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Accepting Applications for Internships for Summer 2022

Allen Insurance and Financial is accepting applications for its 2022 summer internship program, which offers a 12-week immersion into the company’s three insurance divisions (personal, business and health) and its financial planning/investment management group.

Applications from college juniors and seniors will receive priority review; all applicants will be considered. This is a paid position, based in Camden.

To receive a copy of the job description and start the application process, please email Jill Lang at email hidden; JavaScript is required.  Interns should expect to start work in late May or early June 2022 and work through mid- to late August.

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Tax-Smart Planning Strategies

Minimizing your annual income taxes requires a regular review of your overall financial position. With tax season underway, now is the perfect time to evaluate some effective strategies that could help reduce your current and future taxes. Tax planning should be a year-round activity, so it’s wise to revisit these topics regularly in the context of your current financial situation.

Manage Your Retirement Savings Accounts

If you have the means, maximizing your annual contribution to a retirement account will give your savings strategy a healthy boost. But it’s important to understand how the different types of available retirement accounts differ. The most common options include:

Employer-sponsored retirement plans. Employer-sponsored 401(k) plans allow your investments to grow with taxes deferred until you take money out through a withdrawal or distribution. Some employers offer both a traditional 401(k) plan and a Roth 401(k); if yours does, you should be aware of the different rules for taxes on contributions and distributions:

  • With a traditional 401(k) plan, contributions are made with pretax dollars, thus reducing your current income and, possibly, your current-year taxes. Choosing this option may make sense if you want to reduce your income in the current year and/or expect to be in a lower tax bracket in retirement. Required minimum distributions from the account begin at age 72.
  • With a Roth 401(k) plan, contributions are made with after-tax dollars, and the account’s accumulated funds have the potential to be distributed tax-free and penalty-free in retirement, if certain IRS requirements are met. This could make sense if you’re not looking for a current-year tax deduction and anticipate being in a higher tax bracket in retirement. Under circumstances known as “triggering events” (one example is termination of employment), Roth 401(k) funds could be rolled tax-free into a Roth IRA and eliminate the need to take required minimum distributions from those assets. Required minimum distributions begin at age 72 in Roth 401(k) accounts but are not required in Roth IRAs.

Retirement plans for the self-employed. If you run your own business, you can use an individual 401(k), SEP (Simplified Employee Pension), or SIMPLE (Savings Incentive Match Plan for Employees) plan to shelter income.

IRAs. If you qualify, you may also be able to make a contribution to an IRA. As of 2020, there is no age limit on making regular contributions to traditional or Roth IRAs. Different rules for taxes on contributions and distributions do apply:

  • With a traditional IRA, contributions are generally made with pretax dollars, thus reducing your current income and, possibly, your current-year taxes. Eligibility for making tax deductible contributions to an IRA depends on your tax filing status, modified adjusted gross income (MAGI), and whether you’re covered by an employer-sponsored retirement plan. Required minimum distributions begin at age 72.
  • With a Roth IRA, contributions are made with after-tax dollars, and the account’s accumulated funds have the potential for tax-free and penalty-free distribution in retirement. Eligibility for contributing to a Roth IRA is based on your tax filing status and MAGI. There is no requirement for minimum distributions when you reach a certain age.
  • Converting traditional IRA assets to a Roth IRA is another strategy to consider. Generally, this move makes the most sense for those who anticipate being in a higher tax bracket in retirement than they are now. Eliminating the need to take required minimum distributions is a meaningful benefit.

Maximize Your Deductions

Some deductible items, such as medical expenses and charitable contributions, must meet a specific threshold before deductions can be taken. If you fall short of the minimum in a particular year, you might be able to time future discretionary expenses or charitable contributions such that you exceed the threshold one year but not the next.

Review Form 1040

Examining your 1040 could help you spot opportunities for making investments that provide greater after-tax savings. Pay special attention to the Taxable Interest, Tax-Exempt Income, and Dividend Income sections of the form.

Consider Tax-Advantaged Municipal Bonds

Municipal bonds are an excellent tax-advantaged investment, especially for people who are in a high income tax bracket or have moved into a higher tax bracket after a promotion or career change. Interest earned on municipal bonds is exempt from federal income taxes and, in most states, from state and local taxes for residents of the issuing states (although income on certain bonds for particular investors is often subject to the Alternative Minimum Tax).

