Where do we begin?
The world’s greatest debate is always about insurance.
Some say, “You should begin with a good insurance policy and work your way up from there.” Others say, “Insurance is a just waste of time, it won’t yield enough return on the hard earned money I invest to even bother” - and every other possible degree between those two polarities. Yet, is truth somewhere within the preceding statement? Let’s see if we can find it.
In sports and in finance the truth is . . .
Defense is the name of the game!
A great defense and a great offense is always better than just a great offense. If you look at insurance as your defense . . . and saving as your offense . . . and retirement as your goal . . . you will have a winning combination. That is, if you are dealing with the right insurance company that has the financial strength and the best interest of its customers at heart.
Insurance is a strong defense against financial catastrophes such as . . .
- 1. Accidents 3. Sickness 5. Storms
2. Vandalism 4. Floods 6. Theft 7. Fire
8. Disability
9. Loss of life, etc.
Either of the above mishaps could ruin your best plans. They could deplete your assets, and set you back financially for years to come. Most people think of number 1 through 7 as absolute insurance necessities and they willingly pay for those defensive measures without question. However, when it comes to taking action . . .
Regarding numbers 8 and 9 on the list above
. . . Most people have a problem with considering the possibility of early death or an untimely disability. Consequently, they avoid taking time to analyze and understand the power of life and disability insurance as savings and investment tools as well as an assurance that all will be well no matter what happens. That’s because of the common conception that disability insurance and cash value life insurance are liabilities rather than assets. So, let’s see how they can be the best asset in your portfolio
Disability insurance can guarantee your income until age 65.
There are a wide variety of disability insurance policies. So you must beware of what you are getting. Disability definitions range from “Own Occupation” to “Any Occupation” to “Accidental Loss of Both Hands and Both Feet” the latter being highly unlikely to happen statistically.
The best disability policy your can acquire is defined as “Own Occupation.” An example of “Own Occupation” is - if you are a surgeon who develops Parkinson’s Disease and your hands are no longer steady, or lawyer who develops Alzheimer’s - you would have lost the ability to continue functioning in your “Own Occupation” and suffer a lifetime loss of income. Therefore, a good insurance company would pay you up to approximately 75% of your income prior to your disability until age 65.
The next best disability policy your can acquire is defined as “Any Occupation.” An example of “Any Occupation” is - if you were a worker making $30.00 per hour on an assembly line. The line requires speed and a certain amount of production per day. Unfortunately, you have a stroke and you are so incapacitated cannot perform the duties of any job - then a good insurance company would pay you up to approximately 75% of your income prior to your disability until age 65.
However, if you have developed a mild case of arthritis that slowed you down so you couldn’t make your production quota and you could be a security guard making $12.50 per hour, the insurance would not pay because that is any occupation.
With a good disability policy . . .
You receive benefits at the income level for which you qualify. Your qualification is defined by the level of premiums you pay and the terms and conditions in your policy. Of course, there are countless other maladies or accidents that could cut your career short.
The reason your insurance disability payments stop at age 65 is because that’s when your personal retirement benefits, Social Security Disability and other government benefits begin.
Therefore, at the point of your incapacitation . . .
Your Disability Insurance ceases to be a strong defense and becomes the strongest offense you could possibly have. That’s because your disability income continues at the level you have chosen for as long as your disability lasts. It preserves your lifestyle. Yes, it provides the money for you to pay your bills and continue saving toward your ultimate financial goals. “On the other side of the coin” . . .
Life insurance that builds cash value can be your best financial offense and defense simultaneously.
A good Whole Life insurance policy will pay you solid dividends and build substantial cash value for your retirement. Also, Universal or Variable life insurance with a history of a strong return in its investment portfolio can greatly increase to your wealth over time.
“But, I hate insurance!” - my clients would lividly exclaim - “I read in ‘The Popular Nonsense Financial Magazine’ that I will have more money in an annuity when I retire . . . I WANT AN ANNUITY!”
Let me be clear here! An annuity is an insurance policy because it transfers the uncertain effects of an individual’s lifespan after retirement from the individual to the insurance company. It performs this action by a guaranteed lump sum payment, or periodic payments, when you retire. Annuity distributions can be monthly, quarterly, semi-annually, or annually for a specified number of years or for a lifetime.
