What if I could show you how to buy dollars with pennies, would you be interested? If you or someone you know is 65 or older, this financial secret is something you certainly want to know about. There are people who are saving their individual retirement account (IRA) for a rainy day or an emergency. Believe it or not, these IRA accounts often are never spent by their owner. People who own these like the idea of having a nest egg to pass to their loved ones if they never need it during their lives.

The After 70 ½ Rule for Your Ira

One major financial setback of an Ira is that sometimes these accounts are taxed upwards of 50 percent when they pass it to their heirs. As people age, Uncle Sam gets greedier. For example, John is 71. He has a pension from his job and social security that covers all of the monthly expenses. He also has $75,000 sitting in an IRA. There is currently a tax code in place that makes it mandatory for John to take money out of his IRA account even if he has no need or desire to spend that money. This is true for anyone who is 70 ½ or older. Worse yet, John has to deduct money out of that account each and every year.

Uncle Sam Needs Your Money Even After You Retire

In case you are wondering why John is forced to take money out of his personal account, the government wants him and everyone else his age to take a distribution each year because individuals pay taxes on the money they withdraw. The reason why this occurs is because taxes are the fuel that runs the government engine. If there are millions of retirees withdrawing money, there are billions in tax revenue generated for the government. As you continue to read, there is a way to turn this “have to” money into “want to” money. In other words, you are going to learn how to look forward to putting a required minimum distribution to work for you.

How to Make Uncle Sam Work in Your Favor

You will most likely be shocked to find out that cash value life insurance is the answer. One reason why people shy away from life insurance is because the annual premiums are so high. This becomes the perfect scenario for a retirement account that has a required minimum distribution (RMD). Instead of John spending money from his (RMD) on unnecessary purchases, he can take that money and purchase a policy that will last for the rest of his life. Perhaps the best advantage is that the money passes to the beneficiary tax free.

Since the distribution is tax free, John has great flexibility with his IRA as long as he knows that he intends to save it for an emergency and pass it to his loved ones. If we compare John’s options side-by-side, it will be easy to conclude the decision that would be in John’s best benefit. If John keeps his money in his Ira, he will have to withdraw money from his account yearly. If the amount taken out is more than the interest earned the value of his Ira is going to decrease. When John dies, the entire amount left over will be taxed before his heirs receive the money. If John places his money in an insurance policy, he may end up spending all of his money down in his Ira as he transfers that money to his insurance policy on an annual basis. However, the difference is that if he purchases a $75,000 policy, the entire $75,000 plus any earned interest will pass to his heirs. If done properly, this strategy will always allow anyone to pass more money to their loved ones without any out-of-pocket expenses.

Obviously, every situation is unique. If you live in the greater Los Angeles area or the Inland Empire, please feel free to ask one of our experts if you need help to maximize the amount you pass to your loved ones, church, or even your favorite charity.

July 1, 2013 Congress doubled interest rates for student loans from 3.4 percent to 6.8 percent after a one yeareprieve. On average, the cost of schooling increases by about 6percent per year. A less than 10 percent tuitiion hike may not seem significant, but it is because the cost of obtaining a college education roughly doubles every 12 years. Unfortunately, an increase in the principle and the interest compounds the burden on families who already struggle financially to provide their children with a college education.

Something Has to Give

In America, almost all families are expected to pay some out-of-pocket expenses for college. Those families must fill out a Free Application for Student Aid (FAFSA). The information collected from this application will help a family find out their expected family contribution. Currently, the cost of college is increasing faster than the rate of inflation and the cost of living adjustment in wages. Over time, each family’s expected contribution will erode disposable income and therefore, the provider’s ability to accumulate both short-term and long-term savings for other areas like retirement and vacation.

Strategies To Decrease The Financial Burden

There was a book written thousands of years ago that stated, “My people perish for lack of knowledge”. That statement is as true today as it was back then. There are so many unexamined assumptions about paying for college because people simply don’t know what they don’t know. The following is a simplified list of suggestions to decrease the cost of college:

1 – Take Less Time To Graduate

There are high schools designed for students who want to accelerate the time it takes to graduate. These students have the opportunity to take college courses at a local participating college. In some cases, these highly disciplined students graduate college with an Associate’s degree.

