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Financial Planning Life Insurance Retirement Savings

Financial Planning Basics: Permanent Life Insurance

Financial Planning Basics: Permanent Life Insurance

By Scot Whiskeyman

Nothing lasts forever, but what if you could own something that at least lasted for a lifetime?

Last month, we covered term life insurance, and discussed the difference between your coverage through work and owning your own individual policy. We mentioned that it’s important to consider buying a term policy from a company with a good mix of life insurance products, and that offers you the option to convert your policy to a permanent one.

This week, we’re going to pick up where we left off, and discuss the different types of permanent insurance and its upsides and downsides.

The Permanent Insurance Universe

There are four major types of permanent life insurance: whole life insurance, guaranteed universal life insurance, indexed universal life insurance, and variable universal life insurance. While not exhaustive, this is the list of permanent insurance products that impact most of our clients, so it’s what we’re going to focus on.

Whole Life Insurance

Whole Life Insurance is the original permanent life insurance – well, actually, it’s the original life insurance, period. Designed to provide a death benefit that will last forever, whole life insurance builds cash value over a lifetime, can pay eventually pay for itself, and even help cover the costs of long-term care.

Choose Whole Life Insurance if you want:

  • Life Insurance you never have to worry about getting again
  • Automated (and effectively mandatory) savings
  • Supplemental retirement income
  • An alternative source of cash you can use throughout your life without being penalized
  • To avoid the risks that come with investing in the market

How it works:

  • Sometimes referred to as “the Cadillac” of life insurance policies due to its features
  • Builds cash value that can be used throughout your lifetime, or in retirement
  • A “non-correlated” asset, meaning the performance insider is not linked to the stock market
  • Can often pay for itself after enough cash has been accumulated
  • Can provide tax-free income in retirement

Universal Life Insurance

What exactly does the “universal” in Universal Life Insurance mean?

To be honest with you I have no idea.

But I can tell you universal life policies have been around since the early 1980’s, and have changed a lot since then – for the benefit of the policyholder.

When they were introduced, interest rates – and inflation – were at all time highs. Major insurance carriers took advantage of this by creating a new product: one that was similar to whole life in that it built cash values, but different in that its interest rates were variable and paid no dividends.

The results? Catastrophe.

Policies collapsed once interest rates fell from double digits. Agents and insurance companies did not project the historically low interest environment of the late 2000’s. Thus, the cash value couldn’t even keep up with internal costs, causing policies to collapse.

Today’s Universal Life policies really share nothing more than a name with their predecessors. Rather than being dependent on interest rates, new policies function with performance linked elsewhere.

There are three major types of of Universal Life policies used today:

Guaranteed Universal Life Insurance (“GUL”)

  • Resembles term insurance in that it doesn’t build cash value
  • Resembles whole life insurance in that it is often guaranteed until your mid-90’s or beyond
  • Great for individuals 55+ with a permanent need for coverage, but who don’t want to pay the much higher cost of whole life insurance
  • “No-lapse” guarantee – the policy will last forever as long as you pay your premiums on time

Indexed Universal Life Insurance (“IUL”)

Choose Indexed Universal Life Insurance if you want:

  • Life Insurance you never have to worry about getting again
  • Automated (and effectively mandatory) savings
  • Supplemental retirement income
  • An alternative source of cash you can use throughout your life without being penalized
  • More opportunity for cash value growth than you’d get in whole life insurance

Variable Universal Life Insurance (“VUL”)

You might consider variable universal life insurance if you want:

  • Life Insurance you never have to worry about getting again
  • Premium flexibility – you want to be able to use policy cash values to pay for the premiums
  • Supplemental retirement income
  • An alternative source of cash you can use throughout your life without being penalized
  • The maximum opportunity for cash value growth in a tax-favored vehicle

Criticism of Permanent Life Insurance

You won’t hear many financial pundits say favorable things about permanent life insurance.

The common criticisms are that it’s expensive, and the cash value build up – at least inside of whole life insurance – would perform better if invested elsewhere, specifically a stock market index like the S&P 500.

Here’s my response to that criticism: first, financial security is expensive.

The powerful things whole life can do for you that term cannot more than warrant the premium.

Second, who was it that decided to compare whole life insurance to the stock market – or even call it an investment- in the first place?

“Buy term and invest the difference” makes a lot of assumptions (and it’s wrong to make assumptions in financial planning!).

First, it assumes that anyone who wants whole life insurance would also be comfortable being 100% in stocks. As you can see from the chart above, whole life offers lower growth potential, but it offers more guarantees.

