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 After Justin has withdrawn the $588,000, there is a possibility that the $1,400,000 (the estimated result after you subtract $588,000 from $2,000,000) of growth could experience even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 Three – Instant Gratification

As a child, I grew up in many cities near Los Angeles. I remember that going to the store with my mom was something I always looked forward to because more times than not, she would allow me to buy a little toy. One time we went to the store and I wanted her to buy a parachute soldier to throw in the sky and watch it parachute to the ground. I asked my mom to buy it, but she refused. I remember giving her my puppy dog eyes, which usually worked. She didn’t budge. I whined and then cried, and when she still said, “no” I gave her the silent treatment.

Although I didn’t like what my mom did at the time, it taught me a valuable lesson that I now understand and live by as an adult, which is, you must have discipline because you can’t always have what you want. My mother could have given in to my whining and crying, but she held her ground. I have used that same principle not only raising my kids, but also in my decision-making as an adult. I love nice things, but at the end of the day, they are things that lose intrinsic value after the newness wears off.

As a country, we have not learned the value of deferring gratification. We allow our emotions to take over, and when that happens, we buy things we want as opposed to living beneath our means. As we seek to gratify our immediate desires, we put off the need to save money until some other time. We are seeing the symptoms of this thinking more than ever among the growing number of retirees. The young adults of the 60s who lived life to the fullest are now finding themselves unable to take care of their basic financial needs today.

Life Insurance Sniper Four – Procrastination

This sniper is the deadliest of all because no amount of consulting, coaxing, or coaching can rescue someone from themselves. Conscious and consistent action is the only remedy, which is simply a matter of an individual making a decision to change. To put this in perspective, consider the following:

Alexis is 22 yrs. old and just graduated from college. She moved back home and decided to save $500 a month into an account that earned 8%. At age 30 (8 yrs.) and two years of marriage to James, she chose to stay home with her son. She never contributed another penny to her investment, but simply allowed the interest to work for her. When she turns 65, she will have $ 1,019,085.03

At 22, John graduated from college and got himself a car and a nice apartment. With his entry level position, John didn’t have $500 a month to save. John is now 40 yrs. old and has a wife and two kids. He has lots of financial obligations, but realizes that he needs to prepare for retirement at age 65. He struggles, but manages to put away $500 a month in an account that earns 8% for the rest of his working life (25 yrs.). When he is ready to retire he will have $473,726.49.

Although Alexis only saved $48,000 and John saved $150,000, Alexis has more than twice as much money as John at age 65 because she did not allow the procrastination sniper to help her justify why she should wait to save money while she was young. Alexis had to live at home even though she was adult, but a few years of sacrifice made a significant difference later in life.

Procrastination feels harmless during the years that we find valid reasons not to save money. John’s desire to get a new mode of transportation and live independently makes perfect sense. In fact, we would consider John as a person who acted responsibly. The insidious nature of procrastination is precisely why it is so dangerous. Left unchecked, one year slips into another until we find ourselves unable to live the great lifestyle during our retirement years as we envisioned our entire lives.

As we stated earlier, inflation has a major impact on our financial well-being. According to the Bureau of Labor Statistics, the average rate of inflation since 1914 is 3.35 percent. Justin recently received a promotion and wanted to make a responsible decision by taking a portion of his extra income to invest. He was not sure exactly where to put his money, but he was concerned about losing money in the stock market. After Justin had a conversation with his credit union, he decided that a CD or money market account might be his best move. Even though he was not happy with .5 percent rate of return, at least it was better than nothing, and much better than losing money.

Even though Justin took responsible steps to invest a portion of his disposable income, his money now suffers inflationary risk. In other words, if Justin had $10,000, it would take 21.5 years to lose half of its value if inflation maintained a constant rate of 3.35 percent. On the other hand, that same $10,000 would take 144 years to turn into $20,000 in Justin’s credit union. Justin realized that a CD might not be a good way to invest his money.

Justin started asking questions because he was determined to find a way to invest his money. He asked his Human Resources Manager at work if they offered a Roth 401(k) because he heard that he could pay taxes on the money he contributed, and not have to pay taxes when he retires. Unfortunately, his employer did not offer that plan. Finally, Justin sat down with a responsible financial planner named Maria who took time to learn his needs and came up with a solution that addressed all of Justin’s financial concerns.

Having identified the 4 Snipers to Life Insurance (what prevents those from getting life insurance), in the next blog post, I will start with the solutions life insurance provides, giving justification to using life insurance as an effective financial planning instrument. The next blog post is:  Life Insurance as a Financial Swiss Army Knife.