The amount of units a student needs to graduate is based on a four-year scheduled timeline. Students, however, end up staying in undergraduate school five years. This trend is very costly for students and their parents. One reason this happens is because there is little emphasis placed on selecting a relevant major for college. Consequently, students go to college, and don’t find out what they want to do even after their general education courses are completed. A simple solution is to provide high school students with more opportunities to identify their personality strengths and career interests.

2 – Take More Time To Find The Right School

Students often choose schools for the wrong reasons. Perhaps they followed their favorite sports program or a brochure had cool school colors that attracted them. Sometimes the location of the school plays the primary factor in a student’s decision. The right school is a college that best aligns with the student’s career preferences, academic expectations, and to a much lesser extent, social interests. Students who have achieved high levels of academic success have more flexibility to choose an institution that is the best match in each area listed above. Schools desire students who have the potential to make their institution more appealing as a result of a graduate’s success. In fact, they are willing to provide scholarships as incentives for those students to attend their school. In return, it is the institution’s hope that those alumni will give back by making financial contributions.

3 – Decrease The Expected Family Contribution (EFC)

There are strategic ways to lower the EFC. Interestingly, scholarships are not one of them. That being said, substantial scholarship amounts can certainly lower the out-of-pocket expense for college. College savings plans such as 529s actually increase a family’s EFC because many of the grants are awarded based on need. There are financial vehicles that can strategically be used to lower a family’s out-of-pocket expense, but it is sometimes complex and goes beyond the scope of this blog. There are experts who can provide you with assistance, but be sure they are well versed in college planning strategies.

If you are close to retiring or have the fortune of being retired, here is a quick opportunity for you to learn about mistakes people make when they invest in the stock market. Always keep in mind that everyone’s situation is different so it is important recognize your specific circumstance.

Mistake #1 – Buying or Selling Stocks Based on Emotion

Everyone is familiar with the phrase, “buy low and sell high”. However, market research shows that people tend act in exactly the opposite manner. If stocks are trending upward, their emotions tell them to ride it out a little while longer to maximize profits. This perspective may be even more difficult to ignore for those whose fortunes decreased back in the mid 2000s. If you entered the market when share prices were lower and you have made a profit, consider selling while you are ahead.

Conversely, you may be in the middle of a downward trend in the market. In this situation, you must know your living expenses, which will help you make a logical decision. Keep in mind that every percent that your portfolio decreases, you need to gain two-percent to get even, especially if you are no longer actively purchasing shares. Also keep in mind that you do not have the same amount of recovery time as you did 20 years ago.

Mistake #2 – Going too extreme. Risky to Highly Conservative

During the 1980s Cds were yielding over 16 percent with absolutely no risk. People who were retiring during that era who also had their homes paid off were ecstatic with their bank portfolio because their money was giving unheard of rates of return. Nowadays retirees assume that their money is better of outside of the risky stock market. Guided by this belief, they flock toward money market accounts, Cds, and other no-risk investments. As of the time of this writing, no-risk investments give either very low or no rates of return.

Believe it or not, this is actually a risky decision, and let me explain why: if you are like most retirees you are no longer generating income. If that is true, then your money could be suffering inflationary risk. If you took $1,000 and put it under your mattress today, will that $1,000 be able to buy the same amount of gas, vacations, and groceries 10 years from now? We all know that your $1,000 will have less purchasing power as time passes. Therefore, we recommend that you make it your goal to gain a higher rate of return than the rate of inflation.

Mistake #3 – Using an All-In or All-Out Approach

Depending on your risk tolerance and your need for current income, you may want to find a way to diversify your money. Leaving some of your portfolio in stocks may be a good idea, but consider a more conservative asset allocation mix. If you decide to take out your all of your money, taking it out from the most risky to the most conservative is a prudent approach. Also, if you roll your money into an indexed account, the money is automatically diversified.

As a retiree, this should be the most enjoyable time of your life. Financially, the stakes are higher than they have ever been before. Time and timing is critical, and therefore any mistake you make becomes magnified. Because of this, understand that this blog is not meant to provide investment advice, but ideas to consider before you take any action. Be sure to seek the guidance of an expert to help you make informed decisions that best meets your financial needs.