Second, if you have permanent life insurance, you have to pay for it, or you’ll either lapse your policy or have to reduce your death benefit.

What’s at stake if I decide to turn off that automatic investment plan? Whole life insurance encourages one of the most important financial behaviors anyone can possess – disciplined saving.

Finally, the idea that one needs to either select term insurance or whole life insurance is a false dichotomy. Few individuals will be able to cover their entire insurance need with whole life insurance, because it would be cost prohibitive. However, there’s nothing wrong with having a foundation a permanent insurance – perhaps that’s guaranteed to be paid-up at retirement – so that when your term insurance is gone, you’re not left unprotected.

Why Someone Might Need Permanent Insurance Later

It’s common for people to think that beginning in retirement and beyond, life insurance isn’t necessary. Their rationale is that once they’ve retired, they’ll have accumulated wealth and have guaranteed income sources, and that they no longer have children who depend on their income. However, it’s important to understand that while the scope of your needs might change in retirement, the need isn’t altogether gone.

Many people aren’t aware that if both they and their spouse are collecting social security, the smaller of the two benefits disappears at the first death. This might not be a big deal if the smaller benefit is a negligible amount, but what if it makes up half of a retiree’s income?

Though less common, pensions have the same problem – the benefit is often reduced or even eliminated upon the first death. What will you have to sacrifice to live on that kind of reduced income?

If you’d thought about whole life insurance 30 years ago, you’d be relieved. Unfortunately, many people haven’t, which puts them in the unenviable situation of applying for insurance later in life, which dramatically increases the cost.

It’s also important to remember that life insurance death benefits are almost always tax free.

For those in states that have inheritance taxes (including Pennsylvania), this suddenly makes permanent life insurance much more attractive, especially after you consider income taxes beneficiaries will have to pay on inherited retirement accounts, court costs, and the time-consuming and expensive probate process.

The Bottom Line

Permanent life insurance has a place in everyone’s financial picture. The key to financial success is to think big and start with a small action.

Getting permanent insurance into place, or reviewing what you already have, could be that first step.

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Financial Planning Life Insurance

Financial Planning Basics: Term Life Insurance

Financial Planning Basics: Term Life Insurance

By Scot Whiskeyman

Despite the fact that life insurance awareness month officially starts in September, it is still an important topic, all year long.

With such a great deal of misunderstanding about how term life insurance works, we thought we’d go high level and talk term insurance basics this week to keep you informed.

Why Term Life Insurance?

It’s no mystery that the biggest asset a young earner has is there potential for income. However, it’s also no secret that many young earners are saddled with copious amounts of student loan debt, which puts a squeeze on their monthly budget. This is where term insurance comes into play. Whether an individual has dependents or not, buying term insurance while healthy means it will be as cheap as it will ever get.

Why Term Life Insurance? Because it’s:

  • Affordable
  • Provides lump sum of cash that can replace your income, cover the mortgage and other debts, or help pay for college for kids

Now let’s talk about the different types of term life insurance and what to know about each of them. We’ll give you our take on each type of insurance after each breakdown.

Group Term Life Insurance:

What to know:

  • Pricing is age-banded – it increases in price as you get older
  • The coverage typically lasts as long as you are with your employer
  • The employer can cancel the coverage on a non-discriminatory basis, meaning they can’t cancel just yours, but they can cancel the insurance coverage altogether
  • Your coverage is typically not portable, though it is sometimes convertible to a permanent type of policy after you leave your job

Our take:

I hear it all the time: I have life insurance through work! I’m good, right? Maybe. Having some life insurance coverage is better than having none at all – but I often advise clients to get what they can, but not to depend on it. Why? In the event that they retire, get disabled, or change jobs, their term insurance policy is probably staying behind.

Sample of MetLife's group term insurance rates. Notice that the cost of coverage (quarterly) increases in 5 year increments
Sample of MetLife’s group term insurance rates. Notice that the cost of coverage (quarterly) increases in 5 year increments.

Annual Renewable Term Life Insurance:

What to know:

  • Pricing increases every policy anniversary. Thus it is extremely cheap when you are young, but tends to go up when you get older.
  • Good through a certain age – often age 95
  • Cannot be canceled by anyone but you
  • Can often be converted to permanent policy after you buy it

Our take:

The biggest lure of annual renewable term policies are its price. When it comes to owning an individual term insurance policy, annual renewable term policies are often the most inexpensive way to go in the beginning. However, with a price that increases every year, they may not be the best type of policy to own over a long period of time.

