Universal Life Insurance [Clear Explanations]

What is Universal Life Insurance?

Universal Life (UL) is a type of permanent life insurance. (Remember, “permanent” means you keep it your entire life, as opposed to “term”, which is meant to cover a specific period of time.) With UL, the both the premiums and the death benefit amounts can be adjusted according to your changing needs.

With a UL policy you have stated premium, which is the amount that needs to be paid to cover the death benefit and the administration costs for the policy. Payments made in excess of the premium build cash value, which over time accumulates interest. Eventually, the cash value can be used to pay premiums (not recommended) or as policy loans (i.e. tax-free access to your principal and earned interest.)

Types of Universal Life Insurance

There are three main types of UL:

  • Guaranteed Universal Life (GUL) – guarantees the death benefit for a certain number of years if you pay the required premiums.
  • Variable Universal Life (VUL) – invests the cash value of the policy in sub-accounts that may offer higher returns. However, you could also LOSE money in these sub-accounts, just as you could in a mutual fund or other security.
  • Index Universal Life (IUL) – credits interest to the policy’s cash value based on the performance of a stock market index, such as the S&P 500. See this post for a more detailed discussion of IUL.

What’s the Different Between Whole Life & Universal Life?

Whole Life and Universal Life are both permanent life insurance policies. The main difference between the two is that whole life has guaranteed fixed premium payments that you pay until age 100. With UL, you have more flexibility to adjust premium payments if you need to, as well as decrease or increase the policy face amount (provided you are still insurable.)

Capeesh?

Let me know if you have any questions!

Indexed Annuities – Know the Basics in 3.5 Minutes

I ran across this short and helpful video on Index Annuities today. This is a great explanation for everyone, but especially for visual learners.

 

The Wall Street Conspiracy [Movie Review]

I watched The Wall Street Conspiracy this week on Amazon Prime. I thought it was very interesting.

The documentary explains and exposes the practice of “naked short selling” stock shares.

When someone “shorts” a stock, they are hoping to make money as the price declines.

When you think a stock’s price is too high, you “borrow” shares and wait for the price to go down. When/if it does, you buy shares at the lower price and then replace the borrowed shares. Thus, you keep the difference – like you would in a traditional buy-low / sell-high strategy. This time, however, you borrow-high and then buy-low to replace the borrowed shares.

Naked Short Selling is when you never actually borrow the shares before you sell them! This actually increases the number of shares in circulation and you have essentially created shares out of nothing.

It’s definitely worth checking out, even if it is somewhat depressing to see that people were trying to raise awareness of loopholes and cheaters and the Powers That Be refused to act.

The Wall Street Conspiracy

Indexed Universal Life Insurance / IUL [Clear Explanations]

Money TreeIndexed Universal Life Insurance is a type of cash-value life insurance that bases the growth of the cash value on the performance of a stock market index, such as the S&P 500.

You may have heard the “experts” on the radio and TV advising “buy term and invest the difference.”

Indexed universal life is how to buy term and invest the difference! The “term part” is your death benefit. The “invest part” is the cash value that grows.

If someone tells you IUL is a bad idea, they either don’t understand it, or they’re trying to sell you something else.

There are a slew of reasons why IUL is a more secure foundation to build wealth vs. risky investments. Here are a few high points:

  • Investment Safety: You CANNOT lose cash value due to market losses. As such, any gains you experience are locked in and CANNOT be subsequently lost.
  • Tax Safety: Your cash value grows tax-deferred (i.e. you don’t get taxed annually like dividends), you can access it tax-free (through policy loans), and your heirs inherit the death benefit without paying income taxes.
  • Lawsuit & Government Safety: In many states, cash value life insurance contracts are exempt from lawsuits, creditors, and bankruptcy. Also, access the cash value through policy loans will not count towards your income tax calculations for social security.

Indexed Universal Life can be an intelligent choice for legacy planning, wealth creation and transfer, Infinite Banking, and college funding.

Get in touch if you would like to discuss if IUL may be a good fit for your needs.