You are probably reading this because you are looking for some strategies to avoid bankruptcy. If so, keep reading, but you must be willing to make some sacrifices now to avoid the pain associated with 7 to 10 years of tarnished credit and high interest rates when you finance anything. The following are tips about how to avoid bankruptcy and how to rebuild your credit.

Tip 1 – Create a written plan

Take a simple folder labeled “debt-free plan”. Since you are entitled to one free credit report per year, run a report to find out exactly why you have bad credit. There may be outstanding payments that are inaccurate. If so, you must write the company and the credit bureau and, if possible, provide proof that the credit report is wrong. Also, decide which bills to decrease, and which bills to eliminate. For example, decrease eating out and eliminate premium cable channels.

Tip 2 – Take Decisive Action

After you communicate with the crediting agencies and credit bureaus, be sure to send a certified letter to ensure that your letter doesn’t get “lost”. In separate letters send each agency a summary of your conversation. When you call, gather the following information:

• First and last name of the contact person and the first and last name of their supervisor
• The team number (Equifax) of the person you spoke to
• Ask for written confirmation of any promise they make
• Get a copy of the universal data form. This is the document the crediting companies use to update your credit report. If they deny your request, ask them to send a letter to you confirming that they notified each bureau to change the discrepancies on your credit report.

Tip 3 – Consider a Debt Relief Company

You will notice people disagree with this perspective, but sometimes the amount of credit card debt that you have accumulated becomes too overwhelming. With all of the conflicting points of view about whether or not to consider a debt settlement company, here are some simple ways to determine whether or not you are a good candidate:

Do not consider debt relief if:

• You have less than $10,000 in credit card debt
• If you are planning to finance a house or car within two years
• If phone calls from collections agencies bother you

Consider debt relief if:

• You are thinking about filing bankrupt because of unsecured debt (Student loans don’t apply here)
• If the burden of bad credit and higher interest rates is overwhelming
• If you want to reduce your credit card debt by around 40 to 50 percent
• If you want to be credit card debt free

Regardless of the choice you make, just be sure to explore all of your options and consult an expert before you file for bankruptcy. Keep in mind, any choice you make to get out of debt will require some element of pain. If you have the right mindset to (1) make some strategic sacrifices; (2) remain disciplined in your spending; and (3) stick to your written plan, you will spend the rest of your life debt free. Begin this difficult journey with the end in mind and you will emerge victorious.

Simply put, if you have people who love you and depend on you financially, you need life insurance. This is a very difficult subject to talk about because very few people feel comfortable enough to talk about death. In fact, I was sitting down with a family in Fontana, CA and the spouse was driven to tears just thinking about losing her loved ones. Even though life insurance is not fun to discuss, that fact does not diminish the need to prepare for the inevitable.

Life Insurance Serves Many Purposes

Throughout your life you will experience different phases in which life insurance can fulfill a specific purpose. The following examples illustrate the various uses of life insurance.

Single People

People who are not married and have no kids do not typically consider life insurance as a need. However, if you are providing financial support for aging parents or siblings who lack the ability to care for themselves, you should consider life insurance. Unfortunately, some debt passes to your family members, but money from life insurance is not considered part of an estate so it is free of estate taxes.

Married Couples

After the 1950s, families needed dual incomes to get ahead financially. If a wife makes $50,000 a year and the husband makes the same, chances are the family is living at least a $100,000 lifestyle. If one spouse unexpectedly passed away, the family would suddenly have to survive on half the income. Funeral Expenses, plus all of the existing expenses such as credit card balances and outstanding loans that are still in both names still have to be paid.

Parenthood

Raising a child is sometimes the most difficult and rewarding challenge that parents will encounter. Baby formula, baby food, diapers, clothes, toys, and college are a few of the many expenses for parents regardless of socioeconomic status. The US Department of agriculture estimates that the average cost to raise each child is $235,000 (not including college). If your income suddenly stopped upon your death, would your spouse be able to provide your children with the same lifestyle that the two of you always dreamed about? How would you pay for their sports, dance, and college? If you are a single parent, how would your passing away impact your household?

Homeowners

The title of home ownership is a misnomer since a home cannot technically be owned until mortgage payments end. Life Insurance can be used to pay down partial or full mortgages. Some companies offer life insurance policies that equal the number of years remaining on a mortgage. For example, if a mortgage has 28 years left, some companies offer 28 year term life insurance policies. Besides the strictly practical use for life insurance, a family who receives a death benefit can also use the money to maintain their existing lifestyle.