Plan for Capital Gains and Losses

To determine when to recognize capital gains or losses, you will have to know whether you want to postpone tax liability (by postponing recognition of gains) or to recognize capital gains or losses during the current year. If the gains will be subject to a higher rate of tax next year (because of a change in tax bracket), or if you cannot use capital losses to offset capital gains, you could recognize capital gains this year.

Don’t Forget Life Insurance

Life insurance can provide liquidity to pay estate taxes and could be an attractive solution to other liquidity problems, such as those family-owned businesses, large real estate holdings, and collectibles may face. Structured properly, life insurance proceeds can pass free of income and estate taxes.

Putting the Pieces Together

These are just a few of the most common tax planning strategies. We can work with you and your tax professional to assess your current situation and determine which options could be beneficial to you. Making proactive, tax-smart decisions throughout the year is an essential piece of overall financial planning.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer. Third party links are provided to you as a courtesy and are for informational purposes only.  We make no representation as to the completeness or accuracy of information provided at these websites.

Municipal bonds are federally tax-free but may be subject to state and local taxes, and interest income may be subject to federal alternative minimum tax (AMT). Bonds are subject to availability and market conditions; some have call features that may affect income. Bond prices and yields are inversely related: when the price goes up, the yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity.

© 2022 Commonwealth Financial Network®

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2022 Estate and Gift Tax: Looking Back, and an Update

There were many who predicted significant changes to the current federal estate and gift tax law in the past year, but nothing has materialized as of this writing.  Many predicted that the amount that would be subject to tax would be greater due to a lowering of the exemption amount, and that the rates would be higher. It just didn’t happen. Indeed, the exemption is going up.

According to the IRS website and Kiplinger, the federal estate tax exemption is going up for 2022. The amount is adjusted each year for inflation. It’s important to remember that the current law will sunset at the end of 2025, at which point the amounts and rates will revert to those in effect in 2016, which are significantly lower, meaning more estates will be taxable.

2022 Federal Estate Tax Exemption

Generally, when you die, your estate is not subject to the federal estate tax if the value of your estate is less than the exemption amount. For people who pass away in 2022, the exemption amount will be $12.06 million ($11.7 million for 2021). For a married couple, that comes to a combined exemption of $24.12 million.

This is also known as the Basic Exclusion amount. It is as high as it’s ever been. The annual exclusion for gifts was $11,000 (2004-2005), $12,000 (2006-2008), $13,000 (2009-2012) and $14,000 (2013-2017). In 2018, 2019, 2020, and 2021, the annual exclusion is $15,000. Again, in 2022, the annual exclusion is $16,000.

Federal Estate Tax Rate

Only a small percentage of Americans die with an estate worth $12 million or more. But for estates that do, the federal tax bill is significant. Most of the estate’s value is taxed at a 40% rate.

According to Kiplinger, the first $1 million in an estate is taxed at lower rates – from 18% to 39%. That results in a total tax of $345,800 on the first $1 million, which is $54,200 less than what the tax would be if the entire estate were taxed at the top rate. Once the estate’s value exceeds $1 million, the excess is taxed at the 40% rate.

That’s the picture from a federal perspective. What about Maine? Yes, Maine has an estate tax, with an exemption level of $5.87 million. The Estate tax rates range from 8% – 12%, which is one of the lowest rates among the states that have an estate tax. There is no tax on heirs, so no Inheritance tax.[1]

Federal Gift Tax

Gifts can be taxable if they are big enough. First, there’s the exclusion of what you don’t need to report each year. This would apply to gifts to any one individual in the calendar year by a taxpayer. You could double the amount for gifts from a married couple filing jointly. The current exclusion is $16,000. It has increased over the years. Those gifts that exceed the exclusion Amount are reported and cumulatively are not taxable as gifts until they exceed a total of the exemption amount during your lifetime, currently over $12 million.

By the time 2026 rolls around, we will likely hear much more about estate and gift taxes. The current law is slated to sunset December 31, 2025 and go back to 2016 levels January 1, 2026.

All taxpayers should consult with their own professional tax and legal advisors when making estate and significant gifting plans to take their unique facts and circumstances into account.

