What are the living benefits of whole life insurance? Do they exist? We often hear that it is the worst financial product. What if the opposite were true? When would you want to know?If I were under the wrong impression about anything, I would want to find out as soon as possible. Having the wrong information about any sort of financial product or strategy can mean a loss of a lot of wealth. Don’t let your lack of knowledge be the deciding factor on anything.I’d say that the majority of people out there know little to nothing about whole life insurance. (Even the employees at the administration office of these insurance companies are clueless!) Now, we’re not insurance salespersons, but we’ve learned a lot about it in the past few years.My hope is to inspire you to learn more. If you don’t know much about something, research it, ask questions, learn more about it. You can’t learn less. You can only know less.What I ask of you is one thing: Put your preconceived notions and ideas of life insurance aside.Allow yourself to learn more by being open to new ideas. I guarantee you that if you thought whole life insurance was a bad product, you’ll change your mind as you continue reading through this website.So let’s dive into why I call whole life insurance the backbone of our financial plan.Your knee jerk reaction.What’s the first thing you think of when I say the words: Whole Life Insurance? I bet the first thing that pops into your head is: Expensive! Don’t worry, you’re not alone. That’s typically what everyone’s knee jerk reaction is. Maybe we have the popular financial pundits to thank for that.But that response is only half true. It’s the premiums that are expensive. However, just because something is expensive doesn’t mean that you should turn the other way. What’s key here is that you know what benefits the product, plan, or strategy provides in order to make your best judgment.So why do we love this product? It’s because of…The Living BenefitsWhen people think of the benefits of life insurance, they usually only focus on the death benefit. Well, with term life insurance, that’s the only thing it has to offer. But with whole life insurance, there are living benefits. They are advantages available to you when you are alive.
The Infinite Banking ConceptThis is the strategy that we have in place. What this strategy entails is funding your personal bank in whole life insurance policies. Then instead of going to a financial institution to finance your purchases, you take out policy loans. What this does is put you in control of the loan and you still earn interest on the cash value that’s within the policy.This enables you to recapture the interest that you would have paid to a financial institution. If you use this strategy alone, you will realize all the wealth that is paid to other banks.
Premium Cost is GuaranteedThe cost of the premiums paid to the policy will never increase. This is important, so I’ll repeat again.The cost of the premiums paid to the policy will never increase.The reason why this is important is because with term policies, your rates will rise over time. This is due to the changes in your health and age. As you get older, your chances of dying increases. Since the life insurance company takes on that risk, they increase the cost of premiums.With whole life insurance, the premium cost will stay the same as long as the policy is in force. Even if you are gravely ill, the cost will never change. It’s guaranteed.Bonus: As the years go by, the policy actually gets cheaper. What’s one of the eroding factors of money? Inflation. As time progresses, you are paying the premiums with inflated dollars, which means that the premiums get cheaper and cheaper..Look at the rate of return from one of R. Nelson Nash’s policies. (He’s the creator of the Infinite Banking Concept and author of Becoming Your Own Banker.) Notice how cheap his premium is and at his age. That’s inflation working to his benefit.
Premium Consists of Guaranteed “Cash Value” and Death BenefitThe premiums paid go towards increasing the cash value AND death benefit. But the key here is that they are guaranteed. Your cash value and death benefit can never decrease in value unless you start withdrawing the cash value from the policy.Let’s look at a 401k. The cash value amount in your 401k can increase. But, it can decrease because of the fluctuations in the market. You are not guaranteed any cash value amount in your 401k. You can literally lose everything that you have put into it.Your whole life insurance policy acts as a savings account. When you pay your premium and your cash value increases, it’s guaranteed. When interest is earned and added to your cash value, it’s guaranteed. The same applies to your death benefit.
Cash Value Grows Tax-AdvantagedWith a 401k, you are only deferring taxes. You will be paying taxes later once you start withdrawing funds from the plan.With a whole life insurance policy, you pay the premiums with after-tax dollars. The cash value grows with out taxation. You are only taxed after your withdrawals from the policy exceed your basis (the total amount that you put into the policy).However, there are strategies to get all of your money out, and the gains, TAX FREE!