Retirement

If the pitfalls of life never visited you during the early years, consider yourself lucky. Now that the kids have graduated and they have stable incomes, and your home is paid off, people have perhaps taught you that there was no longer a need for life insurance. That stated, what would happen if you died today? Would your spouse have enough money to maintain the same lifestyle for 10 to 20 yrs? Contrary to popular belief, this is the best time to have had life insurance with some cash savings. Structured properly, you can begin to live on the compounding interest that has accrued over the years. Term insurance during this phase of your life gives you peace-of-mind, and cash value life insurance gives you lifestyle. What is so great about insurance is that you can’t lose. It’s a fixed fight. If you die too soon, your family is going to benefit financially by maintaining their current standard of living. If you save and survive, you put yourself in a position to have more money to spend during retirement.

If you are a teacher or any member of the educational community, there is a high likelihood that you are supplementing your retirement plan with a 403(b) or tax-sheltered annuity. If that is the case, pat yourself on the back because you are taking steps to secure your ideal retirement. That stated, you also probably have a 403(b) because it was the only option presented to you. By the time you are done reading this, I hope that you will explore other options and implore your friends and colleagues to do the same.

How a 403(b) works

The purpose of a 403(b) is to set aside a portion of your income now so you will have more income during your retirement.  There are three stages of retirement when you use a 403(b) as your savings vehicle. In this hypothetical example, we will use 30 years as the time-frame to prepare for retirement.

Stage 1 – Contribution

If you decided to place $500 a month toward your retirement, you would have contributed $6,000 ($500×12) that year towards retirement, and $180,000 ($6,000×30) that you have invested. The contribution simply is the amount of money you take out of your pocket to invest.

Stage 2 – Accumulation

Accumulation is the amount of interest that the contributed money yields over time because of compounding interest. For example, if you contribute $180,000 over 30 yrs, that interest earning 10% ( I know it may not seem realistic these days, but it’s just an example to illustrate the concept) would yield $1,139,663.

Stage 3 – Distribution

After you have contributed your $500 each month to watch it accumulate over the years, retirement is the reward. The money you live on during retirement is the distribution. Typical rule of thumb is to live on not more than 5 percent of your total nest egg to ensure that you don’t outlive our money. There are some definite benefits and drawbacks that people should consider when you invest in a 403(b).

Advantages of a 403(b)

• pre-tax contribution
• Deferred taxes

Disadvantages

• taxes paid upon distribution
• you don’t know the rate that your money will be taxed upon distribution
• the money you take out in retirement may be taxed at a higher rate than the amount you saved on the money you put in years earlier

As teachers started to realize that their nest eggs were going to be depleted by taxes, they decided to explore other options that gave them more favorable tax treatment. With tax sheltered annuities, you simply delays taxes. Therefore, a more fitting name would be tax delayed annuities.

My objective was to simply open your eyes to explore other options that have:

• No loss of principle in the stock market
• More favorable tax treatment
• No taxes upon withdrawal – if structured properly
• No contribution limits

When you are able to find retirement investments that offer these benefits, you should take advantage of them because any investment that is missing any of the benefits above has the potential to diminish your long-term wealth building capacity.

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.

Most of us believe that insurance is only for our loved ones when we die, but some types of life insurance fulfills a variety of personal needs and wants while we are still living. The following points can help you decide how to choose between term insurance, permanent insurance, or a combination of both.

Term Insurance

Advantages

• Cost of insurance is lower. If you are healthy, you can buy dollars for pennies
• Ideal for young families who have a limited budget but have a need for lots of insurance
• Coverage lasts between 5 and 30 years. For example, if a person has 24 years left on a $250,000 mortgage, they can get $250,000 of coverage for 24 years.

