Permanent Life Insurance 101

All permanent life insurance policies are not created equally. Yes, all permanent life insurance policies provide protection for your lifetime and yes, they typically have some capacity to build cash value. How these policies build cash value and how great their potential is for the amount are key differences among them.

Let’s take a look at each type of permanent policy:

Whole life: this is the insurance policy that most people think of when they hear permanent insurance. It also happens to be the policy that will have the highest premiums. If you pay your premiums on time, your coverage will stay in force and your policy will build cash value. This type of policy works great for the individual who is going to buy a policy and stash it in their filing cabinet.

Variable life: this policy provides death benefits and cash values that vary with the performance of a portfolio of underlying investment options. You can allocate premiums among a variety of investment options offering different degrees of risk and reward: stocks, bonds or a fixed account that guarantees interest and principal. A variable policy is good for someone who is willing to assume investment risk to try and achieve greater returns.

With such a policy, you are shifting the investment risk from the insurance company to yourself. Good investment performance would provide for the potential for higher cash values and death benefits. However, if the underlying investments perform poorly, cash values and death benefits will drop accordingly.

Universal life (UL): this policy can be great if you would like to earn interest within the policy while getting more flexibility than a traditional whole life policy allows. You can choose your premium payment schedule and you might have the potential to earn more cash value. Most UL policies will earn a minimum interest rate, giving you a level of security about the earnings. You can also borrow or take withdrawals from the cash value that accumulates in your policy.

Indexed Universal life (IUL): IUL’s can credit interest based on the performance of independent financial indices, unlike other universal products, which credit interest based on rates declared in advance by the insurance company. The most popular indices used for IUL’s are stock indices calculated without dividends. Please note, the money in an IUL policy is not directly invested in any of the indices.

IUL policyowners may decide how much of the policy cash value is allocated to the index feature and how much is allocated to a fixed-interest option. Cash value allocated to the index is usually credited with interest based on the change in the index value from one year to the next (Annual point-to-point). Each index option includes a maximum (cap) and minimum (floor) rate that protect consumers from loss but limits upside growth. Generally, these are subject to change by the insurance company, though they will never be reduced below a contractual minimum.

Variable Universal life (VUL): a VUL can give you the flexibility of a universal policy but adds an investment element. You oversee how the parts of your premium payments not needed for your actual cost and charges (net premium) are invested. You have a choice of investment options (called subaccounts), and you decide how much of your net premiums should be allocated to each of the options you select. The subaccounts can invest in stocks, bonds and other funds.

Since the cash value of your policy may be tied to the financial market, this policy provides the potential for returns higher than a universal policy, but it can also lose value if the investment results are poor. A VUL is good from people who like the investment element, can fund the policy properly and have adequate time to allow it to potentially build cash value.

Survivorship or Second-to-Die: this policy is designed to cover two people. It will pay a death benefit once both insured people have died and is often less expensive than two separate policies.

These types of policies are often used in estate conservation strategies, especially in conjunction with an Irrevocable Life Insurance Trust (ILIT), to pay estate taxes; this can be used to preserve a wealthy couple’s estate so it can be passed on to the next generation or to a charitable organization. Survivorship policies are often recommended if one person would otherwise not be able to qualify for life insurance.

Whole, variable, universal and variable universal life policies come in survivorship versions.

credit explained

Credit Should Have Been Explained This Way

Credit is really, really important. Don’t agree? Take a look at the United States National Debt figures. This country wasn’t built on paying for things with cash. Yes, our government hasn’t done the greatest job with managing debt over the years and that inability to effectively manage it has had a lasting impression on individuals when it comes to managing their personal credit.

For starters, most people have serious trouble defining credit. If someone were to ask you what credit is, would you be able to rattle off a simple definition? If not, don’t worry, credit can be summed up with this acronym, O.P.M. (Other People’s Money). Simple right? Now, depending on what source you reference, you may see a definition similar to this; credit is the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future. But why is something that’s so fundamental to our country’s existence such a misunderstood concept?

