Here is a sample video on how life insurance is priced. This video is done by Mr. Dorlan Francis. His book "Life Insurance" is a book that needs to be read. Enjoy the video!
Thursday, November 5, 2009
Saturday, October 31, 2009
Financial Myths Pt2 The 401k plan
The 401K plan(457, 403b, etc)
The 401k plan it is the central piece of the average American's retirement plan. People love this plan becauses it allows people to "save" for retirement; and it allows folks to save on taxes during the current year's contribution into the account. I will show you that this plan is not the most efficent way to save for retirement and it is a ticking tax time bomb. Before we dispel the myth of the 401k plan, let's explore the inner workings of the plan. As a side note as we discuss 401k plans, this discussion also applies to the following qualified plans:IRA, 403b and 457.
The 401k plan is not an investment, but an Qualified retirement savings account. The IRS has certain rules for this account in how it relates to taxes on the contribution and the growth on the money inside of the account. Inside of this "account" a person can use various choices of investments. Typically, Mutual Funds are selected. The money is placed into the account either pre-tax or taxes are reduced based on an annual contribution. The money grows tax deffered. So this means all the gains on the investments are not subject to taxes! Sounds real good right? Keep reading.
After age 59 1/2, you begin to withdraw the money. You are subject to income tax on your money gained! This poses a problem huge problem: How long will your retirement savings last? Before we answer that question, let's look at the difference between a Defined Benefit plan versus Defined Contribution plan.
Defined Benefit Plan-(Pension Plans)
A defined benefit plan is exactly what it sounds. It provides a defined benefit at retirement. These plans are based on guarantees by the employer to provide a defined income at the worker's retirement. This income would provide the retired worker income until death. The employer takes on the risk of the funds ensuring that it is available for retirement. The income stream is taxed, but the risk for the lifetime of income rests 100% with the employer. These plans are going out of style due to increased competition in the business marketplace and other reasons beyond the scope of this blog entry. For most employers, it becomes too expensive to manage these funds, provide benefits to its employees, and stay competitive with lower labor costs booming in other countries. This became(still is) a major problem. So to resolve this issue in the 1970's, the US Government brought to the people ERISA(Employee Retirement Income Security Act). This act provided the groundwork for Defined Contribution plans(401k plans).
Defined Contribution Plans(401k,403b, 457, and etc)
The employer in a Defined Contribution plan sets the guidelines for the contribution to the employees retirement account as per ERISA/IRS law. The employer may match the contributions by the employee, based on the written guidelines of the plan. The employee is responsible for choosing the investment vehicles to save for retirement: Stocks, Mutual Funds, etc. The retirement contribution rests heavily on the employee since there are NO defined benefits at retirement provided the employee. The employer does not have the expense of managing or providing the lifetime income at retirement for the employee. It is up to the employee at retirement to provide a steady income for life.
Here is the main issue with the 401k type plans: Your tax savings is totally lost when you need it! You kids are grown, house is paid for, so all the tax deductions are gone! Since there is no guarantee of a life time of income, your money will run out or you live off of a paltry amount each month!
Let's assume that an employee has saved over $1,000,000 in his working lifetime. As this person begins to withdraw his money from his 401k plan,he is taxed immediately. Also, his money is taxed at his earned income tax bracket. It does not take a rocket scientist to realize that taxes will be higher in the future. While this example seems simplistic, keep in mind that he is taking out the money at a faster rate than the principle is earning on his money! The money will run out! This is the fatal flaw of the 401k plan!
Most Financial Advisors have persons to Buy Term Insurance and invest the difference.That "difference" may be invested into a 401k plan. The average person will purchase term, in the hopes that his 401k balance will be sufficient to sustain him/her during retirement. Based on the advice of most financial planners, they will be self insured at this point(I will explore the fallacy of being self insured using Mutual Funds on a later post). They will let the Term Insurance expire or lapse after the 15-30 years, so at this point of their lives; they will NOT have any life insurance. According to the experts; everything will be taken care of in the 401k plan...until the money runs out! This is a very scary proposition, and millions are going down this road!
