Dividend-paying whole life insurance: The best financial strategy available today

Since establishing this personal finance blog last spring, I’ve alluded to a superior approach for allowing anyone to save money in a way that allows for maximum safety, a respectable rate of return that is free of income taxes, and the liquidity to access the funds that build up – plus have those funds continue to earn interest for you even while utilizing the money for purchases simultaneously.

But while I’ve touched on these different factors… given you varied teasers, if you will… I haven’t gone into much detail about the strategy of using properly-structured, dividend-paying whole life insurance as your primary savings vehicle.  And there’s a couple of different reasons for that.  1) I wanted to focus primarily on basic financial principles with this blog, because they aren’t taught with any degree of consistency but should be, with the idea that using the strategy I’m about to uncover is more of an advanced approach,  and 2) Even though I’m a licensed insurance agent in California, I’m still learning about the specifics of this technique and its plethora of “living benefits” to go along with the traditional death benefit.

In previous posts, we’ve covered the evils of government-sponsored investment/savings programs such as workplace 401Ks, Individual Retirement Accounts (IRAs), and 529 Plans for college education expenses.  I explained how your lack of control over these instruments can subject your money to avoidable taxation, often ridiculously high fees, and an inconvenient (and needless) inaccessibility to your own funds.

We’ve also delved into the high-risk nature of investing in Wall Street via the equity markets; buying and selling real estate; commodities; collectibles; and just about anything else that will allegedly rise in value over time.

Despite the realities just mentioned in the preceding two paragraphs, the substantial majority of Americans continue to follow the herd and put virtually all of their hard-earned monies into these conventional accounts while holding their collective breaths wishing for steady appreciation and hoping not to get killed by taxes.

Why??????????????

Simply answered, because no one has ever bothered to show them a better alternative.  We hear, see, or read folks who purport to be personal finance “experts” (Suze Orman, Dave Ramsey, David Bach to name three) claiming the conventional, government-controlled approaches are the only way to go and assume what they’re pitching must make sense… because we simply don’t know any other way.  These personalities tend to black-ball permanent insurance (of which whole life is a type), criticizing what they don’t know enough about and, frankly, likely have never taken the time to truly investigate.

So, myself and many who have preceded me have decided we will be the voices (or written words) of reason, truth, and logic.

And on that note, and without further adieu, allow me to briefly detail the advantages of utilizing the proper type of dividend-paying whole life insurance:

Enjoy an immediate death benefit, while building a nest-egg you can access anytime you want.  When you open the right type of whole life insurance policy, your pre-determined death benefit is good from the first day in the event something happens to you (or whomever is the insured on the policy), and at the same time you begin building cash value that you can access whenever you want – no waiting until age 59 1/2 to avoid penalties like there is with the government -sponsored programs.

To be fair, the Roth IRA will allow you to withdraw your contributions at any time without having to pay taxes or a penalty, but that doesn’t apply to any gains the account may have made.  With the whole life policy, you can access virtually all of your account with the right approach (either via withdrawal or non-qualifying policy loan).  Refer to your individual agent for guidance on how to accomplish this.

Know, within a reasonable level of certainty, how much money you can build over a given period of time at essentially no risk.  Although dividends are not guaranteed, the companies that issue the type of policy I am referring to here have enjoyed profits (and, therefore, dividends paid to policy owners) for well more than 100 CONSECUTIVE years.  According to Pamela Yellen at www.BankonYourself.com, these companies have profited every single year since before 1900 – that includes during The Great Depression, times of war, The Crash of 1987, and the recession we endured about a decade ago.

Utilize the unique advantage of borrowing against your policy’s cash value, while it continues to grow as if you had never touched the funds.  That’s because you don’t.  Set up properly, these policies allow for the loan proceeds to come from the insurance company’s general fund, with your cash value as collateral, meaning that the cash value itself stays in place and continues to work for you, earning a rate of return plus dividends.

Loans are tax-free, and don’t have to be paid back on a schedule, or at all if you choose. The flexibility of this type of account is unheard of.  You want to borrow from your cash value?  Just let the insurance company know how much you need.  And although a sensible, long-term financial plan utilizing these policies as retirement vehicles compels you to repay these loans (pay yourself back at a lower-than-market interest rate), you are NOT required to do so.  Any unpaid loan balances still in effect at the time of the insured’s death simply results in that owed money being deducted from the impending death benefit.

In the coming weeks, we will cover more features – in more detail.  Bottom line, you should be excited about what I’m introducing to you here.  This immaculate alternative to conventional investing will greatly simplify your financial life, and benefit you multiple times over on multiple levels.

