This is a true story about Angie, a person I will never forget. She was not a person one would think would need a life insurance policy. She was not married, not a home owner, and she had no children. She sat down with me because she had two financial goals. One was to have a comfortable retirement from her job in San Bernardino. The other was to take care of her mom and two of her siblings just in case.

The First Phone Call

I was getting a few groceries one evening at a local supermarket when my phone rang. After a long day, I looked at my phone to determine if I wanted to talk or not. When I saw that it was my client Angie, I was puzzled because she never called. I answered the phone curious to find out why she called. After a few seconds of small talk she said, “I’m calling make sure that my life insurance policy is still active.” I informed her that it was, and then asked her why she was asking.

She said, “You are the second person that I called because I have something important to tell you.” I said, “Tell me.” She said, “I just found out that I was diagnosed with breast cancer. I am deciding to believe that everything will be fine, but I just wanted to make sure that the life insurance policy is in good standing”.  Wanting to reinforce her belief, I said, “I’m believing with you that everything will be fine.” We ended the conversation and I said a prayer for Angie before I resumed to grocery shopping, but with a heavy heart.

Angie’s Second Phone Call

I made it a point to call Angie once a month to check on her. She told me month after month that she was fine, until one month she called me before I called her. “Hello, Dr. Cooper?”she asked. “Hey Angie!” I said, happily surprised but concerned why she called. She told me that the cancer spread aggressively and she was on her way to surgery to have a mastectomy. I was hurt to hear the terrible news, and honored at the same time that she thought enough to inform me as she was facing the most traumatic event of her life.

Two days later she called me, and I could tell from the background noise that she was still in the hospital recovering. We set up a breakfast a month from that day to celebrate her life and survival. When we sat down, she just kept telling me how blessed she was and how much more she appreciated life and the simple pleasures it gives. From that day, I decided to call her about once every three weeks to touch basis with her.

Angie’s Final Phone Call

About a week after our previous conversation she called me again to tell me that the cancer was back, but this time it metastasized into her bone marrow. Speechless, I paused for about ten seconds, and she said something that I will never forget. “Len, don’t worry about me. I believe that I am healed and besides, God is in control of my life regardless of what happens.” I immediately felt ashamed that I felt enough pessimism for her to sense that she had to lift up my spirits with her optimism. After this call, I wanted to be the one initiating our telephone conversations.

As I was driving, I saw her name appear on my telephone. I felt a weird feeling in the pit of my stomach. However, wanting to learn from the previous call I received from her, I answered with as positive of a voice as I could muster. This time, her voice was faint. She asked me if she could re-arrange the percentage of the life insurance death benefit to her beneficiaries. I explained that her request had to be in writing, but I would have the insurance company email her the paperwork. Immediately after the call, I reached out to one of her colleagues at work who was also a client. I asked her to check on Angie, but not to let her know that I initiated the visit.

The Most Difficult Phone Call

The following day, I called Angie’s colleague to give me a report about how she was doing. She told me that she went to visit Angie’s classroom, but there was a substitute teacher there instead. So I called Angie, but there was no answer. Despite all the negative feelings that swirled in my heart, I convinced my head that everything was ok.

The next morning at 5:48 I received a phone call. I answered the call listening to a man whose voice I did not recognize trying to maintain composure while he asked to speak to me. Suddenly, he burst out crying saying, “She’s gone, she’s gone.  Angie’s gone!” Lost for words thinking about the fact that she was only 48 years young, all I could do was express my sincere, but seemingly empty condolences.

The Power Of Life Insurance Hit Me

A week after the phone call, I attended Angie’s funeral. I walked up to a young lady, who was obviously Angie’s sister to introduce myself. What happened next, forever changed my perspective about the life insurance profession. Her eye’s opened widely with delight, and as she gave me a hug she said, You’re Dr. Cooper? Angie talked about you all the time. Thank you so much for what you have done for my family!” I hurried to accept her gratitude before she could see the tears that flooded my eyes. At that moment, I realized that within a week, Angie’s mom will have paid off her home and her brother and sister would be debt free with money to spare.

