from the U.S. Census Bureau’s 2015 American Community Survey, RentCafe.com reported in late 2016 that “wealthy households” that earn more than $150,000 annually increased by 217%, compared to an 82% rise in homeowners in the same income bracket.

The $150,000-and-up dollar amount served as the benchmark for “wealthy” renters because that’s the top of the bracket used in the American Community Survey to identify renters and homeowners.

Even when they had their second child in 2016, Austin says they were more steadfast to keep renting the two-bedroom, two-and-a-half bath townhome instead of buying. Prices are increasing so much that they’re “priced beyond perfection,” he says.

“It’s gotten worse,” he says. “Everything is mispriced at this point.”z

They want the next best thing.

Some buyers’ mindset is, “I don’t love it, so I’m just going to go rent a house,” says Atlanta, Ga., real estate agent Ben Hirsh.

Some may be bored with what’s on the market and are holding out for a home or condo with even more extravagant features or amenities. “They’re not happy with what’s out there,” says Rodriguez, also founder of Group Kora Real Estate Group, which sells new and luxury condos.

If they’re in a location or price range that’s hot, they could get more for their home if they sell now. Some wealthy homeowners take advantage of the resale market by going ahead and selling a home or condo and biding their time while renting. For example, if they’re sold on news about ultraluxe condos that have been announced, but are not under construction, they don’t mind renting in the interim.

“People think there’s more coming,” Rodriguez says.

Some clients have so much wealth that they’re willing to pay for the entire year up front for an unfurnished condo, she adds. Investors also have noticed the market trends and are buying condos for $1 million to $2 million with the intention to rent them out.

They don’t want a long-term commitment.

retirement retire millionaire happy couple on the beach

Some wealthy homeowners are ready to sell their million-dollar estates for a lock-it-and-leave-it lifestyle, but aren’t sold on townhome or condo living.

Instead, they’re willing to spend what can amount to the down payment on a starter home for monthly rent to experience the luxury condo lifestyle with privacy and ritzy amenities, like 24/7 room service and spa access.

“They want to test out a high-rise,” Rodriguez says. “They are people who definitely can afford to buy.”

A 2016 report by the National Association of Realtors identified the top 10 markets in the U.S. with the highest share of renters qualified to buy. The study analyzed household income, areas with job growth above the national average, and qualifying income levels (a 3% down payment in each metro area’s median home price in 2015) in about 100 of the largest U.S. metro areas. The markets that are above the national level (28%) were:

  • Toledo, Ohio (46%)
  • Little Rock, Ark. (46%)
  • Dayton, Ohio (44%)
  • Lakeland, Fla. (41%)
  • St. Louis, Mo. (41%)
  • Columbia, S.C. (41%)
  • Atlanta, Ga. (40%)
  • Columbus, Ohio (38%)
  • Tampa, Fla. (38%)
  • Ogden, Utah (38%)

The short-term mentality also may be the nature of the industry that brings people to a city. Some prospective renters whom Rodriguez meets are planning to live in Georgia for a couple of years because of work, such as jobs in the growing entertainment sector. Films such as the “Avengers” and TV shows such as “The Walking Dead” shoot in metro Atlanta.

They don’t want to live out of a suitcase in a hotel and have the income to afford high-priced rentals, joining political figures and international executives who also are among those making the same choice, Rodriguez says.

They want cash in the bank.

Townhomes sell for about $800,000 in Austin’s neighborhood in California. To make a 20% down payment, he’d have to shell out $160,000 up front.

“Why would I want to tie up $160,000 in cash in an asset that most likely is not going to go up a lot more — and more than likely has topped and has nowhere to go but down in the next cycle?” Austin asks.

Austin says he’s not wavering from his decision, although he’s “taking heat” from friends since he has the income to purchase a home.

“We’re bucking the trend by saying, ‘No thanks, we don’t want to play (the real estate market),’” he says. “We’ll just wait.”

The post More Rich People Are Choosing to Rent Than Ever Before — Here’s Why appeared first on MagnifyMoney.

The Hidden Costs of Selling A Home

With home values picking back up, many homeowners may be already dreaming of the money they’d make selling their home. Although the aim is to make money on a home sale, or at least break even, it’s easy to forget one important thing: selling a house costs money, too.

A joint analysis by online real estate and rental marketplace Zillow and freelance site Thumbtack found American homeowners spend upward of $15,000 on extra or hidden costs associated with a home sale.

Most of those expenses come before homeowners see any returns on their home sale. Most of the money is spent in three categories: closing costs, home preparation, and location.

Here are a few hidden costs to prepare for when you sell your home.

Pre-sale repairs and renovations

Zillow’s analysis shows sellers should plan to spend a median $2,658 on things like staging, repairs, and carpet cleaning to get the property ready.

Buyers are generally expected to pay their own inspection costs; however, if you’ve lived in the home for a number of years and want to avoid any surprises, you might also consider spending about $200 to $400 on a home inspection before listing the property for sale. That way, you can get ahead of surprise repairs that may decrease your home’s value.

Staging is another unavoidable cost for any sellers. Staging, which involves giving your home’s interior design a facelift and removing clutter and personal items from the home, is often encouraged because it can help make properties more appealing to interested buyers. Not only will you need to stage the home for viewing, but sellers often need to have great photos and construct strong descriptions of the property online to help maximize exposure of the property to potential buyers. If your agent is handling the staging and online listing, keep an eye on the “wow” factors they add on. Yes, a 3-D video walk-through of your house looks really cool, but it might place extra pressure on you budget.

You could save a large chunk on home preparation costs if you decide to DIY, but if you outsource, expect a bill.

ZIP code

Location drove home-selling costs up for many respondents in ZIllow’s analysis, as many extra costs were influenced by regional differences — like whether or not sellers are required to pay state or transfer taxes.

With a median cost of $55,000 for closing and maintenance expenses, San Francisco ranked highest among the most-expensive places to sell a home. At the other extreme, sellers in Cleveland, Ohio, pay little more than a median $10,100 to cover their selling costs.

Generally, selling costs correlate with the cost of the property, so expect to pay a little more if you live in an area with higher-than-average living costs or have a lot of land to groom for sale. Take a look at Zillow’s rankings below.

Closing costs

Closing costs are the single largest added expense of the home-selling process, coming in at a median cost of $12,532, according to Zillow. Closing costs include real estate agent commissions and state sales and/or transfer taxes. There may be other closing costs such as title insurance or escrow fees to pay, too.

Real Trends, a research and advisory company that monitors realty brokerage firms and compiles data on sales and commission rates of sales agents across the country, reported the national average was 5.26% in 2015.

Real Trends says rates are being weighed down by:

  • an increasing number of agents working for companies like Re/Max that give them flexibility to set commission rates without a minimum requirement
  • more competition from discount brokers like Redfin, an online brokerage service that charges sellers as low as 1%
  • an overall shortage of homes for sale pressuring agents to negotiate commission rates

The firm’s president, Steve Murray, told The Washington Post he predicts agent commissions will fall below 5% in the coming years.

Luckily, some closing costs are negotiable.

To save on real estate agent commissions, you can either negotiate their fee down or find a flat-fee brokerage firm like Denver-based Trelora, which advertises a flat $2,500 fee to list a house regardless of its selling price. Larger companies like Re/Max give their agents full control over their commission rates, so you may have better luck negotiating with them.

If you have the time on your hands, you could also list the home for-sale-by-owner to save on closing costs. Selling your home on your own is a more complicated and time-intensive approach to home selling and can be more difficult for those with little or no experience.

Other costs to consider:

Utilities on the empty home

If you’re moving out prior to the sale, you should budget to keep utilities on at your old place until the property is sold.

It will help you sell your home since potential buyers won’t fumble through your cold, dark home looking around. It may also prevent your home from facing other issues like mold in the humid summertime. Be sure to have all of your utilities running on the buyer’s final walk through the home, then turn everything off on closing day and handle your bills.

Make room in your household’s budget to pay for double utilities until the home is sold.

Insurance during vacancy

Again, prepare to pay double for insurance if you are moving out before your home sells. You’ll still need homeowner’s insurance to ensure coverage of your old property until the sale is finalized. Check the terms first, as your homeowner’s insurance policy might not apply to a vacant home. If that’s the case, you can ask to pay for a rider — an add-on to your basic insurance policy — for the vacancy period.

Capital gains tax

If you could make more than $250,000 on the home’s sale (or $500,000 if you’re married and filing jointly), you’ll want to take a look at the rules on capital gains tax. If your proceeds come up to less than $250,000 after subtracting selling costs, you’ll avoid the tax. However, if you don’t qualify for any of the exceptions, the gains above those thresholds could be subject to a 25% to 28% capital gains tax.

The Key Takeaway

Selling a home will cost you some money up front, but there are many ways you can plan for and reduce the largest costs. If you’re planning to sell your home this year, do your research and keep in mind falling commission costs when you negotiate.