Until next time, thanks as always for reading.

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DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

Focusing too much on Rate of Return can result in long-term costly mistakes

So many people who I talk to about personal finance and investing are obsessed almost exclusively with what the interest return is on their money, referred to as Rate of Return (ROR), without truly considering the risks involved.

And too many people assume that the stock market, real estate, and other forms of investing will always create wealth in the long run.  While it’s true that most accepted financial instruments have gone up over differing time periods in history, the assumption that it will always continue to do so, under all circumstances, is both ignorant and foolhardy.

Just ask the tens of millions of folks who saw their investments shrink by as much as 70 percent during the downturn that occurred in both stocks and real estate less than a decade ago.

Putting your money into the stock market or real estate can be a boon, sure.  But there are major downsides.  It’s gambling for all intents and purposes, and therefore doesn’t strike me as the smartest thing we can do with our life savings, the funding of retirement, attempting to pay for college tuition for our kids, etc.

Consider this.  As I have demonstrated in a previous post (or two), average ROR isn’t the same as the actual return you get.  If you have Investment A which earns exactly a 10% annual return over, say, five years, the average ROR for that time frame is, indeed, 10%.  Likewise, if you have the following results over a five-year span:  up 20%, down 35%, up 40%, down 5%, and up 30%, you have an average annual ROR of 10% as well (the five annual figures add up to a positive 50%, divided by five years equals 10% per year).

But when it comes to the actual numbers, the first scenario – 10% each and every year for the five years – gives you about $1,552 if you started the stretch with a $1,000, while the second scenario leaves you with just $1,348 – more than $200 less!!  How can this be?  It’s because losses hurt more than gains help.

Let me illustrate that point with a question:  If you have $100, and you lose 50% the first year and gain 50% the second, you should be back to an even $100, right?  If you bit and said yes, it’s because you didn’t take the time to do the math.  Fifty percent of $100 lost the first year leaves you with $50, followed by a 50% gain the second year which results in your account balance being $75 (50% of $50 is $25, added to the $50 = $75).

Your net return was zero, yet you lost 25 bucks!  Mathematical fact of life, my friends.

The actual stats can be confusing, I realize, but don’t miss the inclusive point, which is that steady gains are more valuable than big years followed by significant declines, or losses followed by gains, or the two inter-mixed.

Everybody has been told that you need to have your money invested in the stock market, which can be most easily achieved if your job offers a 401K Plan, and if not you can open up an investment account or an individual retirement account, and get your money in the market that way.  Now tell me, after what I have demonstrated above, are you really sure that’s the way you want to go?

As the expression goes, “there’s got to be a better way.”

Well, folks, there is.  I’ve alluded to it, but not delved deeply, in previous posts.  We’re talking about the proper type of cash value, dividend-paying whole life insurance.  It’s the strategy of many of the country’s wealthiest individuals, but it is a game-plan that those of more modest means can utilize effectively.  It has numerous benefits, some that will really blow your mind (as they did mine when I first learned about this concept) with no significant downside.

Next week, I will write a more detailed (but fundamental) explanation of how the correct type of whole life insurance can replace any and/or all of your other financial and investment instruments.

For now, here’s a teaser benefit:  You can know within about 90% accuracy how much money your policy will build, in advance, based on a fixed ROR combined with annual dividends that, while not guaranteed, have been paid out every single year for the last CENTURY by the top companies who specialize in these types of policies.  And all the while, your money isn’t invested in the ultra-volatile stock market, and so you’re not dependent on its whims.

Seriously, this stuff is really cool.  I look forward to going into more detail next week.  Until then, as always, thanks for reading.

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DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

In the end, the most important aspect of personal finance is independence

By BOB CUNNINGHAM

Today is Independence Day… and I’m not referring solely to celebrating America’s independence from England, achieved in the 18th century.

As we enjoy family and friends, perhaps eat a little (or a lot of) barbecue, and sit back to enjoy the local evening fireworks display, we should also keep in mind that in personal finance/money management, independence is everything.

Consider this:  In the ‘revolution’ of money today the smart people are the rebels who seek to break away and do their own thing, paying as little of taxes as possible, while the metaphorical Redcoats are represented, ironically, by the American government.

Come again?

This column is not intended to be unpatriotic – heck, few people are more red-white-and-blue than I am – but when it comes to finance, our society has been led down a road that tends to serve the best interest of, shall we say, the kings more than the common folks.

Virtually every personal finance educator and guru I know says to rely heavily, or even solely in some cases, on government savings and retirement programs and their alleged tax-favored benefits. They cite 401Ks, IRAs, 529 plans, and others – all government sponsored programs with strict rules associated with them – as your best choices to put money away for the future.