When Angie purchased life insurance, we never thought that she would use the death benefit for her mom and two siblings. She wanted tax-free income during retirement. Had Angie not been motivated by what insurance could do during her lifetime, she would not have decided to purchase life insurance. Angie’s choice to get life insurance changed her family’s life. Not only that, it completely changed my professional life because I gained a level of conviction that my profession significantly transforms the lives of my clients and their loved ones. I now want every individual and family to have the same piece-of-mind.

This blog post is the final post of a 7 part series on life insurance. You can find the first post here: http://www.your-insurance-experts.com/why-get-life-insurance-part-1/

The Real Power of Life Insurance Comes During Distribution

Now that Justin is ready to access the cash value in his policy, there are a number of options he can exercise. After maximum-funding a policy, the proper distribution of cash is the most important strategy. Since Justin is still living and his grown children have no need for life insurance, he could choose to surrender his policy. That would not be a wise choice because without an in-force life insurance contract, all of the gains in his cash value would be subject to taxes. In fact, that choice would have made this option worse than a tax-qualified plan like an IRA because Justin would have at least received the benefit of tax deferral.

Life insurance companies devised an ingenious provision that allows Justin to take out a loan based on the cash value in his policy. It is important to note that Justin will not borrow his own money. He will use the cash value in his policy as collateral. There is nothing particularly clever about taking out a loan and using something of value as collateral. What is inspiring to Justin is that he can take out his loan with no or little interest, and he will never have to pay the loan back.

Earlier, we stated that Justin was 35 and put in around $1,400 each month until he was 70, which equals $588,000 of cash value out of his pocket totaling around $2,000,000 of accumulated cash value in addition to the $500,000 he could pass to his heirs. Let’s assume that Justin is going to live on $100,000 a year during retirement. Justin could distribute or spend down his cash value in two phases.

Phase one – Justin could take a withdrawal of the money he put into his policy. Since he needs $100,000 a year to live on, it would take close to six years to withdraw his $588,000. After Justin has withdrawn the $588,000, there is a possibility that the $1,400,000 (the estimated result after you subtract $588,000 from $2,000,000) of growth could experience even more growth during the five years depending on market conditions.

Phase two – After Justin finishes withdrawing his out-of-pocket money, he could then take out a loan on the roughly $1,400,000 of cash value. The $100,000 a year would still come to Justin tax-free. The three most common purchases use a loan for are cars, homes, and student loans. We receive money to pay for these items, but we don’t owe any taxes on them, right? Instead, we pay interest to the lending institution. Similarly, the insurance company places Justin’s $100,000 into a separate account at a certain interest rate. What’s ingenious is that this $100,000 will also earn an interest rate during the year. If the interest rate is 5 percent and the $100,000 earns 4% in the separate account, then Justin’s net interest rate is only 1%. If the $100,000 earns 5% then Justin has a wash loan and doesn’t owe anything.

A logical question is, “This sounds too good to be true. Why doesn’t Justin have to pay back the loan?” Justin’s cash value is $2,000,000 and his death benefit is $500,000. For the sake of simplicity, let’s conservatively assume that the cash value doesn’t earn interest and the interest rate in the loan (say 5%) and the $100,000 in the separate account (5%) create a wash loan. If Justin lived until 86, (16 years in retirement at $100,000 a year is $1,600,000) he would have a $500,000 death benefit to pass to his heirs. At that time, the insurance company would deduct $1,600,000 from the $2,000,000 and his heirs would receive what was left over, which in this example, would be $400,000. Therefore, the total tax-free death benefit Justin’s heirs would receive is $900,000.

