Peace and Wealth

Imagine for a minute that you had this marvelous machine in the basement of your house. All this machine does is make hundred dollar bills, day in and day out. You simply go downstairs, turn the machine on, pull the lever and just crank out cold hard cash, every single day. Sounds wonderful, right? You would probably spend a great deal of time, energy and money to make sure that this machine is well maintained, functioning properly and insured against damages and breakdowns, wouldn’t you? You could probably do nothing but work that machine when needed and then kick back and enjoy the fruits of the machine’s labor. Seems like a dream world, I know. But, in reality, you are that machine. The greatest machine that exists that will produce the most money over the course of your life, is you. So, why is that many of us fail to maintain and insure ourselves against breakdown the same way we would if we were dealing with some mechanical gadget in our basement? Sure, we may go to the gym sometimes, try and eat healthier, and even quit smoking, but what about situations where the machine breaks and stops working for a year or two, or more? Many people are fully aware of the need for permanent income replacement in the event of death. That’s what life insurance is for, but what about protecting ourselves against the loss of income due to disability? The truth is, a healthy 30 year old is FOUR TIMES more likely to become disabled before the age of 65 than they are to die. Yet, many people that I talk to have or want Life Insurance, but dismiss the idea of Disability Insurance as unnecessary. I recently had a client who was purchasing a fairly large life insurance policy who said, “I just want to make sure that if I am driving down the road and get hit by a mack truck and die, that my family will be taken care of.” Fair point. However, as I pointed out to the client, what happens if that mack truck hits you, and you survive? The greater risk for most of us right now is becoming disabled and not able to work or produce income for our family for years. It is sobering that 60% of all personal bankruptcies are due to medical issues and disability. Fortunately, there is something that you can do to prevent the financial ruin. Let’s take a look at a few key points about Disability Insurance and what type of person is the right fit for it.

 

1. Disability insurance, in most cases, is cheaper than life insurance and in some instances can be considerably less expensive. This makes it an affordable and crucial piece of long term financial planning.
2. There is a maximum benefit that you are allowed to receive from disability insurance. This number varies based on state and other factors, but usually falls somewhere between 60-66% of your pre-disability income.
3. The benefit can usually last all the way up until ages 65-67 if needed. This is all worked out before you purchase your policy. Obviously, the shorter the maximum age you choose, the cheaper your policy becomes. This applies to other facets of the policy as well, such as elimination period, cost of living adjustments for inflation, benefit amount etc. You are in control. The higher the benefit, longer the term and more adds on you want for your policy, the greater the cost.
4. The monthly benefit received from a private/individual disability insurance policy is not taxed. The premiums you pay for your policy, like life insurance, is paid with post-tax dollars and therefore not eligible to be taxed. This is different from a group disability policy offered through work, which will be discussed later in this article.
5. Most private/individual disability insurance policies cover the all forms income including commissions. A group policy from your employer usually only covers a base salary.

 

People Who Need An Individual Disability Policy the Most:

 

If your income represents the sole or majority share of the household earnings – This is probably the single greatest group at risk for having a disability destroy their family’s financial well-being. In this situation, the husband or wife will have a job that brings in enough money to support the entire family, while the other usually stays at home with the children or has a smaller income job to just help supplement the family finances. If one member of the household is the primary earner, an individual disability policy is an absolute must.

 

If you have a group policy through work that will get taxed – This is the majority of disability plans found in the workplace. Most employers offer short and long term disability free of charge as a benefit to their employees. There are two big problems with this. First, since you did not contribute any money to the group plan, the benefit you receive is going to be taxed. Remember earlier I mentioned the maximum benefit being up to 66% of your income. Well, if you are only receiving 66% of your normal income, and then that benefit gets taxed, you may only be receiving around 40-45% of your regular income. Can you and your family survive on only 40% of what you make right now? A private, individual policy purchased outside of work will help you bridge that gap and get you the income you need, should you become disabled. Secondly, you are no longer covered once you are not employed there. The new job you choose may not have any coverage or in a similar manner, leaving you at risk. An individual policy purchased privately is portable. You can take it with you, wherever you go.

 

If you are self-employed or work for a smaller company that offers no coverage – Small business owners are usually very hands on, and are a major driver in their company’s profitability. If they become disabled and unable to work, their business will surely suffer. Most have no protection against this risk and therefore need disability insurance. The same is true for employees of companies that do not offer ANY kind of disability coverage at all. This is usually found with smaller companies or young, upstart operations that do not have the budget or scope to be able to offer such benefits to employees.

 

If a portion of your compensation comes from commissions and other forms of income – This generally refers to people working in sales jobs and other commission/bonus heavy positions. Yes, you may receive a base salary, but a decent portion of your earnings for the year are derived from commissions and bonuses. The good news is you are in control of your earnings. The bad part comes if you become disabled and are expected to live off of your employer’s group disability coverage. These plans are very basic, and only cover a percentage of your base salary. They do not account for commissions or bonuses. If you make a $30,000 per year base salary but earn another $70,000 in commissions, can you really afford to make ends meet off of the $18,000-20,000 that you would receive from your employer’s plan? Private/individual policies purchased outside of work can account for the difference and are a perfect supplement.

 

If you are a high income earner in a white collar field such as physician or lawyer – For many reasons already described above, a high income earner who supports his/her family should definitely be looking to mitigate the risk of a crippling disability by purchasing insurance. However, there is an added benefit to people in white collar occupations such as physicians, dentists, lawyers and college professors. They are in the lowest risk class for disability in terms of occupation, and therefore their policies will be considerably cheaper than someone in a much riskier field. The difference in price can be significant when dealing with very high income policies.

 

 

Disability insurance is a lot like life insurance, in that when you lay your head down at night, you have the peace of mind knowing that you and your family are covered if something happens. If your roof caves in and falls on you in the middle of the night and you can’t go back to work for a while, you will be taken care of. Your main concern should be getting healthy and back on your feet. The financial stress and worry is natural during a disability, but it can be alleviated by taking steps before hand to help protect against those potential pitfalls. That’s why an individual disability insurance policy is a critical and valuable piece of any person or family’s financial plan. Once again, your local trusted financial advisor or agent should be consulted to see which options are right for you and how you should proceed. Protection first! It can save your family from financial disaster.

Is it me, or did 2016 seem to just fly by? Like any year, it was filled with ups, downs, surprises, joy, sadness and lessons to be learned. We endured through Trump vs. Hillary, sat in shock as the Cubs actually won the World Series, and I am still trying to figure out the obsession with Hatchimals. Nevertheless, December is always a good time to take inventory of ourselves, and especially our finances, heading into the New Year. Whether 2016 was a prosperous one and you want to keep the momentum going, or it was a year you would soon like to forget or at least improve on, the good news is that 2017 offers that chance to start new and be financially healthy, both for now and the future. It all begins with asking yourself some important questions BEFORE the New Year starts, so that you can evaluate where you stand currently, in order to make the necessary changes and hit the ground running in 2017. Financial health and well-being is all about personal evaluation. You have to constantly be assessing the situation, monitoring cash flow, and ready to make changes as the need arises. The first two questions are general, big picture questions that affect every aspect of your financial world (and affects the answers to the other questions that we will be asking later) and need to be answered first. Once we get a feel for them, we can dig deeper and move into more specific questions, all adding up, hopefully, to making 2017 your best year yet.