Well, Ladies and Gentlemen, I’m here to tell you flat out that there’s a better way for all of it.  It’s a strategy that, despite significant nay-saying from the “in crowd” in the personal finance community, has been utilized literally for centuries by some of the wealthiest individuals to walk the planet.  And yet, it’s a system virtually anyone with just a little bit of money available to save can utilize.

What is this glorious solution to all of our money problems?  It’s… wait for it…

WHOLE LIFE INSURANCE

Ta-da!!…

OK, let me back-up a moment.  Whole life insurance is NOT the answer to all money problems.  I was exaggerating for emphasis… trying to create a dramatic moment.  But it IS, far and away, the best approach to managing your personal wealth.

Oh, and when I refer to whole life insurance, what I should actually be writing is “the right type of whole life insurance, properly structured.”

In the space I have here, I can’t go into full detail on how it works, but I can give you some basics and attempt to explain why you’re much better off with this approach rather than Uncle Sam’s.

“Having money is nice, but having the independence to do with it what you wish, and when you wish, is truly priceless.”

The cliff notes version is that properly-structured whole life insurance can allow you to have a cash value fund which can be used for literally anything you want with very few restrictions; have a specific, measured rate of return (over and above the money that goes toward the actual insurance itself); be able to access those dollars legally, at any age, with no income tax due; have the ability to enjoy that access while at the same time those dollars continue to work for you as if you never touched the funds; have this money possibly not count as income or assets for purposes of outside financing qualification or student loan assistance if desired, etc.; and several other benefits.

Let’s briefly take each point above individually:

1) Can be used for anything with very few restrictions. Because you have access throughout, you can use the money for whatever you want.  So having one account for retirement income, another for college savings, and still another as a health savings account, etc. is unnecessary unless you prefer to go that route.  The only guidelines are that you can’t always put into the policy as much as you want, or risk it becoming an investment account (referred to as a Modified Endowment Contract) by law rather than an insurance policy, which would essentially convert the policy into government control.  To get around this, simply open another policy.  And if you’re not personally insurable, someone else can be the insured and you still own the policy and the associated control. How cool is that?

Government programs, by the way, have maximum investment allowances of which you cannot circumvent by opening another account. It’s one per customer, and once you’re maxed for your yearly contribution, that’s it ’til next year.

2) A measured rate of return. You will know in advance what the minimum performance of the savings will be because the correct type of policies offer that aspect, with the only variable being the annual dividends paid out. And as we go into this strategy in more detail down the line, you’ll learn how to pick the right sources for your policy(s). Government programs rely directly on Wall Street, and we all know how volatile the stock and bond markets can be at any given time.  Isn’t it better to know you not only will avoid loss of principal or interest forever, but that you are assured your account will grow annually as long as you maintain at least the minimum premium?

3) Access your money income-tax free.  The money in your cash value can be accessed completely free of income tax using two different strategies – withdrawing the dividends paid, or borrowing against the account.  No age or credit requirements. And get this… policy loans never have to be repaid, or can be paid back solely at the policy owner’s discretion.  It should be noted, however, that the savviest long-term strategy for using whole life insurance cash value is to systematically pay back any loans taken.  Government programs all restrict and regulate how you can access your own money, whether it be age 59 1/2 on the front end, or forcing you to take withdrawals from an account – even if you prefer not to – when you turn 70 1/2.

4) Access your money and still have it actively working for you.  You can’t beat this have-your-cake-and-eat-it-too feature.  Because funds borrowed from cash values actually come from the general pool of the insurance company, not your policy cash value specifically, you can borrow funds up to about 90% of your cash value for a major purchase (a car, for example) and at the same time, the funds are still growing within the policy as if you had never taken the loan at all.  This, Friends, is better than paying cash for a car because you avoid losing the opportunity cost.  And it’s obviously preferable to attempting to secure outside financing for a purchase because of the control you retain “borrowing from yourself.”  Try borrowing against your retirement account and see if they will credit you interest earned as if you didn’t take the loan.  Ain’t happenin’.

5) The money doesn’t officially count as assets.  I’m going to tread lightly here because I’m not a tax lawyer or accountant, so be sure you do your own due diligence if you opt to initiate this strategy.  In essence, my point is that you might be able to legally exclude life insurance cash values when requested to list assets for applying for certain types of outside financing, and as part of estate settlements and personal liability.  But again, check on this yourself – I am NOT telling you this is a broad benefit.