To summarize, Justin maximizes the amount he puts into his cash value life insurance policy with after tax money. His cash value grows over a long period of time. During his retirement years, he withdraws $100,000 a year tax-free until that money is gone. After he withdraws his money, he will then take a loan of $100,000 a year tax-free for the rest of his life. When Justin passes away, the death benefit and the remaining cash value will go to his beneficiaries without any tax liability. In other words, for delaying gratification for 35 years and contributing $588,000 in this example, Justin lived retirement on $1.6 million tax-free and still had almost a million tax-free dollars to pass to his heirs. I would say that it was good that Justin and his insurance agent met.

Now that you have the information, do not become a victim of procrastination. Contact an insurance expert in your local area who can sit down and discuss your individual situation (if you reside in the Southern California area, I will be happy to help you — my contact details are below). Whether you decide to make this a part of your retirement portfolio or not, take action now by making an informed decision. Your retirement future and the financial well-being of your family could depend on the steps you take today.

This blog post is a continuation of a 7 part series on life insurance. You can find the first post here: http://www.your-insurance-experts.com/why-get-life-insurance-part-1/

Using Life Insurance for Favorable Tax Treatment

If you had a dollar that doubled every year (100 percent gain) for twenty years, you would have $1,048,576, which would be fantastic. However, if that money was taxed each year at 30% you would have a meager $40,642. I am in agreement that we should all pay our fair share of taxes, but I also believe that we should make ourselves aware of ways to redirect our hard-earned money that favors us. Permanent cash value life insurance is a way to place large sums of cash, and if structured properly, receive the growth of that cash free of income taxes (based on current tax laws as of the time of this writing).

Perhaps you are wondering why you did not know about this, and how is it possible to have an increase of cash value without having to pay taxes. Firstly, it is important to understand that many insurance professionals only know insurance and many financial professionals only know finance. Utilizing cash value as an investment strategy within a life insurance policy combines two different professional industries in one product. As time passes, more professionals are starting to see the value of understanding both industries, but this process is still in the infancy stages.

The money you place in cash value life insurance has already been taxed by the time it enters your bank account. Because the money is a part of a life insurance policy, there is no tax liability on the growth as long as you stay within the funding limitations from the government. For example, Justin needs $500,000 of coverage. Depending upon policy variations from one insurance company to another, he could put around $1,400/mo. into his policy. At age 70, he could have around $2,000,000 even after the fees and cost of insurance. Additionally, he still has $500,000 to pass to his heirs. The best part of the $2,000,000 is that he has access to that money tax free!

You may have noticed the many disclaimers about having a properly structured cash value life insurance policy. To illustrate this point, a dragster racing car requires a special type of fuel and a properly structured racing course to get the maximum use out of that type of high performing vehicle. A specific combination of methanol and alcohol are used as fuel to help these cars to reach speeds in excess of 300 mph in less than 5 seconds. If I decided to fuel a dragster with unleaded 87 fuel, and drive it around the neighborhood, could I possibly get the maximum use from this vehicle? Absolutely not. Similarly, cash is the fuel and time is the course for this type of funding vehicle. Along these lines, someone with a cash value life insurance policy should put as much cash as the policy will allow for at least 20 years to accomplish the absolute best benefit. I would imagine that there is no exhilaration like going from 0 to 100 mph in less than a second. Likewise, having access to over a million tax-free dollars is a thrill like no other.

In the next blog post I will discuss how the Real Power in Cash Value Life Insurance comes during Distribution…

This blog post is a continuation of a 7 part series on life insurance. You can find the first post here: http://www.your-insurance-experts.com/why-get-life-insurance-part-1/

How to Outpace Inflation Using Life Insurance

There are lots of different types of investments that people use to outpace inflation. It’s reasonably safe to assume that every investor desires to sacrifice capital now for a greater amount of capital in the future. The difference is how people plan to get the greatest return on their investment given their ability to tolerate risk. Some like stocks, bonds, or mutual funds. Each one of these investment vehicles have the potential to have very competitive gains. However, the downside is the risk to lose the gains in a down year.