 

Did Any Major Life Changing Events Happen in 2016?

With all of my clients, I like to do a year-end review session, and this is the reason why. Life changes in the blink of an eye, and your financial situation in March can be far different than the one you are facing in November. Start with your family life. Did you recently get married or engaged? Divorced? Is the wife pregnant or deliver a child? Did a key family member pass away or fall very sick? The main point here is that no matter what, any changes in this regard will have an impact on your finances. Whether it’s another mouth to feed and budget for, a spouse’s income now being added to the household cash flow, or maybe medical bills or an income being taken away, the key is you need to understand the impact it will have on your finances and react in a rational, level headed manner.

Next, move to your own income. Focus on the cash flow coming in. Did you get a new job? Maybe you suddenly found yourself unemployed? Did you get a raise at your current job? Are you job searching with the plan to make a change? These answers will obviously have an impact on your finances for 2017, but have you made the necessary adjustments? If you are making more, are you saving more? What are you doing with the extra money? If you make less or are unemployed, have you cut back and made the necessary budget to reflect this change? We cannot just continue to live the same way based off of the past. As cash flow and income change, we must change with it, and do it in the most optimal fashion.

Finally, take a look at the big purchases or moves you have made in your life this year. This focuses less on what is coming in and is more concerned with what is going out (debt and financial obligation). Did you buy a house? Did you go from renting an apartment to now paying a mortgage? Are you living in a totally different area geographically? Maybe your car totally blew up and you had to replace it recently? Major purchases and major changes add extra bills and debt to our balance sheet. We need to evaluate how those changes will affect our finances going forward and make sure that the plan we have in place to cover them is indeed solid and a viable long term solution.

 

Did My “Why” Change?

This is an extension of the first question, and is actually the most important one to answer. It does not involve facts and figures, rather a look deep inside yourself for some personal reflection. Everyone has a “why” in life. It is the reason we do the things we do; the reason we get up in the morning and go to work, the reason we keep dealing with that boss we hate just so that we can make the paycheck every two weeks, the reason we only go out to eat once a month in order to save as much as possible. Everyone has a “why”, and everyone’s is different. Many people would say their “why” is so that their children can live a good life and not want for anything. Others would say because their spouse is the most amazing, patient, supportive person on Earth and deserves to be taken care of (I know mine is). Some people want to change the world and have a positive impact, whether through their own personal greatness and talent or through selflessness and generosity. Perhaps you are dying to start a business and turn your passions into a successful career. Maybe you just want to be able to enjoy your later, retirement years without running out of money. Whatever your “why” is, whatever that motivation is, we need to understand that it drives everything we do and a lot of the decisions we make financially. A change in your “why” will definitely force you to adjust your plan for your finances in 2017. I see this frequently when someone does, in fact, get married or have children. They go from a single person only worrying about themselves and their own wants/needs to suddenly thinking for two or three or four. Their “why” changes from “because I want to be able to go out and enjoy my life and do whatever I want” to “my daughter is the most precious thing on Earth, and I want to make sure she is taken care of and happy for the rest of her life”. This forces you to start thinking about college savings, life insurance, budgeting, debt control, things that a single 22 year old probably never even thinks about. I know my “why” has changed drastically from when I was 22 years old and fresh out of college to today, and I am sure yours’ has too. Sit down and think about why you do the things you do. What drives you to do these things, and live the way you live? Then ask if your financial decisions and actions reflect that “why”. If the two are not in rhythm, it may be time to make some changes. The remaining questions in this article are much more specific but keep the answers to the previous two in mind as you read them. It really will shed some light on your financial plan for 2017 and what, if anything, needs to be adjusted.

 

Am I Saving Enough Money?

It is probably the simplest, but most critical question you can ask yourself when looking at your finances. I know I harp on this a lot, both on this blog and with my clients, but the number one problem most people have financially is that they are not saving enough money. Whether it is long term savings for retirement, short term savings for an emergency or crisis situation (unemployment, medical issue, car troubles etc), or any reason in between, saving money should be at the forefront of any financial plan. Sometimes, it is not the client’s own fault, as circumstances have made it difficult to save money. Surprisingly though, I find that most clients who have trouble saving money are more than capable of doing so, if they simply adjust certain habits and lifestyles they have grown accustomed to. The old saying is true, “Cash is King”, and in today’s world, it has never been more important. I try to advise clients to save anywhere from 15-20% of their income, saving into various accounts that include everything from your 401k/IRA retirement plans and cash value insurance, to investments and liquid cash in the bank. It is an ideal, perfect world, number that I realize some people cannot do right now. Maybe that is a goal for 2017, to get to that point by 2018? Maybe start at 10% and work your way up, or 5%, or whatever you can do. Anything is better than zero. When I am 50 years old, I’d rather have a problem of “what am I going to spend all of this money on” as opposed to “how am I going to be able to afford all of this.” The next article in this blog will be all about saving money and specific strategies and plans to help guide you through the process. Pay yourself first! Build your savings, build your wealth. You can do it!

 

Am I Managing My Debt Properly?

Nothing can be more crippling to financial health than debt. Credit cards, student loans, personal loans, mortgages, they all can be disastrous, but if managed properly and optimally, there is a light at the end of the tunnel. First, we need to look at which debt/bills are taking priority. Which ones are you paying the minimum on? Which ones are you overpaying a bit? The debt with the highest interest rates should be getting the most attention, then focus on the ones with the shortest term and highest balance. A lot of people like to overpay their mortgage or student loans to be done with them early, and in some cases it makes sense, particularly if there is some sort of equity benefit or financial opportunity that can come from it. However, if you are overloaded with high interest credit card debt or a 20% interest personal loan, it can be the wrong move. If you have no liquid savings in the bank to cover an emergency, then it is absolutely the wrong move. The interest rate on a mortgage varies but usually averages between 4-5%, the same with a federal student loan. In most cases, I would much rather use that extra money to help pay off a 15-20% interest rate credit card or personal loan or build some sort of savings or emergency fund. High interest debt just eats away at your finances like a disease. Keep paying the minimums and you are hardly making any dent on the balance at all. This means you will just get caught in the cycle forever, turning it into the worst of both worlds, high interest, and a longer term period. Also, look at your savings. If you are light there, and unprepared for some sort of emergency then maybe you want to re-allocate some of that overpayment of debt to that account. Making an extra mortgage payment three times a year is wonderful, if you can afford it, but if you only have $800 in your bank account, what are you going to do if you lose your job or have some sort of medical emergency? The mortgage is not going away just because you lost your job. Be prepared!

 

What Happens If I Die or Become Disabled?