 

 

[1] https://www.kiplinger.com/retirement/inheritance/601551/states-with-scary-death-taxe

 

 

 

Sarah Ruef-Lindquist, JD, CTFA
Sarah Ruef-Lindquist, JD, CTFA
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Why a Marine Business Needs Commercial Auto Insurance

By Chris Richmond
For WorkBoat Magazine

Recently an insured contacted us to ask if he had coverage for rental cars being driven by his crew members. Of course this led to many more questions, as well as the insurance agent’s favorite response:  “Maybe, depends on what you are doing. Let’s talk about it.”

Our insured had just a commercial hull with P&I policy. I explained that if his crew members were using the vehicle to run errands for the boat − in service to the ship − then there could be coverage for remedies should the crew member be injured while driving. But should the crew member be involved in an accident, there would be no coverage for any damage to the vehicle or for third party damages. This would fall under vehicles coverage.

There are several ways to take care of this with a rented vehicle. First is to take the coverages offered by the rental company. While no one likes to have extra fees added to an already expensive bill, this is often the easiest solution should there be an accident. Adding Hired and Non-Owned Auto coverage is another solution. While there would be no coverage for damage to the rented vehicle or the employee driving it , there would be coverage for the vehicle  hit or the driver of that car.

The non-owned portion of this coverage comes into play when an employee uses their own (personal ) vehicle for company work. While the insurance on the vehicle is primary, should the claim exceed the limits the employee has, then the non-owned coverage would kick in. Also if your business ends up being dragged into the claim and you get sued, then your non-owned coverage will respond as well.

Hired and non-owned auto can usually be added to a liability policy, an existing commercial auto policy or, if needed, written as a stand-alone policy.

One other area to consider are trailers owned by the business. These need to be specifically listed on a commercial automobile policy for liability coverage to respond. And remember, the liability of the trailer follows whatever vehicle it is attached to. If you have an employee towing a company-owned trailer with his or her personal vehicle and the trailer causes a claim, then the employee’s insurance will be the primary coverage.

Having an employee run down to the marine supply store in their own vehicle can be a common task but can leave you vulnerable to unforeseen risks. Have a chat with your agent to help plug those holes.

Chris Richmond, CIC, AAI, CMIP
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Fixed Income Investment Strategies: 4 Ways to Mitigate Inflation Risk

Fixed income investments (also known as bond investments) play an important role in a well-diversified portfolio, potentially serving as downside protection in times of uncertainty. Still, as of this writing in January 2022, some fixed income investors are understandably cautious about the risk of rising consumer prices on their portfolios. The primary concern is the potential for interest rates to increase.

Rising interest rates put pressure on fixed income investments by causing prices for existing bonds to fall. This is known as interest rate risk. Although there is no way to completely avoid the impact of higher inflation on fixed income, the risk can be mitigated. Let’s review four strategies that could help manage fixed income portfolio risk.

1) Reduce Interest Rate Risk

Why is interest rate risk a primary concern for many bond investors? After all, a bond’s original terms do not change within the interest rate environment. If you hold a bond to maturity, you’re entitled to receive the full principal amount, plus any outstanding accrued interest.

If you want to sell a bond before maturity, however, the situation is different. Prior to maturity, most existing bonds sell at a premium or a discount to the full principal amount, plus accrued interest. If interest rates have risen since a bond was issued, the price of the bond typically declines.

So, what strategies can we employ to potentially reduce the interest rate risk of a bond portfolio? Adjusting the duration of your bond portfolio is one of the first methods to consider. Duration is a measure of the sensitivity of the price of a bond to a change in interest rates. Notably, duration is not the same thing as a bond’s term to maturity.

For instance, a bond with a duration of 5 would be expected to see its price fall 5 percent if interest rates were to rise by 1 percent. In comparison, a bond with a duration of 2 would be expected to see a 2 percent decline if interest rates were to rise by 1 percent.

To guard against a rise in rates, it might help shorten the duration of your bond portfolio. It’s important to note, though, that shortening duration alone may not ensure that a portfolio is adequately protected while generating a reasonable return.

2) Increase Credit Spread Risk

A credit spread is the difference in interest rates between a U.S. Treasury bond and another type of bond of the same maturity but different credit quality. Typically, bonds with a lower credit quality offer higher interest rates than U.S. Treasury bonds. The risk for investors is that a bond with a lower credit quality comes with a higher risk of default. Default means a bond has missed an interest or principal payment.