When your money is in a market that can lose investment capital, you might be surprised how long it takes to recover from the losses. For example, let’s assume you are aggressive, and you decide to take some market risks for potentially attractive gains. You invest $100,000, but the market goes in the wrong direction and you lose 50% of your portfolio. Looking at the math, the value of your portfolio is now $50,000. During the following year, the market recovers and goes back up by 50%, how much do you have in your portfolio? If you answered $100,000, your response was the same as 75% of the people in which we ask this question. The correct answer is $75,000 because 50% of 50,000 is $25,000. This exercise is not meant to be a tricky math lesson, but more of a way to illustrate that losing your money to market loss is dangerous because it takes two-percent of an increase to recapture every one-percent loss.

The cash you place inside of permanent life insurance depends on how you prefer to combat inflation. One approach is to place the cash value directly in the market. With this strategy, you can participate in all of the gains that the market has to offer, but you also participate in all of the losses from the market. Someone who has a high risk tolerance may choose this approach if they have the discipline to think long-term and the discipline not to react emotionally when the market conditions are temporarily unfavorable. As stated before, a one-percent loss creates the need for a two-percent gain.

Another strategy that you can use is an equity indexed life insurance approach. In this case, the money you earn is not actually in the stock market so it is not subject to the losses. In other words, when the stock market has a positive year, your cash value will experience a gain up to a percentage that each insurance company determines. That “cap” rate is typically around 10 percent; some companies are slightly higher and some are slightly lower. If the market gains more than the cap, you will earn what the cap rate allows. If the market, however, experiences a loss during a year, you will not risk any of your principle due to market loss. This strategy is for a moderately conservative person who is willing to forego some of the market gains to eliminate the market losses.

In the next blog post, I will explore how to use Life Insurance to Save on Taxes. 

This blog post is a continuation of a 7 part series on life insurance. You can find the first post here: http://www.your-insurance-experts.com/why-get-life-insurance-part-1/

Life Insurance Solution – Financial Swiss Army Knife

Maria, the financial planner, asked Justin to consider a properly structured Indexed Universal Life Insurance (IUL) policy. Considering that Justin wanted to make a responsible decision that was best for his family, he asked Maria to explain how it works. Before Maria was willing to give any details, she had to make sure Justin realized that he would not deviate from the plan, short of a life altering emergency. Justin agreed.

Maria began to explain that the foundation of this plan is permanent life insurance. Justin politely interrupted Maria to inform her that he already had a permanent policy. Surprised, Maria asked Justin to get the policy so she could see it. Even more surprisingly, Justin had an indexed universal life policy, but it was not structured to provide the most efficient financial benefit for Justin. His IUL was structured to make the minimum payment possible to cover the death benefit.

In order for Justin to use his policy to outpace inflation, Maria encouraged Justin to take his extra income to maximum fund his Indexed Universal Life Insurance. Justin looked puzzled because that meant instead of paying $400 a month for a $500,000 policy, she asked him to put away $1,400 a month. Noticing Justin’s non-verbal disapproval of her suggestion, Maria asked, “If I asked you to put $1,000 a month into your bank account, you wouldn’t say that’s too expensive, would you?” “Of course not”, Justin replied, “It’s my money.” “Exactly”, Maria explained, “Making deposits into your bank account isn’t a cost. In fact, it’s a favor you are doing for yourself now to significantly benefit you later. This is the same way you have to view your IUL.” Justin began to look at her idea differently, and was open to hear what she had to say.

Regarding investment and financial matters, we are either uninformed or misinformed. As a result, it is very difficult for us to distinguish between truth and opinion. In the case of cash value permanent life insurance, misconceptions often run amok because some of the people who offer their opinion are well respected and popular. No matter what, every investment has pros and cons.

In the next blog post, we will discuss why it is my opinion that cash value life insurance is the best place to allocate your retirement income so that you can Outpace Inflation.