List all of the costs you’re expecting and calculate how they might affect the profit you’d make on the sale and your household’s overall financial picture. If you’re unsure of your costs, you can use a sale proceeds calculator from sites like Redfin or Zillow to get a ballpark estimate of your potential selling costs, or consult a real estate agent.

The post The Hidden Costs of Selling A Home appeared first on MagnifyMoney.

The Complete Guide to Disability Insurance

 

Quick quiz: What’s the most valuable financial asset you own as a young professional and a provider for your family?Here are some hints: It’s not your home. It’s not your 401(k). And it’s definitely not your car.

The answer? It’s your future income. The money you earn in the years to come will allow you to pay your bills, save for the future, and create a secure financial foundation for you and your family.

Really, all the plans you’re making both for today and the future rely on the assumption that you’ll continue earning money. Which is exactly why it’s so important to protect that income and make sure you receive it no matter what.

That’s where disability insurance comes in.

Disability insurance ensures that you’re able to continue paying your bills and putting food on the table even if your health prevents you from working for an extended period of time. By sending you a monthly check that replaces some or all of your income, it protects your biggest financial asset from those worst-case scenarios.

It’s something that just about every working parent should have, but it’s a complicated product that can be difficult to understand and get right.

So in this post you’ll learn all about how disability insurance works and what kind of policy you should be looking for.

Why You Need Disability Insurance

Disability insurance is often ignored both because the prospect of becoming disabled seems remote and because the premiums can be hard to swallow, especially for young families who are already struggling to pay for child care and all the other expenses that come with having young kids.

But extended disability is a lot more common than most people think.

According to WebMD, your odds of becoming disabled before you retire are about 1 in 3.

The leading causes of disability include:

  • Arthritis
  • Back pain
  • Heart disease
  • Cancer
  • Depression
  • Diabetes

For the most part it’s chronic illness that causes disability, not the kind of major accident that typically comes to mind. And the odds of it happening before you’re financially independent are fairly high, though there are some situations in which your personal odds may be lower.

So the big question is this: If you’re one of the 33% of people who faces an extended disability, where would the money come from to pay your bills and put food on the table? How long would your savings be able to support you, and what would you do if you needed help past that point?

Most people would struggle to make it more than a few months, which is exactly why disability insurance is so valuable. By replacing your income for potentially years at a time, it ensures that you’ll be able to continue taking care of your family no matter what.

Short-term disability insurance vs. long-term disability insurance

There are two main types of disability insurance: short-term and long-term.

Both can be helpful, but they play very different roles in your financial plan. Here’s an overview of each.

Short-Term Disability Insurance

Short-term disability insurance only offers benefits for a relatively limited amount of time. Most short-term disability insurance policies cover you for 3-6 months, though they can provide coverage for up to two years.

There is typically a waiting period of up to 14 days before the insurance kicks in to prevent it from covering minor illness and injury. After that waiting period, it will typically start to pay 50%-100% of your regular income until you either return to work or your coverage period ends.

One of the most common uses of short-term disability insurance is during maternity leave. Many, though not all, short-term disability policies cover the latter parts of pregnancy and the period after childbirth, which can help replace your income while staying home with your newborn.

Most short-term disability insurance policies are offered as an employer benefit, and in some cases that coverage may even be free. Private coverage is also an option if you aren’t able to get coverage through work, though those policies can be expensive. For example, a healthy 38-year-old male might pay a $2,300 annual premium for a $5,000 monthly benefit and 12 months of coverage.

One alternative to short-term disability insurance is building an emergency fund. A 3-6 month emergency fund would provide the same protection as a 3-6 month short-term disability insurance policy, with the added benefit of not having a monthly premium.

Long-Term Disability Insurance

Long-term disability insurance is where you typically find the most value. Because while a short-term disability could be covered by a healthy emergency fund, an extended disability is much more likely to deplete your family’s savings and put you in a difficult position unless you have some way of replacing your lost income.

Long-term disability insurance picks up where your emergency fund or short-term disability insurance leaves off. There’s typically a 3-6 month waiting period during which you would have to replace your income by other means.

But once you’re past that waiting period, your long-term disability insurance would start replacing your monthly income and would continue to do so for years at a time, as long as you remain disabled.

This is a big potential benefit. A long-term disability policy that replaces $5,000 per month in income will potentially pay you $60,000 per year for as long as you’re disable. That would go a long way toward keeping your family on the right track.

Given that potential value, it’s usually more important for families to secure long-term disability insurance than short-term disability insurance. For that reason, the rest of this guide will focus primarily on long-term disability insurance.

10 Questions To Ask When Shopping for a Long-Term Disability Insurance Policy

Long-term disability insurance is a complicated product with a lot of terms and conditions that vary policy to policy. Finding a good, independent disability insurance agent who isn’t beholden to any particular insurance company can help you secure the right policy at the right price for your specific situation.

But whether you’re looking on your own or with the help of an agent, there are 10 key features you’ll want to evaluate.

1. Your Monthly Benefit

Your monthly benefit is the amount of money your long-term disability insurance policy would pay you each month in the event of disability. And there are a few key factors that go into deciding how big a benefit you need:

  1. What are the monthly expenses you would have to cover if you lost your income? Consider the fact that you may be able to cut back on certain discretionary expenses, but also that you may have additional medical expenses in order to treat the disability.
  2. What other income sources do you have? You can factor in your spouse or partner’s income, your savings, and possibly even help from family.
  3. Would your benefit be taxable or tax-free? The benefit from an individual policy you purchase on your own would almost certainly be tax-free. The benefit you get from an employer policy would likely be taxable. The difference affects how much money you would actually have available to spend.

2. How They Define ‘Disability’

Believe it or not, there is no one way of defining disability. There are a lot of variations, but most policies fall into one of three main groups:

  • Any occupation – This is the most restrictive of the three definitions. It defines disability as the inability to perform any job, no matter what it is or how much it pays. It’s hard to qualify for benefits under this definition.
  • Own occupation – This is the broadest of the three definitions. It defines disability as the inability to perform the main duties of your current job. It’s easiest to qualify for benefits under this definition.
  • Modified own occupation – This is a middle ground that defines disability as the inability to perform a job for which you are reasonably suited based on education, training, and experience. In other words, not just any job will do. You have to be able to work in a job that fits your level of experience and expertise before benefits stop.

Understanding your policy’s definition of disability is key to understanding the protection you’re actually receiving. A big benefit with a strict definition of disability may be less valuable than a smaller benefit with a definition that’s easier to meet.

3. The Elimination Period

The elimination period is that amount of time you have to be disabled before you can start to collect your benefit.

Typical elimination periods range from 60 to 180 days, with longer elimination periods leading to a smaller premium. You should consider how long your savings and/or short-term disability insurance would cover you when deciding how long an elimination period to choose.

4. The Benefit Period

This is the maximum amount of time you would be able to collect benefits as long as you continue to meet the policy’s definition of disability.

Many long-term disability insurance policies pay out until age 65 or 67 to coincide with the standard Social Security retirement age. Other policies will only pay benefits for 5-10 years.

Longer benefit periods are more valuable, but also more expensive. You should consider the likelihood of being able to replace your income in other ways, such as transitioning to a different job, when deciding how long you’d like your benefit period to last.

5. What isn’t Covered

Most long-term disability insurance policies will exclude certain types of conditions from coverage. For example, mental health conditions are often not covered or are subject to a shorter benefit period.

Sometimes the exclusions will only last for a period of time, such as the first two years of the policy being in place. Sometimes they last for the life of the policy. You should evaluate these exclusions in relation to your personal and family health history to understand how likely you might be to run into them.

6. Premium Guarantee

Some long-term disability insurance policies are non-cancelable, which means that you are guaranteed a fixed premium until your coverage period ends. The insurance company cannot cancel your coverage and cannot raise your premium.

Other policies are guaranteed renewable, which means that the insurance company can’t cancel your policy, but they can increase the premium as long as they increase the premium for all policies across an entire class of policyholders (such as all policyholders in a given state or all policyholders in a given occupation category).

If you don’t have either of those guarantees, it means that your premium could increase each and every year and that those changes are at the discretion of the insurance company.

7. Residual Benefit

A residual benefit feature means that you could receive partial benefits if you return to work at a reduced salary.

This feature can help you build your workload over time, making for an easier and smoother transition.

8. Cost-of-Living Adjustment (COLA)

Policies that come with a cost-of-living adjustment will increase your benefit each year based on the rate of inflation. This is meant to ensure that you are able to pay for the same amount of goods and services each year, even as the cost of those things increase over time.

Some COLA riders have a maximum annual increase and/or a limited amount of time for which they are applied. For example, a policy might cap the annual increase at 3%, and it may only increase the benefit for a certain number of years before leveling off.

9. Future Purchase Option

Many long-term disability insurance policies guarantee you the right to increase your coverage in the future if your income increases, without any medical underwriting. This is a valuable benefit because it eliminates the risk that a decline in health could prevent you from getting more coverage when you need it.