Rates per $1,000 of an Annual Renewable Term policy issued on a 22 year old. The insurance company in this example is Lion Life. The rates increase every year as the policyholder ages.
Rates per $1,000 of an Annual Renewable Term policy issued on a 22 year old. The insurance company in this example is Lion Life.

Level Premium Term Life Insurance:

What to know:

  • Pricing is level for the number of years stated in the policy. 10, 15, 20 and 30 year policies are common
  • Good through a certain age – often age 95 – but the price increases dramatically after the level premium period
  • Cannot be canceled by anyone but you
  • Can often be converted to a permanent policy after you buy it

Our take:

Level premium term insurance is cheap today and level for as long as you own the policy. It’s for this reason we’re a big fan of level premium term insurance and favor it over annual renewable term insurance.

This 20-year term policy has a level cost for 20 years. Notice how the premium jumps up dramatically in the 21st year. Issued by Penn Mutual. This 20-year term policy has a level cost for 20 years. Notice how the premium jumps up dramatically in the 21st year. This illustration is for Penn Mutual’s 20-Year Level Term product.

What Else Should I Consider?

You’re likely healthier today than you ever will be again, so consider buying a term policy with conversion privileges. This allows you to change the policy, either in part or entirely (your choice) to a policy that will last forever.

  • Consider the strength of the insurance carrier. Check out our post on strength ratings of insurance companies to get a better idea of what’s good and what’s not.
  • Consider the insurance company’s history. Have they been around for 15 years or 150 years? History says a lot about a company’s commitment to its policyholders.
  • Consider the company’s product mix. If you think you’d like to lock in your health rating to convert to a permanent policy later, there’s no point in buying a policy from a company that doesn’t have a permanent product to begin with.

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Financial Planning Life Insurance

Talking About Death: Not Morbid, But Practical

Talking About Death: Not Morbid, But Practical

By Scot Whiskeyman

In the Fall of 2017, my high school classmate, Ana, passed away. I had known her since elementary school, although we were never close friends.

In 4th grade, her problem was with homework. It wasn’t that she struggled with it, in fact quite the opposite; she just never did it.

What I admired most was how much she didn’t care. She never looked ashamed or scared when she said she didn’t have it. Right or wrong, she was confident. I’ll never forget the teacher offering to carry her on his shoulders around the school if she just did her homework once. (She never took him up on it.)

Ana was broadsided in a car accident by a driver that wasn’t paying attention. She loved going to the beach. She had a dog. She had two kids. She had parents and siblings. She was young – only 31 years old. She was a normal person who lived a normal life, and then lost it. The fact that she didn’t do her homework in 4th grade is inconsequential now.

I wasn’t her financial advisor. I don’t know anything about her personal financial situation. But based on the footer of her obituary asking for donations to her children’s GoFundMe account, my guess is that Ana didn’t have life insurance.

If you were to ask the average 20-something how they envision themselves going out, my hunch is you’d find a common theme between “in my sleep” and “peacefully” at an old age.

As we grow older, the natural passage of time begins to show us that old age is not always what takes loved ones away. Death might always be expected, but it is often a surprise. And that was the case with Ana.

We can never know for sure when death will come, but we can prepare. The phrase “hope is not a plan” applies here, as does the phrase “hope for the best, but prepare for the worst.”

A 30 minute conversation, uninterrupted, is all it really takes to understand whether there’s a need for life insurance. Another 30 minute conversation would suffice for most in determining what that need exactly is.

Of note, when considering your life insurance plan: “he/she’d sell the house” or “I’d move in with my brother” are not plans. They are wishful thinking at best, because it assumes the following:

  1. The housing market will always be a seller’s market
  2. Your brother is alive
  3. Your brother will always welcome you unconditionally for an indefinite amount of time

These common objections to life insurance are not bad ideas. Nor are they implausible. But I have never once seen a someone with a notarized, mapped out, legal, step-by-step agreement to execute these ideas. Not only that, they are not fully forward-thinking, because they only consider the immediate next step after death – not the years and decades to follow.

So what’s the bottom line? Do you need life insurance? I don’t know you, so I can’t tell you the answer to that – but what I can tell you is what questions to ponder so that the answer comes to you.

  • If I died, would someone I love suffer?
  • If they would, do I care?

If the answer to both of these questions is yes, then you need life insurance. What kind? How much? Consider the following questions:

  • If I died, how would my loss impact my loved ones financially?
  • What kind of life do I envision for my loved ones if I don’t die?
  • Can my family continue to live their current lifestyle if I die? If not, what sacrifices would they have to make?

