Life Insurance 101 Part 1 Whole Life

   Hello Web World, Your friendly Free Financial Adviser here again. We are going to get into some deep stuff over the next few post here. Not because of the subject matter but because every adviser you talk to will have a varying opinion of the subject of LIFE INSURANCE!!!! (insert scary music). Know that I am going to talk about the pros and cons of each type I mentioned before. We are going to talk about the basics of Whole, Universal, Variable and Term. As the above states... today we will touch on Whole Life Insurance, the good, the bad and the ugly. Please know that we are going to be dealing with the basic outline of the policies. There are some companies who add things or subtract things to their policies to make them unique or "better". We will also talk about what questions you should ask an agent while he shows them to you and what questions are better asked to the corporate office. Please note, every policy is between you and the insurance company. So no matter what an agent says, unless you hear it from corporate or read it in your policy.... Take it with a grain of salt. Lets get started.......
   Whole life insurance is based on a simple idea... the idea of life insurance with the extra amount that you pay for going to a savings/investment account that will build a cash reserve. The idea starts out right but as most of you know companies make them complicated... its human nature. Lets look at a simple graph so you can get a better idea of the way it works.

   As the graph shows... Whole life can start at a bargain. If you start early enough a whole life policy can, price wise, compete with most policies. The premiums are level and will never change as long as you keep it going. The price may be a little more expensive then say.. term insurance but the extra you're paying should be going to a Cash Value account that has some interest on it. The savings side is, according to the government, suppose to be invested. Most insurance companies will invest it in high rated bonds, this will give them safe growth. The problem and upside, depending on how you look at it, is that its a fixed rate. So for example... you may receive, depending on the insurance company and rates, anywhere from 1%-6%. This is a way better return then a bank that's for sure. Lets get a better feel for what that 1%-6% is really doing for you. A simple way to get a ruff estimate of how long it takes money to double is called the rule of 72.  This rule is simple... if you take the constant number 72 and divide it by the interest rate you are receiving, you will get the approximate years it will take your money to double. Lets look at an example, if you have $1 in the bank and according to CNN Money (http://money.cnn.com/2013/10/01/pf/savings-account-yields/) the average yield is 0.06%.  What that means is at that interest rate will double your money in 1200 years... LOL WOW.. you might as well assume that you're not getting any interest. If you're lucky enough to get 1% then it will take 72 years for your money to double. Even at 6%, which is a world of a lot better, it will double every 12 years. The great thing is that the interest rate is guaranteed, no chance of up and downs from month to month. As long as you make the payment you get the interest on the amount that goes to the Cash Value.

   The amount in the "savings" side grows tax-deferred which for some people is a great thing. That means that as long as you have the policy in-force your money gets the 1%-6% with no tax implications. The policies have an added "feature" of being able to borrow a portion of the cash value to use it in a tight situation. There are a few things you must know about doing this though. Money that is borrowed from banks, insurance companies or maybe even a friend comes with the understanding that you will repay it with.... interest. That interest amount can very from policy to policy but usually is higher then the interest they are giving you on the actual cash value. That interest they charge you is not added to your cash value... the insurance company keeps it. It's almost like having a line of credit opened up to you, and if you ever cancel/surrender the policy the full value of the Cash Value and any loans taken will become taxable. Lets not forget that the insurance company will take what you owe them out of the cash value, reducing what you actually get. OH, lets not forget if there are any surrender charges on your policy still.... that could eat up any cash value. That is not an exclusive feature of just whole life policies but most all policies that have a cash savings attached to it.  

   Most Whole life policies will mature at the age of 120 now a days. What that means is your policy is good till your 120th birthday. You will make payments till your 120th birthday and should you pass anytime before that, your beneficiaries will receive the death benefit. So far most of the benefits sound great, the issue comes up when you look at the little over looked stuff.

    Every Policy also has fees/administration cost and what not. These fees take away from the total amount that you are suppose to be accumulating in the cash value. So if your total premium that you are paying is... $100, some of it will go to the cost of insurance, some to the fees and administration charges. The left over will then be added to the cash value. You must ask, after all expenses how much will be credited to my cash value. Many a person will make the mistake of assuming that 1/3, 1/2 will go towards their cash value. Don't be afraid to ask the corporate line how much of your premium is reaching the cash value. You can calculate the amount if you know what to look for in the policy, but easier to just ask. I stress, ask the insurance company customer service line. I stated above, the contract is between you and the company not you and the agent. 