The Urban Financial Services Coalition (San Francisco Bay Area chapter) was hosting a workshop on understanding the importance of credit. During the Q&A portion, a young man wanted to make a comment about how he learned about credit. He stated that his story was simple and one that should be shared with everyone. The young man’s story starts off with him being in college and his mailbox was full of credit card offers. He knew that establishing credit was really important, but didn’t know the first thing about it. Up to this point, he only heard things like how credit was bad and that you should avoid it all cost. Note: for those of you who believe that, please consider changing your opinion. The young man decided that he needed to seek counsel as it applied to getting this credit card and he reached out to someone who he knew was really good with money…his mother. Note: when seeking financial advice, please consider a professional or at minimum, someone who is actually good with money.

During this brief 10-minute conversation with his mother, the young man learned how to ensure that his credit would always remain stellar. His first question to his mother dealt with which card should he select and from which financial institution. He had offers from both banks and credit unions. His mother simply said pick the card that you think looks the coolest. Why on earth would she say that? Well, the mother knew that any financial institution sending such mail wouldn’t be offering a college student any great credit card deals. It would be their basic student card, which probably wouldn’t have an annual fee. And for applying, they would probably get a t-shirt or some other tchotchke.

The young man didn’t think picking a card was that easy and expressed to his mother that he “heard” that he should be concerned about the interest rate prior to applying for a credit card. The mother gave him a great lesson about interest that all should take heed. The interest rate will never apply to you if you pay off your bill in full each month. In case you missed it, it’s worth repeating. THE INTEREST RATE ON A CREDIT CARD WILL NEVER APPLY TO YOU IF YOU PAY OFF YOUR BALANCE IN FULL EACH MONTH.

Reader Challenge: Go out and survey 10 people. Ask the question: What is the biggest thing for you to consider when shopping for a new credit card? Chances are, 8 or 9 out of the 10 people who you ask will say the interest rate is THE most important thing. The sad thing is, if the interest rate is their top concern, then they have already lost. What they are telling you is that they don’t manage money well and are okay with overspending/living above their means and as a result paying their financial institution more money than they deserve.

Next, the young man asked his mother how he should use his brand new credit card. She said make a few small purchases each month and pay off the balance in full when you receive your statement. She informed him that his credit limit would probably be pretty low (it was $200) since he was new to credit, plus the fact that he was a college student. And unless it was a real emergency, he should NEVER get close to that $200 limit. She reminded him that spending on a credit card is like getting a 30-day, interest free loan. If you don’t pay off your balance in full, that dreadful interest will most certainly kick it. She went on further to explain, that as a result of him sticking to this simple process, the financial institution would probably raise his limit. She warned him that just because they raise his limit, doesn’t mean he should go spend more. He should stick to his simple plan on making a few small purchases each month and pay off the balance in full, no matter how high is limit may become.

As a result of that conversation with his mother, the young man never had issues with credit. Of course, his mother didn’t share with him all the moving parts when it comes to credit; like there being 3 credit bureaus, the credit score and how all 3 bureaus report it different, how your credit score is calculated, why checking your credit report from all 3 bureaus each year is extremely important, etc. The biggest thing the mother did for this young man was keeping it super simple. Many of us tend to complicate financial matters and it causes a ton of stress in our lives. This young man has always viewed credit in a positive light, primarily because his credit was indeed stellar, he actually learned how it worked and adopted a great habit early on. It also helped that the person he received the advice from was a great steward of credit.

Not all of us will be fortunate enough to have parents who understand credit and how the game works. Just imagine, what if everyone had someone break down credit prior to getting their first credit card, like this mother did for her son. Debt (credit card debt specifically) probably wouldn’t be much of an issue.

conflicting priorities

Conflicting Priorities

Setting up and sticking to a financial game plan is hard for most individuals. Adding a child to the mix, makes it even more challenging. Parents have tough decisions to make every single day of their lives and one of the biggest financial decisions they must make is deciding how they want (if they have the desire) to fund their children’s college education. In addition to college planning, most parents also need to make sure they are properly planning for retirement. So, which one is more important?