The combination of the use of Mutual funds and these 401ks provide ZERO guarantees on providing a retirement income for life as compared to a defined benefit plan. This combo is a huge problem, since the individual is now carrying all the risk for providing a retirement income. I will admit there are no guarantees for any endeavor, but why place the odds against you? Why accumulate something in order to give it away to have nothing? Most individuals are not trained professionally to work in the stock market. The next installment discusses Mutual Funds and why they are the riskiest investment to use for retirement planning.
Here is a Time Magazine article on 401k plans: Why It's Time to Retire the 401(k)
Doug Andrew's take on 401k plans:
The 401k plan it is the central piece of the average American's retirement plan. People love this plan becauses it allows people to "save" for retirement; and it allows folks to save on taxes during the current year's contribution into the account. I will show you that this plan is not the most efficent way to save for retirement and it is a ticking tax time bomb. Before we dispel the myth of the 401k plan, let's explore the inner workings of the plan. As a side note as we discuss 401k plans, this discussion also applies to the following qualified plans:IRA, 403b and 457.
The 401k plan is not an investment, but an Qualified retirement savings account. The IRS has certain rules for this account in how it relates to taxes on the contribution and the growth on the money inside of the account. Inside of this "account" a person can use various choices of investments. Typically, Mutual Funds are selected. The money is placed into the account either pre-tax or taxes are reduced based on an annual contribution. The money grows tax deffered. So this means all the gains on the investments are not subject to taxes! Sounds real good right? Keep reading.
After age 59 1/2, you begin to withdraw the money. You are subject to income tax on your money gained! This poses a problem huge problem: How long will your retirement savings last? Before we answer that question, let's look at the difference between a Defined Benefit plan versus Defined Contribution plan.
Defined Benefit Plan-(Pension Plans)
A defined benefit plan is exactly what it sounds. It provides a defined benefit at retirement. These plans are based on guarantees by the employer to provide a defined income at the worker's retirement. This income would provide the retired worker income until death. The employer takes on the risk of the funds ensuring that it is available for retirement. The income stream is taxed, but the risk for the lifetime of income rests 100% with the employer. These plans are going out of style due to increased competition in the business marketplace and other reasons beyond the scope of this blog entry. For most employers, it becomes too expensive to manage these funds, provide benefits to its employees, and stay competitive with lower labor costs booming in other countries. This became(still is) a major problem. So to resolve this issue in the 1970's, the US Government brought to the people ERISA(Employee Retirement Income Security Act). This act provided the groundwork for Defined Contribution plans(401k plans).
Defined Contribution Plans(401k,403b, 457, and etc)
The employer in a Defined Contribution plan sets the guidelines for the contribution to the employees retirement account as per ERISA/IRS law. The employer may match the contributions by the employee, based on the written guidelines of the plan. The employee is responsible for choosing the investment vehicles to save for retirement: Stocks, Mutual Funds, etc. The retirement contribution rests heavily on the employee since there are NO defined benefits at retirement provided the employee. The employer does not have the expense of managing or providing the lifetime income at retirement for the employee. It is up to the employee at retirement to provide a steady income for life.
Here is the main issue with the 401k type plans: Your tax savings is totally lost when you need it! You kids are grown, house is paid for, so all the tax deductions are gone! Since there is no guarantee of a life time of income, your money will run out or you live off of a paltry amount each month!
Let's assume that an employee has saved over $1,000,000 in his working lifetime. As this person begins to withdraw his money from his 401k plan,he is taxed immediately. Also, his money is taxed at his earned income tax bracket. It does not take a rocket scientist to realize that taxes will be higher in the future. While this example seems simplistic, keep in mind that he is taking out the money at a faster rate than the principle is earning on his money! The money will run out! This is the fatal flaw of the 401k plan!
Most Financial Advisors have persons to Buy Term Insurance and invest the difference.That "difference" may be invested into a 401k plan. The average person will purchase term, in the hopes that his 401k balance will be sufficient to sustain him/her during retirement. Based on the advice of most financial planners, they will be self insured at this point(I will explore the fallacy of being self insured using Mutual Funds on a later post). They will let the Term Insurance expire or lapse after the 15-30 years, so at this point of their lives; they will NOT have any life insurance. According to the experts; everything will be taken care of in the 401k plan...until the money runs out! This is a very scary proposition, and millions are going down this road!