So, how does this strategy work? Most importantly, investors must consider whether the potential benefit of receiving a higher interest rate is worth the higher risk of default. If this strategy is implemented, the fixed-income portion of a portfolio is oriented away from U.S. Treasury bonds and toward investments that increase credit spread risk. This category includes corporate bonds, mortgages, and high-yield investments. High-yield investments have lower credit ratings than investment-grade corporate bonds, although they typically offer higher yields.

These investments are a step out on the risk spectrum, but the risk is concentrated on credit spread risk. Corporate bonds, mortgages, and high-yield investments are typically driven by improving economic fundamentals. As a result, they could benefit from rising rate environments that see faster economic growth. Given the reasons for the recent inflation increase—namely reopening efforts and economic recovery—spread-oriented investments may make sense for some investors.

It’s important to note that corporate bonds, mortgages, and high-yield investments are not immune to the negative effect rising interest rates may have on prices. Nonetheless, the move from primarily interest rate-sensitive to spread-oriented investments could help lower the interest rate risk of a fixed income allocation. These investments could potentially provide a reasonable yield by shifting the risk exposure toward credit.

3) Consider Foreign Exposure

It might also be beneficial to shift a portion of your fixed income allocation to international bonds. Several factors can affect global interest rates, but the economic fundamentals for individual countries primarily drive their respective rates. Given the diverging global economic recovery, tactical opportunities may arise in developed and emerging international markets.

Including international bonds diversifies a bond portfolio away from U.S.-based interest rate risk. Accordingly, this strategy could help dampen price volatility for a fixed income allocation when interest rates are rising.

As with spread-oriented investments, this strategy involves some interest rate risk. Still, diversifying exposure to include foreign interest rate risk may help lower a portfolio’s overall volatility.

4) Employ Yield Curve Positioning

Another strategy to consider is focusing on holding a diversified portfolio of fixed income investments spread across the yield curve. What is the yield curve? A yield curve is a line that plots the interest rates (also known as the yield) of bonds having equal credit quality but different terms to maturity.

When analysts consider interest rate risk, most hypothetical scenarios envision an environment where rates shift in parallel across the yield curve. In reality, however, this scenario rarely happens.

The interest rates for bonds usually depend on whether it’s a short-term or long-term bond. Short-term bonds are generally more sensitive to changes in the Federal Reserve’s monetary policy. On the other hand, interest rates for a long-term bond are driven more by the outlook for long-term economic growth. Given this fact, holding a bond portfolio with a diversified range of maturity dates could help protect against changes in monetary policy that increase interest rates.

Bond laddering is a strategy that can help diversify interest rate risk exposure across the yield curve. Instead of buying bonds that are scheduled to come due during the same year, purchasing bonds that mature at staggered future dates should be considered. This can allow for more regular reinvestment of income and helps insulate a portfolio against yield changes in a certain segment of the market.

Need Additional Information?

For assistance in evaluating your options, please contact me. We’ll talk through these strategies for managing the potential outcomes and risk of your fixed income portfolio. 

Bonds are subject to availability and market conditions; some have call features that may affect income. Bond prices and yields are inversely related: when the price goes up, the yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity.

A bond ladder, depending on the types and amount of securities within the ladder, may not ensure adequate diversification of your investment portfolio. While diversification does not ensure a profit or guarantee against loss, a lack of diversification may result in heightened volatility of the value of your investment portfolio.

The main risks of international investing are currency fluctuations, differences in accounting methods; foreign taxation; economic, political or financial instability; lack of timely or reliable information; or unfavorable political or legal developments.

This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Please contact your financial professional for more information specific to your situation.

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Maritime Employers Liability – What It Is and Why You Need It

By Chris Richmond
For WorkBoat Magazine

Recently we were reviewing insurance coverage with a local marine contractor. Through the course of our conversation, we learned that one of their employees had been operating a crane aboard another contractor’s barge for that contractor’s project. While this happened only rarely, it did open up a big gap in their coverage. Fortunately, there was a solution: Maritime Employers Liability.