This is another crucial question to ask that a lot of people don’t even consider. Basically, the main point here is to assess your life insurance and disability coverage as you head into 2017. What if you get hit by a bus? Do you have enough life insurance coverage for your family to be taken care of if you suddenly pass away? Many of you have life insurance through work and that is great. But those policies only cover a small amount like 1 x your salary etc. They are designed to cover the funeral and some short term expenses. This will not be enough to get your family through the next 5,10,20 years of life without your income that they have been relying on. Changes in your personal situation affect how much coverage you need as well, so it is important to constantly monitor everything. Did you get a raise at work? A new job that includes a bump in salary? Did you have another child? Maybe you bought your first house? These changes, usually, all require an increase in coverage. A new child or mortgage vastly increase the amount that will be needed to cover expenses should you pass away. A raise at work obviously means your family will be living off of more now, and therefore will need more coverage to replace the extra income. What about disability insurance? Keep in mind, just because that bus hit you, does not necessarily mean that you will die. You could be severely disabled and unable to work. In fact, statistics show that you are more likely to become disabled than you are to die at any given stage of life. Again, many large companies offer disability and this is wonderful. However, on average, it only covers up to 60-66% of your salary, and this is before taxes. Can you and your family live on 40-45% of your normal income? What about if you are self-employed and have no coverage through work? Disability is an even larger threat to your financial stability now. Either way, just like life insurance, your best bet is to get a private disability policy outside of work to make up for the gap in income and restore it to the normal levels you and your family have grown accustomed to and rely on. In most instances, these policies are cheaper than life insurance. Remember, protection first!

 

What Big Expenses/Purchases Are Coming In 2017?

We all have been in this spot once or twice before. We know we have some big purchase or expense coming in the future and rather than deal with it now, we just ignore it. Then, next thing you know, that time comes and we are left scrambling financially, wondering how it could just sneak up on us like that. Sound familiar? It is prudent to look ahead now and plan for any big expenses or purchases that may be on the horizon in 2017. Are you getting married in the next year or two and planning a wedding? Maybe you have a big vacation in August planned for you and the kids? Do you just know that the old car is not going to make it through another year? Try planning ahead for this and start to either put some money away now, or adjust your budget to account for the future expense. Trust me, it will make that purchase feel a lot less stressful and financially damaging. Some of these expenses may be recurring and faced every year/month/quarter, like property taxes. If they have been a problem in the past, try saving for them now, a little each month for it, if you aren’t already doing so. What about Christmas gifts? I am sure we are all going through a little bit of the crunch right now with the holidays, especially if you have kids. The reason that finances get a little tight this time of year is because most of us are unprepared. Why not plan for next Christmas NOW and start a little savings fund for it? It goes for any major purchase or expense throughout the year. Wouldn’t it be better to have these expenses already covered, without having to dip into your paycheck or worse, go into more debt with high interest credit cards?

 

Am I On Track To Retire When and How I Want?

No matter what age you are or what stage of life you are at, it is never a bad time to review your retirement accounts and plans to make sure that they are in line with your goals, objectives and timelines for retirement. If you are not on the right track, it is time to get on the right track. The last thing anyone wants is to be working at 75 years old. You should be putting some percentage of your income away for retirement. Again, life events play a role in this assessment too. Did you get a raise at work? Maybe you want to put the extra money into your 401k or IRA. How did your investments/retirement accounts perform this year? Maybe you need to adjust to the changing market conditions. Are you getting into your late 40’s or early 50’s? It is time to really sit down with someone and come up with a plan. Maybe you need to move some of your assets out of risky investments and be more conservative as retirement approaches. The good news is, with this or any of the questions asked today, if you need any help, a financial planner or advisor would be happy to help walk you through everything. It can be daunting and sometimes confusing but a financial planner is well equipped with the tools you need to not only answer those questions, but formulate a plan to keep you financially fit, healthy and happy for 2017 and beyond.

If you have been following this four part series on Life Insurance Awareness, you will recall that in part three, we discussed the nuts of bolts of building your own bank through permanent cash value life insurance policies. We walked through the process and benefits of cash value build up, the different ways to access your money, and even a real world example illustrating how building your own bank can transform your financial world. The final chapter in this series is designed to expose you to a few advanced strategies that many people are using right now to take the fullest advantage of their own personal “bank”. Keep in mind that yes, the death benefit is the main reason most people contribute to a life insurance policy, but the living benefits of the built up cash reserve can provide tremendous value while you are still alive, as well.

You may have noticed there is a gap of a few weeks between part three and part four of this series, and while I am sure so many of you have been on the edge of your seats eagerly awaiting the latest entry (or most likely not), there was an important reason that I waited. This election season has been full of intrigue, surprises and many polarizing view points, and this blog has no intention of getting political one way or another. You can find that on many other sites of your choosing. However, one thing that the election did illustrate is the fickle and unpredictable nature of our stock market. A few weeks before the election, a Clinton victory seemed in the bag and many pundits and “experts” were calling for, at worst, a flat market for the next few months, possibly even an uptick as Hillary eased her way into office. What happened? The night of November 8^th we saw state after state being won by Trump, and a surprise victory seemed more and more likely. Investors panicked and the after-hours trading sent Wall Street spiraling into a tailspin. The Dow Futures market was down over 600 points. Those same “experts” spent the remainder of the night predicting widespread disaster come morning, almost recession level bad. What happened? The sun came up, investors changed their tune and calmed down a bit, and the damage wasn’t nearly as bad. Things settled down over the next 24 hours and by the end of the week, the market was at a record high (based on the Dow). The lesson to be learned here is that our stock market is quite unpredictable and just when you think you have it figured out, it continues to defy the experts’ analysis. This particular instance happened to be a positive one for our markets, but the opposite is true as well, and many times, those sharp declines seem to come out of nowhere. The bottom line is that the market is tremendously difficult to predict and time, no matter what any expert tells you. Is it good to have some money in the market? Absolutely. Over time, you will earn a pretty nice rate of return and it is still a viable option for a piece of your nest egg. However, this lack of consistency and predictability also illustrates why it is good to have another piece of that nest egg protected from risk and uncertainty. You want to make sure you will have at least SOME of your money available to you when you need it most. That is why I recommend building your wealth and nest egg through BOTH the market AND cash value life insurance policies. Between the tax advantages, liquidity, and consistent and predictable growth, a permanent cash value life insurance policy offers countless benefits to those savy enough to pursue it and it should be a vital piece of your financial portfolio. Let’s take a look at a few high level ideas for how you can use that cash value to benefit you and your family long term.

 

Investing in Real Estate:

There are few investments that provide as much residual income and passive wealth than real estate. I am no real estate expert by any stretch, however, a smart investor could be taking full advantage of their cash value in their life insurance policies to prime that pump and get the ball rolling. The strategy here is to take a loan (or withdrawal) from your cash value to purchase an investment property, or at least a nice down payment. Keep in mind, the loan on your cash value is paid back on your terms and can be very flexible. The idea is to use the rental income or whatever money the property generates to cover the property taxes and repay the loans. The loan interest can even be tax deductible in certain situations (contact your tax advisor for more insight into that). In an ideal scenario, you would be in a positive cash flow situation where the income exceeds the amount you are paying back (and if you have set flexible loan terms, this can be accomplished rather easily). But let’s just assume for a minute that your rental income is breaking you even on the loan/taxes. Once the loan is paid back, you now have all of your money back in your policy, rental income still coming in, and best of all, you OWN the property. Do this multiple times and before you know it, you have created a powerful web of residual income flowing in monthly, in addition to the equity you now have by owning multiple properties. The possibilities are endless. It’s your money. Put it to work for you!