The combination of the use of Mutual funds and these 401ks provide ZERO guarantees on providing a retirement income for life as compared to a defined benefit plan. This combo is a huge problem, since the individual is now carrying all the risk for providing a retirement income. I will admit there are no guarantees for any endeavor, but why place the odds against you? Why accumulate something in order to give it away to have nothing? Most individuals are not trained professionally to work in the stock market. The next installment discusses Mutual Funds and why they are the riskiest investment to use for retirement planning.
Here is a Time Magazine article on 401k plans: Why It's Time to Retire the 401(k)
Doug Andrew's take on 401k plans:
Sunday, October 18, 2009
Financial Myths pt 1-Term Insurance is Cheaper the Permanent Insurance
I want to discuss or cover some myths that are very prevelant in the financial services arena. These myths are causing great confusion and indecision with many clients,Financial Services Professionals, etc. Let's list them out, as I will begin to dispel these myths in a series of blogs. It is dishartening to hear people repeat these myths over and over again, and could possibly receive benefit if these myths were not a part of their belief system. Here are the some of the myths listed here, and we will add more as I continue this blog:
1.Term is cheaper than Permanant Insurance
2.401k plan is the best plan for Retirement
3. Mutual Funds are safe Investments
I will add more "myths" as I continue, but will start off with these three.
Term vs. Cash Value Insurance
Term Insurance is NOT cheaper than Whole Life Insurance.Its ONLY cheaper during the term period!
Term Insurance is cheaper than Whole Life insurance(during the term period) for this simple reason:the probability of death is very low during the term period. The life insurance company calculates the average price of insurance over the term period(10,20, 30 years). The shorter the term period, the lower the price. For example, price out a 10 year term life policy as compared to a 20 or 30 yr term life insurance policy. The price is cheaper, why?The probability of a individual dying in this term period is very low. This is why insurance companies only pay around 2% on death benefit for Term Insurance. After the term period is over, then the price of insurance goes up each year. Term Insurance is designed for a Temporary need, not a permanent need.
Permanent Insurance(Cash Value)
If all life insurance is Term Insurance,then permanent insurance is really term insurance until age 120. The probability of you dying in this term is close to 100%..in fact it is! Since you dont know when you are going to die, then the premiums are averaged throughout the period till age 120. So it may appear that the premiums for Whole life are more expensive, but the premiums are not if you sum the total premiums paid up to age 120.Now the other side of the argument is this, I dont think I will live to age 120, so why am I paying a higher premium? This is where the Cash Value comes into play. In case you live to be 120, the premiums are level so that you will NOT have to pay a higher premium after age 65,since the probability of death increases exponentially.In your younger years, the premiums are higher so the extra cost goes into the Cash reserve account for future premiums and future benefits.This allows the price of insurance to the consumer to be the same throughout his/her whole life. The Cash Value really is not an investment account since it really is for future benefits and future premium payments!This is why Insurance Companies must provide GUARANTEES on the Cash Value or Terminal Reserve Account since it is for Death Benefits. This is also why they require you to BORROW the money out of this terminal reserve aka Cash Value. This is also why you don't get BOTH death benefit and Cash Value at death since this accumulation is really for future benefits on the policy.
If you look at numbers below, I have the term policy for a 30 year old and compared to a Whole Life policy.Same age, same gender etc. I have totalled out the premium payments up to age 70. The reason why I did this assumption since no one knows when they are going to die, we will assume age 70 is when we will die. As you can see, the amount of premium paid is different if you compare both premium payment totals.
Term Life
Age 30-Annual Premium $327
Total Premiums paid up to Age 70:$68,747
Whole Life
Age 30-Annual Premium: $1,143
Total Premiums Paid up to Age 70:$46,863
Cash Value Total(Guaranteed):$57,838
If the policyholder wanted with the Whole Life policy, they could stop making payments for several years! The Term Policy if they continued it, the Annual Premiums would continue to increase exponentially each year!