This blog post is a continuation of a 7 part series on life insurance. You can find the first post here: http://www.your-insurance-experts.com/why-get-life-insurance-part-1/

Life Insurance Sniper Two – Taxation

Teachers, fire fighters, police officers, and the roads they drive on are necessary to all of us if we want a learned citizenry and safe communities to raise our children. Our tax dollars, when used properly, significantly makes our lives more pleasant. However, history has shown that needs have a tendency to transform into wants as economies become more industrialized. If you feed a dog steak and chicken, then try to feed it dry dog food afterward, your best friend will become your worst nightmare. Similarly, we have become accustomed to a certain standard of living that is well beyond our means. If politicians even talk about taking steps to take our steak and chicken away, they know that their career in politics will end abruptly. As a result, they tend to do what is popular as opposed to what is best.

Those of us who complain about high taxes in America and claim that this country is headed toward socialism needs a brief lesson on the history of the marginal tax rates. As people earn more, they are taxed at a higher rate. Here is a snapshot of the marginal tax rate in America:

• 1918 (During WWI) – 77 percent
• 1939 (During Great Depression) – 75 percent
• 1944 (During WWII) – 94 percent
• 1952 (Baby Boom Expansion) – 92 percent

It’s important to note that a person who made $200,000 in 1944 did not pay $188,000 in taxes. Remember, we are talking about “marginal” tax rates. The marginal tax rate is the top rate of income tax charged to individuals on their last dollar of earnings. So in 1952, for example, when the top marginal tax rate was 92 percent, that was the tax rate owed on a person’s income over $300,000. That person would owe 20 percent on the first $2,000 of income; 21 percent on the next $2,000 in income; 24 percent on the next $2,000 and graduated up to the highest rate. A person making $400,000 in 1944 would owe $191,411 (47.9%) of their income in federal taxes.

One cannot argue that war creates jobs for the defense industry and military personnel, but it also places an enormous financial burden on tax payers. During the first two world wars, the United States government ran an aggressive campaign to get private investors to invest in government bonds since they knew taxes alone could not finance the war. The following is a breakdown of the cost of the three of the most expensive wars in US history:

• WWI – $32 billion – (roughly $471.8 billion in today’s dollars)
• WWII – $304 billion (roughly $3 Trillion in today’s dollars)
• Iraq, Pakistan, Afghanistan $3.2 Trillion

During each WWI and WWII, the marginal tax rate increased significantly to help finance them. Although the wars in Iraq, Pakistan, and Afghanistan were very expensive, the marginal tax rate did not increase to cover the increased debt. As we examine the marginal tax rate and its connection to war, it is evident that the highest marginal tax rates in history occurred as a result of war. Why did the marginal tax rate stay relatively level during these wars?

I would like the marginal tax rate to stay low because that means less money out of my pocket. That said, I would also like world peace and harmony among all nations so there is no need for war, but unfortunately we cannot have everything we want. As the nation’s debt keeps getting pushed further and further into the future, it keeps growing like a cancer. We are going to be forced to have surgery, which will hurt really bad and it will set us back for a while. The only other alternative is to let the cancer continue to grow. If that is in fact, the case, this malignant financial cancer will eventually take over and then we will not be able to do anything about it.

Before we discuss a solution and of course an action, we must identify life insurance third and fourth snipers: Instant Gratification and Procrastination.

This is part one of a 7 part series on why you should obtain life insurance. Please check my next blog posts regularly for the rest of this series on life insurance.

Most of us have been told that life insurance is for people who plan to pass away. Contrary to popular belief, life insurance serves a much more significant purpose than most people could possibly imagine. With a real deficit that is around $17 to $75 trillion, the truth of the matter is that the government has allowed the proverbial can get kicked so long that it has morphed into an out of control freight train. Increasing what you pay out of your pocket to reduce this deficit is inevitable, and that payment plan is going to be drastic, at least for those of us who do not have a plan to combat this.

Now that we have a clearer picture about what lies ahead, we must understand what hinders our money from growing with maximum capacity. There are four wealth snipers that you must know about before you make life insurance work the most efficiently for you. These snipers camouflage themselves and silently watch while you meander through life, oblivious to their presence. They patiently wait for you to make a mistake out of ignorance or misguided beliefs that place you on a path that leads you to the center of the sniper’s cross-hairs.

