The Big Myth of “Buy Term Insurance and Invest the Difference”

The thinking behind this strategy initially appears very sound. The cost of whole life insurance is more expensive than term in the early years of a policy. Therefore, you should buy the same coverage for much less premium using a term policy and invest the amount saved between the two premiums into mutual funds. This difference, over time, will create more wealth for you and your family, while at the same time giving you plenty of coverage should you die prematurely. When you get older and the term policy gets far more expensive due to your advancing age, drop all coverage because you will have accumulated enough wealth for your retirement and leave money behind for your estate.

FactMyth

When I was 22 and wet behind the ears I thought the above paragraph was gospel and preached it to anyone who would listen. As with most great myths, there is always some truth and this is no different. The costs of whole life premiums are more expensive in the early years for the same amount of death benefit when compared to term rates for the same coverage.

Now here is the other side of the coin on the rest of the myth. Nobody (or very close) actually invests the difference in their premiums into an investment vehicle. So if their whole life annual premium is $3,600 and their annual term coverage is $600.00 the theory is they are saving $3,000 annually or $250.00 per month. If they put that amount every month inside a mutual fund then in 30 years they will have loads of money. The biggest hurdle is putting away that $250.00. If you are still a “buy term and invest the difference” kind of person, have you done what is described above? If you have, congratulations you are part of the ½%. Almost nobody is actually implementing this strategy but plenty are talking about the theory.

Financial success is not about theory but about actual results. If almost nobody is using the strategy, than it’s great for sound bites, but lousy for results. Let’s also examine the need for life insurance toward the end of your life. You need to look no further than the ads on television to see the huge market for life insurance at the end of your life. Big companies with celebrity spokespeople have been on the air every day for over a decade paying for advertising selling small, end of life, burial insurance. The advertising budget alone is staggering which asks the question, “How many policies do they have to be selling to pay for that advertising, their other expenses, and make their profits”? The non-scientific answer is a whole bunch! However, according to CSG actuarial in 2013 over $400,000,000 worth of these policies were sold spread out over 613,000 people just in that calendar year!

What does the information tell you about this nation’s financial model? Why would you buy one of those expensive policies in your later years? (Yes, they are expensive in relation to the amount of coverage you receive for your premium) The only reason is because you are not sure if you have enough liquid money saved to bury you and cover your final expenses! This is a great barometer of how, “buy term and invest the difference” has done servicing the American public.

In my own life, my mother passed away in 2010 just after the huge economic collapse of the previous couple years and before any real rebound in any of the financial or real estate markets. My mom had done well for herself and worked hard starting at the age of 17 years old. She certainly had acquired enough to cover her final expenses and leave behind a nest egg for her three children. However, she happened to die at a very inopportune time in financial history. Her home had decreased in value by 35% as did most of her investments (my Mom was very independent and did not ask for my help until the damage was done). I found out she had most of her money inside market vehicles that had gotten pounded during the previous few years.

So when she passed away she left considerable less of an estate behind than she believed she was going to just a few years earlier. She was not unique in her circumstances because that same scenario happened to many millions of Americans who passed away during those years. I am very grateful for the money she did leave for me and my family and we are fortunate that we did not “need” her money to survive. However, she really had no business being in mutual funds or stocks at that point in her life.

Had she been shown how a properly designed permanent life insurance program worked she could have long since stopped making any premium payments, had much tax free cash for her retirement years, and left behind hundreds of thousands of dollar more in her estate with a guaranteed death benefit. Many times it’s not what you don’t know that hurts you the most, but rather what you think you know that is false that’s the real killer.

If you are interested in learning more about a properly designed whole life policy to benefit you and your family please visit us at Perpetual Wealth Systems or call us at 586.944.0794.

Do you review your beneficiary forms?

The importance of an annual review of your beneficiary forms on your different accounts and/or policies is often overlooked. Think of your smoke alarm; most people have an annual schedule to change their battery. Your beneficiary forms on your IRA, 401k, annuity or life insurance policies, etc… are important too and should be added to your schedule. At a minimum they should be reviewed by you annually and/or after a life-changing event such as death of a loved one, divorce Calendar 300x301or birth of a child.

Just think how upset you would be if the government took more taxes on your monies because you didn’t name the beneficiary correctly on one of your accounts. Maybe you forgot to change the beneficiary from your ex-spouse to your new spouse on your life insurance policy. Or you just named your estate as the beneficiary and therefore your estate goes to Probate Court. The probate process could take a year or more to get finalized; delaying your beneficiaries from getting the monies. This could have large ramifications for your loved one’s after you have passed away when you wanted to bring them peace of mind.