Commercial vessels will carry Protection and Indemnity. As we know, P&I provides coverage for the insured’s crew members. But this only applies to crew members who are employed by the vessel owner or operator. Your employees working on board someone else’s vessel would be covered under an MEL. The MEL follows your employees while they are on non-owned vessels. Coverage under the policy can include:

  • Jones Act
  • Death on the High Seas Act
  • General Maritime Law of the United States
  • Maintenance, Cure and Wages

One important thing to remember is that while an MEL policy will provide coverage for the benefits listed above it does not include a workers compensation policy. You will still need to keep in force coverage under either you state workers compensation policy or your USL&H. One nice thing about an MEL is that you can often have it added to your existing USL&H policy.

MEL is rated differently than typical crew members on your Protection & Indemnity policy. Those crew members are charged per crew for a fixed price, usually between $750 and $1,000 per head. MEL not only looks at how many employees you have working on non-owned vessels but also at your total number of employees as well as payroll associated with both wet and dry exposures. Payroll also needs to be broken out between USL&H, state act (workers compensation) and Jones Act.

There is much more underwriting that goes into an MEL quote as compared with crew on an owned vessel. The premium associated with the MEL policy will vary based on the payroll associated with the exposure − but be prepared to pay at least $5,000 as there is generally a minimum premium with this coverage.

When you send your employees out on a job you want to make sure that they are properly prepared and protected. Do not forget to protect yourself, as well. Without a Maritime Employers Liability policy you could be leaving yourself unprotected against a major claim.

Chris Richmond, CIC, AAI, CMIP
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Why It’s Important Not to Overlook Cargo Insurance

By Chris Richmond
Originally Submitted to WorkBoat Magazine

I met recently with a client who operates a small water taxi service. I noticed several crates in the bed of his truck and learned he was transporting them to one of our local islands. While this seemed like an innocent risk to the insured, there was one glaring problem: His policy excluded coverage for cargo.

While marine policies will have limited coverage for passengers’ personal effects, there is often an exclusion attached for cargo. This can be added by endorsement with a sublimit of coverage, with premium based on the amount of coverage. Be sure to understand the value of the cargo you are going to be transporting, because your policy will only provide the limits you have paid for. You will also have a separate deductible for cargo claims. A good practice is to have a freight contract with your customer which determines the value of the items to be shipped. This can help avoid any surprises in case of a loss.

Take a look at how the cargo has been packed. We all know things can get rough and wet on the water. You should have an established set of guidelines regarding packaging and you should reserve the right to refuse the right to ship an improperly packaged item. You can’t control the weather and you don’t want to have to pay for someone else’s poor work.

As with all insurance, the cargo endorsement will come with exclusions. Be sure to review these with your agent to make sure everyone is on the same page. Negotiations with an underwriter can often result in more favorable coverage.

Here in Maine, small cargo vessels servicing local island communities are lifeblood to those islands. Often the families operating them have been doing so for many generations. The same is true of many coastal and riverine cargo operations throughout the U.S. As the nature of your business changes and develops, so too should your approach to risk management. Talk to your agent and see if your policy needs to be updated.

Chris Richmond, CIC, AAI, CMIP
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AIO’s Second Annual FILL THE STRAND Event, Keeping Neighbors Fed and Warm

On Monday, January 17, 2022 AIO Food and Energy Assistance will host its second FILL THE STRAND food and funds drive to benefit AIO’s Food Assistance, Energy Assistance, Weekend Meal, and Diaper Assistance Programs. This event challenges the community to fill every seat in the historic theater with bags of food and funds for AIO’s programs.

The 2021 Fill the Strand event raised more than $27,000 in support for AIO, filling the theater seats nearly 3 times. The goal for the second event is to raise $30,000. AIO is grateful to its partners and sponsors the Strand Theatre, Allen Insurance and Financial, First National Bank and First National Wealth Management, Rockport Steel and Fletcher and Michael McNaboe of City + Harbor Real Estate Group for their support of the event.

Coordinators would like to encourage community organizations, businesses, and residents to do food and fund drives within their groups, workplaces, and neighborhoods to help with the drive. The food and funds collected will go directly to AIO’s programs that support Knox County families. Any individuals or groups interested in holding a food drive within their group is asked to contact one of the coordinators listed below for details.

Monetary donations are welcome – and in fact your dollar goes further since AIO can purchase food through partners at a competitive price. Individuals can sponsor a bag at $25, which will fill one seat in the theater. Those interested in sponsoring a bag through a financial donation can make it online at www.aiofoodpantry.org/strand.