10. Insurer’s Financial Rating

Finally, you should make sure that the insurer is in good financial condition. The last thing you want is to have the insurance company flake out on you when it’s time to collect.

You can look up an insurer’s rating through any of the following companies: A.M. Best, Fitch Ratings, Moody’s, and Standard & Poor’s.

The Pros and Cons of Group Disability Insurance

There are two ways you can get long-term disability insurance:

  1. Through your employer as an employee benefit (referred to as group disability insurance)
  2. On your own through an insurer of your choice

Both have their pros and cons. Here’s a breakdown.

The Pros of Group Coverage

1. Cost

Group disability insurance is often less expensive, and the premiums are typically tax-deductible. Many employers even offer a base level of long-term disability insurance coverage for free.

The lower premium can come with some negative trade-offs, as you’ll see below, but in the best cases it simply makes the insurance easier to afford.

2. No Medical Underwriting

Your ability to get group coverage is in no way affected by your current health. Eligibility is solely dependent on your employment status with the company.

This can be an especially big benefit if you have significant health issues that would make individual coverage either prohibitively expensive or impossible to get.

3. Simplicity

Group coverage is easy to get in place. All you have to do is sign up during open enrollment, choose the level of coverage you’d like, and you’re done.

The Cons of Group Coverage

1. Benefits Are Taxed

In most cases, your group disability insurance premiums are tax-deductible, and the benefits you receive are taxed. Which means that you won’t actually receive the full benefit.

So while group long-term disability insurance can be affordable on the front end, sometimes that comes at the cost of smaller benefits on the back end.

2. May Not Cover You Completely

In addition to the benefits being taxable, your employer may not offer enough coverage to meet your full need to begin with. You may need to get an additional policy if you want to be fully insured.

3. Lack of Control

Your group disability insurance policy is what it is, and you don’t have much, if any, say in the features it offers.

Sometimes this won’t matter, since the policy will have everything you want. But sometimes it will be lacking in certain areas, which could leave you with weaker coverage than you’d like.

4. Can’t Take It with You

You typically can’t take your group disability insurance coverage with you when you leave the company, and your employer could also choose to stop offering it at any time.

All of which means that you could find yourself without coverage somewhere down the line. And if your health status has declined or your next employer doesn’t offer group coverage, you may find it hard to get affordable disability insurance elsewhere.

The Pros and Cons of Individual Disability Insurance

The Pros of Individual Coverage

1. Portability

Individual long-term disability insurance policies are portable, meaning that they’re yours as long as you continue to pay the premiums, even if you change jobs. This is crucial to making sure that you always have coverage when you need it.

2. Definition of Disability

With an individual disability insurance policy, you have the opportunity to choose a broader definition of disability that increases your chances of receiving benefits. This can be particularly helpful if you work in a highly specialized field where having an own occupation definition would be beneficial.

3. Tax-Free Benefits

Individual disability insurance premiums are not tax-deductible, but the upside is that any benefits you receive are tax-free. This ensures that you get as much money as possible when you really need it.

4. Control over Other Features

You have a lot more control over all the policy features when you buy individual coverage. You can often pick and choose whether you want residual benefits, cost-of-living adjustments, and the like, allowing you to customize your coverage to your specific needs.

The Cons of Individual Coverage

1. Cost

Individual disability insurance is typically more expensive than group coverage, particularly if you have pre-existing medical conditions or you work in a high-risk occupation.

While it can vary greatly depending on the specifics of your circumstances, a reasonable rule of thumb is to expect $2-$2.50 in monthly benefits for every $1 in annual premium.

2. Complexity

Long-term disability insurance is a complicated product, and unfortunately, it’s hard to shop around and get a true apples-to-apples comparison of policies.

Your best bet is to look for a truly independent disability insurance agent who isn’t tied to any particular insurance company, and who can guide you through the process and help you understand the pros and cons of the various policies offered by different companies.

3. Medical Underwriting

Applying for individual long-term disability insurance includes a medical exam and a review of your medical history, after which the insurance company may ask more questions to get a better understanding of your current medical condition.

This can be time-consuming, can feel invasive, and in some cases can lead to a more expensive policy or even a denial of coverage altogether. It can also lead to an attractive offer if you’re in good health, but regardless, it’s a cumbersome process you have to go through.

A Quick Note on Social Security Disability Coverage

While Social Security does offer long-term disability coverage, it’s generally not a good idea to rely on it.

The main reason is that it has a strict definition of disability, requiring you to be unable to work in any job for at least one year. It only pays out under the most extreme of circumstances.

You also need to have worked long enough to qualify for any coverage at all, and even if you do qualify, it often won’t meet your full benefit need.

All of which is to say that if you truly want financial protection from disability, getting some combination of group and individual coverage is likely the way to go.

Are You Protected?

No one likes to think about the possibility of being sick or disabled, but protecting your income is a crucial part of building true financial security.

Disability insurance can be an effective way to get that protection. When it’s done right, it ensures that you’ll have money coming in no matter what, allowing you to continue providing for your family even in the most difficult of circumstances.

The post The Complete Guide to Disability Insurance appeared first on MagnifyMoney.

The Complete Guide to Disability Insurance

 

Quick quiz: What’s the most valuable financial asset you own as a young professional and a provider for your family?Here are some hints: It’s not your home. It’s not your 401(k). And it’s definitely not your car.

The answer? It’s your future income. The money you earn in the years to come will allow you to pay your bills, save for the future, and create a secure financial foundation for you and your family.

Really, all the plans you’re making both for today and the future rely on the assumption that you’ll continue earning money. Which is exactly why it’s so important to protect that income and make sure you receive it no matter what.

That’s where disability insurance comes in.

Disability insurance ensures that you’re able to continue paying your bills and putting food on the table even if your health prevents you from working for an extended period of time. By sending you a monthly check that replaces some or all of your income, it protects your biggest financial asset from those worst-case scenarios.

It’s something that just about every working parent should have, but it’s a complicated product that can be difficult to understand and get right.

So in this post you’ll learn all about how disability insurance works and what kind of policy you should be looking for.

Why You Need Disability Insurance

Disability insurance is often ignored both because the prospect of becoming disabled seems remote and because the premiums can be hard to swallow, especially for young families who are already struggling to pay for child care and all the other expenses that come with having young kids.

But extended disability is a lot more common than most people think.

According to WebMD, your odds of becoming disabled before you retire are about 1 in 3.

The leading causes of disability include:

  • Arthritis
  • Back pain
  • Heart disease
  • Cancer
  • Depression
  • Diabetes

For the most part it’s chronic illness that causes disability, not the kind of major accident that typically comes to mind. And the odds of it happening before you’re financially independent are fairly high, though there are some situations in which your personal odds may be lower.

So the big question is this: If you’re one of the 33% of people who faces an extended disability, where would the money come from to pay your bills and put food on the table? How long would your savings be able to support you, and what would you do if you needed help past that point?

Most people would struggle to make it more than a few months, which is exactly why disability insurance is so valuable. By replacing your income for potentially years at a time, it ensures that you’ll be able to continue taking care of your family no matter what.

Short-term disability insurance vs. long-term disability insurance

There are two main types of disability insurance: short-term and long-term.

Both can be helpful, but they play very different roles in your financial plan. Here’s an overview of each.

Short-Term Disability Insurance

Short-term disability insurance only offers benefits for a relatively limited amount of time. Most short-term disability insurance policies cover you for 3-6 months, though they can provide coverage for up to two years.

There is typically a waiting period of up to 14 days before the insurance kicks in to prevent it from covering minor illness and injury. After that waiting period, it will typically start to pay 50%-100% of your regular income until you either return to work or your coverage period ends.

One of the most common uses of short-term disability insurance is during maternity leave. Many, though not all, short-term disability policies cover the latter parts of pregnancy and the period after childbirth, which can help replace your income while staying home with your newborn.

Most short-term disability insurance policies are offered as an employer benefit, and in some cases that coverage may even be free. Private coverage is also an option if you aren’t able to get coverage through work, though those policies can be expensive. For example, a healthy 38-year-old male might pay a $2,300 annual premium for a $5,000 monthly benefit and 12 months of coverage.

One alternative to short-term disability insurance is building an emergency fund. A 3-6 month emergency fund would provide the same protection as a 3-6 month short-term disability insurance policy, with the added benefit of not having a monthly premium.

Long-Term Disability Insurance

Long-term disability insurance is where you typically find the most value. Because while a short-term disability could be covered by a healthy emergency fund, an extended disability is much more likely to deplete your family’s savings and put you in a difficult position unless you have some way of replacing your lost income.

Long-term disability insurance picks up where your emergency fund or short-term disability insurance leaves off. There’s typically a 3-6 month waiting period during which you would have to replace your income by other means.

