Cash Value Life Insurance - A life insurance policy which in addition to providing a death benefit upon the death of the insured also accumulates cash value over time enabling benefits to be paid out before death.

When it comes to investments, there are generally two types – Qualified and Non-qualified.  So what exactly do these two terms mean?  They specifically relate to the tax treatment of the investment, or in simpler language, how the investment is taxed.

A Qualified investment is one where the taxes on the invested dollars and interest earned have NOT been paid yet.  The most common examples of this would be your 401k, 403b, Individual Retirement Account (IRA), or an employer profit sharing plan. All of these plans work in the same basic way – money earned by you is invested into a qualified account on a pre-tax basis.  This means that no taxes have been paid and the investment earns interest over time on a tax-deferred basis.

Several important notes to consider before using a qualified investment account.  First, the money is intended specifically for retirement and as such has very strict guidelines surrounding its use – specifically, a ten percent penalty tax for withdrawing money prior to age 59 ½.  Additionally, there is a prerequisite for mandatory withdrawals, called Required Minimum Distributions or RMD’s from the account starting at age 70 ½ with HUGE (up to 50 percent!) penalties if you do not comply.  Finally, there are annual contributions limits to all qualified accounts and there may be income limitations based on your plans design.

The advantage of using a qualified investment account is that you are able to utilize more of your money for your investment, because no taxes have been paid thereby leaving a larger amount of your earnings available.  Furthermore, the tax-deferral on future earnings means that the account grows at a faster pace versus investments that have to pay taxes as interest is earned or prior to the investment being made.  Additionally, many qualified accounts – specifically 401k and profit sharing plans may include an employer matching contribution or additional investment provided by the employer as part of the qualified plan.

With a Non-qualified investment, taxes are paid prior to the investment being made.  The advantage of these plans is that the post-tax money invested is considered the cost basis of the investment.  The cost basis of the investment is the portion that will not be taxed again as interest is earned or withdrawals are made. 

How and when taxes are paid on non-qualified accounts can be tricky.  Like qualified investments, the money in some non-qualified accounts can earn interest on a tax-deferred basis.  This tax-deferral allows the investment to grow on a compounding basis, allowing the money to accumulate faster.  This is most common on annuity and cash value life insurance products.  Other non-qualified investments like stocks and mutual funds don’t pay taxes until the underlying investment asset is sold.  Non-qualified investments like Bonds, CD’s, and savings accounts pay taxes annually on the interest they earned during the previous year.

Several key benefits to non-qualified plans are their open design, lack of income or contributions limitations, and general ease of use.  Additionally, there are no requirements for minimum distributions or tax penalties for withdrawals prior to age 59 ½.

There is one other category of investment account – the ROTH.  A ROTH account is technically a qualified investment, but it acts more like a non-qualified asset in many ways.  First, an investment in a ROTH account is made with post-tax dollars.  Second the money is allowed to grow tax-deferred.  And finally and most important, all subsequent gains are tax-free.  I know, it almost sounds too good to be true, and in some ways it is.  The biggest drawback to the ROTH account is the ROTH contribution and income limits that affect its use.

Obviously this is only a broad overview of the different investment options and account types available.  It is however a good place to start on your financial planning and education.  More importantly, because there are so many options when investing, it is vital to work with a true  “Financial Professional” who can help you determine which type of investment meets your needs best.  Don’t delay; there is never a good reason to wait on improving your financial future.

In today’s complex world of insurance, annuity, and investment products – three terms are thrown about without much explanation: Fixed, Variable and Indexed.  These terms define how interest is credited or earned on the investment.

Unfortunately, many advisors routinely fail to present all three as valid investment choices for their clients because they are unable to offer all three options or they have a dislike of one or more of the options.

Fixed

A Fixed investment offers a pre-determined or fixed interest rate for a specified period.  This is most commonly seen with bonds, CD’s, annuities and universal life insurance products.

Fixed investments have three major advantages over the other options.  First, they provide a guaranteed or known interest rate that is disclosed prior to making your investment.  Second, fixed investments are generally designed to protect your initial or principal investment.