I hope I’ve sufficiently introduced the whole life insurance strategy to you, and awakened you to the definite availability of legitimate, preferred savings alternatives to government programs.  Like any other form of saving and investing, the earlier you get started the better off you will be long-term.

Maintain your independence!  God Bless America.  And as always, thank you for reading.

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DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

Whoa… let’s back up for a moment

By BOB CUNNINGHAM

In case you didn’t already recognize the signs, this site is new… and is published by a blogging newbie.  I don’t mind admitting that.  I’ve been writing professionally nearly 30 years, for established publications and as a freelancer, but BuildWealthEarly.com represents my first foray into the blogosphere.

And as I was contemplating my next post, and briefly reviewing what I’ve released so far, it occurred to me that I have failed to share this blog’s true message – my actual philosophy on personal finance, and the often contrarian angle from which this subject matter will be provided in the coming weeks, months, and (hopefully) years.

Yes, I established in my introductory post that I am not a financial professional in the sense that I sport a bunch of impressive designations in front of my name – my only official title is as a licensed life insurance agent in California – but instead I am relying on a combination of my “PhD in the School of Hard Knocks” and some diligent research over the last decade-plus.

Still, I hadn’t truly shared my perspective – so here it is:

“Most of what you have learned about money, either from your parents, teachers/professors, or from so-called gurus, is NOT truly in your best interest.”

Say whaaat?

There are many, many valid basic points that I would never try to contradict – spend less, save more, know what you’re investing in, etc.  This is mostly common sense that doesn’t require you to read it in a blog post in order to recognize it as fiscal wisdom.

But the American system of, shall we call it, “public economics,” is mostly baloney. Our system is still the best in the world, in my opinion, but it falls shy of being truly valuable across the board for most citizens.  Far from it, actually.

I will give you one example now – trust me, you will get plenty more in future posts.  The 401K Plan.  We have been told that your company’s 401K plan is far and away the best way for an individual to save for retirement.  Put every dollar in that you can muster, many experts recommend.

As Col. Sherman Potter said on the 20th century TV show, “M*A*S*H*, at least once, “Monkey muffins!”

OK, so how would you react if I offered you the following savings plan? My strategy that I recommend to you is not liquid, meaning that once you put money into this instrument, you cannot retrieve it (for an emergency or any other reason) until the government says you can – beginning at age 59 1/2 and with the account open at least five years – unless you wish to pay a 10% penalty for the privilege.  This strategy frequently charges you among the highest fees in the industry, as much as 2.5% of your holdings annually, and gives you  little if any say in what specific investments your money will go into.  This strategy says to save a small amount on income taxes now, by having your contributions taken from your paycheck pre-tax, but pay a much larger gross amount of taxes in the future, when you are finally allowed to access the dough.  Oh, and if you happen not to need your money when you get past retirement age, well, that is irrelevant because when you turn 70 1/2 the government forces you to withdraw a minimum amount, the failure to do so costing you not only the taxes you would owe but IN ADDITION, a 50% penalty tax for good measure.

What do ya think?  Sound like a good way to go?

I just described the primary characteristics of the typical company-sponsored 401K plan.  Does Uncle Sam rock or what?

Now, to be fair, the 401K does have one desirable trait – the possibility of a company match.  Many companies offer some sort of matching funds to your contribution – a percentage of what you put in based on a percentage of your income.  But here’s the kicker – not every company offers a match.  In fact, according to multiple sources, the percentage of companies which offer matches, among those that sport 401K plans at all, is declining.

Under most typical circumstances, it makes sense for folks to contribute enough to their 401K plan in order to maximize the benefit of any company match.  But not always, and never a penny more than what counts toward the match.  There are simply other strategies available, which virtually anyone can utilize, that are significantly more beneficial than what Washington D.C. has laid out for you.

And very soon, we will be going into those.  Thanks for reading.

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DISCLAIMER:  This post represents the author’s opinion only, sometimes based on and supported by cited numbers and sometimes not. In no way should any part or all of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific strategy or investment.  Profitability is NEVER guaranteed.  Invest at your own risk.

Pay off debt or save? A quandary that is deceptively complicated

By BOB CUNNINGHAM

Another personal finance blog’s post on this subject caught my attention recently, and it got me to thinking that the question of whether to pay off debt as soon as possible, or maximize saving and investing, must be among the most-asked by Americans interested in smart money management.

The easy answer is to do both – after all, especially in the world of finance, how can diversification be a bad thing, right?  And the truth is, for most folks, paying off some debt and saving some money, too, probably IS prudent.