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.

If you ask most people to explain short-term medical insurance, there is a good chance that they have never heard of it. Starting January, 2014 short-term medical insurance may become more popular as the price of health insurance increases. Rising costs are inevitable because more sick people will utilize existing resources for adequate care.

What Is Short-Term Medical?

Short-term medical allows someone to have health care coverage for a short period of time (30 to 180 days.) However, in California, an individual may reapply indefinitely, provided they continue to qualify. In some cases, short-term medical could decrease your health insurance costs by up to 40%. Since most people are not familiar with short-term medical insurance, it’s important to know if you are eligible to have short-term medical.

What Are The Eligibility Criteria For Short-Term Medical?

If you can answer “no” to these questions below, there is an excellent chance that you will be eligible for short-term medical insurance.

1.Do you or any proposed applicant have any other insurance policy (group, major medical, government, or other) that will be in force on this policy’s effective date?

2.Are you or any of the proposed applicants now pregnant or an expectant father?

3.Has any person proposed for coverage been declined for health insurance in the past 12 months?

4.Have you or any proposed applicant received treatment, medication, medical and/or surgical advice, and/or been diagnosed with: cancer or tumor, stroke, heart disease including heart attack, chest pain, asthma, COPD (chronic obstructive pulmonary disease) or emphysema, liver disorder, degenerative disc disease or herniation/bulge, rheumatoid arthritis, degenerative joint disease of the knee, diabetes, chronic renal failure, alcohol abuse, chemical dependency, or diseases of a mental nervous nature within the past 5 years?

5.Have you or any proposed applicant been diagnosed or treated for AIDS, AIDS-related complex, or any other immune system disorder, except HIV infection?

What about people who lie on their application?

While this is not an absolute statement, but most short term medical insurance carriers are not in the business of determining eligibility. Rather, they are in the business of collecting money from lots of people in order to pay out large claims to a few individuals. If an individual decides to file a claim, but the claim is somehow traced to any of the disqualifying questions above, the insurance company has the right not to pay for the medical claim. Therefore, it is in one’s best interest to complete an application untruthfully.

What if I previously had one of the conditions listed above?

Depending on the carrier, if you have lived symptom-free for five years, then you do not have to answer “yes” to any of the questions. For example, if you have been cancer-free and haven’t taken any medication for five years and one day, then question 4 above no longer pertains to you. Depending on your resident state, some carriers only require a two-year symptom-free period.

Which doctors can I visit?

In the event that you need to visit a doctor, there are virtually no limits on the doctor you can visit. Unless you would like to change doctors, short-term medical will cover your same medical needs with your existing physician. It is important to note that if a condition manifests during your coverage period, you will only be responsible for your deductible and copayment if they apply. However, once that specified coverage period ends, you will be responsible for the entire medical bill, and will most likely forfeit your eligibility for short term medical insurance on your next application.

Overall, if you are healthy and you want the peace-of-mind that comes with knowing that you are covered, you may consider short-term medical. It may be a cost-effective way to take care of you and your family.

If you reside in the Greater Los Angeles and Southern CA area, please don’t hesitate to contact me with your short-term medical insurance questions. I can help you to best determine if short-term medical is a good fit for you. My contact details are below…

Toward the end of the 1800s companies in America began to evolve from mom and pop shops to large corporations. With that shift, Americans began to trust in their employers to provide them with pension plans. By 1980 35.9 million private-sector workers (46 percent of all private-sector workers) were covered by a pension plan. In the 21^st century, pensions are rapidly becoming a thing of the past. If you still believe that a pension plan is going to take you to the glorious sunset of retirement, perhaps a dose of reality may open your eyes to a sobering outlook.

Steel Workers

The birth of high-rise buildings and railroads created an insatiable demand for steel. Both innovations enabled people to have more efficient modes of transportation, which fueled population growth in metropolitan areas. The steel industry gave people a chance to make a good living, and therefore, people worked in this industry their entire lives. As steelworkers have aged and the steel manufacturing industry has experienced a dramatic shift in recent decades, pension plans have failed to meet their financial obligations to hundreds of thousands of workers who count on their defined benefit plans to survive. In fact, the metals industry accounts for about 27 percent of pension plan failures.

Air Travel

Airlines throughout the world were forever changed by September 11 when all airplanes were grounded. Since then, the larger and more established air travel companies were crippled by high fuel costs, poor labor relations, and an economy that incubated an increasingly cost-conscious consumer. Consequently, 257,280 employees in the industry were financially impacted by a failed pension fund. This pension failure created a massive financial liability for the Pension Benefit Guaranty Corporation (PBGC), a government funded entity that assumes responsibility for failed pension plans.