The term ‘life insurance’ can bring up many misconceptions. I encourage you to set aside any preconceived notions you may have on life insurance and find a trusted advisor to help educate you and look at your personal situation.

No one can predict the future or when your time here is finished, but an advisor can help you prepare so when that time comes, your family can take the time they need to grieve before having to make any major decisions. It’s not morbid to think about your death but rather practical and your family will appreciate your forethought.

I’ve never had a client say to me, ‘wow, I wish you hadn’t told them to buy so much life insurance, that’s really more money than I need right now.’

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Financial Planning Retirement Savings

What Is An Annuity?

What Is An Annuity?

By Scot Whiskeyman

It’s a simple question, isn’t it? Unfortunately, annuities are complicated, so the answers we get aren’t always straight forward. There’s a lot of press around these products – some good, some bad, some scathingly bad. Regardless of your opinion on annuities, we can all agree that they are some of the most misunderstood products in the financial market place.

To understand what an annuity is, let’s start by understanding what an annuity was. Before insurance companies got creative, annuities were designed to do one thing: provide lifetime income to the recipient in exchange for a lump sum of money. For example: I hand the insurance company $100,000, and they promise me $500 per month, no matter how long I live. Pretty straight forward, right?

Although this type of annuity (known as an immediate annuity) still exists, but it’s no longer alone. In the 90s, we could all go to McDonald’s an order French fries. Are our options on the side were ketchup, and ketchup. But humans are fickle creatures, and not all of us like ketchup. Restaurants want our money, so they put out packets of ranch dressing, bbq sauce, honey, mustard, honey mustard, and so on. All of these fall into the category of “condiments,” yet all of them are slightly different and gears towards consumers’ unique tastes. This is not unlike annuities today.

Let’s return to the above example. I hand the insurance company $100,000, and they promise me $500 per month, no matter how long I live. But what happens after I die? Are you saying the insurance company just gets to keep my money, that I worked hard for and earned? Just like ranch dressing doesn’t sit well in some people’s stomachs, that concept of losing one’s hard earned money didn’t sit well with retirees. So insurance companies came up with death benefits that are also guaranteed. I die early, my wife keeps getting paid. We both die early, our kids get a refund.

Okay, great, insurance companies are to fast food conglomerates as annuities are to condiments. What else do I need to know? Well, there’s a catch. You want more benefits, you pay for them. (It drives me nuts when I have to pay extra for a side of ranch!) In our running example, the insurance company just might offer you $400 per month instead of $500 if you want death benefits.

Fast food wouldn’t exist without preservatives. Sure, they’re often terrible for you, but they keep products from spoiling, and profits from falling. Because we as fickle consumers, want things when want them, and not when they’re available, preservatives have found their way into our whopper jrs and chicken nuggets to make their ingredients last longer. This is not unlike deferred annuities, which are designed for people who want money later, but not right now. If I use retirement money to buy an annuity, but plan to work for two more years, why do I want to take income right now and pay tax on it? I’m already earning money through my job.

You might be thinking: who needs an annuity if they don’t need income now? It’s another great question, and the simple answer is that not everyone is comfortable leaving their nest egg parked in other investments that are exposed to market risk. Enter deferred annuities, many of which are fixed, and earn a set interest rate, or at the very least cannot lose money. For someone who has gone through major recessions like 2001 and 2008, the peace of mind that comes with guaranteed growth might be worth the opportunity cost that comes with risky investing – especially if they are only a few years out from retirement.

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Financial Planning Investing Retirement Savings

Why Every Young Professional Should Consider a Roth IRA

Why Every Young Professional Should Consider a Roth IRA

Roth IRA egg and nest
Image source: Jillonmoney.com

By Scot Whiskeyman

Compounding growth is an amazing thing. Using that that growth tax free? Even more amazing.

If you had contributed to a Roth IRA between December 31st, 2007 and December 31st, 2017, at a rate of $100 per month, you would $19,097* that you could use 100% tax free in retirement. Of course, there’s a catch. First, you must be 59 1/2 or older. Second, you  must have opened your first Roth IRA (not Roth 401k!) more than 5 years ago.

Okay, Scot – the title of this article references young professionals! Why are you talking to me about Roth IRAs if the benefits don’t come until retirement? Here’s why. You can access your contributions penalty and tax free, regardless of age or waiting period. Basically, you can double up on having an emergency fund and retirement savings in one go. That’s the short-term reason.

