Behavioral Finance: The Key to Your Financial Independence

Some people believe that one of the most frustrating words in the financial world is the word “taxes”. But it doesn’t have to be…and it actually shouldn’t be. Understanding the world of taxation takes enormous amounts of education, understanding and application. The average person doesn’t necessarily want to become an expert on taxes, but they certainly don’t want to pay more than they have to, either. Hence the reason many people and businesses reach out for help. Finding a tax professional can be complicated; hoping to find the right kind of tax professional for the services needed tends to be the number one challenge.

When starting a search to find the right tax professional, there are basically two major things to consider. Firstly, it’s important to understand the differences between the types of tax professionals. Secondly, it’s important to ask the right kind of questions to help discern if a working relationship with a particular tax professional is a good fit.

Start with having a basic understanding of a few different types of tax professionals.

TYPES OF TAX PROFESSIONALS:

Tax Preparer – A tax preparer can help individuals, families, and businesses prepare tax returns. They cannot represent clients during an audit. Their role is limited to tax preparation. A large percentage of the general population might find that a Tax Preparer is a match for their filing needs.

EA – An Enrolled Agent (EA) has passed an IRS examination that puts them in a position to not only help clients prepare tax returns, but they can also represent their clients in the event of an audit. Generally speaking, EA’s may tend to have more thorough knowledge and understanding in regards to tax preparation than that of a Tax Preparer. Individuals, families, and business owners might find that an EA is helpful due to the complexities that their tax preparation needs may entail.

Tax Attorneys – Tax Attorneys can not only prepare tax filings, but they can also represent their clients during an audit, as well as represent clients in court proceedings. Tax attorneys play a significant role in helping their clients through complications with tax liabilities, responsibilities, and other issues that may arise.

CPA – Certified Public Accountants are tax professionals who have a degree in accounting or a related field. They have passed the state CPA exam, and are able to perform a myriad of services for their clients. They can prepare tax filings, represent clients during audits, prepare and certify audit statements. They cannot, however, represent their clients in court.

There are additional types of tax professionals, but the above mentioned tend to be the most widely sought after by individuals, families, business owners, non-profit entities, and others.

Secondly, it’s important to ask questions that are relevant for finding a professional that might be best suited for the specific needs at hand. Here are a few questions to consider when interviewing a tax professional:

QUESTIONS TO ASK:

1. What is your designation, or professional title?
2. What industries or types of clients do you have?
3. How many years of experience do you have?
4. How many people do you have in your organization, and what are their roles?
5. Do you help clients with tax planning strategies, as well as tax preparation?
6. Do you work in collaboration with financial planners and other professionals?
7. What kind of ongoing service model do you have?
8. What is your fee structure?

When discerning which tax professional to work with, having a basic knowledge of the types of tax professionals might go a long way with helping to build a productive relationship, and subsequently, possibly more favorable tax solutions. Taxes are a major part of life, and having a strategy around how finances are built, managed, and maintained could possibly help significantly. It’s important to be responsible with taxes, and having a professional that can help discern taxation with efficiencies could have significant importance to overall financial planning.

Generally, people purchase life insurance because they have a spouse or child they want to protect financially in case they pass away. But, there are several other reasons to buy life insurance that can benefit more than just those who need to protect their family. One of those benefits is accumulating tax-deferred, tax-free, cash value.  Just like a Roth IRA, the cash value in a permanent life insurance policy can grow on a tax-deferred status and be accessed tax-free, but without the consequence of incurring a 10% penalty if accessed before attaining age 59.5. “Living Benefits”, also known as “Accelerated Benefit Riders” are another advantage of life insurance other than the death benefit. As the name suggests, “living benefits” can be utilized in certain circumstances by the policy holder without passing away.

Common living benefits allow the policy holder to access all or some of the death benefit of their policy to help provide managed care if they are diagnosed with a critical or chronic illness. ABRs originated in the 80s and 90s when companies called “viaticals” found a market for purchasing life insurance policies from people that were very sick who realized they needed money now to help pay their medical bills more than their beneficiaries needed the death benefit. The insurance industry realized what was happening and started adapting policies to include Accelerated Benefit Riders to help their consumers get access to expensive medical care, outside of what health care would cover, while they were sick.

Living Benefits that are common today are terminal, chronic and critical illness or critical injury riders. It is important to talk to your advisor and read the fine print when considering different insurance policies because riders can differ significantly between insurance companies and policies. Terminal illness riders will allow the insured to accelerate a portion of their death benefit, tax-free if they are diagnosed with a terminal illness. Some companies require a diagnosis of 24 months or less to live while others require 12 months or less to live. A chronic illness rider is generally triggered when the insured has a long-term illness in which they are unable to perform two of the six “Activities of Daily Living” including eating, dressing, toileting, transferring, bathing, and maintaining continence. Some companies structure these riders to pay a large benefit upfront and some will provide a much smaller amount but spread over a long period of time. Lastly, critical illness/injury can include many things – heart attacks, stroke, cancer, brain trauma, severe burns etc. and the amount of benefit that is paid out depends on how critical the injury/illness is and how much it will affect the insured’s life span.

Because medicine and medical technology have advanced so rapidly, people are living much longer lives than they used to live. The US Census Bureau reports that at least 70% of people over age 65 will require some long-term care at some point in their lives . In 2014, the annual rate for a skilled nursing facility was $95,707 .  Because traditional, stand-alone Long-Term Care policies can be incredibly expensive, utilizing life insurance can be a great way to build assets throughout your income-earning years that are earmarked for advanced medical costs later on and can protect yourself and your loved ones from unknown health scares.

Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing. Guarantees are based on the claims paying ability of the issuing insurance company. Withdrawals from the policy may result in the reduction of the death benefit.

1. US Census Bureau, American Community Survey 2013
2. Univita Cost of Care Survey, Feb 2014