Becoming Your Own Banker by R. Nelson Nash [Book Review]

Becoming Your Own Banker ReviewBecoming Your Own Banker by R. Nelson Nash is the original and definitive treatise on the concept of Infinite Banking.

Infinite Banking is the process of using the cash value in dividend-playing whole life insurance to finance your major purchases. Since you borrow from yourself, you are “becoming your own banker.”

BYOB (coincidence?!) was first published in 2000, and is now in its 5th edition in print (the Amazon Kindle version is apparently the 6th edition.)

Despite the various editions, portions of the text read as if they have not been updated with newer figures or examples.

Offspring

This book is very highly recommended, and inspired a number of similar books that address Infinite Banking.

Sections

Becoming Your Own Banker is divided into five parts:

  • Part I – Becoming Your Own Banker
  • Part II – The Human Problems – Understanding Parkinson’s Law (which is “expenses rise to equal income”)
  • Part III – How to Start Building Your Own Banking System
  • Part IV – Equipment Financing
  • Part V – Capitalizing Your System and Implementation

The book’s 20 chapters (plus each “part” above, each comprising one chapter), explain the Infinite Banking Concept through clear analogies and understandable examples.

Bad Government

As you make your way through the book, you will notice Mr. Nash can’t help but take a few tangents about the government.

“Government is a parasite and lives off the productive taxpayers, the host.”

And this interesting Q&A:

“Question: who is the biggest thief in the world? If you answered the Internal Revenue Service you are correct!”

How Infinite Banking Works

As mentioned above, after you build cash value in your policy you loan it out to yourself and eventually return the loan with interest. There are three key concepts to understand:

  1. Even though you are “using” the cash value through a policy loan, you aren’t actually withdrawing the cash value.
  2. The full account value continues compound uninterupted, as if nothing has happened.
  3. Plus you keep the interest payments that would usually go to the bank.

Conclusion

Mr. Nash’s book is excellent, although it does have a few quirks. Overall, he explains the subject well and provides clear examples.

There is power in this concept and, used properly, it can be a vehicle that you drive to the ultimate (earthly!) destination: financial freedom.

Whole Life Insurance [Clear Explanations]

Whole Life Insurance is permanent life insurance that last for… wait for it… your whole life.

Remember that Term Life Insurance just lasts a specified period of time (e.g. 10, 20, or 30 years) and then it ends. If you are still alive at the end of the term, you have no life insurance and all the money you have spent is gone (unless you paid for a return of premium rider.)

Whole Life Insurance policies build cash value. This cash value can be used to pay ongoing premiums, purchased a “reduced paid-up” death benefit, or accessed as a loan.

Traditionally, Whole Life Insurance policies “endowed” or were “paid-up” at age 100. You would pay the level premiums until you turned 100, at which time your cash value would equal the stated death benefit and you would “cash out.” This was when it was almost unheard of to live to age 100. Now, some policies endow at age 120. There are also limited pay options, so you would only pay for 20 years, or until you turn age 65 or 80.

Whole Life Insurance policies should be tailored to the individual’s long-term needs and goals.

You can accomplish some amazing things with Whole Life Insurance. (Stay tuned!)

The Retirement Miracle by Patrick Kelly [Book Review]

The Retirement Miracle by Patrick Kelly (Book Review)The Retirement Miracle by Patrick Kelly is a well-written book that effectively explains a powerful strategy for retirement planning. Kelly writes in an informal, conversational style that makes the subject matter easy to understand and accessible for people who don’t routinely read books about money or finance.

Shocking Truth About America’s National Debt

The first chapter reveals a little-revealed secret about the U.S. government’s debt obligations, especially pertaining to social security and Medicare. Shockingly, the reality is that the American Government’s fiscal issues are MUCH larger than most people know. We always hear that the national debt is $16 or $17 trillion. The truth is that it is really $76 trillion! This topic is so important, I wrote another complete post about it here. There are only two solutions to this impending disaster:

  1. Spend less
  2. Tax more

Chapter 2 end with the question, “Which one do you think is likely?”

