Don’t Be Pressured by Dire Predictions of Soaring Term Life Insurance Rates
Q: I’m hearing some scary ads on the radio about how term life insurance rates are about to go through the roof once Jan. 1 rolls around. Should I hurry up and buy coverage now?
A: If you need term life insurance anyway and have been procrastinating, then maybe those scary ads are doing you a service.
But whenever somebody tries to panic you into making a decision fast, it should make you suspicious. This goes for insurance firms as much as boiler-room telemarketers.
The truth is, nobody really knows what’s going to happen to term life insurance rates, despite all the squawking. Consumer advocates are discounting the hype, as are many insurance regulators.
What is true is that new rules requiring more conservative accounting on certain policies are set to go into effect Jan. 1 in California and a few other states. The rules, known as Triple X, affect insurance policies that guarantee a policyholder can extend coverage after an initial period but that allow the premium to rise after that period, according to California Insurance Department Deputy Commissioner Norris Clark.
For example, a common term policy that would be affected is one that guarantees coverage for 20 years but only guarantees the premium for the first five.
Some of the hysterical advertising you’re hearing claims that prices will rise 50%--reversing a long trend of lower prices on term insurance. But even the American Council of Life Insurance, an industry trade group, says that market conditions for term insurance are so competitive that companies will still have a strong incentive to keep prices down.
The new rules could even make some policies cheaper. Term insurance that ends completely after a certain time, with no continued guarantee of insurability--a 20-year term policy with a 20-year premium guarantee, for example--receives more favorable treatment under the new rules, which could cause their prices to fall, Clark said.
The sad thing about the whole Triple X mess is that some otherwise reputable companies are passing along the insurance hype. Charles Schwab, for example, sent out a questionable Triple X warning to its customers, and Intuit Inc. posted inaccurate information on its Quicken Web site.
If you want to cover your bets and you need the insurance anyway, you can buy one of the affected policies before Jan. 1. But don’t charge into an insurance contract you don’t need, or one you don’t understand, because of some half-baked ads.
Qualifications for SEP-IRA
Q: You recently advised someone who works in the film industry about saving for retirement, suggesting that he set up a Simplified Employee Pension or SEP-IRA. I am a film worker, and I got into trouble with the IRS last year because I have been putting my retirement savings into a SEP-IRA. Although most people who work in the film industry think of themselves as self-employed because they aren’t on the payroll of a studio or production company, they probably do not qualify for a SEP-IRA either. Most of the time, the production company pays the worker through a payroll company, which in effect is the “employer of record.” Any worker who isn’t set up as a company with employees--and most film industry workers are not--does not qualify.
A: Well, not quite. You don’t need to have employees to set up a SEP. As long as you’re self-employed, you’re eligible to put aside 13% of your net income each year into these tax-deductible, tax-deferred retirement accounts.
How to tell if you’re self-employed?
One good way is by the tax forms you get in January. If a company that has employed you sends you a 1099 form to report your pay for tax purposes, you’re probably an independent contractor and thus by definition self-employed. You’ll fill out a Schedule C to report your business income and expenses. (The SEP would be funded out of the resulting profit.) If you get a W-2, you’re most likely an employee, and you’ll report your wages on the front of your 1040 form. A few people who get W-2s can also fill out Schedule Cs if their employers have checked box 15 on that form; these folks, known as statutory employees, are usually traveling salespeople and insurance agents.
Which brings up the whole controversy of companies who treat their workers as independent contractors when in fact they really are employees--people who are closely supervised, who don’t get to set their own hours and methods of work and who are told what to do and when to do it. The IRS has cracked down on many companies that did this to save on payroll taxes and benefits, but it’s still going on.
That’s not your problem, of course. What is your problem is that you tackled your tax return with just enough knowledge to get into trouble. Perhaps next year you’ll consider consulting a qualified tax preparer; you can get a referral list from the National Assn. of Enrolled Agents at https://www.naea.org or the California Society of Certified Public Accountants at https://www.calcpa.org. Tax law is complex and constantly changing, so if you have anything more than a basic 1040-EZ to fill out, it often pays to pay for a little help.
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Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions submitted--or inspired--by readers on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com/moneytalk.