Did you know that your beneficiary form will override your will on your IRA accounts? Say you remembered to update your will after you remarried but didn’t update your beneficiary form on your IRA account. This means the monies in that account might not be going to the person or persons you wanted.

There could be tax ramifications for those named as your beneficiary on your different accounts and/or policies. For example; naming a person or trust as a beneficiary will usually help those monies avoid going to probate court. This could also keep the monies away from your estate and available to creditors. We recommend you speak with your tax advisor to determine the best way to list your beneficiary to avoid the common pitfalls that beneficiaries deal with after the death of their loved one.

You’re Getting Ready to Retire… is Your Money Ready?

The baby boomers are retiring and preparing to retire by the millions: According to the AARP, 8,000 people turn 65 every day in America. But even if boomers are ready to retire physically, psychologically and chronologically, many are not ready financially.

I’m not talking about the usual question of whether or not you have enough money to retire. This discussion is about the proper use of that money. I work with clients from all over the country to map out their own financial strategies, and the first step is educating them about four phases of wealth.

Accumulation

The accumulation phase usually begins about age 25 or when you begin your full-time profession. This is when you start putting money away in retirement vehicles, such as 401(k) plans, Individual Retirement Accounts and other alternatives.

During this phase, you can take losses more easily since you have time to recover. Dollar cost averaging is your friend. You can take reasonable risks and might consider more aggressive funds, stocks and bonds. You should also consider solid real estate investments. You can use a self-directed IRA to own real estate and other non-traditional assets inside your retirement accounts. This phase will last until 10 years before your desired retirement age.

Pre-Retirement (aka Retirement Danger Zone)

Pre-retirement is when you begin to reassess your risk tolerance and start to realize that any losses you take now might dramatically affect your ability to retire at your scheduled age. It is when you begin to shift the bulk of your retirement money to very safe, stable, low-risk assets. No more than 30 percent of your portfolio should be left in the market, and that should be in low-risk, blue chip stocks. You also might consider selling off your real estate holdings or paying off mortgages and loans, giving you great cash flow and removing most of your downside risk. If real estate values drop dramatically, it hurts much more if you are leveraged with big mortgages. When you own properties free and clear, they are still great cash-flow machines even if the values drop. You should also consider using a portion of your cash to purchase a solid, low-fee, fixed-indexed annuity.

Retirement

Once you leave your profession — and your paycheck — risk and loss are your most dangerous enemy. At this point, most of your funds should be in guaranteed products. There is a myth that guarantees and low risk mean lousy rates of return. Seek out low- or no-risk alternatives to mutual funds. If you keep most of your money in mutual funds now, you are subject to the ravages of reverse dollar cost averaging, which that can gobble up retirement money in a hurry.

Retirement is all about hands-off income that you should be able to draw from several sources. These can include Social Security, pensions, 401(k)s, IRAs, cash value life insurance, free and clear real estate, fixed indexed annuities with lifetime income riders attached, certificates of deposit and standard savings. You could also be receiving payments from businesses or assets you sold when you retired. Creating income from these assets will make sure you can live in style for the next 30 years and beyond. During this time, you should also plan a long-term care or home health care strategy.

Legacy

The legacy phase represents what you would like to leave behind for family, charities, foundations and other causes near and dear to your heart. Ask yourself this question: What do I want to accomplish after I am gone? Then set up a legacy plan with an estate attorney to make sure your wishes are carried out with your money

People have widely varied opinions on this phase. Most want to leave a nice nest egg to their children and grandchildren to help with education and other expenses. But other people say they started with nothing and want to leave little to nothing behind after they are gone. One way to leave behind a fantastic legacy is to set up a properly designed life insurance policy while you’re still relatively young. It will be a tax-free retirement asset during your lifetime and leave behind tax-free cash for your heirs.

If you master these four wealth stages, you will be assured a life of financial abundance.

Can You Really Afford Your Car Lease?

Last week I wrote about how to save boatloads of money buying the car of your dreams — but only after it is two or three years old. This week I want to talk about how leasing a car really works and offer some tips to save you more money on your next car.

OK, so what exactly is a lease? A lease is an agreement you enter into to rent your car for a predetermined length of time (usually 24 to 36 months) for a predetermined monthly payment, and for a set number of miles. These payments are always less than the payment would be had you bought the same car on the same day. The lower payment makes the car look more affordable on the surface, but inside that lease agreement are all kinds of terms that can cost you far more than just the payments.

To start with, why is the payment less expensive with a lease than with a loan for the same car? When you lease, you’re only paying for the estimated depreciation during the length of the lease rather than the entire loan balance you would pay back during that same time frame.