    When you have a whole life insurance policy you must take into account that in the event of something happening to the insured, your family is faced with the option of either the cash value that has been saved up to that point or the death benefit. This keeps the insurance companies liability low since they take the cash value. An example would be... lets take someone who has had their policy for 25 years... faithfully paying, never missing a premium payment and has not taken a loan out of it. They have a $100,000 worth of coverage and have saved up... $30,000 in cash value. The unforeseen happens and they pass away, The beneficiary will face the simple yet unfair choice of receiving the $100K death benefit or the $30k cash value. Any person will take the 100K over the 30K, what they fail to take into calculation is that the insurance company now only has to come up with $70K to pay out. So you as the policy owner were paying the same premium payment the whole time but the value of the death benefit in a way was decreasing as you build up your savings. So your premium for the coverage, to the insurance company, has increased in a sense. Some insurance companies have added the option to have both if you ask for it, but at an added cost. 

   The another draw back of this type of policy is the guarantee that people love to have. You see the average return of the S&P500 if you take the CAGR rate which is the true return or annualized return since 1871 to the end of 2013 was a hair over 9% (Some may say that's not fair because its a huge time frame but in a realistic time frame say 50 years ago.. its 10.22%). So if you are locked in at a 1%-6% return you're in essence leaving 3% on the table. While 3% may not sound like a lot, a 30 year old who has this policy till he passes at say 80 will leave ruffly $130,000-$690,000 on the table if you were investing $100 in a fund that mirrored the S&P500, depending on the fixed rate you're getting. The question arises, but were do I find the other 3% but all in good time.   

    I believe that you should ask a few questions in this type of policy... #1 What is the interest that my money will be earning in the cash value after all fees and administration charges? #2 How much of my monthly premium is going into my cash value? #3 Are there surrender charges and if so how much and for how long are they in place? #4 If I had to take a loan out, how much interest would I be charged? #5 Are there any exclusions/suicide clauses that I need to know about? #6 In the event that I pass, does my family/beneficiaries get the death benefit and the cash value? If you ask these questions, you will get a much better picture of what you have and what to expect. IF you're one of the many people that do not have life insurance and are reading this, do not rush into buying one. Especially after just reading this one blog, there are another 3 to come. Next blog we will cover the Life insurance know as Variable Life, till then and like always... if you have any questions or clarifications you may have.. Just ask.  Till then Web World....

AXI C.

Building Your Financial House

  Hello web world...  how are we this day before Valentines day? Good I hope... I am sure that we all have some kind of fun outing planned with a loved one. Today as I am sitting here I want to talk about the basics of a financial house set up. I was having lunch today with a client of mine and I was stating that I wished more people were dedicated to saving as he was. Building a lifestyle around a goal/budget, then he stated something that I hope is more of a generality then the norm. He told me it's just a generational thing... that the reason he saved/saves so much is because he was told that from a child. Now I know that it's difficult sometimes to save when things get backed up.. but it should be a priority for people. Have we become such a microwave society that we can't see the long term goals of slow and steady to reach our goals? I digress...

   Today we are going to talk about the set up of the financial house. Basically how it should look and how the process should be prioritized. When I meet with new clients and especially young families, I always use the builders analogy. I am sure some of you have heard of it, but lets state it anyway. If you are planning on building your forever home.. A home of your dreams and you get all the choices. You search far and wide for that right place to buy the land. Once found, you pick the land and ask the builder to start the process. What is the first thing that the contractor must lay to make sure the house is strong? Well if you know of building and construction, it's a simple answer... the FOUNDATION. That is the most important thing that the house needs, a rock solid spot to rest upon. Especially in California where the ground can move on you, you want that foundation to never give. See the foundation is the income that this lifestyle is built upon, the person/people that pay for everything.    

   In today's age, most families are built off of what 2 people bring in. They share expenses, the buy based upon the income of 2. The issue arises when you remove one of those people prematurely from the picture. Bills don't magically get cut in half, the banks don't allow your mortgage to be half the payment. The credit cards still have a minimum payment to be paid. I have always found it funny that the government will require you to get some insurances like Auto insurance, Home owners insurance, Health Insurance... But the thing that pays for them.. is not required to get insurance.. our income. That's why I believe the foundation of any financial game plan should be to insure that the person/people who pay for all we have is insured themselves.