The following are some distinct differences of which you should be aware when considering an annuity contract vs an insurance policy.
1. The Insurance Company
2. The Death Benefit
3. Accumulation of funds
4. Taxation According to the current tax code
5. Distribution of funds
Let’s examine the five differences above beginning with . . .
1. The Insurance Company:
But first, please answer this question so you will have a firm mental picture of concepts I am attempting to convey . . . If an insurance company was a vehicle which would you rather ride from the east coast to the west coast - a tricycle or a Rolls Royce?
Personally I would prefer the Rolls Royce. That would be a logical tangible choice. However, insurance companies and their products are abstract. That’s what complicates the decision making process when you are making your most important financial decisions. It requires thought, effort, concentration, investigation, and diligence.
Therefore, you must do your homework - by searching the internet - in the library - and by interviewing expert financial professionals.
That’s exactly what I did When I decided to establish a career in the financial industry. After my research, I scheduled interviews with the top fifteen companies in America. During the interview process I narrowed the field down to three companies. Then I asked those three for a second interview.
Then I scheduled a third interview with the one special company that, in my humble opinion, is the Rolls Royce of the financial industry. Fortunately, they hired me and my diligence paid off because working with that company was one of the best experiences I have had in this lifetime.
I discovered that there are only a handful of the many life insurance companies that are really strong financially and have the philosophy and the integrity to:
a. Sell a wide variety of excellent products
b. Allow their agents the flexibility to sell
the products of other companies in areas
where their products are not competitive
c. Have the courage and the integrity to rate
the needs of their customers as their
highest priority
You should seriously consider the financial strength, and all of above mentioned qualities of the insurance company you choose. Your insurance and/or annuity contracts are important. You need to be aware that major insolvencies have occurred at least 62 times since the collapse of the Executive Life Insurance Company in 1991. As of today there are many more failures on the horizon.
2. The Death Benefit Of . . .
The Annuity:
You get back what you put in plus interest. For example - Let’s suppose you sign an application for an annuity contract and give the agent a check for $50. Then you drop dead that day, or anytime during the life of your contract, the insurance company will graciously give your family the amount of money you paid plus interest, if applicable.
The purpose of an annuity is retirement income only. That seems simple enough; however, there are a myriad of annuity options and you must decide which choice would be the most suitable for you and your family. If you choose a five year payout, you get more money per payment period. If you chose a longer payout period - you get less. If you take payments for a lifetime - you get even less. If you take a lifetime benefit with the stipulation that a survivor of your choice will receive payments until he or she dies be assured you will get the minimum. The longer the payout period the less you get.
Insurance:
You get the face value of the policy. If you sign an application for insurance wit a face amount of $100,000 and give the agent a check of $50 for the first premium then drop dead that day your family will get the full $100,000 the face value of the insurance policy. The face value could be several thousands of dollars - or many millions of dollars according to the face value and the dollar amount of the premiums that you pay.
At moment of your demise, with insurance, your retirement plan would be fulfilled and your family taken care of financially. You are fully insured while the insurance company is in the process of investigating your health history and other factors that would cause them to approve issuing or denying you a permanent policy.
3. Accumulation of funds:
In both insurance and annuities you can earn interest or a return on your investment that accumulates tax deferred.
Let’s assume that you took an interest bearing insurance policy and an interest bearing annuity the same day. The rate of return has consistently been 6% per year for both. Month after month you have sent the insurance company $100 per month for 25 years. Now you are ready to retire and there is more money in the annuity than in the insurance.
The cost of insurance has reduced the cash in the insurance policy compared to the annuity. You start kicking yourself in the neck because you could have accumulated more money if you had put all your money in the annuity.
But, Wait . . .
The insurance policy could yield more cash for you to spend during your retirement years because of the way tax laws affect the distribution of retirement funds. So, before you panic let’s take a look at the effect of . . .
4. Taxation according to the tax code:
Insurance is “First In First Out” (or commonly referred to as “FIFO”)
Annuities are “Last In First Out” (or commonly referred to as “LIFO”)
“FIFO” - First in first out is the first money paid into an insurance policy. Therefore, “FIFO” is the total sum of premium dollars you paid for the policy during the years prior to your retirement. By law, the first money you withdraw is premium dollars you paid and those funds cannot be taxed.