But once you’re past that waiting period, your long-term disability insurance would start replacing your monthly income and would continue to do so for years at a time, as long as you remain disabled.

This is a big potential benefit. A long-term disability policy that replaces $5,000 per month in income will potentially pay you $60,000 per year for as long as you’re disable. That would go a long way toward keeping your family on the right track.

Given that potential value, it’s usually more important for families to secure long-term disability insurance than short-term disability insurance. For that reason, the rest of this guide will focus primarily on long-term disability insurance.

10 Questions To Ask When Shopping for a Long-Term Disability Insurance Policy

Long-term disability insurance is a complicated product with a lot of terms and conditions that vary policy to policy. Finding a good, independent disability insurance agent who isn’t beholden to any particular insurance company can help you secure the right policy at the right price for your specific situation.

But whether you’re looking on your own or with the help of an agent, there are 10 key features you’ll want to evaluate.

1. Your Monthly Benefit

Your monthly benefit is the amount of money your long-term disability insurance policy would pay you each month in the event of disability. And there are a few key factors that go into deciding how big a benefit you need:

  1. What are the monthly expenses you would have to cover if you lost your income? Consider the fact that you may be able to cut back on certain discretionary expenses, but also that you may have additional medical expenses in order to treat the disability.
  2. What other income sources do you have? You can factor in your spouse or partner’s income, your savings, and possibly even help from family.
  3. Would your benefit be taxable or tax-free? The benefit from an individual policy you purchase on your own would almost certainly be tax-free. The benefit you get from an employer policy would likely be taxable. The difference affects how much money you would actually have available to spend.

2. How They Define ‘Disability’

Believe it or not, there is no one way of defining disability. There are a lot of variations, but most policies fall into one of three main groups:

  • Any occupation – This is the most restrictive of the three definitions. It defines disability as the inability to perform any job, no matter what it is or how much it pays. It’s hard to qualify for benefits under this definition.
  • Own occupation – This is the broadest of the three definitions. It defines disability as the inability to perform the main duties of your current job. It’s easiest to qualify for benefits under this definition.
  • Modified own occupation – This is a middle ground that defines disability as the inability to perform a job for which you are reasonably suited based on education, training, and experience. In other words, not just any job will do. You have to be able to work in a job that fits your level of experience and expertise before benefits stop.

Understanding your policy’s definition of disability is key to understanding the protection you’re actually receiving. A big benefit with a strict definition of disability may be less valuable than a smaller benefit with a definition that’s easier to meet.

3. The Elimination Period

The elimination period is that amount of time you have to be disabled before you can start to collect your benefit.

Typical elimination periods range from 60 to 180 days, with longer elimination periods leading to a smaller premium. You should consider how long your savings and/or short-term disability insurance would cover you when deciding how long an elimination period to choose.

4. The Benefit Period

This is the maximum amount of time you would be able to collect benefits as long as you continue to meet the policy’s definition of disability.

Many long-term disability insurance policies pay out until age 65 or 67 to coincide with the standard Social Security retirement age. Other policies will only pay benefits for 5-10 years.

Longer benefit periods are more valuable, but also more expensive. You should consider the likelihood of being able to replace your income in other ways, such as transitioning to a different job, when deciding how long you’d like your benefit period to last.

5. What isn’t Covered

Most long-term disability insurance policies will exclude certain types of conditions from coverage. For example, mental health conditions are often not covered or are subject to a shorter benefit period.

Sometimes the exclusions will only last for a period of time, such as the first two years of the policy being in place. Sometimes they last for the life of the policy. You should evaluate these exclusions in relation to your personal and family health history to understand how likely you might be to run into them.

6. Premium Guarantee

Some long-term disability insurance policies are non-cancelable, which means that you are guaranteed a fixed premium until your coverage period ends. The insurance company cannot cancel your coverage and cannot raise your premium.

Other policies are guaranteed renewable, which means that the insurance company can’t cancel your policy, but they can increase the premium as long as they increase the premium for all policies across an entire class of policyholders (such as all policyholders in a given state or all policyholders in a given occupation category).

If you don’t have either of those guarantees, it means that your premium could increase each and every year and that those changes are at the discretion of the insurance company.

7. Residual Benefit

A residual benefit feature means that you could receive partial benefits if you return to work at a reduced salary.

This feature can help you build your workload over time, making for an easier and smoother transition.

8. Cost-of-Living Adjustment (COLA)

Policies that come with a cost-of-living adjustment will increase your benefit each year based on the rate of inflation. This is meant to ensure that you are able to pay for the same amount of goods and services each year, even as the cost of those things increase over time.

Some COLA riders have a maximum annual increase and/or a limited amount of time for which they are applied. For example, a policy might cap the annual increase at 3%, and it may only increase the benefit for a certain number of years before leveling off.

9. Future Purchase Option

Many long-term disability insurance policies guarantee you the right to increase your coverage in the future if your income increases, without any medical underwriting. This is a valuable benefit because it eliminates the risk that a decline in health could prevent you from getting more coverage when you need it.

10. Insurer’s Financial Rating

Finally, you should make sure that the insurer is in good financial condition. The last thing you want is to have the insurance company flake out on you when it’s time to collect.

You can look up an insurer’s rating through any of the following companies: A.M. Best, Fitch Ratings, Moody’s, and Standard & Poor’s.

The Pros and Cons of Group Disability Insurance

There are two ways you can get long-term disability insurance:

  1. Through your employer as an employee benefit (referred to as group disability insurance)
  2. On your own through an insurer of your choice

Both have their pros and cons. Here’s a breakdown.

The Pros of Group Coverage

1. Cost

Group disability insurance is often less expensive, and the premiums are typically tax-deductible. Many employers even offer a base level of long-term disability insurance coverage for free.

The lower premium can come with some negative trade-offs, as you’ll see below, but in the best cases it simply makes the insurance easier to afford.

2. No Medical Underwriting

Your ability to get group coverage is in no way affected by your current health. Eligibility is solely dependent on your employment status with the company.

This can be an especially big benefit if you have significant health issues that would make individual coverage either prohibitively expensive or impossible to get.

3. Simplicity

Group coverage is easy to get in place. All you have to do is sign up during open enrollment, choose the level of coverage you’d like, and you’re done.

The Cons of Group Coverage

1. Benefits Are Taxed

In most cases, your group disability insurance premiums are tax-deductible, and the benefits you receive are taxed. Which means that you won’t actually receive the full benefit.

So while group long-term disability insurance can be affordable on the front end, sometimes that comes at the cost of smaller benefits on the back end.

2. May Not Cover You Completely

In addition to the benefits being taxable, your employer may not offer enough coverage to meet your full need to begin with. You may need to get an additional policy if you want to be fully insured.

3. Lack of Control

Your group disability insurance policy is what it is, and you don’t have much, if any, say in the features it offers.

Sometimes this won’t matter, since the policy will have everything you want. But sometimes it will be lacking in certain areas, which could leave you with weaker coverage than you’d like.

4. Can’t Take It with You

You typically can’t take your group disability insurance coverage with you when you leave the company, and your employer could also choose to stop offering it at any time.

All of which means that you could find yourself without coverage somewhere down the line. And if your health status has declined or your next employer doesn’t offer group coverage, you may find it hard to get affordable disability insurance elsewhere.

The Pros and Cons of Individual Disability Insurance

The Pros of Individual Coverage

1. Portability

Individual long-term disability insurance policies are portable, meaning that they’re yours as long as you continue to pay the premiums, even if you change jobs. This is crucial to making sure that you always have coverage when you need it.

2. Definition of Disability

With an individual disability insurance policy, you have the opportunity to choose a broader definition of disability that increases your chances of receiving benefits. This can be particularly helpful if you work in a highly specialized field where having an own occupation definition would be beneficial.

3. Tax-Free Benefits

Individual disability insurance premiums are not tax-deductible, but the upside is that any benefits you receive are tax-free. This ensures that you get as much money as possible when you really need it.

4. Control over Other Features

You have a lot more control over all the policy features when you buy individual coverage. You can often pick and choose whether you want residual benefits, cost-of-living adjustments, and the like, allowing you to customize your coverage to your specific needs.

The Cons of Individual Coverage

1. Cost

Individual disability insurance is typically more expensive than group coverage, particularly if you have pre-existing medical conditions or you work in a high-risk occupation.

While it can vary greatly depending on the specifics of your circumstances, a reasonable rule of thumb is to expect $2-$2.50 in monthly benefits for every $1 in annual premium.

2. Complexity

Long-term disability insurance is a complicated product, and unfortunately, it’s hard to shop around and get a true apples-to-apples comparison of policies.

Your best bet is to look for a truly independent disability insurance agent who isn’t tied to any particular insurance company, and who can guide you through the process and help you understand the pros and cons of the various policies offered by different companies.

3. Medical Underwriting

Applying for individual long-term disability insurance includes a medical exam and a review of your medical history, after which the insurance company may ask more questions to get a better understanding of your current medical condition.