But there are factors that many gurus don’t properly consider, especially those who happen to come down particularly hard on either side of the aisle.

In the get-rid-of-that-nasty-debt-at-all-costs camp, the reasoning for paying off a 23% APR credit card ASAP is difficult to assail.  It’s sort of like an instant 23% return on your money… yeah, sort of.  Certainly, being able to ratchet that balance down rapidly is beneficial – a $120 minimum payment on $5,000 of credit card debt at 23% nets only about $24 going to principal, the other $96 pure interest profit for the company which issued the plastic.  That’s why you can end up paying nearly $20,000 to erase that debt if “you go the distance,” and just pay the minimum required each month.

But whenever you add money to the minimum, you have to figure the lost opportunity cost of not having that cash invested in a compounding account instead.  In other words, the interest goes both ways.  True, that performing asset is likely to fall way short of a 23% Rate Of Return, but in getting the money into the account earlier, you reap the rewards of more interest accrued long-term because of the magic of compounding.

The invest-as-much-as-you-can-and-don’t-worry-so-much-about-the-debt crowd, meanwhile, conveniently tends to overlook the lack of liquidity in most of the alleged best investments.  Want to build up your 401K and then use some of those funds to pay off that credit card?  Forget it.  Unless you’re turning 59 1/2 and are prepared to quit your job, it’s unlikely that will be an option for you.  And borrowing against your 401K generally defeats the purpose.

Also, don’t forget you will be paying taxes on your accrued savings when you finally do access it.  With the beefed up credit card payments, it’s after-tax dollars already so you get the full bang of your bucks toward eliminating principal.

I know… I haven’t really answered the question of which is wiser.  Well, here are some basic numbers using the following scenario:  An individual we will call Titus (why not?) is faced with a choice.  He makes $3,000 per month gross salary, has no savings yet, and owes $5,000 on a credit card at 20% interest with a minimum required monthly payment of $100.  His 401K at work offers a 50% match on up to 5% of his gross income, and is returning an average of 7.5% annually (figure 10% minus the typically exorbitant 2.5% of fees).  Lastly, Titus has determined he has $300 per month extra to dedicate either to savings or debt elimination.

If Titus opts to go after his credit card debt, at $400 per month ($300 extra plus the $100 minimum required payment), he will have his $5K debt paid off in about 15 months, after which he plans to put $300 monthly toward his 401K and improve his current standard of living with the $100 extra per month for discretionary spending.  After five years from the start of accelerating the pay-down of his debt, Titus has about $21,000 in his 401K with no debt. He achieved this with his $300 plus $75 from the company ($3,000 salary times 5% = $150 times 50% is $75), for 45 months. He went from minus $5,000 to plus $21,000.  Pretty sweet.

If there had been no company match, incidentally, he would have a little less than $17K.

On the other hand, if Titus chose to pay the $100 minimum on his debt and instead put the $300 toward his $401K, along with the $75 match, it would amount to about $27,000 in five years minus the $3,800 he would still owe on the card for a net gain of roughly $23,000.  Sans a company match, the net gain would be about $18K.

But before you key on $23K being more than $21K, one other factor needs to be considered:  Remember that Titus would not have the option of using the 401K money to pay off the $3,800 credit card balance, so that debt would continue charging 20% interest annually.  Chances are that this ongoing liability eats into (or completely decimates) what is otherwise a relatively small advantage for going the 401K route.

In the end, it is the company match of the 401K and the interest we credited in this example that pushed the pendulum towards not accelerating the pay-off of the credit card initially.  But what if we endured a down market during this five years and the return was only 3%?  Wouldn’t that make paying off the debt come out significantly better?  Yep.

Ah, and remember that Titus took $100 a month after the debt elimination and began using it as extra spending money.  He improved his budget flexibility, and that’s a tangible gain too.  I incorporated this into the example because it’s my opinion a large percentage of folks, faced with having $400 to “play with” after eliminating a debt, would choose to have fun with a portion of it.

Ultimately, in my opinion, a credit card debt at 20% interest should be your first and only priority because it is definitive, non-taxed progress.  Opting to contribute to the 401K up until the company match is maxed and then turning your attention to the credit card debt certainly is logical – you’ll never get a truly dissenting vote from me even if the math leans otherwise.

But ignoring the available acceleration of paying off big debt in order to pad your retirement account contributions is essentially leaping over dollars for quarters.

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DISCLAIMER:  This post represents the author’s opinion only, sometimes based on and supported by cited numbers and sometimes not. In no way should any part or all of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific strategy or investment.  Profitability is NEVER guaranteed.  Invest at your own risk.