Policy Pays a DividendWhole life insurance policies, also referred to as dividend paying, permanent insurance policies, pay dividends. Now, the key thing here is that these dividends aren’t taxed. They are actually considered returns of premium.For example, let’s say that you pay $1000 into the policy. At the end of the year, the insurance company looks at how efficient it was with your policy. Let’s say they earned 10% on your policy ($100).After deliberation, they decide to return $90 back to you (the $10 pays for administration fees and a contingency fund). This is not an actual gain. It is a return of premium, which is not considered a taxable event.And, a dividend paid to your policy does not lose value. It’s value is guaranteed because now it’s part of the cash value.
Option to Have the Insurance Company Pay Premiums if You Become DisabledYou can take advantage of a disability rider on the policy. In the event you become disabled, this rider has the insurance company continue the premium payments for you. You are no longer required to pay the premiums.Can your 401k do that?Can your IRA do that?Can any other of your qualified retirement plans do that?Adding this rider to your policy is another way to transfer risk away from you to somewhere else.
Provides Wide FlexibilityYou have the ability to do something special with the dividends. You can have the dividends paid directly to you. They can send you a check, no questions asked.Or, you can make those dollars work even harder for you. You have the option of having those dividends purchase additional paid-up insurance. Those dollars will buy more life insurance, provide a bigger death benefit, and earn interest.This will help you fight inflation. You have extra dollars growing your cash value and earning additional interest.
Can Borrow From Your PolicyMy wife and I did this recently to finish off the payments on our car. We do pay interest that does go to the insurance company. However, the dollars within the policy are still earning interest as well…compounding interest.Best of all, you have no obligation to pay the principal back. If you carry that loan balance to your death, the principal will be deducted from your death benefit.
Cash Value Can Be Used as CollateralBanks will accept the cash value within the policy as collateral. Unlike your car and boat, this collateral is appreciating.
Cash Value is Exempt from CreditorsThis is very important. We have encouraged our readers to protect their assets. Of course, life insurance protects the most important asset, you. The death benefit is in place to replace your Human Life Value in the event of your death.What some people don’t realize is that the money inside a whole life insurance policy is protected as well. In the event that you are sued, creditors can’t touch the money in your policies.The reason is because life insurance policies are meant to benefit someone else, a beneficiary. But now you understand how it can benefit you in your living years. So, take advantage of this feature. It’s another great way to protect your assets.Is your 401k protected from lawsuits?What about your IRA?Are any other of your qualified retirement plans protected?Unfortunately, they are not.Whew! What a list. I hope you’ve gained some insight on this dynamic product. It’s been around for over 200 years. But just having a whole life insurance policy doesn’t mean that you’ll become wealthy. Heck, you can say that about anything: stocks, real estate, gold, businesses, etc.It’s what you do with the product that can make it productive. I’m always reminded of this simple analogy.If you were to compete in the PGA tour, what would you rather have…Tiger Woods’ golf clubs or his swing?I know that Tiger could play better with a tree branch than me playing with the best clubs money can buy. Too much emphasis is put on getting the perfect financial products…the clubs. Often people fail to develop the right strategy and plan…the swing.Popular financial pundits, the Suze Ormans and Dave Ramseys, despise whole life insurance. As you can see, we have a different perspective. Study the living benefits. If you want different results, think differently.If whole life insurance made you queasy before, I hope I shifted your paradigm. Continue your education towards financial freedom. Keep learning and pretty soon, you’ll be able to swing like Tiger.