This can be time-consuming, can feel invasive, and in some cases can lead to a more expensive policy or even a denial of coverage altogether. It can also lead to an attractive offer if you’re in good health, but regardless, it’s a cumbersome process you have to go through.

A Quick Note on Social Security Disability Coverage

While Social Security does offer long-term disability coverage, it’s generally not a good idea to rely on it.

The main reason is that it has a strict definition of disability, requiring you to be unable to work in any job for at least one year. It only pays out under the most extreme of circumstances.

You also need to have worked long enough to qualify for any coverage at all, and even if you do qualify, it often won’t meet your full benefit need.

All of which is to say that if you truly want financial protection from disability, getting some combination of group and individual coverage is likely the way to go.

Are You Protected?

No one likes to think about the possibility of being sick or disabled, but protecting your income is a crucial part of building true financial security.

Disability insurance can be an effective way to get that protection. When it’s done right, it ensures that you’ll have money coming in no matter what, allowing you to continue providing for your family even in the most difficult of circumstances.

The post The Complete Guide to Disability Insurance appeared first on MagnifyMoney.

MagnifyMoney 2017 Survey of Recent College Graduates

An estimated 1.8 million college students will make up the U.S. class of 2017. The first few years — even the first few months — after college can feel like a financial land mine as graduates figure out how to manage their finances independently.

To give this graduating class a leg up, MagnifyMoney asked 1,000 recent college graduates to tell us what they wish they had done differently in those crucial years after graduation.

Among the most popular regrets were not being careful about debt/missing debt payments (48%) and not building their credit score up sooner (40%). One in five graduates also said they wished they had been better about saving money.

Missing a credit card or student loan payment even once can result in lasting credit score damage, and a lower credit score can make it difficult to get approved for new credit down the road.

Looking closely at the results of our survey, we can understand why so many college graduates may be struggling to stay on top of their bills — especially those who graduated with student loan debt.

Student Debt: A gateway to credit card debt

The vast majority of our survey respondents (61%) said they left school with student loan debt. On average, graduates with student loan debt said they carried $35,073.

We found some troubling trends among those with student loan debt. Not only are they more likely to say that they did not feel like they were better off their parents at their age, but they are also more likely to carry large loads of credit card debt.

More than half (58%) of graduates without student loan debt say they believe they are better off now than their parents were at their age. Graduates with student loans were less likely to agree with that statement. Half (52%) of college graduates with student loans say they are better off than their parents were at their age.

According to our survey, college graduates who left school with student loan debt were more likely to wind up in credit card debt down the road, as well.

  • 59% of all college graduates reported having credit card debt.
  • But 67% of recent grads with student loan debt report having credit card debt, versus 44% of those without student loans.
  • 20% of recent grads with student loans report credit card debt of $10,000 or more, almost twice the rate of those without student loans (11%).
  • And 24% of recent grads with $50,000 or more in student loans report having $10,000 or more of credit card debt.

2 in 5 will need longer than 10 years to pay off their student loans

A significant percentage of student loan borrowers expect to take longer than the standard 10 year repayment timeframe to pay off their loans.

  • 40% of recent grads with student loans anticipate that they’ll need more than 10 years to repay their student loans. For context, the standard repayment period for federal student loans is 10 years.
  • Among the grads who report more than $50,000 in debt, just 26% say they will pay off loans within 10 years. And 41% believe they will take more than 20 years, or never pay off their student loan debt.
  • Among all student loan borrowers, 7% said they will ‘never’ be able to pay off all the debt.

Optimism for the future

One thing graduates seem to have in common — whether they carried student debt or not — is a shared sense of optimism for their futures.

  • 65% of grads without student loans feel they will be better off than their parents in the future.
  • 64% of those with student loan debt also feel they will be better off than their parents.

Even among recent graduates with the burden of $50,000 or more in debt, 60% believe they will be better off financially than their parents in the future.

Those with Master’s degrees are most confident, with 68% saying they will be better off than their parents, versus 64% of Associate’s and Bachelor’s degree recipients.

Top 3 tips to manage debt after college

Know your options. If you are struggling to pay down your student loan debt, find out if you qualify for flexible repayment options like income-driven repayment plans. Students with high-interest student loan debt can consider refinancing to lock in a lower interest rate.  Here are the top 19 places to refinance student debt in 2017.

Stay on top of your payments. Student loans will be reported on your credit report after you graduate. By making on-time student loan payments, you are already taking one of the most powerful steps toward building a solid credit score. If you fear you will miss a payment, contact your loan servicer right away. Even one missed payment can derail your credit score.

Build your credit score strategically. A 2014 study by MagnifyMoney found that the average college student will face credit card APRs of 21.4%. Carrying a balance with an APR that high can quickly lead down a long road of unmanageable credit debt. A simple way to build credit is to take out a credit card, charge small amounts each month and pay it off in full. To avoid relying on credit card debt, set money aside from your paycheck for emergencies.

Methodology

MagnifyMoney conducted a national online survey of 1,000 U.S. residents with college degrees who reported completing their most recent degree within the last 5 years via Pollfish from April 26 – 30, 2017.

The post MagnifyMoney 2017 Survey of Recent College Graduates appeared first on MagnifyMoney.

How Much Should I Spend on a Wedding Gift?

When Alston Waldrip was in law school and money was tight, she thought creatively about how to buy wedding presents. For one couple, she bought a cast iron skillet for $15 and hand-decorated a sign with their last name. For another, she and several female friends each contributed $20-$25 for a bedding set.

Waldrip, now an attorney in Gainesville, Ga., kept all that in mind when she picked items with a range of prices for her November 2017 wedding registry. The lowest starts at just $16, for a bottle opener from Anthropologie.

“I would feel so guilty if someone were to pay out of their means for me,” Waldrip says. “I try to be really respectful of that.”

But how much money should you spend on a wedding present for someone? And how do you balance that cost with the other financial investments associated with attending a wedding?

Spending Guidelines: Replacing Something Old with Something New

One old gift-buying rule you can ignore is to spend as much as the cost of your plate at the reception, plus the cost of your guest’s meal, if you bring one. Nancy Mitchell, founder of The Etiquette Advocate, an etiquette training and consulting firm in Washington, D.C., says she thinks using this guideline is a mistake.

“How in the world would you know how much someone is spending on the reception and the per-person cost for the reception?” she says.

The Knot, a wedding-planning website, conducted a survey of 15,000 brides and suggested people spend $50 to $75 for co-workers and distant friends and family, $75 to $100 on friends and relatives, and $100 to $150 on close friends and relatives.

A 2016 survey by FiveThirtyEight.com polled over 1,000 people and found that, on average, people spent $50 on friends, $82 on close friends, $71 on extended family, and $147 on close family.

Mitchell says these numbers are reasonable, but emphasizes that outlining exactly how much to spend is difficult since each person’s income and resources will differ.

“I probably range from $30 if I don’t know them very well, to $50 to $75 if I know them a little better, at this point in my life,” Waldrip says.

If you’re invited to the wedding of someone with a much higher income — your boss, for example — don’t think about how much that person could afford to spend on a gift for you. Follow the general rule to spend within your means, Mitchell says.

Create a Gift Budget

Many millennials are at a point in their lives when it seems everyone they know is getting engaged, getting married, or getting pregnant. Dominique Broadway, a financial planner in Washington, D.C., who works with millennials, says setting up a monthly gift budget can prevent you from overspending.

“You need to figure out what works for you and don’t try to force yourself to walk in with the biggest, grandest gift,” she says. “You need to figure out what you can actually afford.”

Broadway says to sit down and figure out exactly what your expenses are every month and determine how much of your leftover income should be allocated to gifts for weddings, as well as baby showers and birthdays. The gift amount could be anywhere from $25 to $100 a month, depending on your financial situation.

“Buy your gift in advance if you are going to buy a gift,” Broadway added. “I think a lot of times the reason people overspend is because they’re literally picking something up on the way to the wedding.”

Kate Zepernick and her husband, Trey, attended 12 weddings last year. Zepernick, founder of TheBrideBoss.com, a website that helps brides set up wedding budgets, says she has a monthly gift budget. She purchases gifts ahead of time so she’s actually using that money each month.

“Even if a wedding is in July, I may not have a wedding in April and I may go ahead and purchase a gift for that July wedding in April so I drain that portion of my budget,” Zepernick says.

Allocate Travel Funds Early

In addition to buying the present, wedding guests may have to spend more on hotels and travel, such as airfare or gas, if the wedding is out of town.

A 2016 American Express survey of 1,800 people found that, on average, Americans attend three weddings a year and spend about $703 on each. Millennials, as a cohort, spent about $893 per wedding. And millennials who were in a wedding spent closer to $928.