College is not getting any cheaper and with the continual increases in tuition and fees, parents need to seriously consider the various options they have access to for college planning. The most popular vehicle today is the 529 college savings plan. Aside from the 529 plan, parents can also utilize a Coverdell Education Savings account, UTMA/UGMA, Life Insurance, IRA’s or U.S. savings bonds. Each of these solutions has pros and cons, so be sure to consult with your financial advisor about which option makes the most sense for your situation. If none of these options has ever crossed your mind, there are other methods of funding a college education which most of you are familiar with… loans, grants, and scholarships. With grants and scholarships, the money is just given to you, but loans you must pay back. If you can outright avoid loans, please do, but they are a great source of funding and sometimes they end up being the only option.

Retirement is on the mind of every working adult and when that day comes, hopefully you are financially prepared. If you’re employer offers a retirement account (like a 401K), you should be utilizing it. If you’re employer doesn’t offer such a benefit or you are the business owner, then it’s up to you to take care of your retirement program. Depending on where you work, your company may still offer a pension plan, which means the company is putting money into an account on your behalf to be utilized during retirement. Pension plans are slowly becoming a thing of the past because they are extremely expensive to keep in force, thus companies are putting more of the responsibility on the individual to take care of their retirement needs. In addition to those retirement options, the government will provide some assistance via social security. Social security, by itself, will not be able to fully support you during your retirement years, thus you need to make sure to take full advantage of your retirement benefits through your employer if offered. If those retirement benefits are not in place, then you should pick up the phone or send an email to your financial advisor and get to work.

Have you figured out which one is more important? Your answer should have been retirement and here’s why. With retirement, if you don’t setup a plan and stick to it, there are no loans, grants or scholarships to bail you out. At that point, you only have two choices: (1) retire with less money or (2) work longer. Most people probably don’t like either one of those choices but unfortunately that is going to be a reality for many people. College planning is a huge priority for many parents, but there will always be loans, grants and scholarships available. Such options don’t exist when it comes to retirement, so if you are a parent and you are trying to figure out which one to focus on, choose retirement.

buy term

Buy Term and Invest the difference

Many people struggle over which type of life insurance makes the most sense for their situation…term insurance or permanent insurance. The difference between the two comes down to cost. Some experts will say why pay for an expensive permanent policy, when you could buy term (which is way more affordable) and invest those savings into a mutual fund, annuity, stocks, bonds or some other investment vehicle. The idea is that investing that “difference” (premium savings) would replace or exceed the cash value accumulation of permanent insurance.

If you are deciding if this strategy is right for you, you need to seriously consider what best suits YOUR personal objectives and circumstances. Think about this:

  • You may not have the discipline to actually invest the difference.
  • If you need to renew or reapply for your term policy, the cost may become prohibitive as you get older of if you develop health problems.
  • If health problems occur, you could become uninsurable and not even be able to purchase term insurance when it comes time to renew.
  • You need the discipline not only to invest the difference, but also to invest early while the difference between the amount of your term insurance premium and the amount of the premium for your permanent insurance is the greatest. You will need to make up for the dramatic increase in the cost of term insurance at later ages.
  • The investment you choose may not perform as you hoped.

Please make sure to carefully weigh knowledge about your habits and self-discipline along with the benefits, risks, product features, and any current or future charges associated with any insurance and/or investment product before deciding how to address your particular needs. When in doubt, schedule some time with a professional because they can help you sort through all your options and ultimately make the decision that will be in your best interest.


All IRA’s Are Not Created Equally

The individual retirement account (known as the IRA) was created to allow people to stash away money for retirement on a tax favorable basis. There are a variety of IRA’s, some are specifically for individuals and others which serve business owners. There are numerous financial institutions, from banks to mutual fund companies to brokerage firms that will allow you to open such an account. Most people might not be aware of this but there is a huge difference between a bank IRA and a brokerage IRA.