The #1 Principle for Wealth Accumulation

Kelly goes on in Chapter 3 to say “Protect your investment capital at all costs!” Really, he advises to never take losses! Impossible, right? What if there was a way to:

  1. Capture each year of positive gains, up to a maximum cap
  2. Never participate in a “negative” year in the market, making your worst possible return 0% 

(Hint: there is a way!)

The Somewhat Ugly History Universal Life Insurance

In Chapter 4, The Retirement Miracle gives a quick overview of the first two iterations of Universal Life Insurance were introduced in the 1980′s and 90′s.

  • Traditional Universal Life was issued during the highest period of interest rates on record. (The prime rate was double digits from October ’78 to May ’84.) These policies projected great results based on continued high interest rates. When the rates eventually reduced to “normal” levels, the policies crashed and burned.
  • Variable Universal Life policies were created to give people the opportunity to invest the insurance policies cash values in the stock market. Just as no one really thought about interest rates eventually going down, no one really considered whether or not the stock market could ever go down. When it did, these policies crashed and burned.

Third Time’s a Charm

In Chapter 5, Kelly introduces the third generation of universal life insurance: Indexed Universal Life. This policy combines the strength of the first two (growth potential) while offering peace of mind. The Top 15 characteristics of almost all Index Universal Life policies are then explained.

  1. Death Benefit: after all, this is life insurance
  2. Cash Accumulation which can be access tax-free up to the amount of paid premium
  3. Protection Against Market Loss guarantees the policy can NEVER have a negative return due to market losses
  4. The Annual Reset Provision that locks-in gains in positive years that can NEVER be lost in subsequent market down-turns
  5. Upside Growth Potential allows the cash value to grow with the indexed market, up to a ceiling amount or “cap”
  6. Tax-Deferred Growth means you don’t pay taxes until you withdraw more that your principal basis (which is the amount of premiums paid)
  7. Tax-Free Access to Cash Accumulation through the Policy Loan Provision… that’s right you can get ALL of your cash value back without paying taxes!
  8. No Minimum Age or Income Require so policies can be purchased for anyone at any age (e.g. children)
  9. No Mandatory Distribution - unlike IRAs and 401(k)s, which require you to take payments at age 70.5
  10. Access at Any Age - again unlike “qualified plans” which make you wait until you are 59.5.
  11. Protection From Lawsuits, Creditors, and Bankruptcy (in many states)
  12. Continued Investment if Disabled through a Waiver of Premium for Disability, so your policy continues even if you can’t work and earn money
  13. Does Not Make Social Security Income Taxable - if you have a higher income, you social security benefits become taxable. “Qualified plan” distribution plans count as income, policy loans don’t
  14. Avoids Probate after death since your designated beneficiary gets the proceeds
  15. Accurate Return Figures unlike most other financial products

 A Story

In Chapter 8, Kelly tells the story of “Tom”, who retired on the day he turned 65 on November 20, 2008. On this day, the S&P 500 ended down 52% from its all-time high on October 9, 2007. The index was actually closed at its lowest point in 11.5 years. Tom’s retirement account shrank from $2.5 million to $1.2 million in 13 months. To make matters worse, every dollar that Tom withdraws is taxable.

Accessing Money Tax-Free

Strictly speaking, life insurance cash value grow tax-deferred, not tax-free. If you wanted to cash out your policy, you would have to pay taxes on the difference between the value and the premiums paid. However, insurance companies provide a Policy Loan Provision that allows you to borrow against the cash value of your policy. There’s a big difference between borrow against and borrow from. Borrowing against is leaving your cash value as collateral. With a Fixed Loan or a Wash Loan, the earn the same rate on your collateral that you pay on the loan. For example, if your loan interest is 4%, your collateral would also pay 4%. The net cost of your loan is zero. Since this is a loan, it’s not taxable as income. This is tax-free money. The loan is paid back by deducting the amount from your death benefit when you die. Accordingly:

  • You must be sure to not borrow too much!
  • You must be sure that the policy stays in force until the insured’s death!
  • Be conservative with your projections and be sure the policy is illustrated to age 120 (vs. 90, 95, or 100.)