 

College Savings for Children:

One of the most daunting and expensive parts in raising a child is saving for their college tuition. While there are options in place such as 529 plans, a growing number of people are using cash value life insurance policies to aid in this funding. This money can be taken from your policy as either a loan, which as you recall, can be paid back flexibly on your own terms, or just a basic withdrawal. It is best to start this as soon as the child is born, so that you have plenty of time to save and build up cash value for college (not to mention you should have some life insurance when you have a child anyway). I am planning a full article in the future about this but for now, let’s take a brief look at some of the benefits of using life insurance vs. a traditional 529 plan or other funding vehicle:

Financial Aid – When assessing how much financial aid you are eligible for, the government considers all of the income and wealth available to pay for tuition and expenses, including 529 plans. However, cash value accumulated in a life insurance policy is exempt from this formula. The more money you save for college in a life insurance plan, the less you will have to declare on a financial assistance form, resulting in a greater amount available to you in financial aid. This is one of the greatest advantages to using life insurance as a college savings vehicle. It opens up many other funding options, should you need more money.

Risk – College savings that is put into a 529 plan or some other market invested strategy is subject to serious risk. I cringe when I think about how many people had their children’s college savings fund invested in some sort of 529 plan or brokerage account during the market crash of 2008. Many people lost 20%-30% even upwards of 40% of their savings, and if your child was scheduled to go to college sometime shortly after that, you did not have enough time to recover the money. Using a cash value life insurance policy to save for college protects against that risk since the money still earns some interest, but is not invested in the market and therefore not exposed to the potential disastrous declines.

Flexibility in Usage of Funds – A 529 plan provides similar tax advantages as using a life insurance policy to fund college tuition, however if you do not use the money directly for college related expenses, a 529 plan will charge you fees and penalties to access your money. Should your child receive a scholarship, go to a foreign school, or opt out of college altogether, be prepared to pay penalties to access that money, in addition to now being taxed on the earnings. Life insurance plans, however, do not discriminate on what you use the money for. If it is meant for college savings, and your child gets a free ride, you can use the money for whatever you like without any excess fees or taxes involved.

 

Supplementing Retirement Income:

Many people find themselves having less retirement income and fewer resources when they decide to retire these days. Social security is nice, and 401k/IRA distributions are nice, but if you have cash built up in a permanent life insurance policy, you have access to a tremendous untapped source of tax free supplemental income. The idea here is to withdraw from your cash value every year and “spend down” your bank in order to provide extra cash during retirement. This will not be a loan; you are simply taking the money. In this scenario, I recommend planning ahead and having multiple policies in place (one can be a term policy) so that there is still enough of a death benefit to cover expenses. Spending down your cash value will deplete the death benefit. However, if you have those expenses covered, either through another policy, a pension that goes to your spouse, or some other asset, then you are free to use this cash while you are living. Let’s take a look at a few scenarios:

Waiting on Social Security – The longer you wait to take your Social Security, the more you will receive every year from the government. Obviously there is a limit to that, but in general, you can use your cash value from your insurance policy to supplement your income each year you choose not to take your social security. Filling this income gap allows you to maximize your social security benefit return and ultimately earn more money, each year, in the long run.

Lowering Your 401k/IRA distribution – Because you are pulling money from your insurance policy tax free for the most part, you can use less of your 401k or IRA account each year, allowing to grow even more in the long term. Because 401ks are taxed when you take distributions, you would need to take about $130,000 dollars (give or take) out of a 401k to net the same amount you would if you took $100,000 out of your cash value in your insurance policies, all things being equal. By taking income from your cash value, it allows you to leave more money in that 401k/retirement account to earn more interest for the future.

Pension Maximization – This is a very common scenario for government, state, and union employees who receive pensions (teachers etc). There are two different ways to use life insurance to maximize your pension. The first is to take 100% of your pension benefit while you are living, then purchasing a life insurance policy, which provides the income for your spouse to live on when you pass away. In most cases, the premium needed to fund this policy is significantly less than the extra money you are receiving each month by taking the full pension, so you are coming out ahead financially. This is a very common scenario and one that I HIGHLY recommend to mostly anyone receiving a pension. The second scenario is if you already own a policy in place with enough cash value, you can take less of your pension (say 50%), and use your cash value to supplement the income gap. This allows your spouse to still be well taken care of after you pass by receiving not only 50% of your pension and the higher social security, but also whatever remains from the death benefit of your insurance policy.

 

These are just a few of the many high level strategies you can put into place with your cash values in your life insurance policies. Putting your money to work for you can be a very powerful tool and can greatly benefit you and your family financially. You can see why I refer to this as “Building Your Own Bank”. This concludes the four part series on Life Insurance Awareness. Hopefully you have found value in the contents and have come out of this with a greater understanding and appreciation for not just the need for insurance, but also the benefits that certain policies can provide you while you are living as well. Remember, protection first! Protecting yourself, your family and your assets should be a top priority of anyone looking to achieve financial peace of mind and build wealth along the way. If you have any questions or are interested further, I recommend you contacting your financial planner/advisor (or me) and they would be happy to assist you in answering any questions and getting you set up.

Talk to your friends, coworkers or even family members about money and their financial plan for the future, and there is a good chance that the topic of life insurance is not coming up in the discussion. I have found two main culprits that I pose as reasons for this. The first is simple and understandable; most people just don’t like to think about their own death and mortality, let alone talking about it with friends and coworkers. The second reason is that life insurance isn’t sexy to most people. It is viewed as just another bill that would come out of their account every month which provides no “in the moment” sizzle or benefit, unlike the latest stock tip or hot new mutual fund which carries the potential of big, immediate returns. To most people, insurance is synonymous with the phone bill or cable bill. We need to change this type of mindset as it is flawed and inaccurate. The truth is, by dismissing life insurance as just another bill, you are seriously missing out on the many financial benefits a permanent life insurance policy can provide while you are alive, specifically cash accumulation, dividends, tax advantages and the ability to produce multiple income streams. In essence, your policy would not just serve as protection against the unexpected, but also, now a serious financial asset that is a key component to any solid portfolio or financial plan. It is time to open your minds to the all the wondrous potential that building your own bank can offer.

 

How it Works:

You will recall in part two that we discussed the difference between a temporary (term) policy and a permanent policy. Remember that with a permanent policy, no matter if it is Whole or Universal, the premium you pay not only provides death benefit protection, but also allows you to accumulate cash value in a totally separate ledger within the policy. This cash value builds up and grows over time based off of a determined interest rate, and you can use it at your desire while you are still living. The interest rate and manner in which the cash value grows depends on the type of policy you are contributing to. Some Whole Life policies even pay dividends on top of the normal cash value buildup in a given year, which adds even more equity and liquidity to your policy. If you don’t want the dividend put back into your cash value, you can always have the insurance company mail you a check at the end of the year. Your advisor/agent should be able to help you figure out which type of policy and option best suits your goals and needs.