In conclusion, both types of insurance are excellent depending on the person's situation.This is not an indictment of Term Insurance. In Fact,many people may start off with Term insurance, and convert that policy into a more permanent type policy. One is NOT better per se than the other, but it is prudent for a working individual to carry life insurance. The point of the matter is this, if Term fundamentally was cheaper OVERALL in comparison to Whole Life, then no one would buy Whole Life or permanent insurance. In my opinion, the best kind of insurance is the one that pays benefits to the loved ones at the time of need. There is no price for that service. The next entry I will discuss the next myth: 401k plan.
1.Term is cheaper than Permanant Insurance
2.401k plan is the best plan for Retirement
3. Mutual Funds are safe Investments
I will add more "myths" as I continue, but will start off with these three.
Term vs. Cash Value Insurance
Term Insurance is NOT cheaper than Whole Life Insurance.Its ONLY cheaper during the term period!
Term Insurance is cheaper than Whole Life insurance(during the term period) for this simple reason:the probability of death is very low during the term period. The life insurance company calculates the average price of insurance over the term period(10,20, 30 years). The shorter the term period, the lower the price. For example, price out a 10 year term life policy as compared to a 20 or 30 yr term life insurance policy. The price is cheaper, why?The probability of a individual dying in this term period is very low. This is why insurance companies only pay around 2% on death benefit for Term Insurance. After the term period is over, then the price of insurance goes up each year. Term Insurance is designed for a Temporary need, not a permanent need.
Permanent Insurance(Cash Value)
If all life insurance is Term Insurance,then permanent insurance is really term insurance until age 120. The probability of you dying in this term is close to 100%..in fact it is! Since you dont know when you are going to die, then the premiums are averaged throughout the period till age 120. So it may appear that the premiums for Whole life are more expensive, but the premiums are not if you sum the total premiums paid up to age 120.Now the other side of the argument is this, I dont think I will live to age 120, so why am I paying a higher premium? This is where the Cash Value comes into play. In case you live to be 120, the premiums are level so that you will NOT have to pay a higher premium after age 65,since the probability of death increases exponentially.In your younger years, the premiums are higher so the extra cost goes into the Cash reserve account for future premiums and future benefits.This allows the price of insurance to the consumer to be the same throughout his/her whole life. The Cash Value really is not an investment account since it really is for future benefits and future premium payments!This is why Insurance Companies must provide GUARANTEES on the Cash Value or Terminal Reserve Account since it is for Death Benefits. This is also why they require you to BORROW the money out of this terminal reserve aka Cash Value. This is also why you don't get BOTH death benefit and Cash Value at death since this accumulation is really for future benefits on the policy.
If you look at numbers below, I have the term policy for a 30 year old and compared to a Whole Life policy.Same age, same gender etc. I have totalled out the premium payments up to age 70. The reason why I did this assumption since no one knows when they are going to die, we will assume age 70 is when we will die. As you can see, the amount of premium paid is different if you compare both premium payment totals.
Term Life
Age 30-Annual Premium $327
Total Premiums paid up to Age 70:$68,747
Whole Life
Age 30-Annual Premium: $1,143
Total Premiums Paid up to Age 70:$46,863
Cash Value Total(Guaranteed):$57,838
If the policyholder wanted with the Whole Life policy, they could stop making payments for several years! The Term Policy if they continued it, the Annual Premiums would continue to increase exponentially each year!
In conclusion, both types of insurance are excellent depending on the person's situation.This is not an indictment of Term Insurance. In Fact,many people may start off with Term insurance, and convert that policy into a more permanent type policy. One is NOT better per se than the other, but it is prudent for a working individual to carry life insurance. The point of the matter is this, if Term fundamentally was cheaper OVERALL in comparison to Whole Life, then no one would buy Whole Life or permanent insurance. In my opinion, the best kind of insurance is the one that pays benefits to the loved ones at the time of need. There is no price for that service. The next entry I will discuss the next myth: 401k plan.