Never Lose Money!

Chapter 10 is so short, I’ll quote it in full:

With Indexed Universal Life Insurance, you will never lose money due to a market decline … ever! How good is that? (End of chapter. Really!)

Conclusion

So far in this review, I have essentially provided an overview and synopsis of The Retirement Miracle. If you’ve read this far, hopefully you are intrigued by the topic and the potential utilizing it in your financial plan. Kelly finishes the book with seven more chapters giving some more practical illustrations and answering some what-ifs. I strongly reccommend this book as an introduction to the power and possibilities of Index Universal Life insurance. You can purchase your own copy of the book here on Amazon.

Retirement You Can’t Outlive by Dennis M. Postema [Book Review]

Retirement You Can't Outlive CoverRetirement You Can’t Outlive by Dennis M. Postema was published in 2013. It is a clear and relatively concise book looks at the difficulties that retirees face, and how to guarantee an income that lasts for the rest of your life.

Problems

The book clearly outlines the difficulties facing today’s pre- and post-retirees. The pressing concerns and conditions that must be overcome include:

  • Outliving your savings
  • Inflation
  • Increased taxes
  • Increasing medical expenses
  • Market risk

A 2008 study by Ernst & Young reported that retirees relying on Social Security alone as their only source of guaranteed income would have to reduce their standard of living by 32% to minimize the likelihood of outliving their assets. Worse still, those seven years away from retirement (i.e. those retiring in 2015!) would have to reduce their standard of living by 45%. Add to these significant challenges the immense financial shifts that have occurred in the last 20 years:

  • The “Dot Com Bubble” in 2000.
  • 9/11 in 2001
  • The S&P dropping 41% from 2000-2003
  • The housing bubble burst of 2008
  • The Dow Jones falling 53% over 17 months in 2007-2009
  • Social Security paying out more than it takes in beginning in 2010
  • The Fiscal Cliff of 2012
  • The Debt Ceiling Crisis of 2013

The result of all this? Not only lost savings, but more importantly, lost confidence in the ability to create a safe, stable retirement income.

A Necessary Change in Thinking

In order to successfully navigate the financial pitfalls of retirement, savers must move from an accumulation mindset to one of preservation and distribution. Those in or nearing retirement need to get off the market roller coaster and not risk losing what they worked so hard to gather. This is understandable. But even when we do this, we have even more challenges to face:

  • Keeping up with inflation
  • Living much longer because of improved medical care
  • Paying for that improved (and more expensive) medical care

A Solution to All of the Above

To combat all of these setbacks and challenges, Mr. Postema spends the rest of the book explaining in detail the features and benefits of Fixed Index Annuities. These financial products, which are issued by insurance companies, offer accounts that model different market indices, such as the S&P 500 and the Russell 3000. At the same time, fixed index annuities protect principal against loses while exposing savings to market gains. 

Add a “Rider” to the Solution

Mr. Postema explains that you can also add a Guaranteed Minimum Income Benefit Rider (GMIB). This enhancement offers these features:

  • Absolutely NO downside risk
  • Income guaranteed FOR LIFE
  • Investment flexibility
  • Control over starting or stopping payments, taking a lump sum, changing underlying investment accounts, and naming a beneficiary

I recommend Retirement You Can’t Outlive for anyone 10-15 years away from retirement and for current retirees. Mr. Postema offers a very clear and compelling overview of the features of a Fixed Index Annuity with a Guaranteed Minimum Income Benefit. If you live in the Martinsburg, Eastern Panhandle, or Shenandoah Valley areas of WV and VA, I would be happy to discuss your unique situation to see if an annuity might be a wise choice for your needs. You can contact me here.

An Example of a Fixed Index Annuity

S&P 500

A few days ago, I provided a brief introduction to the different types of annuities. This short example may help in illustrating the different concepts.