The long-term reason is this: imagine having two jobs – one which paid you taxable income, and the other which paid you tax free income. How much extra you might you take home by having a tax free income source? Less taxable income means less taxes for two reasons: one, tax-free income isn’t taxed. Two, taxable income is taxed at a much lower rate.

Not convinced? Here are some more reasons to consider a Roth IRA as a young professional:

  • You could eventually be phased out. It might some crazy now, but there may come a day where you have to worry about making too much money. At $120,000 of income, single earners start to be phased out ($189,000 for married earners filing jointly.) This means that the amount you are allowed to contribute to a Roth gradually decreases. You are fully ineligible at $135,000 and $199,000, respectively.
  • A Roth 401k is not enough. If you leave your job and roll your Roth 401(k) to a new Roth IRA, you have to wait 5 years – no matter how long your Roth 401k has been there. Those taking advantage of Roth options through group 401ks would be advised to open a Roth IRA today, even if it’s only funded with a few hundred dollars.
  • It’s a great way to leave a legacy. If you die, you can leave your Roth IRA as a tax free legacy to your spouse, your kids, and even their kids. In theory, it could last generations.
  • Tax laws can change. Will Roths be around forever? It’s hard to say. There’s no better time than today to get started.

Lastly, remember that Roths are just the brand of clothes, and the cash inside is the person. People come in a shapes in sizes, and so do investments – they can be cash, CDs, stocks, mutual funds, and more. You can start up a Roth IRA with very little investment risk. See the infographic below for more information on investing inside of a Roth IRA.

Roth IRA infographic
Source: bankrate.com

The Bottom Line

If you haven’t opened up a Roth IRA, now is a great time to start. Talk to your investment professional about opening an account.

*Assumes that your return is compounded annually and your contributions are made at the beginning of each year. The actual rate of return is largely dependent on the types of investments you select. The Standard & Poor’s 500® (S&P 500®) for the 10 years ending December 31st 2017, had an annual compounded rate of return of 8.3%, including reinvestment of dividends.  It is important to remember that these scenarios are hypothetical and that future rates of return can’t be predicted with certainty and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment. It is not possible to invest directly in an index and the compounded rate of return noted above does not reflect sales charges and other fees that investment funds and/or investment companies may charge.

The contribution limits for Roth IRAs referenced in this article are for tax year 2018. For current Roth IRA contribution limits, see IRS publication 590-A, section 2 on Roth IRAs or visit www.IRS.gov.

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Budgeting Couples Financial Planning Relationships

How to be Honest with Your Partner about Money

How to be Honest with Your Partner about Money

Talking about money isn’t easy. When it comes to relationships, money is a topic with unique challenges.

Don’t get me wrong – relationships have plenty of other challenges. But we can all agree that money is one of the biggest of them – and certainly at the center of many of the others.

Here’s three common pitfalls to avoid when talking finances with your significant other.

Avoid covert contracts.

What is a covert contract? Think of it this way – it’s rule of engagement that one partner sets, while silently expecting reciprocation. When it comes to relationships, money is not tit for tat. Consider having separate fun money accounts so that you can each enjoy your respective hobbies without restriction.

Decide what money is going to fund your fun money account. $20 per month? Money from a yard sale? Whatever is easiest for you. Personally, I keep the revenue I earn selling books online. I use it to buy a bucket of balls at the driving range, pick up a snack or soda, or have a beer on the weekend with friends.

Talk about boundaries – don’t set invisible ones.

Sometimes, financial boundaries in relationships are like invisible fences for dogs: you don’t know it’s there until you’ve crossed it, and by then you’ve already been shocked.

To avoid these kinds of surprises, talk to each other regularly about your goals. Are you working towards the same ones? If so, then listen to what meeting them means to each other. Finding a common perimeter will become much easier.

Knowing the budget is your responsibility, too.

I joke sometimes that my girlfriend is the budgeter in our relationship. It’s not to say that I don’t keep track of what I’m spending. But by contrast, Lindsey is on our personal favorite budgeting tool, YNAB (You Need a Budget) multiple times per day.

To stay in the loop, Lindsey and I sit down a few times per month (we aim for weekly budgeting dates) to talk about what the next month of expenses look like. I can’t stress how important it is to do this: you need to know who’s getting paid, and when – not just what’s in your account today. The direct path to deep debt is paved by checking your bank account balance and thinking you have that money to spend. Avoid mental accounting – there’s software to do that for you! (Hint: it’ll do a much better job – I’m speaking from experience.) Bottom line: the money might be there today, but it’s both partners’ responsibility to make sure it’s properly put to work before being frivolously spent.

