Whole Life Insurance: The New Asset Class
November 17th, 2009 // 12:10 pm @ Andrew Rosenbaum
In economic terms, an asset is any form in which wealth can be stored. Asset classes have three essential characteristics:
- They embody a future benefit that involves a capacity to contribute to and receive future net cash flows.
- They involve a resource controlled by a firm or an individual that offer the possibility from which future economic benefits (besides cash) are expected to flow.
- They allow the owning entity control and access to the benefit.
I liken the performance of permanent life insurance to that of an investment-grade bond with a super-bonus.
The word “bond” works well here because a bond is a financial instrument that is very stable, reliably producing low-risk gain. It doesn’t offer crazy, off-the-chart returns; just safe reliable actual rates of return.
The super-bonus is the death benefit, which is payable income-tax free to the policyholder’s chosen beneficiary. More importantly, with the right strategies the death benefit can be leveraged by the policyholder to use while living.
When used this way (which I discuss in the next chapter), whole life insurance is an asset class of substantial value that meets all the designated criteria:
- The cash value provides the policyholder with living benefits similar to a fixed account with a guaranteed minimum return that can be used for a wide range of applications.
- The death benefit provides cash when needed most.
- The tax-deferred cash accumulation can be accessed income-tax free.
- The death benefit is payable income-tax fee and, with the proper strategies, estate-tax free.
- Policy proceeds are typically beyond the reach of creditors.
- Unlike equities, with a waiver of premium rider, the policy is self-completing in the event of disability.
- The death benefit is based on the event of death — not a market event that can cause a downturn in value.
- Premiums may be funded with interest earned from other invested assets in lieu of budgeted income.
- Adding permanent life insurance to a portfolio of cash, bonds and equities can produce at least as favorable long-term result with less risk then a similar portfolio without life insurance.
Because of these factors, I view permanent life insurance as an unknown new asset class. It is even more appealing in that it still flies under the radar screen of the federal government’s tax-claw.
Here’s another example of a tax benefit using this financial contract. Imagine you put $10,000 of annual premium into a permanent life insurance policy for ten years.
Your basis on this policy would be $100,000 ($10,000 x ten years). Let’s say that over the ten years the equity in the policy grew to $110,000 of cash value. Because permanent life insurance operates with a First-In First-Out principle, you could take the $100,000 (your basis) out of the policy without creating a taxable event.
You could also borrow virtually the whole amount as a loan, using the cash value as collateral. Of equal importance is that you can do so without disrupting the cash value growth, or the death benefit features of the policy.
Most insurers have very low net cost associated with borrowing cash values. But the most powerful features are the utility, liquidity and control you have over your money.
Category : Featured Content &Life Insurance &Permanent Insurance
Economic Confidence: The Goal of Your Financial Plan
November 17th, 2009 // 11:13 am @ Andrew Rosenbaum
What most clients really want in simplest terms is economic confidence. They don’t want a tremendously complex plan that requires luck for it to work.
Economic confidence can only be experienced if their plan is designed to work under almost any circumstance. The certainty would be derived by mitigating risk as much as possible, while simultaneously providing for what I call the “hit list.”
The “hit list’ is my pet name for the universally-shared objectives all people want to see their plan provide them with, including the following:
- Optimized cash flow
- Maximized actual rate of return
- Legally pay the least amount of taxes
- Have more tax-free and tax-advantaged money
- Feel greater security by balancing risk/actual return
- Make philanthropic and charitable giving possible
- Enjoy a near-guaranteed financial safety net so that higher risk financial ventures become tolerable
- Know that one’s wishes for their family’s ongoing financial needs will be planned for and realized no matter what
- Have a scientific measurement that verifies your plan’s ability to achieve all of the above goals, free from rhetoric or salesmanship
These are the positive outcomes that people seek. They also want to ensure protection from the following negative outcomes:
- Possibility of premature disability
- Possibility of premature death
- Unforeseen income and estate tax situations
- Unexpected lawsuits
Does your financial plan give you economic confidence?