A Fixed investment also has two major pitfalls.  First, because they provide a known or guaranteed interest rate, they generally provide a lower rate than what may be available when you’re willing to risk your principal.  Second, they normally have restrictions or penalties associated with any withdrawals made during the fixed interest rates term period.  This is especially true with CD’s and annuities.

Overall, Fixed investments can be a great option for those not willing to risk some or all of their money, older clients using the investment interest to provide or supplement their income, and clients looking to provide a hedge against other, more aggressive investments.

Variable

A Variable investment is one where your money is typically invested in stocks or mutual funds.  The performance of these stocks or funds varies and is not guaranteed – hence the term “variable investment.”

Variable investments have many key benefits.  They allow you to earn interest by investing in a single company (individual stock), multiple companies, or a specific segment of the market (mutual funds).  You can even invest in an entire Index like the Dow Jones or S&P 500.  Also, variable investments allow for the greatest return and historically have outpaced all other investment options.

Sounds pretty good, right?  It is, as long as you have the tolerance to lose money as well.  The volatility of variable investments is a major concern for many investors.  The “upside” or growth potential is nearly unlimited, unfortunately so is the “downside” or risk of losing money. 

One other adverse factor that Variable investments face is the cost.  Most have either fees or loads associated with the underlying investments.  These fees or loads can reduce the performance by as much as 3.5%, although 1-2% is more common.  These fees or loads are applied even in down years so it is definitely something to consider.

Indexed

Unlike Fixed and Variable investments, Indexed investments are somewhat unique to the insurance and annuity marketplaces.  An Indexed investment shares traits of both Fixed and Variable investments, but with one major difference – how interest is earned.

With an Indexed investment the underlying funds are not directly invested in the stock market or an Index, nor are they directly invested in a bond, CD, or other fixed investment.  They are however, secured by bonds or other conservative investments which provide a minimum guaranteed interest rate similar to a fixed investment. 

Generally, this minimum or fixed rate is lower than what is available in a purely fixed product.   This is because Indexed products offer a higher maximum interest rate over Fixed investment products.  The Indexed products determine the maximum interest earned using a formula based on three factors, all part of an option purchased by the insurance or investment company.  They are the participation rate, the cap rate, and the reset period. 

The maximum interest earned provides “upside” potential while at the same time eliminating “downside” risk.  In essence, it is like having the growth potential of a Variable investment with the “downside” protection of a Fixed investment.  There is however a trade-off.

An option, sometimes referred to as a call or put option, provides investment returns (interest earned) based on the growth of a specific market Index like the S&P 500 or Dow Jones.  The option allows for lower initial costs, a pre-determined strategy for establishing current and future interest crediting, and ensures that money can’t be lost due to market fluctuations.  The option also caps (limits) upside potential or growth.

Many opponents of Indexed investments point to this limiting of growth, especially in years were the Index or stock market exceeds the Index (option) cap or participation rates, as the Achilles heel of these products.  There is also some controversy over the way the Index rate is determined in future years. 

While Indexed products do have a minimum cap and participation rate that is known for the entire term period, the current or maximum cap and participation rates normally reset on an annual basis.  This makes it difficult to determine what will happen in subsequent years.  Some advisors avoid these products claiming that the difference between the current and minimum rates creates client confusion.

No matter which type of investment you choose, it is important to get the facts and options available for each.  Each of the investment choices outlines provides different advantages that need to be weighed against their disadvantages, however they all have different uses and can all be viable choices when planning your financial future.  As always, it is important to consult your “Financial Professional” to find out which of these investment choices is right for you.

Fixed Rate – Sometimes called a fixed interest rate and generally referring to a type of interest crediting method that provides a predetermined or known interest rate on an investment for a specified period of time (term period).  The interest crediting method is typically seen with CD’s, Bonds, certain annuities, and Universal Life insurance policies.

So when did life insurance become a retirement account?  With the recent decline of the stock and real estate markets, many are rethinking insurance as an asset class.  Products like whole life, universal life, and indexed universal life have maintained their values when other assets like, stocks, mutual funds, variable annuities, and real estate haven’t.