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Behavioral Finance Financial Planning Investing Stocks

When It Comes to Investing, Don’t Go With Your Gut

When It Comes to Investing, Don’t Go With Your Gut

When it comes to investing, “go with your gut” does not apply.

There’s an interesting phenomenon that affects us humans known as consumer utility. I first learned of it in business school, because it has a big role in how people make decisions, and therefore has a big role in how businesses market their products and services to us. But the phenomenon extends far beyond business. It’s affected each of us, and happens every time you lose your car keys or find a penny on the street.

What is consumer utility? It’s is a system of measurement used to quantify negative and positive feelings we each experience. We measure car trips in miles. We measure body weight in pounds. For our purposes here, we’ll be uncreative and call it a “pain unit.” How many units of pain a traumatic event is worth varies from person to person, and isn’t really relevant. What is relevant is that a pain unit is heavier than its opposite, which we’ll call a “gain unit.”

What’s the opposite of one step forward? One step backward. But not in this case. What I’m getting at is that it takes more than a single gain unit to counter-balance a single pain unit.

To illustrate this point, take two random investors, who each start with $100,000 before trading. The two investors don’t know each other and their investments are made in different years. We’ll assume they both have average skill and experience with investing.

Remember: this example isn’t about the investment results, but rather the investors’ attitudes towards those results.

Investor A has $100,000 in stocks. The account loses 40% of its value (a loss event). Investor A now has $60,000 in stocks.

Investor B has $100,000 of different stocks. The account gains 40% in value (a gain event). Investor B now has $140,000 in stocks.

How do you suppose it feels to lose $40,000? Pretty terrible, right?

On the other hand, it probably feels pretty great to make $40,000. 

Either way, we can all agree that $40,000 was the absolute value that affected each investor – just in different ways. But because of the consumer utility phenomenon, good = good, and bad = terrible. One pain unit actually has the weight of about three gain units.

In order for the emotional weight of a gain event to equal the emotional weight carried with a loss event, investor B would need to have made $120,000, taking their account to $220,000. Yes, that’s right, they would have had to more than doubled their money.

In short, negative emotions “weigh” a lot more than positive emotions. This explains why stock market volatility causes noticeably irrational panic, and why investors make the mistake of buying high (hey, the market’s going up, time to get in!) and selling low (oh man, the market’s doing terrible, I better cut my losses and get out).

When it comes to investing, don’t go with your gut. A financial advisor can help you guide you through emotionally tumultuous times – such as recessions – so that you don’t make mistakes that cost you down the road. And because no one quite knows exactly when the next wild market swing will occur, now is a terrific time to get to know, like, and trust (hello PRE!) an advisor that can help you manage your money and your emotions – so that you meet your goals.

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Categories
Financial Planning Income Protection Insurance Life Insurance

Buying Term Life Insurance? Here’s 5 Things to Consider Other Than Price

Buying Term Life Insurance? Here’s 5 Things to Consider Other Than Price

Pictured above: representation of someone’s actual life insurance policy

We’ve all seen the television advertisements for cheap term insurance. “I protected my family with $500,000 of life insurance for only $18 per month,” proclaims a young, suburb-dwelling professional. Sounds like a good deal, right?

Everyone hates fine print (myself included). Unfortunately, it’s the details buried in the fine print that need to be understood before purchasing that cheap term insurance policy. For one, how long is the coverage for? 10 years or 40 years? How about the premium – will it be $18 per month for that entire time?

Perhaps most importantly: what if you actually die? Is the insurance company financially strong enough to make good on their promise to pay your family? Does their service model have a record of providing solid guidance to beneficiaries collecting death benefits? And what kind of settlement options are available – i.e., will your beneficiaries get a lump sum check or a stream of payments?

Everyone wants a good deal, especially when it comes to insurance. As you can see, there are many factors that go into getting a good deal, and a fair price is only one of them.

Financial Strength Ratings of Carrier
In the insurance universe, ratings agencies serve as watchdogs to keep the public informed on how financially stable a particular company is. Rankings are usually letter graded – however, what is the strongest ranking possible at one company may not be the strongest at the next, even though they use the same letter.