Disadvantages

• Once the contract ends, it is expensive to renew
• If the policy lapses, it is very difficult to reinstate
• Term policies do not accumulate cash value
• Coverage ends

Permanent Life Insurance

Advantages

• Offers coverage for the insured’s entire life as long as the premiums are paid
• Premiums can be flexible or fixed depending on different financial needs
• Significant tax advantages
• College savings inside of cash value do not increase the parent’s expected financial contribution for college
• No probate. If a spouse passes away, the proceeds from insurance can’t be used to pay outstanding debt in the insured’s estate
• The policy accumulates cash value, which the insured can access during his or her lifetime and, if structured properly, can provide income during retirement

Disadvantages

• Initially larger premiums are required to properly fund this type of policy
• Some plans provide few or no guarantees, and while increased benefits may occur, poor investment performance can cause a reduction in the cash value account, the death benefit, or both. Be sure to get the product that best meets your needs and risk tolerance

Combination of Term and Permanent Life Insurance

To determine if you need both types of life insurance, consider using the DIME method:

D = Debt – If you pass away prematurely, you want to make sure you consumer debt like outstanding car payments or student loans for your children.

I = Income – It is recommended that you get between 7 to 10 times your income in coverage. This amount is meant to replace your income for 7 to 10 years.

M = Mortgage – How much does is your mortgage?

E = Education – When your children do go to college, how much will it cost for them to attend college four or five years?

When you add up these four figures, you will know how much insurance you need. Your debt, mortgage and education are temporary, so term is appropriate to cover those amounts. Your income will hopefully increase over your lifetime, so permanent insurance is appropriate for this amount. However, this example is over-simplified to provide a basic understanding. Every individual and family has a different set of circumstances, and therefore, you should see an insurance expert to discuss your specific needs.

Recently, I was watching a television show called Open Court, which is a basketball show that features retired basketball players who had great professional careers.   I just returned from Italy and wanted to catch up on the NBA finals. This show is great because it gives casual fans and basketball enthusiasts an opportunity to gain insights about the mindset and lifestyle of professional athletes. These players on the show shared some interesting perspectives about why professional athletes end up broke even after making millions of dollars.

Shaquille O’Neal made an interesting comment that in my estimation should have been discussed more in detail. He said, “…The best word I learned is annuity. The way it was explained to me was, guys make a lot of money and then when you finish playing, you get some of that money back after you finish playing… We need to educate ourselves”. The great lesson in O’Neal’s comments is that the information is within our grasp, but we have to take an active role to acquire knowledge and then apply what we learn.

What Is An Annuity?

An annuity is an investment that you make that provides tax-deferred growth, guarantees, safety, a death-benefit, flexibility, and the option to have a monthly stream of income that you cannot outlive. In other words, an annuity is like having a pension plan that is not tied to your job, but potentially pays you for the rest of your life. If you are a Baby Boomer and you are ready to retire, an annuity is a great option for your hard earned money to grow without market risk if you structure it properly.

How You Can Use An Annuity

If you were born in the post Baby Boomer era, chances are you have little or no intention to stay at your current job for 30-plus years. However, if you have a nest egg that you have been growing through your previous (or soon to be previous) employer, you have the option to place that money in an annuity and continue to grow your nest egg until you are ready to retire. Just make sure that you don’t get too anxious and spend the money early because you will make Uncle Sam very happy. When you have an annuity, the tax code currently requires you to leave the money in the account until after you turn 59 ½ to avoid a 10 percent early withdrawal penalty.

Long-Term Value Of An Annuity

Shaquille O’Neal pointed out that if pro players take 50 percent of their income and put it into an annuity, they would be able to survive financially after their NBA career. To put this in perspective, if an “average” NBA player starts at age 22 and makes $10 million (after taxes) over the course of his career, and places half of it in an annuity for 30 years, this is what it could hypothetically look like:

• $5,000,000 earning 6% for 30 years  = $28,717,455.86 –(Accumulation from Age 30 until 60)
• At age 60, if he lives on 5% per year = $119,656.07 per month.

The challenge of O’Neal’s idea is to convince people to value the idea of deferring gratification, which is a virtue that American culture seems to appreciate less these days. Those of us who follow basketball know that O’Neal is a big kid at heart, but I also recognize that he took some wise steps to remain relevant even after his playing days stopped. He still receives millions of dollars from a combination of commercials, product endorsements, and his work as a basketball commentator.

Although Shaq has earned more than most, he also saves more than most. For people who have the vision and discipline to take steps now to ensure a financially stable future, Shaquille O’Neal provides a great example by using an annuity to fulfill that objective.

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.