You may think that your most important asset is your home, your nest egg, your priceless collection of Etruscan snoods. Your most important asset is you – your human capital. Your human capital is your current and future economic contributions to your family. Perhaps you’ve gone to college and majored in a profession to pursue a career. You may have earned advanced degrees and designations to increase your knowledge, professionalism, and income. All of this increases your human capital – your ability to earn, substantially, over your lifetime. Now that you have a family, a spouse and kids to support, you need to hedge your human capital, you need to protect it in the event it’s lost – should you die unexpectedly. No one likes talking about death. Even writing these words, it’s hard to type them. But it’s necessary to convey the importance of life insurance. Life insurance protects […]
life insurance
529 vs. Life Insurance
Over the past few weeks I have been asked (and pitched) the idea of whether cash-value life insurance makes sense as a vehicle for saving and paying for college. By cash-value life insurance, I am including whole life, variable life, universal life and variable universal life policies. First, in almost all cases, it does not. The very few cases where it may make sense will be covered shortly. Here are some reasons why a 529 college savings plan is better than cash-value life insurance. 529 plans have very high contribution amounts. Depending on your state, the total amount you can contribute to your 529 plan is very high, and the annual contribution amounts are high as well. From a federal tax perspective, you are allowed to contribute up to $14,000 annually without incurring gift tax consequences. This amount doubles to $28,000 annually if you’re married and elect to split the […]
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The Value of a Stay-at-Home Parent
In earlier posts we’ve discussed the importance of a spousal IRA for a spouse that stays at home taking care of the children in order to still save for retirement even though the “non-working” spouse has technically no “earned” income. Spousal IRAs aside, I wanted to shed some light on the value of a stay-at-home parent has, even though they might not be getting paid a salary for their work raising the children. The goal is to point out why stay-at-home parents still have a need for risk management and retirement planning as they (in my opinion) work one of the hardest jobs – raising children. According to the 2016 salary.com Mother’s Day Infographic, the value of a stay-at-home mom (parent) is approximately $143,102 annually, accounting for 40 regular hour work and 52 hours of overtime. This “salary” takes into account occupations such as driver, teacher, chef, nurse, and janitor. […]
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Buy Term and Invest the Difference?
A topic often argued in the financial service world, especially in the life insurance sector, is whether or not an individual should buy term and invest the difference or buy a cash value life insurance policy. How this argument generally goes is on one side you’ll have someone arguing that an individual should buy a cash value life insurance policy. This individual (generally a commissioned salesperson) will argue that buying a cash value life insurance policy (such as whole life) is a better option for a client since it generates cash value over time and “forces” the client to save. Often they’ll argue that the client wouldn’t save for retirement otherwise. On the flip side of that argument you’ll have someone (perhaps from our office) suggest the client should buy term life insurance and invest the difference in price from the whole life policy and the term life policy in […]
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A New-Hire Checklist
Starting a new job can be very overwhelming. Often, new-hires go through a barrage of training, information overload and multiple booklets covering procedures, processes and application. Somewhere in that mix is the benefit package. Here is where the new employee can sign up for important health insurance coverage, retirement savings plans, and other benefits such as life insurance and disability. In the stress and whirlwind of the on-boarding process, sometimes benefits can get pushed to the side, and then after time, forgotten about. Here’s a checklist of what a new employee can do to make sure they sign up for these precious benefits and some information on how to move forward. Select the appropriate health coverage. Some employers have one carrier that provides coverage with different options from that carrier. Options may include HMO, PPO or HSA plans. The premiums the employee pays will depend on the deductibles in the […]
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Should You Self-Insure?
At some point in our lives the question arises as to whether or not it makes sense to keep some of the insurance we have. Please understand that this post is not about encouraging the reader to drop any insurance coverage, but perhaps give some perspective on whether or not it makes sense to do so. Consider the case of life insurance. Generally, the younger we are the more life insurance makes sense. When we’re young we have many years until retirement and have high human capital; the ability to earn great amount over our working lifetime. Our financial capital is very small; we haven’t accumulated any assets such as retirement savings. As we age, our human capital decreases. Our financial capital increases and is high when we retire. Thus the need for life insurance diminishes. It’s at this point that an individual can consider letting their term insurance policy […]
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The Designation Everybody Should Be Aware Of
At some point in your life you have probably started a new job, applied for life insurance, started an IRA or retirement account, or opened a bank account. You may remember when filling out the paperwork that the form asked for a beneficiary – both primary and contingent. This is simply telling the account’s custodian to whom you want your account to go to should you pass away. Your primary beneficiary is the first (hence the name primary) that receives account balance or death benefit. The contingent is who receives the account balance in the event your primary beneficiary predeceases you. When choosing beneficiaries you had the choice of allocating a certain percentage to the primary and some to the contingent if needed. You may have even had two or more primary beneficiaries that you allocated a certain percent of your account to totaling 100% Then you may have forgotten […]
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Do I Need My Life Insurance Through Work?