Bank IRA’s are a great place to put your retirement dollars if you are looking for safety and security. Such accounts are going to utilize certificate of deposits (CD’s) or other safe options like money market funds to invest your dollars. You can be assured that having your money here, you will not lose a cent. Plus having your funds placed there allows them to be protected by the Federal Deposit Insurance Corporation (FDIC). Some banks may offer riskier options, like mutual funds (which are not covered by the FDIC), but primarily the safe options are what you will typically see. This doesn’t seem like a big deal on the surface, however, playing it too safe with your retirement dollars could hurt you in the long run. Banking solutions by their very nature are low-yielding, thus this will subject you to purchasing power (your dollar today won’t be worth much in the future) risk over time due to inflation. IRA’s were designed with the intent of being utilized as a long-term financial instrument, which means it isn’t wise to use CD’s or money markets (which are more geared towards short-term goals) to fund your retirement.  A bank IRA makes perfect sense if you are within a couple of years of retirement because you can’t afford to be too risky simply due to the fact that you don’t have enough time to make up any losses. Or, if you just don’t have the appetite to really take any substantial risk with your money, this option is also appropriate.

The brokerage IRA enables you to purchase securities… stocks, bonds, mutual funds, exchange-traded funds (ETF’s), etc. However, by purchasing securities you are adding more risk to the equation. Unlike the bank IRA, you could lose some of your initial investment and you will see your account balance fluctuate over time. This usually scares people but have you ever thought about your retirement account in this manner… what if retirement is 10/20/30 years away, and the market is down and as a result, so is your account balance. If you’re not at retirement age, meaning you have absolutely no need for these funds, then you have only “lost” on paper. Why exactly are you worried? Most people don’t have a good response to that, thus we need to change the way we think about short-term news in relation to our long-term accounts.

No one individual has control over the stock market, but over the long-haul, having money in the stock market can be extremely rewarding for your brokerage IRA. The neat thing about the brokerage IRA is that you are able to invest in a money market type of fund, along with the other riskier solutions. The one thing you want to avoid is having a brokerage IRA open and ONLY having money market funds within it. This happens quite often because people will rollover funds from an old 401k or 403b and the money will just sit in a money market fund (which is the default), not being invested. Or, they will open a brokerage IRA, fund it, and never make a decision on what to invest in. Take full advantage of all your options within the brokerage IRA.


50/20/30 Plan

The budget is the quintessential piece of any financial game plan, however, it tends to be a huge challenge for most people. Some people have even done away with using the b-word because of its negative connotation. Why is it so negative? Well, anytime you hear the word budget in the news, it’s because the government can’t balance it and some item needs to be eliminated.

You never hear the word “budget” and something positive come out of it. This is the exact reason why the average person has such a hard time doing a budget. They are constantly witnessing a group of people (the government) struggle to make sure they can spend money appropriately on a regular basis. Then they look at themselves in the mirror and figure they pretty much don’t stand a chance against the abominable budget.

What’s the solution? For starters, people need to begin to use spending plan instead of budget. Spending plan sounds so much friendlier. Plus, we all love to spend money, so why not focus more on our spending habits as opposed to cutting things out of our lives. A simple paradigm shift is the answer.

All spending plans are not created equally and you must find one that fits your personality. The 50/20/30 plan is a simple spending plan that most people might actually like doing on a regular basis. Here’s how it works: Once you get your paycheck, no more than 50% of it should be spent on essentials…your rent or mortgage/food/transportation/utilities. 20% should be applied to financial obligations…savings, retirement, insurances, investments, paying off debt. 30% is allocated to your lifestyle…so whatever else you want to spend your money on, it’s up to you!

The 50/20/30 plan is a basic framework and its simplicity is the reason you might stick to it. Plus the fact that you’re free to spend 30% of your money on whatever you want, should make you a bit happier about doing a spending plan each month.

timeless tips

5 Timeless Financial Tips

Most people would agree that discussing your finances can be extremely challenging. The biggest hurdle that plagues us…getting started. Just like with anything else, when it comes to beginning your journey to financial glory, you must set a goal. Once the goal is set, now it’s time to take action.