The beauty of this type of asset comes when you decide you want to use some of the cash value that you have built up in the policy. Any of us who have ever tried to get a personal loan from a bank or try to finance a major purchase, know what a hassle and torturous process it can be. Not only do we have hope that our credit score is sufficient, but we also have to worry about loan terms and high interest rates to pay back. If you have “built your own bank” through a permanent life insurance policy, however, you won’t need to go through any of this hassle. It is YOUR money, and there are a variety of different ways to withdraw/borrow the money and to pay it back to your policy if you choose. It is this flexibility, combined with tax benefits that make it a wonderful alternative to regular banks or pulling money out of other assets/investments.

Taxes – A big advantage of a cash value life insurance policy is the tax treatment of the money you withdraw/borrow. Life insurance policies build up cash based on interest rates and dividends, however in most cases, you are not paying taxes on the money you are withdrawing from the policy. The federal government views withdrawing money from your insurance policy as a use of your premiums that you already paid, and therefore those monies are not taxed. Keep in mind, there may come a time when you take out so much of the cash, that you are dipping into the interest/gains that have been paid to the policy, and that money will be taxed. But for the most part, you will not be taxed on any money you withdraw up to the amount of premium you have already contributed. The first money that comes out in withdrawal is considered the premium and the later money down the road is what is considered interest. It is this “First in First Out” taxation method (FIFO) that allows life insurance policies tax advantages over other investments/assets in which the opposite is true.

Withdrawals – This is a simple method in which you just remove a portion of your cash value from the policy. By doing this, you reduce the cash value and also the death benefit. At times, depending on the policy, the death benefit can get reduced as much as dollar for dollar based on your withdrawal, and even more in some instances. It is important to understand the impact that a withdrawal will have on the face amount of the policy that will be paid out upon death. Again, your advisor/agent should be able to make you aware of this impact.

Policy Loans – This is probably the most common, and most recommended method for using your cash value in the policy. You simply are taking a loan for a specified amount of money, and then paying it back over time. The interest rates vary depending on the type of policy, but tend to be a little lower than banks, credit cards and definitely lower than some of those high interest rate personal loan institutions that are all the rage these days. The beauty comes in the different options with which you can decide to pay back the loan. You can pay a monthly installment of both principal and interest like a normal loan. You can let the interest be paid out of the remaining cash value in the policy if you don’t feel like paying out of your pocket. You can even just pay back half of the loan if you want. What bank is going to allow you to do that?? Keep in mind, this is YOUR policy, so you don’t even have to pay back some or even all of the loan. However, any unpaid loan or interest will obviously decrease the future cash value and death benefit that gets paid out when you die. This is not something I recommend, but it just goes to show that many options are there if you need them depending on the circumstances. The most important point is that once you pay back the loan, THE MONEY IS BACK IN YOUR POLICY CASH VALUE TO BE USED AGAIN AND AGAIN in a similar manner. IT IS YOUR MONEY STILL. IT DID NOT DISAPPEAR OR GO TO THE POCKETS OF TD BANK OR WELLS FARGO! You can see why building your own bank and using a permanent insurance policy to fund investments or major purchases can be a great alternative to banks and other assets. Let’s take a look at a common real world example to illustrate.

 

Using Your Cash Value: A Real World Example

The process of buying a car can be painful in many ways, from getting the hard sell from a pushy salesman to having to negotiate numbers and haggle with the finance manager. The final numbers can cause the most pain, as depending on your credit score, the interest rate can be anywhere up to 13-14% when you finance the car. Let’s look at an alternative to financing through the bank and, instead, use the cash value from your insurance policy. Picture yourself on the car lot and after all of the searching and research and test drives and number crunching, you have finally found the car you want. After taxes and tags etc, the final purchase price comes out to $20,000. Let’s assume, for argument’s sake, that you have decent credit (call it a score of 700) and to finance it through the bank/dealership for 48 months, you are being charged an interest rate of 7.5% apr for a monthly payment of $483 per month. This is not too bad, although these numbers will change with a lower credit score, but for now let’s do the math:

$483 x 48 months = $23,200

In other words, at the end of the day, after the car has been paid up, you will have paid $23,200. Good news, after four years, you own the car. But let’s take a look at how those numbers would look if you used your cash value from your insurance policy. Instead of financing through the bank, you decide to take a policy loan of $20,000 out of your cash value. The insurance company interest rate varies by company and type of policy, but 6% is a good average number. So you walk in, pay the $20,000 for the car and drive off. Now the business of paying back the policy loan comes into play. Keep in mind, we can create a flexible payment structure to reflect a variety of different terms and options, but for now, let’s assume the same time table. We will be paying back this loan over the same 48 months. Now with a $20,000 loan and 6% interest rate, you will be looking at about $470 a month for 48 months. Obviously the point of this example was not to illustrate the $13 a month difference in payment, so let’s do some more math:

$470 x 48 months = $22,560

This doesn’t seem like much of a difference either, right? At the end of the 48 months we will have spent $22,560 for the car, not even a $700 difference from financing it. The difference lies in what happened to that money that we paid. By financing the car, we are paying the bank $23,200 over four years. That money is gone, and we will never see it again. USING A POLICY LOAN, WE ARE PAYING OURSELVES BACK THE ORIGINAL $20,000 THAT WE TOOK. THIS MEANS THE MONEY IS STILL OURS TO USE AGAIN! The only amount that actually was lost for us was the interest that we paid to the insurance company for the loan. The rest of it went back into our insurance policy cash value.

$22,560 – $20,000 = $2,560

So if $20,000 went back into our policy and is ours to use anytime we want, THE ONLY REAL COST OF THE CAR, AT THE END OF THE DAY, WOULD HAVE BEEN $2,560, which represents the interest to the insurance company. Now, once it is paid off, you can use the $20,000 for something else if you would like, maybe a down payment on a home. This is a simple, yet strong example of the power that your accumulated cash value has when used to invest and make large purchases. Think of the world of possibilities that exist out there using this method. This is what is so exciting about the concept of building your own bank. Whether you are buying real estate, investment properties, starting a business, buying a car or paying for your kids to go to college, having your own bank with which to draw funds from to finance these purchases makes life a lot easier in the long run and allows you to grow more and more equity and net worth over time. In the fourth and final part of this series, we will look into contribution amounts to fit your budget, and also some more advanced ways to use your permanent life insurance policy to build wealth, create multiple income streams and finance the life you have always wanted for yourself and your family.

If you remember, in part 1 of this series on Life Insurance Awareness, we talked about the value of having that protection in place, in case of the unexpected happening. I assume from the fact that you have decided to read part 2, that you actually see the importance and necessity of having yourself and your loved ones protected. Great news! However, now that you know that you need insurance, you may be thinking, “Yeah but how does it work? What are my options.” Life insurance may seem complicated on the surface, with many different moving parts, but when you dig deeper, it really is fairly simple at its core. This article is designed to provide you with a greater understanding of the basics on how it works, the different types of insurance you can choose from, and what makes each one a potentially good or bad option. By the end of this article, you will be well on your way to becoming comfortable with everything. Soon you will be ready to make the choice of what type of policy and coverage is best for you and what is the best way to protect yourself and your family, which is the ultimate goal. Protection first!