Non-perishable food with a current expiration date is appreciated (no glass please). AIO would be grateful for donations of the most needed items including: ready rice pouches, macaroni and cheese and pasta; cereal & oatmeal; pop-top canned foods and Chef Boyardee meals; single serving lunch items; kid-friendly snacks; 100% juice boxes; shelf stable milk; snacks (granola bars, peanut butter crackers, 6-pack raisins). Whether a monetary gift or food donation – your support will help the people in our community who need it the most.

“At the Strand, we’re thrilled to partner with AIO again in this creative effort! We believe in supporting the good work of other organizations throughout our community, and nothing is more important than helping to make services available to anyone in Knox County with a need for food and heat — especially in these extra-challenging times,” shares Jessie Davis, Executive Director of Friends of the Strand Theatre.

“We are thrilled to continue our partnership with AIO and the Strand Theatre on this unique project. Together, we can make a real difference in the lives of our friends and neighbors,” said Mike Pierce, president of Allen Insurance and Financial.

“First National Bank is proud to support AIO’s Fill The Strand Event,” said Tony McKim, president and CEO. “We are grateful for the critical services AIO provides our neighbors in need in Knox County.”

The impact of this event is significant. “Last year’s event provided a tremendous amount of food when we needed it the most” said AIO executive director Joe Ryan. “Facing an even more challenging winter this year, we expect the needs within the community to be even greater. The Fill The Strand Event will provide much needed relief at exactly the right time.”

Food collection sites have been established at area businesses, including Allen Insurance & Financial offices (Rockland and Camden), The Strand Theater, First National Bank (Rockland branches), and AIO Food and Energy Assistance (Rockland). On January 17th volunteers will be at the Strand Theatre between 9:00-2:00pm to receive food and funds donations. For more information about the event and how you can participate please contact event coordinator Leila Murphy, email hidden; JavaScript is required. Event information can be found at www.aiofoodpantry.org/strand.

About AIO Food and Energy Assistance: For over 30 years AIO has provided critical food and heating assistance to Knox County families. Funding for AIO’s programs is needed more than ever as food insecurity in Knox County is projected to increase 46% overall. Knox County ranks among the highest food insecurity rate in the state. Child food insecurity is projected to reach 28% (a 52% increase). In 2021, AIO has supported 1547 individual households and has distributes nearly 400 meal kits each week during the school year. AIO’s Energy Assistance Program helps households with heating assistance or electrical disconnection prevention – which is critical as winter begins. Last winter AIO distributed 450 energy assistance vouchers, totaling $108,000 in support. The need for assistance is real and is not going away anytime soon given the ongoing pandemic.

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Debt Management in a Healthy Financial Plan

Wise debt management is a key component of healthy and effective financial planning. Today, most people carry some amount of debt to finance a degree or buy a home or car. Other debts may be incurred out of necessity or as part of an investment plan. Whatever your reasons for taking on debt, you should understand the different types of debt and their risks. This knowledge will help you manage debt wisely as part of your overall financial plan.

Primary Types of Debt
The two primary types of debt are:

  • Unsecured debt. Credit card balances and student loans are common types of unsecured debt. Typically (without considering pandemic-related relief), missing one or more of your monthly payments on unsecured debt could result in late fees, increased interest rates, damage to your credit score, and/or action by a collection agency. A delinquent borrower can also be sued by the lender.
  • Secured debt. With secured debt, the lender has an interest in an asset, such as a home mortgage or car loan. In the event of default, the lender has a legal right to repossess its interest in the asset.

Risks to Consider

The distinction between unsecured and secured liabilities should not lead to conclusions about when debt is appropriate. Credit card balances and car loans, for example, are rarely part of a healthy financial plan, in part because assets acquired this way are subject to rapid depreciation. Furthermore, because unsecured debt is convenient, it can get out of control quickly. So, avoiding credit card debt and car loans is advisable unless you have a strict budget and the discipline to stick to it.

Other types of debt, such as mortgages and business loans, could increase your long-term net worth, provided the asset value increases or remains more valuable than the loan balance. In these cases, you have less risk of the debt getting out of control because secured loans can be fully satisfied by disposing of the secured asset. But the obvious downside is you could lose your home, car, or other valued asset. As a result, even if secured debt has lower interest rates and more favorable terms, you should carefully weigh the potential downsides before taking it on.

 How Much Debt Can You Afford?