Broadway says if you know you’re going to have to travel for a wedding, start researching the costs and setting aside money as soon as you get the save-the-date. She recently worked with a client who was going to travel to a wedding in September, another in October, and another in November. They worked together to figure out a ballpark figure of what each wedding would cost so the client could start saving right away for not just the travel but also the gifts.

Zepernick, who lives in Atlanta, says she starts planning even earlier by keeping an eye on social media.

“I keep a mental note when I see someone get engaged and I think I’ll be invited,” she says. “I try to keep a mental note: ‘You’re from Atlanta, that’s not going to be travel for me. OK, you’re from Ohio, that will be travel.’”

Calculate Wedding Party Costs

If you’re in the wedding party, costs like the bridesmaid’s dress, tuxedo rental, and travel to the bachelor or bachelorette party can add up even further. Don’t forget about potentially spending on pre-wedding gifts.

A 2015 American express survey found on average Americans treated their closest friends and family members well by spending $77 for bridal shower gifts, $86 for bachelorette/bachelor party gifts, and $89 for engagement party gifts.

Mitchell says proper etiquette does call for bringing a separate gift to the wedding. But if you’re buying additional gifts for the couple throughout their engagement, it’s OK to spend a little bit less on the actual wedding present.

“It just does not have to be the most expensive thing on the wedding registry,” Mitchell says.

Contributing to a group gift from the wedding party can also help you save money while making sure the couple receives a big-ticket item from their registry.

Zepernick, who is a maid of honor in a friend’s upcoming wedding, says she’s been “showering her with gifts throughout her entire engagement period.”

“It’s more important to me to be kind of consistently doing that than to kind of blow it all on a big gift at the end,” she says.

The post How Much Should I Spend on a Wedding Gift? appeared first on MagnifyMoney.

What Happens to Loans When We Die?

You may not have to pay loans after you pass away, but that doesn’t mean they disappear into thin air. There isn’t a one-size-fits-all answer as to what happens to your loans when you die, but there are many factors that can affect them. Where you live, the types of loans you have, as well as who applied for them can determine what happens.

While it’s not fun to think about your eventual demise, it’s necessary to know if your debt could be passed onto another person.

Gathering Up Loans

When you pass on, your executor will notify creditors, hopefully as soon as possible. Whatever known creditors you have, the executor will notify them and forward a copy of your death certificate and request that they update their files. He or she will also notify the three major credit reporting agencies to notify them that you are no longer alive, which will help prevent identity theft. As well, the executor will then get a copy of your credit report to figure out what debts are outstanding.

When that is completed, the executor will go through probate, which means that your estate goes through a process of paying off bills and dividing what’s left to the state or whoever you named in your will.

When Someone May Be Responsible for Paying Back Your Loans

Simply put, your loans are the responsibility of your estate, which means everything that you owned up until your death. Whoever is responsible for dealing with your estate (usually your executor) will use those assets to pay off your debts. This could involve selling off property to get money to pay it off or writing checks to do so. The rest of it then will distributed according to the wishes in your will. If there isn’t enough money to pay off the debtors, then they’re usually out of luck.

However, this isn’t always the case. If you co-signed a loan or have joint accounts (like credit cards), then the account holders may be fully responsible to pay off the whole debt, no matter who incurred it.

If you live in a community property state, then your spouse could be responsible for paying off your loans. If you have property in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin, your spouse may have to pay back half of any community property from a marriage. This doesn’t include any loans you have that came before the marriage. However, Alaska only holds a spouse responsible if they enter into a community property agreement. All states have different rules, so it’s best to check what will apply to your situation.

There is also the “filial responsibility” law that could hold your adult children responsible for paying back loans that are related to medical or long-term care. The same works in reverse. Currently, there are around 30 states that enforce this law, including Maryland, Pennsylvania, and Virginia. Some enforce this law pretty strictly, so it’s best to check with your state to see what could happen.

For more details on the different types of loans, read on to find out about what could happen to each when you pass on.

Credit Card Debt

If the credit card debt was yours and yours alone, then your estate is responsible for paying off the debt. Depending on which state you live in, creditors may only have a limited time to file a claim after you have died. If your estate goes through probate, then the executor will look at your assets and debts and determine which bills should be paid first, according to the law.

If there isn’t money left when it comes time to pay off your credit cards, those companies unfortunately have to call it a loss. Credit card companies cannot legally force family, friends, or heirs to pay back your debt unless you live in a community property state. In that case, your surviving spouse may be liable.

However, if the credit card is joint, the other account holder is responsible for it. That means if a family member or business partner signed the card application as a joint account owner, then he or she will need to help pay back the loan along with your estate. However, if your partner is just an authorized user (meaning he or she didn’t sign the application), then they’re not held responsible.

Mortgages and Home Equity Loans

There are several options for dealing with an outstanding mortgage after you have passed away. Due to the complexity of these options, it may be worth speaking with a local estate attorney.

If you are the sole owner and your mortgage has a due-on-sale clause, your lender may try to collect the entire balance of the loan or foreclose on the property. However, the CFPB has expanded protection for heirs who have inherited a home. The transfer of property after your death won’t trigger the Bureau’s ability-to-repay rule, making it easier for your heirs to pay off your loan or refinance.

In contrast, a home equity loan against your home is different. A lender may have the right to force someone who inherits the home to pay back the loan right away. Some lenders may work with your heirs to take over the payments or work out a plan, but you shouldn’t assume that will be the case. In a worst-case scenario, your heirs may have to sell your property to pay back your home equity loan.

Car Loans

Car loans are similar to the other types of debt we have discussed. The steps for handling this type of debt will depend on whose name is on the loan and where you live. If your heirs or co-signer are willing to take over your payments, the lender won’t need to take any action. However, the lender can repossess the car if the loan isn’t paid back.

Student Loans

If you have federal student loans, these will be discharged when you die. It will not be passed onto anyone else. If you were a student recipient of Parent PLUS loans, you’re also eligible for a death discharge. These loans will not be the responsibility of your estate. Your executor simply has to present an original death certificate or certified copy of your death certificate to your loan servicer.

However, if you and your spouse co-signed Parent PLUS loans on behalf of a student, your spouse will still be responsible for the balance.

Some private lenders may also offer a death discharge if you don’t have a co-signer. However, these policies vary by institution. You should review the terms of your loan for the specifics. Wells Fargo is an example of a company that may allow student loan forgiveness in the case of death.

However, if your private loan has a co-signer, your co-signer may be legally responsible to pay back your debts. Some companies may ask for the balance immediately. Also, if you live in a community property state, your spouse may be held responsible for your student loans if the debt was acquired during the marriage.

Medical Bills

If you have outstanding medical bills, nursing home bills, or any expense related to your long-term care, your spouse or family members may be responsible for paying it back per your state’s filial responsibility laws.

Your children could be held responsible for your medical bills if the following scenarios are true:

  • You receive care in a state with a filial responsibility law.
  • You don’t qualify for Medicaid while receiving care.
  • You can’t afford your bills, but your children can.
  • Your caregiver sues your children to collect on your unpaid bills.

Final Thoughts

The last thing your family members want to think about after you have died is outstanding loans. This is why it is essential to get organized in advance. It may be worth speaking with a financial planner regarding the specifics of your individual situation. They can help you review which options could best protect your heirs from your unpaid debt. Once you have passed away, your heirs should seek assistance from a qualified estate attorney.

The post What Happens to Loans When We Die? appeared first on MagnifyMoney.

Guide to Renters Insurance: When You Need it and When You Don’t

If you’re currently renting, you may not have given much thought to buying insurance for your place. After all, your landlord is the one who owns it. Shouldn’t he be the one buying insurance?

The truth is that while your landlord almost certainly does have insurance, it doesn’t cover all the risks that you personally face. And that’s where renters insurance comes in.

Renters insurance is inexpensive and provides a number of financial protections you can’t get elsewhere. It’s something that just about every renter should consider, and in this guide we’ll cover the following:

  • What Is Renters Insurance?
  • What Does Renters Insurance Cover?
  • How to Get Renters Insurance

What Is Renters Insurance?

If there was a fire in your place, or if someone broke in and stole something, who would be responsible for the damages?

Your landlord almost certainly has an insurance policy that would cover the cost of repairing the apartment itself. His insurance would pick up the tab for fixing or replacing the walls, floors, ceilings, and other structural components of the apartment. He would restore it to the empty apartment that existed before you moved in.

But, of course, you don’t live in an empty apartment. You own most of what’s inside it, furniture, clothes, your laptop, and everything else.

That’s where renters insurance comes in. Renters insurance covers the financial loss you could personally face if your apartment was damaged or burglarized.

Specifically, renters insurance covers:

  1. The cost of replacing your possessions.
  2. The cost of living somewhere else if your rental becomes temporarily unlivable.
  3. Your financial liability if someone gets injured while at your apartment, or if you accidentally injure someone or their property while you’re away from your apartment.

And the good news is that all of that coverage comes pretty cheap. According to the National Association of Insurance Commissioners, renters insurance premiums average just $15-$30 per month, though your specific premium will depend on where you live and what you’re covering.