 

Key Terms and Elements of a Life Insurance Policy:

This section is designed to help you understand some of those moving parts and the terminology commonly found in most life insurance policies. You may hear a term or two referred to slightly differently depending on the person you talk to, but for the most part, these are all standard components you will find across the board.

 

Face Amount – This refers to the amount of death benefit coverage paid to your beneficiary when you pass away. Simply put, if you purchase a policy on yourself with a face amount of $500,000, this means that your beneficiary will receive $500,000 if you die, as long as you are still covered.

Premium – The premium is the amount of money that you agree to pay the insurance company for the coverage, very similar to an auto or homeowner’s policy. The annual premium is calculated by the insurance company and then you have the option of how you want to pay this amount over the course of a year. You can be billed annually, quarterly or the most popular and recommended, monthly. Most companies now a days have an automatic withdrawal set up, where the money can come directly out of your checking account every month on a particular day (15^th, 30^th etc).

Rating – Your rating is your classification for the amount of risk that you represent to the insurance company. In simpler terms, given your health, age, gender and other factors, how likely is it that you will die sooner rather than later. The greater a risk you are to the insurance company to die soon, the more expensive the coverage will be. Ratings vary depending on the company. The most common ones are standard and preferred. Standard represents the average, baseline for risk. If your health is above that standard, you may receive a rating of preferred, preferred plus, or even elite, depending on what that company calls it. A below average/higher risk will see ratings of substandard etc. Usually this information is collected via a paramedical evaluation, which is a series of medical questions about your history, conditions, and other factors designed to assess your level of risk to the insurance company. There may be a urine or blood test required as well, depending on the amount and type of coverage you are seeking.

Beneficiary – The beneficiary(s) on the policy is the person(s) you designate as entitled to be paid the face amount in the event of your death. You can choose primary beneficiaries and also contingent beneficiaries. The contingent beneficiaries will only be paid if the primary beneficiary is no longer living. In most cases you usually cannot designate a minor as a beneficiary.

Riders – A rider is an add-on option to your policy which allows you to further customize it and add additional benefits. These benefits can range from adding on more insurance in the future without having to go through underwriting again, to waiving the premiums for a certain period of time if you become disabled, to accessing a portion of your death benefit early if you become terminally ill. There is even a rider which can cover your child, allowing you money for help with final expenses, should the unthinkable happen and you lose a child. Some of these riders are free, but most carry a certain charge, which is usually no more than a few dollars per year.

Settlement Options – This is the manner in which the death benefit proceeds are paid to the beneficiary. In most cases, the beneficiary chooses the option after the death has occurred. The most common settlement option is a lump sum, however there are other choices, including those that cover a specific period of installments or interest payments, which may be more beneficial depending on the beneficiary’s financial situation at the time. No worries, a good advisor/agent will help them make the right choice that is best for them and the family.

Cash Value – Some policies, depending on the type of life insurance you purchase, allow you to accumulate cash value over time. In this case, the premiums that you pay, not only cover the cost of the insurance coverage, but also build up cash value over time, allowing you to earn some interest, and provide you with available cash that can be withdrawn or taken as a policy loan at your discretion, while you are LIVING. The cash value refers to how much money is available to you NOW, as opposed to the face amount, which refers to how much will be paid out when you die. We will cover this more when we get into the different types of policies you can purchase.

 

Different Types of Life Insurance Policies:

Understanding the various types of life insurance policies available helps you determine what is best for you. Your financial planner/advisor should be able to help you choose which option is optimal for you and your family, based on goals, needs and financial situation.

Term Insurance – This is, in most cases, the simplest and most affordable type of life insurance. Essentially you are paying for temporary life insurance coverage for a specific period of time (or term), and once this period is up, you are no longer covered. Terms can normally range anywhere from five years to as high as 30 years in some cases. The longer the term, the more expensive the coverage will be. This type of policy is used solely as life insurance coverage and does not accrue any cash value over time. The only time any money can be received or used from the policy is if the person insured passes away during the designated term, and the face amount is paid out to a beneficiary.

Pros of Term Life: Obviously, the largest benefit to purchasing a term policy is the cost. For some families or individuals living on a very tight budget, this may be the only option for them. Also, in some cases, the temporary nature of the policy may fit their needs. It could be a situation where a family is just trying to add some coverage on top of existing coverage, just for a specific period of time, such as until the kids get older and move out of the house, or until the mortgage is paid off etc. Finally, the cost is fixed. The premium never changes over the course of the term.

Cons of Term Life: The biggest drawback to a term policy is the actual fact that it is temporary. You are essentially renting coverage from the insurance company for a specific period of time. If you are fairly healthy and do not experience a pre-mature death, the policy will most likely lapse before it pays out. This means that you are basically paying for something that you will never use. Some studies have estimated that as few as 2% of all term policies ever pay out, though those numbers vary by company and term length. However, there are riders available on some term policies that allow you to convert your term insurance to permanent insurance at a certain time. If you purchase a term policy, I would almost always recommend this rider. The other main negative is that there is no cash value build up to the policy. Essentially the money that you are putting into the policy provides no benefit or use to you other than a death benefit in case you die. Also, if you are older, less healthy or a smoker, term policies tend to be a bad value, since you are paying a much higher premium than you would want, when compared with your likelihood of actually having the policy pay out. Term insurance for older or unhealthy people tend to be a bad buy, particularly for smokers.

 

Permanent Life Insurance – This type of policy provides lifelong protection, as long as you pay your premiums. There is no term or temporary component to it. If you purchase permanent life insurance, and continue to pay your premiums, the policy will pay out upon death, no matter when it occurs. The policy remains in force until death. Some policies can be structured so that you only have to pay premiums to a certain age, like age 65, to have permanent coverage for the rest of your life. You will also accumulate cash value on a tax deferred basis, which can be used while you are still living. This is a key component that can make it a very attractive option for people looking for protection, and also a mid-long range savings vehicle that builds up over time.

Pros of Permanent Life: I tend to favor permanent insurance for two reasons. First, the coverage will last you for the rest of your life, as long as you pay your premiums. Keep in mind, this does not mean you have to pay premiums forever. There are ways to structure the policy which allows you to pay premiums only up until a certain age or time period. No one can predict the future or what will happen over the course of the next 20 years, so it is good to have a permanent policy in place now, while you are healthy and insurable. Second, the cash value that builds up in a permanent policy means that money that you are paying into it does not go to JUST insurance coverage. Your money is actually going into a savings vehicle which allows you to access it while you are still alive. Liquidity is a very important notion that I preach to all of my clients. To me, a term policy provides no value outside of the death benefit. The money you put into it gets locked into a gamble that you will die within a certain time period. The only way to ever touch this money again is if you die during the term. With permanent life insurance, the money you put into it does not just go away. It builds over time in sort of your own personal bank, allowing you to use it at some point in the future if you need it. I have seen clients use it for a variety reasons, including bills, college tuition, a down payment on a house, an investment property, a car, a vacation and even to start a business. The idea of letting the money work for you and earn even more is a concept we will get into in part 3.