Of course, there is no “one-size fits all” type of approach, and no matter where you are in your life, you may need to address one or all of the following as it applies to your financial game plan:

(1) Create a spending plan (also known as the budget).

How much do you earn? How much do you spend? How much are your bills each month? How much do you save/invest? Try your best to stick to a spending plan each month and have someone hold you accountable when you do not stick to it. Please do not beat yourself up if you don’t stick to it each month because it’s hard to change your spending habits overnight. Grade yourself on a 3-month basis because if you can manage this over an extended period of time, then guess what, you’ve created a brand new habit! And if the conventional way of “budgeting” doesn’t work for you, consider an alternate strategy, like the 50/20/30 plan.

(2) Pay off credit card debt.

We all know that credit card companies make money off the interest they charge on your account. Here are a couple of tips: 1) Stop spending money that you don’t have; 2) Pay off the card with the highest interest rate; 3) Consider paying off the smaller balance (this will give you the emotional jolt to continue to fight against the larger balance) 4) If possible, pay more than the minimum payment each month. 5) Try the debt-snowball technique

(3) Build an emergency fund.

Make sure to have between 3-6 months worth of living expenses saved at all times. Or for those over-achievers, considering having 9 months to 1 year’s worth. This may be a challenge, but you will never be upset with yourself for saving money when an actual emergency pops up.

(4) Determine personal insurance needs.

Many people may be uninsured or under-insured and this could prove detrimental to your overall financial game plan if the unexpected happens. Consider your situation and see if life insurance and disability income insurance provided by your employer will sufficiently cover your needs. If need be, consider owning personal insurance outside of what is offered through your job. Please note that if you change jobs – or lose your job – typically, you will lose those employer-provided benefits, because the employer is paying the premiums, thus you don’t “own” the policy. Personal policies can help ensure that you’re protected, no matter where you work or what happens with your job situation. Also, your age and health play a HUGE role in how an insurance company will set the price of their policy, so please keep that in mind.

(5) Begin/review your retirement plan.

We all work extremely hard, but what do we have to show for all our years of service? Many companies are doing away with pension plans, thus the responsibility of putting money away for retirement falls on our shoulders. Take advantage of your employer-sponsored retirement plans like a 401(k) or 403(b) because these plans allow you to invest monies tax-deferred. A nice advantage of these plans is that they take money out of your check before you get paid. There are also ways to save for retirement outside of an employer-sponsored plan. Consider opening an IRA (traditional or Roth) or a brokerage account. An annuity or life insurance contract could also be an option. If you decide to save for retirement outside of or in addition to your employer sponsored plan consult with a financial professional as you’ll need to be aware of contribution limits, tax treatment, and how the accounts work.

5 reasons

5 Reasons to Buy Life Insurance

Did you know that life insurance is not for those who die? It’s for those who live. If you die and have life insurance in place, the people who you love and care about (your beneficiaries) will receive a sum of money. They can use this money for anything, however, it’s main purpose is usually to help make up for the loss of your income. The money that they receive is generally free of federal income tax and is generally used to address the following:

  1. Daily Living Expenses: help maintain your family’s lifestyle by replacing your current income. The proceeds can help make sure there is food in the refrigerator, the utility bills are covered, the car note is made on time, etc.
  2. Home: help protect your family’s home by enabling them to pay off the mortgage. This is important because it can help them stay where they are comfortable and in a place that is filled with memories.
  3. Education: help safeguard your child’s future by keeping the college fund intact. This will ensure that there will be money for their education no matter what
  4. Final expenses: help to provide funds to pay estate taxes and other expenses, such as funeral cost, outstanding medical bills, etc. This will prevent leaving a financial burden while your family grieves.
  5. Retirement: help ensure a solid retirement for your spouse or partner since you’re no longer there.