Tuesday, September 29, 2009
The Seen and Unseen-The Problems when a Business is Down Temporarily
The Seen and Unseen-The Problems when a Business is down temporarily
Let's suppose for a moment, that a group of college friends decide to start up a small retail business. The Group plans every detail out: Financing, Equipment, Location, Market Analysis, Inventory, etc. They even purchase General and Professional Liability Insurance. They open the business! Grand Opening!!! YAAA!! They are making money! They are beginning to pay back all the money from the start costs of the business. A year or two goes by, they are still paying back the start up cost for the business, and BOOM!!! A Fire destroys EVERTHING! Are these guys covered? The General/Professional Liability policy covers this situation, right? WRONG! Now these guys have lost everything, and they must continue to pay back the investors for the start up costs, lost equipment, lost inventory, etc etc, etc.
What could be done to prevent this situation? Many Business Owners can purchase a Commercial Insurance Policy known as a BOP(Business Owner's Policy). The details of this policy may vary from company to company, but here are some problems that our Entrepreneurs face in this story:
- Loss of Business Equipment-How is this equipment going to be replaced?
- Loss of Business Income-How are the guys going to pay back the start up costs, overhead, etc
- Lost inventory-Once the damage is fixed, they need to purchase inventory
- Law Suit-If these business owners are the ones found negligent in this peril, how will the legal costs be covered?
The BOP addresses all of these issues. The coverage limits and amounts may vary from company to company, but the point is this: Always look at your Commercial insurance as part of your business plan. To many times Business owners attempt to start a business from a shoe string budget. Murphy's Law typically loves these types of situations! In the planning process of your new enterprise, talk to insurance professional about a BOP package for YOUR new or existing enterprise! If have questions, call me at 866-846-4901 or email at:rbjbizgroup@gmail.com
Tuesday, September 22, 2009
Double Minded Man..Please Make a Choice!!!
I dislike people that cant make a decision. It is very very frustrating. If you have ever dealt with this type of individual, you can understand. In the investment world, you have to have a clear focus on your objective, and you must not be double minded in your wealth accumulation vehicle(s). Some folks like risks but dont like the downside effects. Others like more conservative investments, but inflation beats them up also. Here in lies the paradox! I have a video for people who are double minded! You can have the best of both worlds! There are vehicles that allow clients to have Stock Market like gains, with guarantees of NO LOSS OF PRINCIPLE! This video explains how it works! This video is from best selling author Douglas Andrew and his son. Call 866-846-4901 to see how this product can work for you!
Friday, September 4, 2009
Zig Ziglar - Attitude Makes All The Difference
This is an EXCELLENT Video! Zig Ziglar is a excellent business leader! www.coveryourassetsnow.net
Thursday, September 3, 2009
Zero is my Hero!
No, I am not thinking about the old "School House Rock Video". Many folks have lost up to 50% of the value in their current 401k or other qualified plan. Where is the guarantee? What insurance or protection does one have when the market tumbles? Should we just buy more shares in case the market turns upward? What written guarantees are available if does NOT happen?
These questions should be asked at the time of the investment account inception. The problem is this: Folks are sold on the "what if". What if the market does 20%? The average investor can not time the market to earn 20%! The average investor during the 1900s earned about 2-5% when the market was booming? Why? Lack of knowledge in the science of Market timing. There are investors out there who are accumulating wealth and NOT losing money! They will get a 0% ROI on their money when the market goes down! They never lose their principle! That is more important than ROI! So ZERO IS A HERO in a down market! When the market goes up, they still can earn an Excellent ROI on their money! This video below explains it all.
These questions should be asked at the time of the investment account inception. The problem is this: Folks are sold on the "what if". What if the market does 20%? The average investor can not time the market to earn 20%! The average investor during the 1900s earned about 2-5% when the market was booming? Why? Lack of knowledge in the science of Market timing. There are investors out there who are accumulating wealth and NOT losing money! They will get a 0% ROI on their money when the market goes down! They never lose their principle! That is more important than ROI! So ZERO IS A HERO in a down market! When the market goes up, they still can earn an Excellent ROI on their money! This video below explains it all.
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