   I believe that the foundation should be a basic life insurance plan. Now I know a lot of people will say.. "I have life insurance through work", "life insurance is a rip off", or "I'm young/health I don't need that". Well, yes some jobs do offer group life insurance; but I'm talking about life insurance that you control. That you actually have your own policy in hand and not just a certificate. Besides the idea of leaving your foundation in the hands of people who will argue with you over that yearly $0.25 raise, there is no guarantee that your job will keep that benefit paid for if they need to save on overhead. Sure, some companies may allow you to keep that if you pay for it but you wont get a say of the type of insurance or the terms on it. There is also the little problem of knowing how long you may be at your current job. Either do to cut backs, changing in scenery or getting fired.. we really have no control of that job. According to the Bureau of Labor and Statistics, the average length of time at a job is 4.6 years... With that in mind.. what is the average time frame it takes to find a job with good benefits. Especially now a days withe the job market were it is, are you willing to gamble your families financial future with the chance you will find another job with the benefits you want? Or even that you will still be in good health, and alive for that matter, when you find something? 

   Some Life insurance plans can be a "rip off" if you fail to study the policy and all its features, fees, restrictions. You must know the right questions to ask, what to look for and most importantly what fits YOUR needs financially not the needs of the agent that is selling it or sold it to you. As for young and healthy... lets face it. No one knows when our times up, regardless of health. How many car washes and donation trays have we seen in our community because they never got to it or didn't think it was a need. 

   I love the idea that the banks, insurance industry and credit industry will require you to insure all the things that they lent you money for. They don't however require you to have life insurance should the person paying for them pass. I believe that is because they know that if something does happen, at least they can still get your house, car, other valuables and send you to collections if needed. They can keep you paying on things for the rest of our lives if we do not have that solid foundation. Families have enough to grieve about without having to deal with corporations breathing down their necks about bills. So that's where we are going to start.. with the foundation.

   You may ask though.. how do I pick a Life Insurance policy with so many to choose from... Yes, there are a lot of choices to pick from.. so we will be covering the basics of 4 different types of policies in the next blogs.. The 4 we will be covering are Whole Life, Variable Life, Universal Life, Term, and Term with return of premium. IF there are others you would like to know more about drop me a line and I can add more. I will give you a general break down of policy features as well as what you need to make sure you know so you wont get burned by the types. I will do my best to keep as impartial as I can, but by the end you will get a good idea of were I stand. Till then a parting though of wisdom... Many believe that knowledge is power, we grow up on that idea. The truth of it is, only APPLIED KNOWLEDGE is power. The rest is just taking up space. Apply what you learn and believe, only then can you improve your situation. Sleep well WebLand...

AXI C.    

     

The Basics of a Sound Budget

   Hey everyone out there in cyber-land, today, if the name of the post didn't tell you, I would like to talk about what should be a simple but complicated thing to manage a budget. Now this is not going to be a plug and play budget but more of an outline of were your money should be placed.   We have all been guilty of it. Either because we were never told, shown or just have seen bad budget habits in the past. Even myself, as a financial planner, messed that up in the beginning... now once we (my family) realized how out of alignment our budget was, the true work came in. Cutting here, readjusting there.. See once we fall out of financial alignment we can't just hit the proverbial reset button. All we can do is align it from that point forward and if need be, be willing to sacrifice some creature comforts till we are back in alignment.
 
   Now there are a lot of different theories on proper distribution of income to the financial plan, I am going to talk about the one that helped us and are currently using. Since I will be using our situation as an example, you must know a bit about myself. As a financial planner, most of us work off of commissions.. as such income is a general guessing game... now career professionals can get a good idea of whats in-store based on appointments, work ethic etc... but since one month its possible to make $800/month and the next.. $8000+/month we really need to budget for the rainy days and save during the sunny ones. This is true for any business owner, independent agent, real-estate agent or job were the bulk of your income comes from what you produce. We learned this the hard way, but are getting better. See the key to a budget is you keep on adjusting it and you keep learning. The moment you stop learning about your finances is the moment you get into trouble. Lets take a look at how a budget breakdown in % form should look like..