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Where to Invest in Good Mutual Funds in 2014, 2015 and Beyond
Finding good mutual funds starts with finding good mutual funds companies (families) and some families are friendlier to average investors than others. They offer good investments to folks who simply aren’t sure where to invest money. People get confused by all the sales rhetoric, so here we simplify where to invest with the companies that are investor friendly.I started following (and selling) this stuff in 1972 as a stock broker, trying to get a handle on where to invest other people’s money… trying to pick only good investments for those who trusted me. Once I learned that funds were the answer to what 90% of people needed, the question became: how do I find good mutual funds? I am writing this in 2014 as a retired financial planner, and would like to share something I’ve learned over the years, so hold your breath.Your idea of what good investments or good mutual funds are might differ from the ideas a sales rep might have, especially if that person makes money from commissions and other fees. Breathe easy. A financial planner who works for commissions can tell you where to invest and can sell you good mutual funds. The problem is that he or she can’t tell you where to invest in the investor friendly companies… and make a living doing it.A $20,000 investment in a stock fund could cost you $1000 upfront, $400 a year for expenses, and another $300 a year for additional fees if you invest through a planner. Or, it could cost you a total of $200 a year or less if you invest directly with a major investor- friendly NO-LOAD company.Truly good mutual funds companies keep investor costs low. They are financially strong; and offer a broad selection of investments with good performance records. Good service is provided at no cost. Enter “no load funds” into a search engine to find them. Names like Vanguard, Fidelity and T Rowe Price will appear. They all offer average investors good investments at low cost. All three of the above meet our qualifications – and the first two are the largest companies in the business.Good mutual funds are not expensive, and you do not get what you pay for when you pay for high charges and fees. In fact, these extra costs drain money from your account and work against you. The net result is a lower return on investment. I don’t call that investor friendly. When there’s a high cost if investing, that’s not where to invest your money.Now, once you’ve opened an account with one of the friendly companies you could be facing a list of more than 100 choices to choose from. Now the question of where to invest gets more specific. How do you find good mutual funds to invest in? The general categories are stock (equity), bond, money market, and balanced funds (the latter being a combination of the other three). What you need to understand is that even good mutual funds in the stock category might lose money in 2014 and/or 2015. If the stock market falls, these funds in general will not be good investments. Also, if interest rates climb, bond funds will not be good investments. More than anything else, the markets determine whether or not investors make or lose money. On the other hand, good mutual funds tend to outperform the rest over the long term.With today’s record low interest rates money market funds don’t look like good investments because they pay almost nothing in interest. But, that’s where to invest money you want to keep safe. If rates go up, money market rates will follow. Balanced funds will be losers if stocks and/or bonds take a big hit. Don’t get depressed. Invest in 2014 and 2015 with your eyes open.Going into the year 2014, stock funds were very good investments for five years straight; and bonds funds were good mutual funds to invest in for over 30 years. In 2014 and beyond things could get rough. Focus on strategy more than picking good investments in each fund category. Have some cash in a money market fund awaiting future opportunities when the dust settles. Spread your money across all four fund categories, because no one really knows where to invest in times of uncertainty.As 2014 and 2015 unfold, remember that both stocks and bonds have their up and downs. Over the long term, funds have been good investments for tens of millions of people through good times and bad. Keep in mind that good mutual funds come from good mutual funds companies… and that’s where to invest your money.