So, why wouldn’t you consider investing in life insurance?  Insurance has several key advantages over other investments.  First, insurance can provide a guaranteed death benefit.  The death benefit can ensure a positive return for your family on your investment, made via your premium payments.  At life expectancy this return is often in the 6-8% range and is income tax free to the beneficiaries.  That would be the equivalent of a 7.5-11% taxable return at a 28% tax bracket.

Second, like annuities and retirement accounts, the cash accumulation inside of a life insurance policy grows tax-deferred.  This tax-deferral allows the money to grow faster due to the effects of compounding interest on the premiums and the subsequent gains.

Finally, similar to a ROTH account, income produced from an insurance policy can be received tax-free.  So why not just use a ROTH account?  Well, it isn’t insured and the growth isn’t guaranteed.  ROTH’s also have contribution and income limitations, where cash value life insurance doesn’t.  Basically, a life insurance policy has the same advantages as a ROTH without the limitations, plus it offers a minimum guaranteed interest rate and a death benefit.

Let’s recap – life insurance, while not technically an investment, provides all of the following:

1. Long-term protection via a death benefit.
2. Income tax-free return on your investment (premiums) at death.
3. Tax-deferred growth on the internal cash values of the policy.
4. Potential for tax-free income from the policies cash values.
5. No contribution or income limitations.
6. A minimum guaranteed interest rate on the policies cash values.

That’s a pretty nice list of benefits for any “investment”, especially when it’s not considered one by most people.  I know what you’re thinking – if permanent life insurance does all that, why do prominent advisors like Suze Orman and Dave Ramsey tell you to never use it?  The simple truth is that many “old school” advisors – especially those that no longer actively practice their profession, have lost touch with current products, capabilities, and in many cases, laws and regulations that pertain to insurance and investment products.

Additionally, the advice offered by most prominent advisors is intended for “mom and pop” middle America.  As such, it is often generic in nature and focuses on families with median incomes of under $50,000 per year – plus it doesn’t hurt that by making dramatic statement like “never” or “always” creates media attention and provides an audience for their message.  This isn’t wrong; it is just the facts of the situation and should be heard as a word of caution for those needing more specific advice or one-on-one help.

To learn more about augmenting your current assets or investments with cash value life insurance, find a true “Financial Professional”.  He or she will be able to discuss the pros and cons of using life insurance as an asset in your current investment portfolio.  Don’t wait – there is never a good reason to delay making your financial future better.

Life insurance is one of the most commonly misunderstood and under-used financial products available.  Why is that?  Most people don’t understand how, why, or when to use life insurance.  Life insurance has two main benefits.

First, life insurance like all types of insurance is designed to protect against economic loss.  With life insurance the loss protected against is the economic value of a human life.  This life or “Capital” can be defined as the future earnings, current debt obligations, or intellectual value of a person.  In essence, life insurance is a hedge for human capital.

Second, it provides a tax free death benefit that replaces the human capital value of the insured at death.  Obviously it doesn’t replace the person or make up for your loss, but it does ensure that an economic loss isn’t added to the physical and emotional loss already suffered.

Whether you are a newlywed, empty-nesters, or retiree just about everyone has a need for life insurance.  In determining how to use life insurance it is important to remember two specific questions.  First, how much insurance do you need?  Second, how long do you need it?

Many people assume that you can never have too much insurance.  Unfortunately many in the life insurance industry would like you to believe the same thing.  The reality is that there are two primary methods that can be used to determine how much life insurance you need.  The first is the Income approach and the second is a Needs or Expense approach.  Neither is perfect, but they will both give you a very good estimate.

The Income approach uses your current income and an assumed inflation rate to determine how much insurance you need to protect that income level over a specific time period.  The Needs approach uses your current expenses and an assumed inflation rate to determine a minimum income level needed to meet those debts over a specific period of time.  Both can be further influenced with the need for future savings, investments, college tuition, and

Are there any folks in particular careers or life stages who should buy this insurance?  Most people need life insurance.  The question is how much and how long.  This will determine how much needs to be temporary and permanent.