So, how exactly do each of those protections work? Let’s dig in.

Renters insurance only protects you from certain kinds of damages. These are called named perils, and while every policy differs, here’s a list of common perils that are covered:

  • Fire and lightning
  • Windstorm or hail
  • Accidental discharge or overflow of water or steam
  • Earthquake
  • Explosion
  • Smoke
  • Aircraft
  • Vehicles
  • Collapse of building
  • Theft
  • Vandalism and malicious mischief
  • Riot and civil commotion
  • Falling objects
  • Sudden and accidental tearing apart, cracking, burning, or bulging
  • Freezing
  • Sudden and accidental damage from artificially generated electrical current
  • Volcanic eruption

This is just a generic list, and your specific policy may name different perils or define them slightly differently. Whatever your named perils are though, your renters insurance will only cover damages that result from one of those perils that is specifically listed in the policy. If damage results from some other cause, it will not be covered.

Certain types of perils, like flooding, may not be covered by your base policy but could be covered by an additional policy. You’ll have to review the details of your policy to see what is specifically covered, and what, if any, additional perils you may want to insure against.

Now let’s get into the specific protections that renters insurance offers.

Protection #1: Your Property

While you don’t own your home, you do own most of what’s inside of it. And when you add up the value of all your clothes, furniture, electronics, dishes, appliances, and everything else, you probably own a significant amount of property.

If any of that property was damaged or stolen, your renters insurance would help pay to replace it. Your landlord’s insurance would not.

When you buy renters insurance, you buy a certain amount of personal property coverage. For example, you might get $30,000 of coverage, in which case your renters insurance would reimburse you up to $30,000 for damage caused to your personal property. Without that coverage, you would have to foot the bill yourself.

Wisconsin’s Office of the Commissioner of Insurance offers a Personal Property Home Inventory form that can help you determine how much personal property coverage you need and create a record that can be used if you ever need to file a claim. Keeping photos of particularly valuable items is also a good idea, just in case your insurance company asks for more proof.

It’s worth noting that most renters insurance policies have coverage limits for certain types of property like jewelry and artwork. For example, it’s common for the policy to limit its jewelry coverage to $1,000 per item.

In that case, you can add a rider that covers specific pieces of property that exceed those limits. So if you have a $5,000 engagement ring, you would have to ask the insurance company to add coverage specifically for that item, which would come with a small increase in premium.

You will also likely have a deductible on your policy, which is the amount of money you would have to pay out of pocket before your insurance kicks in. For example, a $500 deductible means that you would be responsible for paying the first $500 in damages, and your renters insurance would reimburse you past that amount, up to your total personal property limit.

Protection #2: Your Cost of Living

Let’s say that there was a fire and your home became temporarily uninhabitable. While you wouldn’t be responsible for repairing the house or apartment, you would be responsible for finding somewhere else to live in the meantime.

This is the second big area where your renters insurance would kick in.

Renters insurance has something called loss of use coverage that would provide payments to help you cover that cost. Essentially, it would pick up the tab for any excess expense above what you would normally pay while living in your home.

For example, let’s say that your rent is $1,500 per month and you’re temporarily forced to stay in a hotel that charges $150 per night. That’s an excess cost of about $3,000 per month, which would be covered by your loss of use coverage.

You may also face additional food, utility, and transportation expenses, which could all be reimbursed under that same coverage.

Typically there’s a maximum dollar amount that will be paid out under this coverage and a maximum time limit for payments, and your insurer will likely also set limits on what constitutes reasonable additional expenses.

Payments will end once your home is habitable, once you find a new place to live, or once you’ve hit your coverage limits.

Protection #3: Your Liability

In addition to protecting your property and making sure you can afford a place to live, renters insurance can provide a substantial amount of liability coverage.

Liability coverage protects you from the financial consequences of accidentally injuring someone or damaging their property. And your renters insurance coverage protects you both against incidents that happen in your home and against certain incidents that happen away from it.

For example, imagine that your landlord sends someone to fix your refrigerator and that person trips over your child’s walker and seriously injures himself. That could be a significant financial loss for him, both in terms of medical bills and missed work, and he would have the right to seek reimbursement from you. In that case, the liability coverage on your renters insurance policy would kick in to pay the financial damages and to pay any legal costs you might face.

As another example, maybe you’re out for a walk with your dog and he bites someone. Again, you could be financially responsible for the consequences, and your renters insurance would be there to pick up the bill.

While the odds of something like this leading to a major financial liability are likely pretty small, the potential costs could be high. And with renters insurance you can get several hundred thousand dollars of liability protection for an average of $15-$30 per month.

It’s inexpensive coverage that protects you from the risk of a big financial loss.

How to Get Renters Insurance

If you don’t have renters insurance, how can you go about getting it?

If you already have auto insurance, the easiest way to get renters insurance is through that same company. They will almost certainly provide renters insurance as well, and you may be able to get a discount for having multiple policies with the same company.

But getting renters insurance is a good opportunity to shop around. Because you may be able to get a better deal on both your renters insurance AND your auto insurance by switching insurance companies.

Here’s how to do it:

  1. Google “renters insurance STATE”, replacing STATE with your state of residence.
  2. Get a phone number for each of the major insurers providing coverage in your state.
  3. Call each insurance company directly and ask for quotes for both renters insurance and auto insurance. You should have a copy of your current auto insurance policy on hand so that you can get a quote for the same level of coverage.
  4. If you have any possessions that are particularly valuable, such as jewelry or artwork, ask how much it would cost to get additional coverage for those possessions.
  5. Make sure to ask if they offer a multi-policy discount and, if so, to get the premiums quoted with that discount applied.
  6. If there are any particular threats in your region, such as flooding or earthquakes, ask about their coverage of those specific threats.
  7. Compare the coverage and cost from each insurance company, including your current insurer. If you can get a better deal elsewhere, it should be relatively easy to switch.

Other than the work needed to shop around, getting renters insurance should be relatively quick and easy.

Are You Covered?

Renters insurance is one of those things you hope you never need but could pay off significantly if you did. In a worst-case scenario, it would help you replace all of your possessions and maintain a place to live without depleting your savings or resorting to debt.

It’s big protection at a small cost.

The post Guide to Renters Insurance: When You Need it and When You Don’t appeared first on MagnifyMoney.

3 Things to Know About Long-Term Care Insurance

Long-term care insurance is designed to save you money later in life if you need medical care, such as hospice or round-the-clock assistance from nurses.

But some long-term care insurance policyholders are feeling the financial crunch because of a rise in premiums.

An estimated 7.2 million Americans held long-term care insurance policies in 2014, according to The State of Long-Term Care Insurance 2016, a report by the National Association of Insurance Commissioners and the Center for Insurance Policy and Research. An estimated 15 million Americans will need long-term care by 2050, the report notes.

Here are three things to consider about purchasing long-term care insurance.

Long-term care insurance is only getting more expensive

In 2016, insurance companies raised premiums, outraging policyholders. Customers in Pennsylvania saw a 130% increase in their premiums, and New Yorkers under Genworth’s policy faced a 60% premium increase. Federal government employees, insured by John Hancock Life and Health Insurance Co., saw their premiums rise by an average of 83%.

“The rising costs for long-term care insurance are directly linked to the rising costs of long-term care,” says James Carson, Daniel P. Amos Distinguished Professor of Insurance at the University of Georgia. “Insurers vastly underestimated costs associated with long-term care, and subsequently revised upwards their insurance premium structures, even on existing policies.”

While the increases in premiums were legal and authorized by the state, this left many policyholders unhappy, Carson says.

Since its emergence in the 1970s, expenditures in the long-term care market have grown. Less than $20 billion was spent on long-term care when it appeared in the marketplace. By 1980, these expenditures had grown to $30 billion.

Now more than $225 billion is spent on long-term care, according to The State of Long-Term Care Insurance 2016. As more long-term care is demanded, these expenses are pushed onto the insurance companies, resulting in rising incurred claims costs.

Meanwhile, Americans are living longer and spending more on health care. Americans aged 55 and up accounted for 55% of all health spending in 2014, even though they represent only 28% of the U.S. population, according to the Kaiser Family Foundation.

“Millennials should start paying attention to the looming costs associated with long-term care, and possibly also long-term care insurance, because they are going to live a really long time,” Carson says. “Health costs tend to get much larger when we get older.”

Once in retirement, the average American is expected to spend as much as $250,000 on medical expenses, says Tony Steuer, founder of the Insurance Literacy Institute, based in California.

Like any insurance, the trade-off with long-term care insurance is the leverage provided. If you can’t afford the premium and it doesn’t provide good leverage, investing in long-term care insurance might be unwise, says Steuer, also a member of the National Financial Educators Council Curriculum Advisory Board.