   As you notice the monthly income is split into 3 categories. Lets look at what each category means.  "Must-Have Expenses" now this is true must have, like things needed to live. Not just things you really want.. lol.. so for example.. Housing, utilities, groceries, car payment, auto/home/life ins (yes I believe that auto/home/life ins is a must have) the things you must keep at mminimum to live not included.. are cable, internet, cell phone, those are wants and when we really ask ourselves we can live without them, lol I would be hard pressed to cancel them as well but they don't fall under "Must-Have Expenses". 

The "Wants" section are the things that can be cut down in times of needs, like eating out, entertainment/cable, cell phone, hobbies, shopping for extra stuff.

The "Savings" section is for things we are saving for, retirement, investments, emergency accounts, college funds. Lets take a look at a typical family and how that would break down...   

   So the typical american household according to the Census Bureau in 2012 (2013 not released yet) is a hair over $51,000.. so lets just keep the number nice and say $50,000 a year for a family of 4. If that sounds low.. yes it is.. especially since its basically the same as it was in 1989, well actually you made about $600 more but that's for another blog.. lol..

   

   So taking that $50,000 then allocating them to the budget set up above will give you a great way to make sure you don't fall into financial problems.. so lets do a ruff one..

$50,000 split into 12 months.. is 4,166.66 so lets just say $4,100 a month... If we stay to the budget % above.. Must-Have will receive $2,050 a month.. with that in mind.. I would recommend that housing do not exceed half of that.. so $1,025 towards your house mortgage or rent. The other half.. goes to utilities, groceries, car payment and insurances. Some of you might already be saying.. wow how the heck can I live off of just that.. well chances are you are already over extending yourself or not properly saving for your future.. As I said earlier.. we are guilty of it ourselves.. Since income can fluctuate in my career, we had to base it off the steady income and then add the extra at that comes from the previous month to the budget. More work but it keeps you on track.. 

   The Wants will receive 30% of the $4100, so that's  $1230 for your families wants.. so that's cable, cell phone, eating out or just some extra shopping. My personal belief is you want this section to be a bit higher then savings.. reason is, I will use the diet analogy, if you take away everything a person enjoys eating they will struggle keeping to it BUT if you allow them to have a small treat within a plan, they can except that easier. 

   The Savings will receive 20%, so that's $820 towards savings/retirement/college fund.. That $820 if allocated correctly can go along way.. we will touch more on the 20% savings and where they should be allocated in the future but we believe that if you can align your money to these sections you will be in a great financial situation. I also know that many people have credit card debt and for those who do, we will touch base on that in the future as well. There are exceptions to all rules, but one thing we have come to understand in our own life and path is that each exception/problem has a solution.. its just a matter of the price your willing to pay to reach that solution/goal. 

    Lol I know there are probably misspellings and other errors... but this is a finance blog so my apologies to the English majors and teachers. Now the math and financial professionals of the world. If something doesn't add up or you have a differing opinion.. please let me know.. I am always willing to hear and learn from other professionals.. 

   If you have any questions or would like help with your own budget. I am more then willing to help. Just drop me a message below and I will help you set up, adjust and plan with anything I can.. till next time.. 

Best Wishes,

AXI C.

Do you know your destination?

As we look as various financial topics from time to time... we want to get back to the basics..The idea of proper planning for the simple things in life.. As a responsible member of a community, we must get over this idea of quick and now results... Life is about planning and sticking to a process. I have no set schedule of new blogs coming out but I will at least place 1 new blog a month if not more often. Like I said.. its a process and this is my first blog.. lol.

1. Embrace a positive view of money. Everyone has a relationship with money. What’s yours? Many people equate wealth accumulation with being miserly. Or, they feel doomed to repeat financial 

mistakes of the past. Give yourself the gift of a fresh start and vow to take a positive view of finances.

2. Track your spending. Keeping track of your expenditures over two weeks can really offer eye-opening insights into your financial “black holes.” When you know where your money is going, you can start to take control.

3. Create a financial roadmap. What are your goals? Without a financial roadmap, you have no idea where you are going financially. Think about your dreams and commit them to paper. 

If you have any questions or would like your own GPS feel free to ask.. just drop me your contact info and I will get a hold of you. The greatest thing about finances are, at any given moment... you can change them... even with in your budget.. if your willing to start and make the changes..
We are all guilty of bad choices, quick buys or over extending ourselves... but there is help