Life Insurance Carrier Rating Agency Names & Ranking

Name of Agency
Website
Financial Strength Ranking Examples
A.M. Best Company, Incwww.ambest.comConsidered “Secure”

A++, A+ (Superior)

A, A− (Excellent)

B++, B+ (Good)

Fitch Ratingswww.fitchibca.comConsidered “Investment Grade”

AAA, AA

A, BBB

Moody’s Investor Services*www.moodys.comConsidered “Fair” or Better:

Aaa (Superior)

Aa (Excellent)

A (Good)

Baa (Fair)

Standard & Poor’s
Insurance Ratings
Services*
www2.standardandpoors.comConsidered “Adequate” or Better:

AAA (Extremely Strong)

AA (Very Strong)

A (Strong)

BBB (Adequate)


Duration of the Coverage Offered

If you own a term policy, flip it open. You may see that you are guaranteed coverage through age 95. Of course, your end of the bargain is this: you have to pay for it the the entire time.

What’s the big deal? Term insurance is cheap right?

Term insurance policy premiums are typically banded for simplicity’s sake. This means that the premium you pay stays the same for 10, 15, 20 or 30 years, depending on what the insurance company offers. This type of policy is known as “guaranteed level term insurance.” Does the coverage go away after that time? Usually, no – but what does go away is the affordable premium. It’s not uncommon for policies to increase tenfold  on the 21st year of a 20 year term policy.

If you’re thinking, “Hey, I have a term insurance policy, but I already pay more every year!” then you may have what’s called “annual renewable term insurance.” The premium is substantially lower in the early years of the policy – even lower than a 10 year term policy in many cases. The trade-off: every year the premium goes up – and exponentially so the older you get.

Additional Policy Benefits

If you become disabled and can’t earn a paycheck, let’s face it: life insurance premiums will likely be on the chopping block. But what if your insurance company promised to pay the premiums for you?

This is just one of multiple available benefits, known formally as “riders,” to tack on to term life insurance policies. The cost is often less than a dollar per month. Other common term insurance riders include:

  • Accidental Death Benefit: In the event that the cause of your death is ruled accidental, the death benefit often doubles, and sometimes even triples or quadruples. (I personally am not a fan of this rider – if you’re protecting your family, the amount of money they need isn’t going to double based on how you die.)
  • Child Term Insurance Rider: Again, for what is tantamount of pocket change each month, you can insure your living and future children for $5000 or more. Typically, the death benefit expires on the policy anniversary following the child’s 25th birthday. Note that all children have to be insured equally.
  • Spouse Term Insurance Rider: Just like the child term rider, you can protect your spouse with the a spouse term insurance rider for just a little bit extra each month. The benefit usually expires at a stated age – for example, age 60 – and can’t be more than the primary insured’s death benefit.

Conversion Privileges

At the end of the level premium period (or at the time you’re just sick of paying a higher premium every year), you may wish to convert your term insurance policy into a permanent insurance policy. Examples of permanent policies included Guaranteed Universal Life, Index Universal Life, and Whole Life. The mechanics of these policies is beyond the scope of this post, but suffice it to say that not every company that offers term insurance offers permanent insurance; and not every term policy comes with the privilege to convert to a permanent policy, even if it’s offered.

Portability

Will your term life insurance policy always be yours?

If your employer provides you with a company car, you won’t get to keep it if you leave. Company provided term insurance – whether paid for by your company, or you – might not come with you if you switch companies or careers. (It certainly won’t come with you by default.)

Don’t get me wrong: if you’re offered term insurance through work, take advantage of it. The dangerous thing to do is to completely rely on it. Ask yourself: can you be sure the next place you go will offer you term insurance coverage? If they don’t, what changes in your health could occur that might prevent you from qualifying for an individual term insurance policy?

In Summary

Not all term life insurance policies are created equal. When considering insurance, be sure that it fits your needs as well as your budget.

We offer complimentary insurance policy reviews. E-mail us to ask how to get started.

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Behavioral Finance Credit Credit Score Debt Emergency Funds Financial Planning Investing Retirement Savings Student Loans

Accomplishing Your Financial Goals by Weighing Each Part

Accomplishing Your Financial Goals by Weighing Each Part

A man walks into his doctor’s office for his annual checkup. After checking his heart beat, taking his blood pressure readings, and flipping through his chart, the doctor breaks bad news to the man: that he’s got to lose some weight, or suffer some serious health consequences very soon. The man, very annoyed, explains to his doctor that he has tried to lose weight, but “nothing works.” He eats a salad for lunch every day. He cut out soda and beer. He has vegetables with every meal. It’s just genetics!

Not so fast. Further prompting from his doctor reveals the problem: the man dumps croutons, breaded chicken, and ranch dressing on his salads, making them no better than a fast food sandwich – and he does this daily. The vegetables he eats are always accompanied by high calorie dips. And his daily snacks of ice cream and M&Ms add nearly 1500 calories to his daily intake. Turns out they’re more than just a treat – they make up half his diet.