Private vs Government  Pension funds

Previously, pension plans were the foundation of a solid retirement. However, times and economic forces have caused a seismic shift in the economic viability of defined benefits in the workplace.  As Baby Boomers retire at an increasingly rapid rate, traditional defined benefit pension plans offered by private employers are rapidly facing extinction.  Additionally, government funded pension funds are entering the endangered list in rapid fashion. The 10 worst state pension plans in the country are all less than 50% funded. In other words, if all of the employees left work today and demanded payment for their pension plans, less than half would get paid the full amount and the other half would receive nothing! To further put this into perspective, these low performing pension plans have roughly 1.5 million employees.

Why you should be concerned

Since 1981, the number of pension plans has decreased by nearly 70 percent. The previous generation of retirees was able to enjoy their pension plans, social security, and their individual savings as a solid foundation for retirement. Clearly, those days are becoming distant memories as the shifting economic climate is forcing us to take refuge in our own structured retirement plans. If we intend to survive the impending financial storm, we must take matters into our own hands since we will always serve our own best interests.

For more ideas about how to design a better financial future for you and your family, sign up for my free blog and newsletter.

I recently sat down with a newlywed couple in Rancho Cucamonga who wanted to know if it made sense to increase the amount of life insurance coverage to achieve their overall financial goals. They each showed me a policy that they purchased a number of years ago. I was surprised to see that each of them was paying about 30 percent too much for their coverage. Similar to gas stations and grocery stores, you will find cost variation, but 30 percent is too much of a difference. People work hard for their money and therefore, deserve to save it, spend it, or invest it. Here are some ways to suspect that you are overpaying.

Know about mortality trends

There are secrets about the insurance industry that everyone should know to ensure they have the best possible policy. This particular secret could potentially impact every person who owns a small term policy to a multi-million dollar permanent policy that is accumulating tax-free retirement income, and every policy between.

Life Insurance companies pay large sums of money to know to the greatest level of certainty the lifespan of males and females. Prior to strict legislation that held insurance companies more accountable, a small number of those companies unscrupulously overcharged their clients to pad their profits. In response to this act of greed, the industry developed a standardized pricing system for life insurance in 1958. This system was called the Commissioners Standard Ordinary Mortality Rates (typically referred to as CSO).

During the 50s people had shorter lifespans. This fact is important for insurance companies for obvious reasons. Consequently, people who purchased life insurance policies during that era had to pay a higher amount for their insurance.  Another mortality study was done in 1980 to reflect the changes in life expectancy. The most recent mortality study was conducted in 2001 which revealed that people were living even longer than the people in 1980. The CSO table in 2001 reflects a 30 percent reduction in the cost of insurance compared to the table in 1980.

A reduction of 30 percent means that you can purchase $130,000 of life insurance for the price of $100,000 or you can pay $70 for the same amount of insurance instead of $100. If you have the right kind of policy, you could take the extra $30 and use it for tax advantaged cash value accumulation.

Secrets of some Insurance companies

Every industry needs an agency to regulate unethical practices. Devoid of such an agency, a small number of individuals inevitably fail to resist the temptation to amass more profits. The same is true in the insurance industry. Specifically, the 1980 CSO tables were not enforced until 1989. To properly put this into perspective, let’s assume you are a business owner and you find out that a new procedure takes effect next January that will reduce your profits by 30%, but you are not forced to implement the procedure. How quickly would you integrate that practice into your business? Chances are you probably would not be in too much of a rush, would you? Neither were companies in the insurance industry.

Know how this secret impacts you

It’s January 1986 and you just made a New Year’s resolution to lose weight. On the 28^th you see the Space Shuttle Challenger explode on television, which prompts you to protect your life against some unforeseen accident. If you purchased a life insurance policy in 1986, chances are the prices you paid was based on CSO table of 1958, nearly 30 years earlier. If you knew this secret, it would have saved you a ton of money because the rates in the late 50s cost 40 percent more.

In other words, if you invested $100 a month earning 6 percent annually for 30 years, you would have $94,869.82. If you invested $140 a month (40 percent more) earning 6 percent annually for 30 years, you would have $132,817.75 or $37,947.93 more.

Everyone knows they need life insurance, but the essential question is, are you overpaying for yours? I encourage you to look at your policy issue date to see if that is possible. Secondly, you might consider having a local insurance expert examine your policy. You may be leaving lots of money on the table that could benefit you greatly.