Timing is everything

Unlike traditional health insurance, long-term care insurance covers health services in late stages of life, alongside Medicare. Medicare may not cover all the services you need after it kicks in once you turn 65, especially if you are battling illnesses such as dementia or cancer.

For example, the U.S. Department of Health and Human Services projects that an American who turned 65 in 2016 will incur $138,000 in future long-term care expenses. About half of those costs will be paid for out of pocket, and the other half will come from private insurance and government assistance programs, such as Medicaid.

Purchasing long-term care insurance now can protect you from paying so much out of pocket at a time when medical needs are greater and often more expensive.

Long-term care insurance is most beneficial for those who can’t perform two out of six daily activities of living, such as eating, bathing, dressing, and walking. The insurance reimburses policyholders up to a preselected limit daily, so customers receive the services that get them through activities of daily living.

Services covered by long-term care insurance become more necessary as life expectancy increases and retirement funds drain.

Typically, long-term care insurance is purchased by those over the age of 50, says R. Vincent Pohl, assistant professor of economics at the University of Georgia, whose research interests include health economics.

“For a monthly premium that may depend on age and health, insured individuals get nursing home stays and other forms of [long-term care] paid for by the insurance,” Pohl says. “Long-term care insurance can only be bought before someone enters a nursing home for the first time.”

Steuer advises those who expect a need to purchase a long-term care policy after the age of 40. But purchasing long-term care insurance in your 40s also could save you hundreds of dollars in premium costs, compared to doing so in your 50s.

One way to consider your need for long-term care insurance is to look at your family’s medical history. For example, if a parent or grandparent has Alzheimer’s or Parkinson’s disease, long-term care insurance is something to consider. Once a debilitating condition develops, you may not qualify, or it may be more difficult to find a provider.

Long-term care insurance helps you pay now for options later

In these cases, knowing about long-term care insurance and having invested in it before your health started to decline can prove to be beneficial.

Joanne Westwood, who lives in Ohio, learned the value of long-term care insurance when her father developed Alzheimer’s disease, and her stepmother, the primary caregiver, became ill.

“We needed to get [my father] in a place with consistent caregiving, and we needed to take it off of [my stepmother] because she was killing herself trying to be his caregiver,” Westwood says. “If he didn’t buy long-term care health insurance 20 years ago, we’d all be in a heap of trouble right now.”

Westwood’s father, now in his mid-80s, qualifies for Medicare, but Westwood says it isn’t enough. Medicare offered the bare minimum, not enough for him to stay in a facility without paying out of pocket.

Long-term care insurance gave the family options.

“It’s a lot of peace of mind and comfort,” Westwood says.

Westwood, 57, is now trying to purchase long-term care insurance for herself. After doing the research, she expects to pay much higher premiums than her father did 20 years ago, since she’s getting started in her late 50s and because of rising costs.

She says she wishes she had purchased long-term care insurance at a younger age. Even though you’re paying for a longer time, the premiums are much lower, she adds.

Pros & Cons of Long-Term Care Insurance

The Pros:

  • Future medical costs will be lower. Long-term care insurance can help you pay for the health care expenses not covered by Medicare or Medicaid. One in six individuals, or 17%, will pay at least $100,000 out of pocket for future long-term care services and support, according to the U.S. Department of Health and Human Services.
  • You could buy a bit of peace of mind. If you’re investing in retirement accounts, a long-term care insurance policy provides another layer of confidence that if significant medical costs arise, it won’t eat into your nest egg.

“Living longer means an increased chance of needing long-term care,” says Kerstin Osterberg, a spokeswoman for Northwestern Mutual. “It’s critically important that individuals have a financial plan in place to protect their assets and cash flow if they should need long-term care.”

  • Buying a policy in your high earning years could cut the costs later on. Peak earning years for most people are in their late 30s to early 50s. You’ll pay more if you wait until your 50s, 60s, or 70s to sign up for long-term care insurance, and even risk not finding an insurer willing to give you coverage.

Because long-term care insurance premiums are based on several factors, such as age, sex, policy, and location, costs vary from person to person. Even if two people purchase insurance at the same age in the same state, they’re likely to pay different rates.

A 55-year-old male in Georgia will pay an annual premium of $2,645 to receive $200 of coverage a day over four years, according to Genworth’s long-term care insurance calculator. In comparison, a 40-year-old male in Georgia will pay $2,272.40 annually for the same policy. The Genworth calculator assumed a 90-day elimination period.

“In the world of insurance, you can almost always find someone willing to insure you. The problem then arises — is the coverage enough to support you?” says Jeremy Pierce, who has worked as a financial planner in Georgia. “In many cases, when you wait too long, that cost simply isn’t affordable.”

The Cons:

  • You may not need to use it. Long-term care insurance requires that you pay now to have coverage when you are older. If you don’t need medical care when you are a senior, you paid for something you won’t use.
  • You may not be able to meet the requirements. To use the benefit, you have to be unable to perform two of six activities, such as bathing or feeding yourself. Your health may not be poor enough to use it as a result. “It is likely that a claim won’t be made until someone reaches their 70s,” Steuer says.
  • You may not be able to afford it right now. If you have student loans and other expenses that have placed you in debt, paying for a long-term care insurance premium simply may not be possible. Steuer advises those who expect a need to purchase a long-term care policy after the age of 40 and if you have assets between $1 million and $5 million. “Someone who either has less than $1 million or more than $5 million should not consider it,” he says.

The post 3 Things to Know About Long-Term Care Insurance appeared first on MagnifyMoney.

What is a Required Minimum Distribution?

For workers or retirees who have not begun to withdraw funds from their retirement accounts by age 70½, the IRS requires that they start withdrawing funds. The RMD requirement applies to all tax advantaged retirement accounts, from traditional IRAs and 401(k)s to 403(b)s and SEP IRAs. The RMD does not apply to Roth IRAs or Roth 401(k)s.

Here’s a full list of retirement accounts subject to the RMD rule:

  • Traditional IRAs
  • SEP IRAs
  • SIMPLE IRAs
  • 401(k)s
  • 403(b)s
  • 457(b)s
  • profit-sharing plans
  • other defined contribution plans

How do I figure out how much to withdraw?

Just like filing your taxes, it falls on your shoulders to remember to take the RMD once you reach 70½. You can do the math yourself (we’ll explain below) to figure out what your required minimum distribution will be, or you can ask for help from a tax professional or financial adviser.

To calculate your RMD, you need to know exactly how much you’ve got saved up in each account as of Dec. 31 of the previous year. Next, use this table from the IRS to find your “distribution period” score, which is based on your life expectancy.

Most people can calculate their RMD by dividing their total retirement account balances by the distribution period that corresponds with their age.

Let’s say you turned 70½ in Dec. 2016 and had a balance of $1 million in your eligible retirement accounts on Dec. 31. You would then find the distribution period that corresponds to your age in Table III.

According to the table, your distribution period number is 27.4. When you divide $1 million by 27.4, you get an RMD of $36,496.35. That is the minimum withdrawal you must make from that account by April 1, 2017.

When do I have to start taking an RMD?

If you are already retired, you are required to take distributions by April 1 of the year after you turn 70½.

If you are still working at age 70½ and you carry a traditional 401(k) or 403(b) account with your employer, you do not have to take an RMD unless you own 5% or more of the company. However, if you are still working at age 70½ and you have individual retirement accounts outside of your employer retirement account, you will need to make an RMD from those IRAs.

You do not have to take your RMD as one lump-sum payment. The IRS will allow you to take out the funds in chunks throughout the year, which allows your money to keep growing tax free. As long as the total meets the RMD for the year, you’re in the clear.

What happens if I don’t take my RMD?

If you don’t take your RMD during the year after you turn 70½, you’ll be slapped with a 50% excise tax on the amount that was not distributed when you file taxes.

For example, if your RMD was $10,000, but you only took out $5,000, you will be assessed the 50% tax on the $5,000 that you did not withdraw.

You can delay your first RMD. If you choose to do so, you’ll be required to take two in the next year, which will affect your gross income.

 

What if I don’t need to live off of the distribution?

You are required to take your RMD beginning at 70½ , but you that doesn’t mean you have to spend it.

“A lot of clients believe that they must take an RMD and spend it. In reality, all the IRS cares about is that you remove it from the account, declare it as income, and pay taxes on it,” says Riverside, Calif.- based financial planner Breanna Reish.

You are actually free to use the money however you’d like.

One way to meet your RMD requirement is by making a qualified charitable distribution paid directly from the IRA to a qualified charity. The charitable distribution can satisfy all or part of the amount you are required to take from you IRA.

What if I have multiple retirement accounts?

If you have more than one retirement account, things can get a little more complicated. You still need to take an RMD, but you don’t have to take one out of each account. You’ll need to add up the amount you have in all of your qualifying retirement accounts, then use that figure to determine your RMD using Table III.

Again, it’s probably a good idea to seek advice from a tax or financial adviser professional who can help make the wisest decision for your finances.

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