For anyone who cares about their health, filling in the blanks is easy: calories in > calories out. For this man, it’s confusing. He eats vegetables and some sweets, so what?

A good habit does not cancel out a bad one. When it comes to accomplishing one’s goals, the summation of all of his actions are what results in the consequences, whether desired or not. It’s not the lettuce that’s the problem, it’s the deep fried chicken and carb loaded extras on it.

The same is true when it comes to money. It’s not saving money that’s the problem, it’s avoiding wasting it. Would lower interest on my credit card help? Sure, but if I keep swiping it to buy useless junk, how much will my balance decrease?

Successful people look at how their individual financial habits impact their financial situation as a whole. By addressing their financial situation in parts, they feel more empowered to make real changes for the better.

Consider your financial situation and it’s parts. What can you cut out of the budget, however tiny? How much extra change can you throw into savings, or at your credit card balance?

Whether it’s improving cash flow, saving for a vacation, or paying off a credit card, big change happens when the weight of each part is tackled bit by bit. Cutting out croutons from a salad can reduce it by hundreds of calories. Give it time, and the impact of cutting out croutons will speak for itself. The same is true for your bottom line.

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Emergency Funds Financial Planning Lifestyle Savings

There is No Free Pet

There is No Free Pet

Meet Sam: Pictured in “Innocence” Mode, Above.

One thing to know about my girlfriend’s family is that they are being fans of dessert. It’s not uncommon for her father to return from State College with 6 gallons of ice cream from the Berkey Creamery. One night after having dinner with her parents, the dessert of choice wasn’t ice cream, but rather homemade chocolate chip cookies – with extra cocoa. Great for people (at least, not lethal.) Not so much for cats.

Nevertheless, my cat Sam decided he would taste them while were away from home at the office. Always hungry and never discreet about his hunting, we returned home in the evening to find remains and crumbs of cookies, as well as the plastic bag that housed them, scattered across the kitchen floor and even into the living room.

Amazingly, he was fine. Considering how toxic dark chocolate is to cats, I thought we’d gotten lucky. Wrong.

A day and a half after his cookie binge, Sam threw up his regular diet (of actual cat food) onto a carpet on our basement. Things progressively got worse over the next several days. Normally a proverbial quadrupedal vacuum, he now barely ate. And what little he did it was thrown up immediately. It got to the point where he would walk right by his bowl, sniff his food, and not even take a bite. We knew something was still wrong.

There wasn’t much choice but to take him to the emergency vet to get checked out. An x-ray revealed that he was “backed up” – none of the food he was eating had anywhere to go, if you catch my drift. Enter the resolution – an enema. I’ll spare you the details, but suffice it to say we were fortunate that we didn’t spend more. Still, a 2 hour visit still set us back $400. Ouch, I thought. But it I’d deal with it.

Fast forward a few days, Sam had once again lost interest in food. So it was back to the vet – this time, the local one.  We dropped him off in the morning, only to find out in on an afternoon phone call with the vet that he needed some very expensive tests – which would set us back another $1500-$2000 dollars.

Just for context: We weren’t in a position to pay that kind of money. We had just gone through several months of expensive bills from Kalie – Lindsey’s 14 year old cat. Her frequent visits included dental surgery, and inspection of an abnormal spot on her backside. That spot become a lump. Ultimately, Kalie had to be put to sleep due to terminal cancer.

But back to Sam – the vet suggested keeping him overnight, instead of running the tests, which she admitted were costly. “I just keep going back to the dark chocolate he got into,” she said. She thought that if they kept him hydrated, he might be more willing to eat in the morning. And that’s what happened. He’s been fine ever since, and we’ve taken some preventative measures (elastic bands to keep his prying paws out of the cupboards, for example.)

The irony of having been gifted Sam as a pet isn’t lost on me. He was free! If you’re a pet owner, you know how much pets can cost. It’s a matter of when they’ll need to be treated by the vet.

Fully recovered & lounging on a soon to be installed dishwasher.

Need a good reason to have an emergency fund? Here it is.

The total cost of vet bills to get Sam health again was just over $1,400. Take it from me: it’s important to think of the cost of ownership in advance of taking on the responsibility of a pet. When it comes to animals, the emergency health issues they have are often completely unpredictable. Having cash on hand in the form of an emergency fund can literally be the difference between life and death for your pet.

Despite cash on hand being tight at the time, we managed to get Sam’s bills covered, and he’s home as happy and healthy as ever. He might be a member of the family, but we make sure he doesn’t get dessert anymore.

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