Many employees have access to employer provided benefits such as health insurance, a retirement savings plan disability insurance and life insurance. Generally the coverage is group term coverage that will pay a specified death benefit up to a certain amount that is usually based on a multiple of the employee’s salary. An employee making $50,000 per year may have group term life insurance that pays a death benefit of $40,000. Generally the employer will pay the premium for coverage up to a certain death benefit amount. Usually this amount is $50,000. The reason why is the IRS allows the employer to pay the premiums on a group life insurance policy up to a face amount of $50,000 without the employee having to include the amount the employer pays for premiums in gross income. Sometimes the employee can elect to have coverage for a higher amount but will most likely have […]
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The Other Life Insurance – Annuities
The last few weeks I have been writing about the more conventional form of life insurance that most people are familiar with when I say ‘life insurance’ – which is protection against a premature death. The other life insurance is that which protects your from living too long – and that insurance is the annuity. Over the years annuities have gotten a bad rap – and rightfully so. Like life insurance, annuities are generally sold to the public via a sales force of licensed agents. In most cases, they are not the right vehicle for the individual (I know I am setting the blog up to receive the thunderous rebuttals) but there may be cases where an annuity makes sense. The other reason annuities get a bad rap is because of the pure insurance (longevity) feature that they provide – especially pure life annuities. A pure life annuity is simply […]
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Life Insurance is Not an Investment
Last week I seemed to cause a bit of a kerfuffle when I wrote about which life insurance may or may not be appropriate for the general consumer. For the readers that sent in emails and comments – thank you! It’s much appreciated and we enjoy the feedback. Twitter was also flitting and chirping with the commotion. In particular, the discussion really narrowed down to, and most of the comments we received were regarding the comment I made on life insurance not being an investment. And that’s still true. It’s not. Now there are plenty of people that will argue with me that it is an investment for this reason or that. For this writing I am hoping to explain and to clarify what I meant as an investment. From a pure investment standpoint – meaning saving and investing one’s money for retirement and or college or just saving and […]
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What is the Best Life Policy to Buy?
When researching the appropriate life insurance to buy individuals and couples are faced with a myriad of choices. Term, whole life, universal life, variable universal life are just a few of the policies that may be presented, if not sold, to the person. So which one is best? Generally, it depends. If someone is looking for the best bang for their buck and wants to purchase the most insurance for the least amount of money term is going to be the best bet. Term is cheap, builds no cash value, and is generally used if someone or couples have a time frame where they need insurance (30 year term for a 30 year mortgage or 30 year term until retirement age). Generally those that are interested in term know that it will run out, but are hoping to “self-insure” their death at retirement since in theory they’ll have saved enough […]
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A Stable Pyramid
One of the basic fundamentals regarding financial planning and saving money revolves around what is known as the financial planning pyramid. You may hear other names such as the wealth management pyramid, the financial house, etc. You may also see different stages or “building blocks” added here or there, but I’ve broken it down for the purpose of this book to three basic levels for easier understanding. The first level is where we see risk management. This is the foundation of your plan. It’s important to have a strong base to build off of, otherwise the slightest of breezes or tremors can send it toppling. Risk management can be simply seen as your insurance – and this can range from your auto, home, renters, life, health, disability, and umbrella insurance, to your will, emergency fund, and debt management. The reason why insurance is the base is due to the fact […]
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Book Review: A Random Walk Down Wall Street
Right from the start this book will be an excellent read for both financial advisors as well as their clients. Dr. Malkiel provides academic insight on the reasons why passive management works and some great commentary on the use of index funds as part of someone’s overall portfolio. This was the second time I read this book and certainly not the last. It’s great reinforcement on why we invest our clients’ money the way we do and provides solid academic evidence that doing anything to the contrary is counterproductive, more expensive and simply playing a loser’s game. Some of the bigger takeaways from the book are Dr. Malkiel’s thoughts and research on the different part of the Efficient Market Hypothesis or EMH. The EMH consists of three parts – the strong form, the semi-strong form and the weak form. The EMH essential admits that markets are efficient – meaning that current […]
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How Financial Advisers Get Paid
As you begin your search for a financial professional it’s going to be important to know how the particular professional you choose will get paid. It will also be important to ask questions not only in regards to their compensation, but who actually pays the adviser. There are generally three ways in which financial advisers and planners get paid. Commission: An adviser that’s paid on commission generally gets paid based on the underlying product they sell. Commission rates vary depending on the product sold – anywhere from 5% to 50%. Term Life insurance for example, will have roughly a 40% commission rate on the annual premium for the first year. Whole Life insurance is generally 50% the first year. The difference being Term Life may have an annual premium of $1,000 where Whole Life may have an annual premium of $5,000. It can be difficult to be objective when an adviser can make $2,500 versus $400 […]
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Maximizing Your Pension Using Term Life Insurance
There are many, many ways that life insurance can be used. Sometimes it is to replace lost income, when a wage earner dies during his or her working years. Other times it may be to help pay taxes on a large estate upon the passing of the second spouse in a couple, so that your heirs can receive the full fruits of your labors and won’t have to worry about a tax haircut. Another use for life insurance is to help you to maximize a pension. I know, everyone believes that pensions have gone the way of the buggy-whip. That may be the case for many folks, but I still find a lot of people retiring these days who have a traditional pension. For those of you who are familiar with pensions, you’ve probably seen the payout options that are typically available: lump sum, single life annuity, joint and 100% […]
Sterling Raskie, MSFS, CFP®, ChFC®
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