Cons of Permanent Life: The main negative to permanent insurance is the cost. Obviously, if you are purchasing a permanent policy that is guaranteed to pay out (if you pay your premiums), the premium is going to be higher than that of a term policy. The insurance company knows at some point, they WILL be paying that face amount, whereas, with term life, the insurance company does not plan on ever paying most of the policies that are purchased. The saving grace to this drawback is that with a permanent policy, your money is not just going away. Rather it is accumulating and will be available for you to use at some point in the future. Yes you are paying a higher premium, but that extra money you are spending is going into building a cash account. You have both a death benefit AND living benefits of this policy. This is why these policies can be good mid to long range savings vehicles.

With that said, there are two main types of permanent life insurance policies, Whole life insurance and Universal life insurance. Whole life insurance locks in a set premium payment from day one of the policy, which never changes. The policy remains in force as long as you continue to pay that amount. Also, the cash value accumulates at a fixed, guaranteed rate. However, some insurance companies do pay dividends, which can be added into the cash value. Universal life insurance allows you the flexibility to alter your premium payments, death benefit coverage, and also cash value accumulations. Also, the cash value has potential to grow at a more rapid rate, based on certain factors. There is a minimum payment required to keep the policy in force. However, due to the risk/cost of insurance that increases as you get older in this type of policy, paying the minimum, or some other low amount, drastically alters how much cash value builds up in the policy. This makes them a riskier proposition. There are certain situations in which Universal life insurance is a better option, but for the most part, if you are looking for a consistent, predictable payment, and cash value accumulation, Whole life insurance tends to be the best bet. It all comes down to talking to your advisor/planner as to which one works best for you. Part 3 of this series will focus on the nuts and bolts of using a permanent policy as a savings strategy and how to benefit from its cash value while you are still living.

Of all the things that I get to help clients and families with on a daily basis, this may be the most important for them and definitely one that I am most passionate about. Close your eyes and imagine that beautiful life you have built for yourself; great job, nice place to live, incredible family. What would happen to all of those things if you were to unexpectedly pass away? Life insurance is designed to replace the income, wages and assets that people and their loved ones rely on that are lost due to death. The proceeds from life insurance are paid out to a designated beneficiary, tax free (a key factor which makes it a wise investment), and are typically used for the mortgage, bills, groceries, college savings, child care and retirement. It tends to be a touchy subject with most people, because let’s be honest, who likes to think about and plan for their own death? The problem with this thinking comes when the unexpected does, in fact, happen, and your family and loved ones are left scrambling to make ends meet, in addition to dealing with the grief. At the end of the day, when you lay your head down on your pillow, it is comforting to know that if something happens to you, your family and loved ones will be taken care of. September is Life Insurance Awareness Month, and I am delighted to be able to take this time to shine a spotlight on the need for such a critical piece of a solid financial plan. This will be the first of a four part series designed on going over the basics, the different types of insurance, the pros and cons of each, what the best choice for you may be and also the common myths surrounding life insurance that are unfounded. Let’s dive right in and get you protected!

Protection First

This is one of my major philosophies of financial planning. Many people want to jump right into the stock market or real estate or some other investment the minute that they get a spare dollar in their hands. Some people want to just go shopping, or go on lavish vacations. While investing the money is sure better than blowing it on ANOTHER pair of shoes, we have to first make sure that our income and assets are protected, before we take any risk that comes with spending/investing our money. The central idea of “Protection First” is that if your money, assets, and income are not protected, you are exposing all of your hard earned wealth and future to significant risk. I don’t just mean risk of the market going down or your investment going belly up, but also the risk of pre-mature death, disability or medical emergency that will inevitably place an enormous financial burden on your loved ones in your absence. You have insurance on your cars and home to protect yourself from a potential disaster, right? Why would you not have the same protection on your life and your income? The most accurate statistic, unfortunately, is that 100% of the people on this planet will eventually pass away. It cannot be disputed. So when you ask, “who really needs life insurance?” My answer is, EVERYONE!

 

Common Life Insurance Myths Debunked

Now that you have a better idea of the value that life insurance can provide, let’s put to bed some of the common complaints and myths surrounding it.

 

“I have Life Insurance through work, so I don’t need anything else.”

This is, hands down, the most common response that I get from clients when asked about their life insurance. Honestly, having life insurance through work is great. I am glad the companies are offering it and people are taking advantage of it. It definitely helps. However, the problem with life insurance from work is two-fold:

 

• It is only a tiny amount of coverage, and that is just designed to help with immediate expenses, funeral costs etc, not meant to supplement years of future of income that will be lost due to the death of a loved one. Think about the life insurance you have from work. It is probably some multiple of your salary, whether it be 1x salary or 1.5x salary. Is that really going to help your spouse, or children, or loved ones down the road, three, five, ten years from now? The mortgage doesn’t stop coming just because you passed away, neither do the credit card bills or tuition for Junior’s college. What if you are in sales or depend on commission/bonuses for the bulk of your income? That whole 1.5 x salary number looks pretty paltry compared to what your family actually needs and relies on. Experts recommend anywhere from 6-8 x your salary needed in coverage, and if you are in your 20’s, this number probably goes up to 12-15 x salary.

 

• Life Insurance from work, in most cases, is not portable. Once you leave that job, you do not get to retain the coverage and take it wherever you go free of charge. Your coverage usually expires the day you leave or 30 days after the end of the month that you leave, depending on your company’s benefit guidelines. That is why having a policy outside of your job or career provides the most dependable and long lasting form of protection possible.

 

“My wife doesn’t work. She stays home with the kids. She doesn’t need insurance.”

While it is true that your spouse does not necessarily provide income in the form of wages, in this scenario, he/she provides a tremendous value to the family that needs to be accounted for and protected against in the event of a death. If your spouse passes away and you have young children, who will watch them during the day while you are at work? Anyone who has had to spend money on day care knows that it can be financially crippling. Did your spouse plan to go back to work when the kids got older to help pay for college or some extra money for groceries or bills? If he/she passes away, those are lost wages that are gone forever, and need to be replaced. This is where the planning is critical. Having a plan in place makes it easier to account for and handle the unexpected.

 

“I am too young to worry about life insurance. I don’t need it right now”

I would argue in this scenario, the opposite is true. Being young and healthy is the BEST time to purchase life insurance, particularly if you are using a permanent cash value life insurance policy as a wealth building tool for the future (basically the money that you pay into the policy grows over time and is available for you to use throughout the course of your life, but I will get more in depth on this in a future article). The cost of life insurance is based on life expectancy, taking into account both your age and health. To put it simply, the lower the risk you are to the insurance company of dying anytime soon, the lower the cost you have to pay for the coverage. What better time to take advantage of being young and healthy than right now? Maybe you plan on being single for your entire life and don’t think you need to leave any money to any loved ones if you die. I would say, be careful with that thinking. Life changes, and our needs and wants change over time. I once had a client who swore to me he would never get married or have children, and therefore he did not think he needed coverage. A few years later, he found himself engaged with a beautiful baby girl. The problem was, he was older and developed a few health conditions that made him a greater risk. His insurance was three times higher than it would have been had he gotten it when I initially mentioned it to him. Take advantage of your youth and plan for the future now. You will be much happier that you did.