Investing: Personal Portfolio
Before one decides that they want to invest they need to make a few sub-decisions. Firstly one must know the purpose why they are investing, where they will invest, how they will invest and when they will invest. If these elements are not outlined clearly then there may be losses that occur because of this indecision.THE WHY QUESTIONDealing with the why question involves looking to the future. This is the intent and purpose why you are delaying consumption. Many people have different reasons why they go into different investment vehicles. As an investor you need to decide what tenure is best for you. I personally classify investment horizons into three; short, medium and long term. The short-term is for those investors who want a quick maturity of their investments that ranges from days to a year. Medium-term would be anything from 1 year to 5 years. Long-term would be anything above 5 years.For example is someone is trading on news or merely speculating on price movements, they would go long or short for a limited time horizon. In this type of investment technical analysis is used to study the trends and candlesticks of an underlying investment such as currency pairs in foreign exchange arbitrage. Transactions of this kind can hardly be called investing. I would call them speculating since they do not take into account any meaningful fundamentals and hence the odds of making a profit become no different than tossing a coin. However if someone is saving for a wedding it would be critical to have an investment vehicle that is liquid and preserves the initial capital or principal such as fixed income securities or treasury bills (TBs). Such a person would be looking at a medium-term horizon depending on when he intends to liquidate and have the wedding. However if a 25 year old starts saving for retirement they have more time to hold investments until their prices align with their true values (in the case of value investors). Such a person could go long in stocks and hold them. In this instance, fluctuation of the stock is not as important since liquidation of the investment is deferred.It is vital for anyone to decide why they are investing as this will give an acceptable time horizon bench-mark and more importantly determine the risk level acceptable to their portfolio.THE WHERE QUESTIONOnce one is clear why they are investing, it will not be hard to establish where they must invest. If you are simply speculating then there is need to take cover in the hedging system. This is because your positions are just guesses that may turn out wrong. This was coined in the saying “downside risk and upside potential”. So if you have bought long a mining stock that you anticipate going up, you may want to protect yourself by going to the derivatives market and buy a put on the same stock. A put is a right but not an obligation to sell an underlying security at a predetermined strike price in the future. So if the security price goes down the holder of the put may still sell at a higher price than the ruling market value of the underlying security (mining stock). These complex transactions are normally done by active traders in search of alpha. I would not recommend a novice trader to be dealing the derivatives market as even the most experienced fund managers and business remodeling gurus like Andrew Fastow shipwrecked because of them.The novice investor can participate in two broad markets; the money and capital markets. The rule to success is keeping it simple. The money market serves those who are in the short-term investment horizon and the capital market serves those who are in the medium to long-term investment horizon. These two markets can be very crucial in making sure that your portfolio is well diversified and balanced. The money market gives a choice of investments such as TBs, negotiable certificates of deposit (NCDs), and other short-term debt instruments. Such instruments stabilize the value of a portfolio since they are not as volatile as stocks. The mix between stocks and debt instruments in a portfolio should be according to an investors risk profile. For the risk-averse investor, a portfolio could have 60%-80% debt instruments (with triple A ratings) and 20%-40% stocks (blue chips). For the more risk-loving investor a portfolio could have the above weighting but however inverted between stocks and debt instruments.You can choose to divide the debt into time horizons as well but however remember that there is price volatility on long-term bonds caused by interest rate fluctuations. Stocks can be sub-divided into small, medium and large cap; value, growth, dividend and so on. If you are after higher return you could look at investing in emerging markets like India. The stock exchanges in India are among the top paying exchanges in the world in terms of yearly market return. It may be a mammoth task to invest in these exchanges on your own. You can easily do this through world funds like the Templeton India Growth Fund and many others. However to be able to harvest the maximum returns from these funds you need to hold your investment for more than five years. This is because you may end up being hurt by transaction costs and capital gains tax.HOW AND WHEN QUESTIONMutual funds are a good way to get started if you are a novice investor. It is not advisable to search for a fund using the highest returns from a single period. A fund has got to consistently return above market to qualify to be enlisted on your potentials. Also evaluate how they invest and their risk tolerance before you take the leap. Once you have invested do not jump from fund to fund as this will hurt your returns. Better still you may choose index funds that emulate a certain sector of the market or a whole market as John Bogle demonstrated with the Vanguard 500 Index Fund. The lack of