Just like buying anything else, it is important to be informed.  There are three specific tips you should follow when purchasing life insurance.

First, you need to know is that not all insurance agents are created equal.  Some agents are required to sell only one company’s products.  This type of an agent is called a “captive” agent, because they can only offer their companies products. As such, they tend to see everything as it relates to their products, not necessarily your needs.  Although many of these agents are honorable, ethical, and educated in there filed, it is normally easier to just avoid captive agents as much as possible.

Second, you need to know is that there are two basic types of insurance – temporary and permanent.  Another name for temporary life insurance is term insurance.  It is important to know what kind you need and how much you need of each type.  Most people need a lot of term and a small amount of permanent insurance.  This need tends to shift over time and may move completely to one side of the spectrum or the other.

Finally, you need to understand is that the amount of insurance you need changes often.  Things like losing a job or getting a pay raise, marriage, divorce, births, deaths, and having children all affect the amount and types of insurance you need.  It is important to get regular reviews to ensure that you aren’t over or under insured.

Two things that may surprise you about life insurance, one you may be surprised to learn is that insurance products all have different features, called riders that provide different benefits beyond the death benefit.  Some of these riders are disability income, waiver of premium, return of premium, and accelerated death benefits.  The riders can be free or add to the overall cost of the insurance and may not be needed by everyone, but they should at least be presented and considered during your selection process.

Two, it is important to make sure that you are dealing with a true “Financial Professional” and not just a salesperson.  You can do this by checking the license status and any complaints your agent may have had on your states department of insurance website.

You should also ask your advisor what professional designations hold, what specialized training they’ve received, and what professional organizations they belong to.  Ideally, they will have a CLU, ChFC, CFP® or other similar designation.  This shows that they have taken the time to receive extra training and education about the products and services they offer.  They should be attending regular Continuing Education (CE), seminars, and industry events to stay up-to-date on laws, products, and services available.

Your advisor should also be a member of a professional organization like the National Association of Insurance and Financial Advisors (NAIFA), Association of Advanced Life Underwriting (AALU), or the Million Dollar Round Table (MDRT).  These organizations require their members to adhere to stringent codes of conduct, receive additional training and CE, and participation in peer reviews or mentoring programs.

So what should you do?  First, find a “Financial Professional” and conduct an interview with them.  Not sure how to do that – read my earlier post on “Asking the tough questions – how to interview a financial advisor.” Second, don’t delay – there is never a reason to wait on making your financial future better.

Buying anything online has its pros and cons, and life insurance is no exception.  While most would agree that life insurance is an important resource to have, not everyone agrees on the type of insurance one needs. 

Many, like Suze Orman (See video) and Dave Ramsey (See video), tend to be adamant and vehement supporters of term only.  Others, especially financial planners and advisors, are seen as “pushing” whole life or universal life insurance.

The need for most people usually lies somewhere in the middle.  They have a need for some form of term (temporary) and universal or whole (permanent) life insurance.  The exact blend will vary by person and situation, and a “Financial Professional” can and will help you determine the correct blend.

So how does this process vary online?  The first thing to be aware of is that many online sites actually sell their leads (your information) to a local insurance agent.  While this in itself isn’t particularly good or bad, it does lead to several questions. 

First and foremost of these is how was the agent who purchased my information screened to ensure that they are both qualified and reputable?  Unfortunately, the answer is normally that no screening process took place other than the fact that the credit card used to make the lead purchase was approved.  Not a very thorough screening process to say the least.

The second question that you need to ask is to how many agents will my information be sold?  Again, the answer here is usually less than desirable.  Many online sites sell your information to as many 6 competing agents.  Normally, competition is a good thing, however, in this situation, the protection of your personal information, undue irritation from multiple phone calls, and verbal abuse by “pushy” sales people is exactly what you don’t want or need.