For example, you borrow $25,000 and sign a 36-month loan agreement at 5 percent, giving you a payment of $749, which is a pretty hefty car payment by today’s standards.

For many people, that’s simply too rich for their blood. But if you could swing that payment for those 36 months, you now have a free-and-clear car with a lot of life left in it and, if you were disciplined, you would continue to make that big payment — but instead of giving it to the bank, you could put it into a tax-free account. (More on that next week in Part 3.)

In contrast, when you sign a lease on that same car for 36 months, your payment might only be $300, which is much easier on your pocketbook. But after three years, you still have a balance to pay off if you want to own the car. This balance is called the residual value, and it must be paid off either with cash or a new loan. Most people won’t have the cash to pay off the car, so if they want to own it they have to take on another loan for several more years to actually get the car paid off.

Most people do neither of these things and instead turn in their car and get the next newest model, taking on yet another lease payment — and on and on until they’re old and gray.

In essence, a lease allows you to extend your payments on a car for six to eight years, and you end up shelling out far more in payments and interest (yes, there’s a hidden interest rate with a lease) for the same car. Sure, you have a lower monthly payment, but you have many more payments in total, sucking even more money out of your bank account.

So instead of just winging it, what if you actually employ a strategy for your next car?

If you can’t afford the three-year payment, then how about committing to no more than a five-year note? Can’t afford that either? Then the truth is you really can’t afford that car. Shop for something less expensive, perhaps a model year or two older, and buy that instead.

Then once you pay off your car, you should make a commitment not to buy another one for two years. That way you can continue to make your monthly payment — but to yourself — into a tax-free account.

According to IHS Automotive, the average length of time people hang on to a car is nearly six years, so you’ll go one extra year for good reason.

It will look like this in real numbers: You borrow $25,000 at 5 percent for five years on your next car, resulting in approximately a $470 monthly payment, which you pay for five years. Then you own the car free and clear. But then what will you do with the payment you were making? If you’re like most people, you’ll blow it on junk.

But you — you are not like most people. You have a plan.

Instead of adding to your junk collection, you could instead continue making that payment from your checking account every month — but now the money goes to a bank (or a pool of money) that you control. If you do this for the next 24 months, you’ll accumulate $11,280, plus the growth on that money (guaranteed and tax-free if you do it right), which would put you at a total of about $13,000 you’ve saved for yourself and your family.

That $13,000 in a tax-free account that gets just 5 percent compound interest will be worth more than $35,000 for you in 20 years. Could you do that on every car you and your spouse ever own? If you do, you’ll have hundreds of thousands dollars more for your family in the years to come.

According to the Employee Benefit Research Institute, the average American only has $56,000 in savings by the time he’s 65 years old. But by mastering this car strategy, you could have four or five times that amount over your lifetime, depending on when you start.

Now some of you are wondering why you still need to make a payment to yourself every month instead of just letting the unused money sit in your checking account. That’s simple: Human nature won’t allow you to truly “save” your car payments unless you get the money out of your day-to-day cash flow and easy access. Money is only truly saved if it’s focused — and not frittered away on other things we really don’t want or need.

Focused cash flow is the key to wealth, and the disposition and growth of that cash flow is critical if you want to get ahead and have more options later in life.

Have you ever “saved” money on a big-ticket item in your life? Where are those savings now? Precisely! Get in the habit of taking your “savings” and truly making them savings by getting them out of your cash flow account and into a separate tax-free account.

In today’s world, automobile ownership is a luxurious necessity. Sure, it’s nice to own a nice car, but over time the costs of doing so are enormous. You need a strategy to stop the wealth drains of depreciation and interest.

Perpetual Wealth Strategist Newsletter

Hello, I am pleased to say our most recent Wealth Strategist Newsletter is hot off the press. Click here to download a copy.

In this Newsletter I discuss  the Current Financial System and You; including:

  • Why Real Estate is a great place to provide income and potential big backend profits!
  • A New Insight to Pension Plans and a Great Option for You
  • Reverse Mortgages – The things you figure out when you make the mistake of watching television

Amazon book launch to #1

Many thanks to all our Joint Venture partners in launching our book The Perpetual Wealth System to number one in 3 days! Could not make it happen without a team effort. Very exciting it came together and looking forward to working with some of the readers of the book in their wealth accumulation efforts!

Double your social security income

So many people mistakenly believe there is nothing they can do with their social security benefit but apply when they qualify. This thinking will cost you tens of thousands of dollars per year in income. Just did a great interview with SSI expert. Please listen at www.wealthdoctorradio.com