active management generally gives the advantage of lower fees (which would otherwise reduce an investor’s return) and in taxable accounts, lower tax.If an investor has the basics to begin investing on their own, I would suggest a concentrated portfolio. This portfolio is made up of a small number of stocks (advisably below ten) that you select and invest in. At best a concentrated portfolio must have stocks from sectors that can achieve negatively correlated returns. However if one carries out a thorough fundamental analysis and constantly reviews the portfolio to check for divergences there will be no need to structure a portfolio using the academic approach mentioned above.Fundamental AnalysisWhen conducting fundamental analysis, an investor wants to be sure that they are buying a healthy business. Stock prices in the long run eventually align with the financial health of the underlying stock. The stock market punishes the weaklings and rewards the strong. Hence in doing your fundamental analysis you can look at the following aspects:1. Market share trends – when the market share of a business is decreasing it is a clear sign that it is heading for the doldrums. Business can be operating in decreasing, static or growing markets. You will be better off if you buy a company that is increasing its market share in either a static or growing market. An investor can use the Porter’s Five Forces to analyze an industry and the market trends existing therein.Management – the ultimate test of management is their frugality. In the words of Peter Lynch, if you invest in a company with gold plated toilet seats at its headquarters you have most likely contributed towards their purchase. Salaries paid to managers and the consistency of business strategy can also indicate the suitability of management. If you see management with such inconsistent strategies like raising equity financing and paying out dividends at the same time you should be suspicious. Managers must be open, have integrity and be honest. This is the criteria that the famous investor Warren Buffet uses.2. Return on Equity (ROE) – this is by far the most important indicator of the financial health of a business. This indicator shows the return as a percentage of the equity or shareholders’ worth. It is specifically an investor ratio. Look at the ratio starting 10 year back to the present time. Look at how the trend is progressing. Make sure the accounting policies are consistent over the same period to avoid concealment of salient problems. You should invest in companies with a high and/or increasing ROE ratio. This also shows that the management is careful to incessantly increase shareholder value.3. Price-Earnings Ratio (P/E) – this ratio equates the price of a share to the earnings it made over a period of 6 months or a year. It can also be a forward P/E when it measures using forecast earnings. This ratio is great if you are a value investor. You have heard the gurus say “always buy low and sell high to make the most returns”. But how do you determine whether a stock is cheap? You use the P/E ratio. However you must be careful to research why a stock has a low or high P/E ratio. According to the Efficient Markets Hypothesis all the information of a stock is reflected in its price. So if a stock has a low P/E ratio, it might be because it has very little prospects. On the other hand if a stock has a high P/E it may mean that the market has factored in its future growth. To measure this aspect analysts take to the PEG ratio that expresses the P/E over the future growth anticipated for that stock. However there are some stocks that tend to go under the market radar and it will take a lot of work to identify them.4. Dividend paying stocks – these companies give back money to the shareholder in the form of dividends. Buy stocks in companies that pay dividends or buy back their own stock. Any company that does not have suitable merger or acquisition targets must give back money to the shareholders. A lot of companies lose money by trying to go into new industries in which they are ill experienced. This is why a company which buys back its own shares is a good company to invest in. By buying back shares, a company is actually reducing the supply of those shares on the market. From your Economics 101 course you probably know that when demand is more than supply the price goes up. So when the price of the shares goes up the investor has been rewarded by capital gains. On the other hand when dividends are paid the investor has been rewarded by income.5. Debt – invest in companies that are debt-free or have low gearing. Gearing is the ratio of debt to equity. When a company is leveraged its returns will have more risk as measured by standard deviation. Also in bad times a leveraged company suffers more than a debt-free one. Debt covenants can be very stringent demanding a company to disclose whenever they enter into any riskier projects. Other lenders will recall the bonds placing the company at the risk of bankruptcy. Cash rich companies are better and less risky than debt-ridden ones. They can easily weather a financial storm than those companies in debt and cash-strapped.A passionate and savvy investor will always have a watch list. Certain stocks, however attractive, do not have the right prices. When the market dips and prices fall it would be the right time to buy them. For maximum gains invest in depressions or recessions. Wait for corrections in the market and then buy and hold. There are no formulae for knowing the rock-bottom of a bear market. Follow your gut! On the other hand you can always be buying stocks in a monthly programme known as dollar cost averaging. In this approach you select stocks based on the principles outlined above and you invest infinitely into the future and thereby averaging the price at which you buy the stock.