 

“I just can’t afford life insurance right now. I have too much other stuff to pay for.”

This is probably the one objection that I am most sympathetic to. It is difficult when a family is struggling to make ends meet, yet doesn’t have any life insurance coverage. The problem is, as hard as it is now, think of how much more difficult it would be to make ends meet if one of the parents or spouses passes away unexpectedly. It is a sad reality, but one that absolutely has to be planned for. On a brighter note, basic life insurance coverage is nowhere near as expensive as people think. Almost all families should be able to afford something, particularly if you are able to shop around and find the best price. This is where teaming up with a financial planner can be most effective. A financial expert who knows the game inside and out will be able to price shop and find you and your family the best possible coverage that fits your budget. He/She may also be able to breakdown your financial situation to be able to find a few extra dollars each month in your budget with which to finance it. Even if the coverage is minimal, something is so much better than nothing, particularly when you consider the alternative and the what if scenarios that could happen without it. There are also options on certain policies which allow you to purchase more/different coverage in the future should you need it and your financial situation improves. I will get more in depth with that topic next time.

 

 

The bottom line is that life insurance is a critical piece to any person or family’s financial plan. Protecting your income and your family comes first. There are so many different types of insurance, from cheap to expensive, temporary to permanent, and so on, that there will almost assuredly be something out there that fits your needs, long term financial goals, and most importantly, your budget. Part 2 of this series will focus on the basic components of a policy, an overview of the different types of policies, their pros and cons, and also the many features and options available to help you find exactly what you need. I look forward to continuing to guide you on this journey to protection, wealth and peace of mind.

The last margarita has been poured. The last putt on the 18^th hole has fallen. The cover has gone on the pool. Yes, the ball has dropped on another summer, and those depressing blues of returning to a rote and predictable existence have crept in. What may be even more depressing is checking your bank account and realizing how much you have spent on all that summer fun. The average American household is projected to have spent $1,798 on vacation this summer, an increase of 11% from the year before. How much did you spend? How about those little day trips or weekend excursions to the shore, or the city for some outdoor culture and shopping, or a new golf course? Add in back to school shopping for the kids and countless nights out to eat and drink, and you have the makings of a fun, but pricey summer.

The end of the summer is always a good time to step back, re-evaluate and get back on track financially. One of the main issues I encounter with clients, or through any financial education I do, is that people are not saving as much as they should, at any time of year. This article is focused more on short term saving; the liquid, safety net, “there when I need it” fund, the Christmas savings fund, the “Next summer we are definitely going to Hawaii” fund, the emergency fund, so when the car breaks down you aren’t eating Ramen Noodles for three months fund. Today’s article is not delving into retirement or mid to long range savings. My goal today is to make everyone aware that we need to start saving more money. Period. Bottom line. The good news is, there is no better time than right now to start. The end of the summer provides a great opportunity to get going, and I have provided a few tips to make this transition easier.

 

Embrace Routine:

One thing that the end of summer signifies is the return to a life of schedules and routine. The kids are back in school. We go back to work with no vacation days in sight for a while. More weeknights are spent at home on the couch with a glass of wine and the television. It may seem mundane and robotic, but the good news is, we tend to spend less during these times. Embrace routine and try sticking to it. That spontaneous, spur of the moment trip to the amusement park won’t happen in November. Use this to your advantage, and allow yourself to put away some of those dollars that would have been spent in summer indulgence. Don’t just blow it on something else, like a new pair of shoes.

 

The Season for Sacrifice:

This goes hand in hand with the first tip of embracing routine. The summer is the time for letting loose and being a little more careless with your spending. If this is true for you, then the next few months have to be the time for saying “no” and making some more sacrifices financially. Do you stop and get that five dollar latte on the way to work every morning? Why spend $30 a week when you can spend half that? Maybe grab the latte on Mondays to get the week going, and Fridays as a little of end of work week treat. The other days, bring coffee from home, or spend less on a regular Dunkin Donuts coffee for $1.39. There’s nothing wrong with bringing lunch from home a few days a week either. How many nights a week do you go out to eat? Maybe this number is higher in the summer, maybe it is not. Personally, I know I go out to eat a lot more in the summer months, whether it’s part of a nice night out or just a way to break up the monotony of cooking. Either way, try reducing the number of times you go out to eat; particularly if you have kids, you could be saving a lot. Remember, it’s all about commitment to a routine. Sit down one night this week and map out a strategy. You will be surprised how many different ways you can save money in your daily life just by sacrificing something small at times. No one is saying to totally give up your lattes (they do taste pretty good); recognize though that moderation is crucial, and can make a big difference in your spending/saving habits.

 

Setting Weekly/Monthly Savings Goals:

This is probably the most important advice I can give. What good is cutting back on your lattes if you don’t put the money away or have a plan for it? Depending on how you get paid (weekly, bi-weekly etc), try to establish some sort of savings goal. Maybe it is 50 dollars a week, or 100 dollars a pay check, but there has to be some sort of goal to keep you focused. Once you have it down cold and repeat it, it starts to become habit. Obviously it is all relative to how much income you have coming in and what debt/bills have to go out the door, but you can easily curtail the numbers to fit your budget and lifestyle. Just think what cutting out four lattes and one “dining out” trip a week will do for your expendable money. That’s an easy 50-60 dollars a week right there, at minimum.

There is also the concept of “paying yourself first” that you can put in to place. After the mortgage/rent and bills are paid, immediately deposit your savings goal into a separate bank account. This will be done BEFORE you go grocery shopping, or take the kids to McDonald’s, or go out for drinks with the boys to watch the game. The idea here is once you have saved what you need to save, the remaining money will be used as your budget for everything else. We have a tendency to spend first, then save what is left. I recommend doing the opposite. Save first, then spend based on what is remaining.

No matter what methods or strategies you employ, saving money is one of the fundamental pieces of financial health. Future articles will focus on more long term savings strategies such as 401k, IRA, brokerage accounts and cash value insurance plans. For now, try to get into the habit of increasing your short term savings. It starts with a mindset. Saving money is a commitment and a frame of mind. Set goals, put a plan in place, and stick to it. You will be surprised what you can accomplish. Who knows, you may find yourself paying for that trip to Hawaii next summer out of your new found vacation fund, as opposed to your paycheck.

 

 

Hello everyone! Welcome to my financial advice blog, entitled Peace and Wealth. Within the parameters of this space, we will explore topics that affect your everyday financial life, and more importantly, your financial future; topics that range from credit card and student loan debt to the ideal 401k contribution; from the right way to pay off your mortgage to the best life insurance for your budget.

Aside from physical health, the most important facet of daily life is your financial health and stability. I would argue that your financial well being affects your physical and mental health, as well. Let this blog serve as a sort of “personal trainer” for your financial fitness. Feel free to reach out with questions or topics you want to see covered, or even if it’s a simple personal question, I would be happy to give my thoughts and advice. Who knows? Your question may save someone else’s financial life too. Financial planning and education is my life’s passion, and I feel privileged to be able to make a positive impact on the lives of others. Thank you for being a part of that passion. Now let’s get on the road to financial bliss!