Category : Featured Content &Financial Certainty &Financial Planning
The Big Picture: Microeconomics v. Macroeconomics
November 17th, 2009 // 10:32 am @ Andrew Rosenbaum
Microeconomics is the study of economic parts that appear unrelated to the whole, or without consideration for the whole.
In contrast, macroeconomics is the study of how every economic choice relates to and impacts your entire financial world. This view redirects one’s financial decisions because of the powerful understanding that each decision is inter-connected.
From any individual’s vantage point it appears that the earth is flat, but seeing it from space verifies that it is round. This simple analogy illustrates the radical difference between micro and macro.
When one takes a global view of their financial world things look radically different in contrast to how it’s seen from the traditional perspective.
Seeing your financial world from a macroeconomic perspective allows the trained eye to discover two things. I not only see the tiny flaws, but more importantly the hidden possibilities, specific to each client’s life.
The financial flaws and possibilities are never precisely the same for any two people, but if they go undetected the erosion of wealth is always the same. We must correct the flaws, and capture the possibilities to increase efficiency.
One of the biggest reasons why this matters so much is that the microeconomic approach to personal finance teaches the false concept “high risk = high return.”
In contrast, the macroeconomic planning methodology I use is based on “wise risk = safe return.”
Every investor I’ve ever met was risk tolerant until they lost money. With high risk you will invariably lose your money because it is no longer financial planning, but rather legal gambling.
Being willing to shift from the traditional micro view of money to a more global and
comprehensive view will maximize your enjoying greater economic confidence. In macroeconomics it is not only important what you do. It is of equal importance what you do not do, for what you don’t do can financially destroy you.
Category : Featured Content &Financial Certainty &Macroeconomics
The Wealth Swing Coach: Maximize Lasting Wealth with Certainty, Not Luck
November 16th, 2009 // 3:58 pm @ Andrew Rosenbaum
My book, The Wealth Swing Coach, explains how you can achieve lasting economic confidence and financial peace of mind, regardless of market volatility.
Why the title?
Well, I was once watching Tiger Woods taking practice swings, while a gentleman carefully studied his swing. The commentator mentioned that this man was Tiger’s swing coach, Butch Harmon.
I was somewhat shocked.
I knew Tiger was perhaps the greatest golfer in history, yet he still had a swing coach? Despite his skill, Tiger cannot see himself swing. Harmon’s vast knowledge enables him to spot tiny flaws in even the best golfer’s swing.
What the swing coach does for the world’s greatest golfer is exactly what I do for some of the world’s smartest executives and entrepreneurs.
I’m their wealth swing coach.
My book explains how you can become a more efficient investor by rethinking your attitude toward money and definition of wealth.
Here’s an excerpt that describes my philosophy of wealth and financial planning:
“Investors should stop pursing high-risk investments and begin to seek ‘safe-risk’ investments instead. My great fear is that investors who lost money taking big risks in the last few years now will take even bigger risks to try to recoup their losses in a hurry.
“What people need most is financial peace of mind. They need a financial plan that works whether the markets go up or down. They need to stop chasing high returns. My message is that it’s time to shift your financial goals from amassing wealth to ensuring lasting economic confidence no matter what.”
Purchase and read The Wealth Swing Coach to enjoy the following benefits:
- Reveal the hidden flaws that invariably result in money worries and erode financial efficiency.
- Learn how to get the closest thing to a lock-down guarantee as possible with specific financial contracts.
- Absorb a new financial strategy that will increase your economic confidence with certainty, not luck.
- Learn why it is better to “utilize” money than to merely “accumulate” it.
- Discover a new asset class hidden from the general public, which offers tax-free and tax-advantaged growth.
Category : Articles &Featured Content &Financial Certainty &Life Insurance &Wealth Swing Coach