Sniper one – Inflation

One morning, you go to the grocery store because the kids eat when they are not full instead of when they are actually hungry. Today, you don’t mind because it’s a beautiful day in Southern California. You get your shopping cart and go down every row in the store to make sure you didn’t miss anything. As you scan the enormous selection of ice cream, you zero in on cookies and cream because it has enough vanilla flavor to satisfy an adult palette and enough cookies for the little ones at home. As you pick up the ice cream, the price tag seems to be the same, but the half gallon of ice cream you remember buying is now 1.5 quarts. You are busy so you don’t really think too much about it, so you keep shopping.

As you get to the junk food aisle, you notice that the bag of chips has a lot more air inside and the dish-washing liquid seems a little more diluted than before. Suddenly, you become more observant as you go down the cereal aisle. You recognize that the prices have sharply increased. The same is true for bread, orange juice and especially produce.

The prices of these staple commodities continue to increase and rob us of our wealth.  These snipers steal from us every time we take our cars to the gas station or check our bags into an airport; long gone are the good ole’ days when a ticket price included luggage and a hot meal. Certainly, we can choose not to travel, but we can’t opt out or boycott the grocery stores because we have to physically survive. In short, as the cost of the goods and services we buy increases, the amount of money we have to invest decreases.

Please check out my next blog post on life insurance which discusses Life Insurance Sniper 2:  Taxation.

Have you ever wondered about the history of Life Insurance?  Where did it all began, and why are so many high-rise buildings owned by life insurance companies? Based on my personal and professional experience, I have a sneaky suspicion that this topic is not going viral (because history is boring to lots of people and life insurance is a taboo topic for even more people).  There are, however, people who ask me to give a simple explanation about how life insurance started.

Life Insurance in Ancient Rome

Thousands of years ago Romans created burial clubs because they believed that people needed to have a proper burial so their spirit could properly travel into the after-life. Communities agreed to place a fraction of their earnings in a common fund that could be used to properly bury their members. This process lacked sophistication, this was the beginnings of life insurance.

Life Insurance in England

It is widely believed that the modern form of insurance we understand today began with a group of merchants in the shipping industry. Lloyd’s coffee house was the famous gathering place of shipping merchants and investors who formed associations to purchase shares to spread risk among the members. On long voyages the ships were subject to fires, piracy,  and shipwrecks. In return for their investment, they would receive their money back in interest along with goods acquired from other places around the globe.

Life Insurance in America

More recently in America, the colonists who migrated from Europe were dying in large numbers because of disease and famine. When the head of the household died, it put a large financial strain on the family. Often, a small number of the locals would contribute funds to help the family survive, but this practice often placed a financial hardship on their families.

Since people knew death was such a common occurrence that would eventually impact everyone, the colonists agreed to place money into a common fund so if someone in that community died during the year, a small amount of money contributed from a larger number of people could pay to support the effected family without draining any one family’s finances.

Over time, these communities grew larger and some of the colonists became more sophisticated in their understanding of life expectancy. Equipped with more knowledge, these specialists began to learn more about pooling risk and resources to create large cash reserves to pay insurance claims. Investors began to see the financial potential and created companies to sell life insurance at a profit.

Modern Life Insurance – Cheaper now, but purchased less

Following World War I people increasingly purchased life insurance, and by 1920, there were more than 120 million life insurance policies owned in the U.S. Based on census data, that equaled approximately one policy for every adult person in the U.S.

Nowadays, life insurance is a very precise industry that studies the life expectancy of huge groups of people, and can predict with incredible accuracy how many years the average person will live, and how many people per thousand will pass away in each ten-year band. This accuracy, along with increased life expectancy has benefited the clients by lowering insurance premiums since the 1980s.

Despite the good news,  sales have fallen steadily, and now LIMRA estimates (2010 report) that only 44% of U.S. households have individual life insurance coverage, which is a 50 year low, but life insurance has remained an important piece of a family’s financial planning.