What you do need is a qualified, experienced, and knowledgeable “Financial Professional” to assist you through the important processes of determining how much protection you need and for how long you need the protection.

There are several very reputable online sites that offer information about, quotes for, and will assist you with the life insurance process.  The best of these are Matrix, WholelsaleInsurance.net and SpectrumDirect. 

My personal favorite is WholesaleInsurance.net due to their extensive library of insurance terms and terminology, and insurance uses.  They also have one of the most extensive line-ups of insurance companies in the industry.  But here is the important part – they offer a one-on-one consultative approach to life insurance, no pushy sales people, just good old fashioned service.

Nicole Ward, Business Development Director of WholesaleInsurance.net, had these recommendations when making any purchase online, especially life insurance:

• Find out who you are doing business with, check there Better Business Bureau (BBB) rating and complaint history.
• Make sure that they have a privacy policy and that they are using a secure website encryption verification service like VeriSign.
• Make sure that they are authorized or licensed to sell any products or services offered, for insurance. This means checking their state license status.
• And finally, make sure that they have qualified professionals able to assist you with your planning and needs assessment – for insurance this is critical.

For purchases online, it is extremely important that you take a few minutes to verify the above mentioned credentials and licensing of any “Financial Professional” with whom you may work.  If they don’t have this information easily identifiable and available – move on, it isn’t worth the risk.

Finally, you should be evaluating an online “Financial Professional” with the exact same due diligence that you would apply to a local one.  You need to evaluate their offerings, credentials, industry associations, licensing, and experience.

Taking a few extra minutes to do the above will save you stress, time, energy, and money in the long-run.  It will also make sure that you are working with a true “Financial Professional” and that you and your loved ones are properly protected.

Life insurance has many different uses.  The first uses for modern insurance in the US were to ensure that you were protected from the unexpected.  Insurance eventually evolved to where its basic premise came to be thought of as spreading the risk among others, so that individuals could trust that they or their survivors would be financially compensated in the event of loss.

Life insurance has specifically changed over the years to include other purposes like insuring the future income of a spouse, insuring the intellectual or physical assets of a business partner (today called buy-sell), doing the same for a key employee and the potential/future revenues that they would earn for a company (called key man today), and estate planning/wealth transfer (a way to mitigate death taxes imposed by the government).

There is no other way to mitigate these risks if they happen earlier than expected.  For example a person who needs to guarantee their income for the next 40 years (not unreasonable for someone in their late 20’s – early 30’s) a term policy isn’t possible or feasible.

The first argument many make is that you shouldn’t need insurance for that long.  Your kids should be gone in 20-25 years and then you don’t need the coverage.  Wrong, I need the coverage even more at that point because my wife has been at home raising those kids for the past 20-25 years and won’t have the skills or experience needed to get a high paying job to replace my income if I die.

Secondly, I wouldn’t want her to go without or have to change her living habits just because I died.  It doesn’t seem fair that she would suffer just because I was inconsiderate enough to die first and unexpectedly.

Additionally, the potential $1 million I could possibly save during my life prior to an unexpected death doesn’t even begin to cover the expenses of a 30-50 year retirement, long-term care, medical expenses, property taxes, income taxes, sales tax, gas tax….man we pay a lot of taxes…I digress.

The stock market has produced about a 10% rate of return over the last 30 years and assuming that she only took out 100k per year (the after-tax equivalent would be about $65,000), she stands a good chance of run out of money prior to her life expectancy and death. 

Going one step further let’s say that she didn’t use all of the money, now I have an estate tax problem – instead of my kids getting the money and house, Uncle Sam taxes 55% as part of the estate tax (should be called the death tax), and potentially taxes any qualified accounts as ordinary income to my kids.  The combined total could be as high as 75%.  That doesn’t sound like we don’t need insurance.

Obviously not everyone is in my situation, but enough people are that general “cookie cutter” ideas don’t work and worse yet cause even more problems than they solve.  For Suze Orman, Jim Cramer, and the like to only recommend “term” insurance, shows that they are at least out of touch with a large portion of the population.  Worse it shows how un-expert they really are.