“LIFO” - Last in first out is the last money paid into an annuity. Interest is earned after you pay your premiums and they are deposited into your account. Therefore, the last money into the account is the interest earned, or the return on investment you accumulated. Upon withdrawal those dollars are immediately taxable according to your retirement tax bracket.
5. Distribution of funds
To illustrate fund distribution at retirement - let’s assume you are in a 30% tax bracket because your total retirement income from all sources is substantial and you have $200,000 cash value in your insurance policy compared to $240,000 in your annuity with each earning 10% annually. You want to augment your retirement income by withdrawing $10,000 per year. So . . .
Below are hypothetical comparative illustrations. These illustrations will give you an idea of the impact the FIFO and LIFO Tax Laws can have on the cash you would have to left to spend for necessities and to enjoy your retirement.
FIFO LIFE INSURANCE ILLUSTRATION
Assumptions: $500,000 Face Value - $200,000 Cash Value - 5% Annual Return
Year Value Withdrawal Earned Taxes Your Money
1 $200,000 $10,000 $10,000 $0 $10,000
2 $200,000 $10,000 $10,000 $0 $10,000
3 $200,000 $10,000 $10,000 $0 $10,000
4 $200,000 $10,000 $10,000 $0 $10,000
Switch to Loans (see notes below)
5 $200,000 $10,000 $10,000 $0 $10,000
6 $200,000 $10,000 $10,000 $0 $10,000
7 $200,000 $10,000 $10,000 $0 $10,000
8 $200,000 $10,000 $10,000 $0 $10,000
The reason for the switch to loans is - loans from insurance
polices are not taxable and never have to be repaid as long
as you do not deplete all the funds from your policy.
Another plus is that the full face value of your policy which,
in the above illustration would be $500,000 and that is much
more than the $200,000 cash value.
The $500,000 face value will be paid to your beneficiary
income tax free upon your demise. However, proceeds
from insurance are subject to the Estate Tax if you are
the policy owner. This punitive Estate Tax can be avoided
by establishing an Irrevocable Life Insurance Trust. (ILIT).
LIFO ANNUITY ILLUSTRATION
Assumptions: $0 Face Value - $240,000 Cash Value - 5% Annual Return
Year Value Withdrawal Earned Taxes Your Money
1 $240,000 $12,500 $12,500 $3,750 $8,750
3 $240,000 $12,500 $12,500 $3,750 $8,750
4 $240,000 $12,500 $12,500 $3,750 $8,750
5 $240,000 $12,500 $12,500 $3,750 $8,750
6 $240,000 $12,500 $12,500 $3,750 $8,750
7 $240,000 $12,500 $12,500 $3,750 $8,750
8 $240,000 $12,500 $12,500 $3,750 $8,750
By comparing the above illustrations It should be clear
that an annuity could leave you with less cash to spend
during your retirement years and that’s when you will need
adequate passive income the most.
Annuities pay no death benefit because the contracts
have no face value.
* * * * Please Note:
The above illustrations are not actual. They are designed
to give you an idea of how the concept works. A qualified
agent in your state is necessary to run a illustration that
is applicable to your age, financial requirements and other
pertinent information.
In Summary . . .
Disability Insurance policies can provide short term or lifetime income if you are disabled from sickness or accident.
Life insurance policies that build cash value can be especially effective retirement instruments because of:
Tax laws that favor accelerated buildup of cash
Tax advantages when withdrawing funds during retirement years
Tax free payout of the face value at death
2,425,000 people die in the United States per year. Around 40% of these are sudden deaths. * * * * Source: National Vital Statistics Report, 2007
Others have protracted illnesses that cost a fortune leaving their families destitute. Many of these people have far too little insurance for their families to carry on without government assistance. Tragedy puts a tremendous burden on the welfare system and on families that have lost a breadwinner.
Therefore, the government wisely provided very attractive tax incentives regarding life and disability insurance mentioned in this article.
Yes! Insurance can take care of you and those you love when you need it most - and I am sure you will agree - financial security is one of the most important goals you can have. Read the rest of this entry »