With any type of loan, lenders decide what level of risk they will accept when making a lending decision. Factors they consider include credit history and the prospective borrower’s debt-to-income ratio. But the lender’s main concern is answering the question, “What is the maximum amount we can offer this borrower with the least likelihood they will default on the loan?”

It’s important to realize that a lender’s willingness to loan funds does not mean accepting the loan is prudent. When analyzing your ability to carry debt, consider your budget carefully and focus on the following:

Liquidity. If you suddenly lost your job, would you have enough cash to cover your current liabilities? It’s a good idea to maintain an emergency fund to cover three to six months of expenses. But don’t go overboard. Guard against keeping more than 120 percent of your six-month expense estimate in low-yielding investments. And don’t let more than 5 percent of your cash reserves sit in a noninterest-bearing checking account.

Current debt. Your total contractual monthly debt payments (i.e., minimum required payments) should come to no more than 36 percent of your monthly gross income. Your consumer debt—credit card balances, automobile loans and leases, and debt related to other lifestyle purchases—should amount to less than 10 percent of your monthly gross income. If your consumer debt ratio is 20 percent or more, avoid taking on additional debt.

Housing expenses. Generally, your monthly housing costs—including your mortgage or rent, home insurance, real estate taxes, association fees, and other required expenses—shouldn’t amount to more than 31 percent of your monthly gross income. If you’re shopping for a mortgage, keep in mind that lenders use their own formulas to calculate how much you can afford. These formulas may not work for your situation. For a mortgage insured by the Federal Housing Administration, your housing expenses and long-term debt should not exceed 43 percent of your monthly gross income.

Savings. Although the standard recommended savings rate is 10 percent of gross income, your guideline should depend on your age, goals, and stage of life. You should save more as you age, for example, and as retirement nears, you may need to ramp up your savings to 20–30 percent of your income. Direct deposits, automatic contributions to retirement accounts, and electronic transfers from checking accounts to savings accounts can help you make saving a habit.

 Debt Pay-Down Strategies

If you’re carrying debt that exceeds what’s normal for the average household, we can discuss strategies to pay it down as aggressively as is reasonable. Here are two approaches to consider:

  • Snowball debt elimination. This involves identifying lowest-balance debts and targeting them for priority repayment while making only the minimum payment on other items of debt. Once the lowest balance is paid off, move on to paying down a new set of lowest-balance debts.
  • Debt avalanche. This strategy advocates paying off debts with the highest interest rate first. This makes mathematical sense but requires discipline and the ability to stick with the process.

 Debt and Your Investment Plan
In some cases, you may believe that holding debt, such as a mortgage or margin investments, is beneficial. This idea is usually based on the potential for your investments to outperform the interest rate on the applicable loan and the investment opportunities you could explore with that extra liquidity.

For instance, you might believe that paying off a mortgage or margin loan could represent a tax-free return on investment essentially equal to the interest rate paid on the debt. But you would enjoy a significant net benefit only if the rate of return substantially exceeds the cost of the interest. And that result cannot be guaranteed. So, though this strategy could potentially yield a monetary benefit, the overall risk involved is significant.

 Need Additional Information?

We’ll talk through these strategies for managing debt and explore other planning solutions that can help you stay or get on track to financial security. By carefully approaching debt with a detailed plan on how much to borrow and how to repay your debt, you can reach your goals and support your long-term financial success.

© 2021 Commonwealth Financial Network®

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer. Third party links are provided to you as a courtesy and are for informational purposes only. We make no representation as to the completeness or accuracy of information provided at these websites.

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Business Income Insurance – What It Is and Why You Need It

Sally Miles, Allen Insurance and Financial

By Sally Miles

If your business has to stop operations unexpectedly, there would be loss of business income. There is a type of insurance coverage which can help a business owner meet payroll and other operating expenses and replace actual loss of net income during the time required to repair or replace the damaged property after a loss.

There are a few important things to know about business income coverage:

  • Business income is defined as net profit or loss before income taxes that would have been earned or incurred if no physical loss had occurred.
  • This coverage is triggered by direct physical loss or damage to your property due to a covered loss AND a partial or full suspension of operations.
  • Business Income coverage can be programmed to fit the needs of a specific business.

We recommend asking your insurance agent to help you determine whether  business income coverage is essential for your operation. It could mean the difference between reopening after a covered loss  or closing your doors for good.

 

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