While individual needs can be covered by life insurance, it also comes in handy for a business owner. Having life insurance can aid with business continuation. Life insurance can help keep the business in the family according to your intentions by helping your family buy out or maintain the business.

There are many layers to the amazing product called life insurance, and now, you know the “why” behind it.

soon to be parent

5 Planning Tips for the soon-to-be parent

The best time to get money-wise about parenthood should be before a child is born. Most soon-to-be parents are probably thinking about all the glorious elements of being a parent…the snuggling, the baby baths, the feeding, or changing diapers. The last thing newly minted parents are thinking about is making sure their family is setup for financial success. If you are a parent-to-be, preparing ahead of time will enable think through all your options and create a solid financial plan.

1.      Create a (parent) budget

When a child arrives, your family budget will change dramatically. Make sure to factor in the cost of diapers, baby formula, child-care, clothes, toys and the list goes on.

2.      Start an emergency fund

Start saving three to six months of household expenses in an account that you can readily access. For those who wish to be a bit more aggressive, aim for six to twelve months.

3.      Review your insurance coverage

The primary goal is to make sure your family can continue to keep the household going financially if something unexpected were to happen. This will involve conducting a thorough analysis of your life insurance, along with short- and long- term disability insurance.

4.      Think retirement before college

Students have options for funding their education…grants, scholarships, loans and any savings or investments you’ve put aside. You don’t have such a variety of options to fund your retirement, nor can you make up for that time lost. It’s understandable that you want to provide proper funding for your child’s education, but your own financial independence should be the top priority.

5.      Make an estate plan

Make sure your family’s wishes are carried out in the event something happens to you. Your family’s details will end up in court with a judge deciding what he or she thinks is best if you don’t have documents such as a will, trust or power of attorney.

Please make sure to speak with a financial professional as it relates to these tips. Doing so will ensure that you and your family will have peace of mind as it relates to your financial decision making.

5 estate planning

5 Important Estate Planning Documents

One of the most valuable gifts you can leave your loved ones is a properly prepared estate plan. During your lifetime you will have worked hard to acquire various assets (hopefully) and when you leave this earth, the choice is yours about who/what gets those assets. However, this won’t happen without the proper planning. Don’t leave it to the state to make decisions about what happens to your assets upon your death. The first thing you should do is touch base with an estate planning attorney, as they will be well versed in the legal requirements for the state in which you reside.

Here are 5 estate planning documents that you should familiarize yourself with:

1.      Last Will and Testament – a will is a legal document which allows you to:

  • Designate who will receive your assets after your death; this avoids having your assets divided according to the state’s formula
  • Nominate an executor; they will manage your estate, pay your expenses, debts, taxes and distribute your estate according to the instructions in your will
  • Nominate a guardian for your minor children

2.      Durable Power of Attorney for Health Care

  • With this document, you name a person of your choice, and who has agreed, to make medical decision for you and to act in your behalf in health care matters is you are unable to make those decisions. This authority expires upon your death

3.      Revocable Living Trust

  • In a revocable living trust, your assets are transferred into a trust, generally administered by you for your benefit during your lifetime and transferred to your beneficiaries upon your death, without the need for court involvement. Your Last Will and Testament, which is supplemental to your trust, covers any assets that have not been transferred into the living trust. A revocable trust allows you to retain control of your assets during your lifetime, quickly transfer them to your beneficiary upon your death and avoid the expense and delay of Probate Court. This trust also helps to reduce or eliminate any federal estate taxes.

4.      Durable Power of Attorney for Property Management

  • This document designates and authorizes a person of your choosing to make financial decisions and manage your assets on your behalf to the same extent and effect as if you were present in person. Durable means that they may also act for your in the event you become incompetent or incapacitated.

5.      Living Will

  • A living will allows you to state your desires regarding the use of life-support devices to prolong your life in the event you are stricken with a terminal illness or when there is no reasonable hope for recovery from an injury or illness.