John received a $100,000 inheritance from his grandfather. He didn’t need the money right away, so he decided to let the money safely grow in an annuity for 8 years until he retired at age 67.  In years when the S&P 500 went up, he was credited interest up to the same amount of the growth, with a “cap” of 7.5%. When the market performance was negative, his credited interest had a “floor” of 0%.

This table shows:

  1. The yearly performance of the S&P 500
  2. What the balance would have been if actually invested in the S&P 500
  3. The interest that was credited to the fixed index annuity account
  4. The annuity’s resulting balance

 

Year S&P Result S&P Investment Balance Annuity Credited Interest Annuity Balance
2006 13.62% $113,620 7.5% $107,500
2007 3.55% $117,653 3.55% $111,316
2008 −38.47% $72,509 0% $111,316
2009 23.49% $89,542 7.5% $119,664
2010 12.64% $100,860 7.5% $128,639
2011 0.00% $100,860 0% $128,639
2012 13.29% $114,264 7.5% $138,287
2013 29.60% $148,087 7.5% $148,659

 

You can see from the “S&P Result” column that the stock market in general was a roller coaster ride, both financially and I’m sure emotionally for those involved. Compare those values to the “Annuity Credited Interest” column. You will notice that when the index was up, John’s account participated in some or all of the gains. However, when the market went down, he participated in none of the loses.

When the market is up 23.49%, it might feel frustrating to only get credited with 7.5%. On the other hand, when the market is sharply up over a period, what usually happens before that? In this example, John’s account earned 0% when the market was negative 38.47%!

You can see that the final balances are about equal. The fixed index annuity saved John from the emotional roller coaster of the market, and eliminated the uncertainty of the market’s inevitable up and down cycles. This way, John didn’t have to worry about whether or not the market was bull or bear when he turned 67 and started withdrawing money.

Do you think it is wise to risk losing principal in order to chase potentially higher returns?

Please feel free to contact me with questions about your individual situation.

Annuities [Clear Explanations]

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What are annuities?

Annuities are the opposite of life insurance. Life insurance protects against dying too early. Annuities protect against living too long. (In other words, outliving your savings.) For this reason, annuities are sometimes called longevity insurance.

Annuities offer a way to accumulate funds for the future and then systematically distribute them over a given period.

Annuities are contracts issued by insurance companies; there are different types and various features that create an alphabet soup of terminology.

Remember how lottery winners can take a “lump sum”, or take payments stretched out over 20 years? The latter is paid using an annuity.

Types & forms of annuities

There are two quick ways to categorize annuities:

  • When does payout begin?
    • Immediate Annuities begin paying out – you guessed it – immediately. “Immediately” is typically one month, but can be up to one year. Since the payout begins quickly, there is usually only one premium payment. (Thus, a SPIA is a Single Premium Immediate Annuity.)
    • Deferred Annuities are designed for accumulating funds for the long-term. Deferred Annuities can be single premium, or flexible premium (meaning you have the flexibility to add funds at other times during the accumulation period.)
  • How are the funds invested?
    • Fixed Annuities pay a set interest rate that either resets every year or is guaranteed for several years. (Thus, a MYGO is a Multi Year Guaranteed Annuity.)
    • Variable Annuities have sub-accounts that can contain stocks, bonds, and other securities. Variable Annuities can lose value just like stock market investments. (Variable Annuities are called VAs.)
    • Fixed Index Annuities (or FIAs) credit interest based on the performance of a market index, such as the S&P 500. (This is why they are sometimes called Equity Indexed Annuities or simply Indexed Annuities.)

Indexed Annuities are one of the most popular and powerful financial products available today. They offer the potential for market-type gains while also protecting your investment from market losses.

 

I hope this little article has been a helpful introduction to annuities. As with everything, the subject can get very complex depending on how much you care to study it.

If you have any questions about how an annuity might fit into your retirement planning or financial situation, please get in touch so we can discuss your specific needs.

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