Interesting Financial Statistics You May Not Know

Fotilla Images

Jim Lorenzen, CFP®, AIF®

I came across some interesting stats in the most recent Journal of Financial Planning; I thought you might find a few of them interesting – I know I do.

A recent survey revealed that 65% of respondents said they mistrust the financial services industry.  Only 2% said they trusted financial professionals “a lot”.  Yet, 58% of those with 401(k) plans said they wanted help choosing investments.

93% of Americans think that advisors who provide retirement advice should put their clients’ interests first.  53% mistakenly believe that all financial advisors are required to do so.  Only 21%, however, understand the difference between a planner who is a fiduciary and one who is not.  Maybe this is what leads to the gap in trust.   50% of investors who work with a financial planner say they know for certain their advisor is a fiduciary.

It appears both investor education and advisor trust need to be improved.

Jim


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Retirement Income Knowledge Less Than Believed

Jim Lorenzen, CFP®, AIF®

There’s seems to be a huge gap between perceived retirement income knowledge (how much people really know) and the knowledge people actually possess.

That appears to be the conclusion one can draw from the results of the American College’s National Retirement Income Survey.  The survey used questions commonly used to gauge financial literacy and the results of the quiz were pretty poor.  The mean retirement income literacy score was 47%… only 26% of older Americans passed the literacy quiz in 2017.

While only 12% of those with the lowest levels of wealth ($100,000 to $199,000) passed the quiz, the passing rate for those with $1.5 million or more in wealth was only 50%!

If  you would like to take the American College’s Retirement Income Literacy Survey for yourself and read the full report on the national survey results, you can do it here.

Enjoy!

Jim


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Don’t Make These IRA Mistakes!

Shutterbug

Jim Lorenzen, CFP®, AIF®

Have you reviewed your beneficiary forms lately?  You should.  IRA mistakes there can’t be fixed after the IRA or plan owner dies.

The two biggest problem areas most prone to beneficiary form:  Divorce and trusts.  Problems often arise when someone erroneously believes that a trust takes care of naming the beneficiary for IRAs.   It doesn’t.

When someone names a trust in a will as the IRA beneficiary, a problem can arise when a new will is prepared with no trust named.    Most new wills revoke the old ones – so the trust under the first will no longer exists as a beneficiary leaving no named beneficiary.

Other problems arise when a trust is created to inherit an IRA but never named on the IRA beneficiary form.  The trust must be named on the IRA beneficiary form; and if a new trust is created to inherit the IRA, the IRA beneficiary form must be updated again.

Make sure your IRA beneficiary forms name the correct beneficiary – and contingent beneficiaries.  And, if the trust is named, make sure it’s still accurate.

If you want to learn more about IRAs, I’m never hesitant to recommend Ed Slott’s books and DVDs.  He’s one of a very minute number of ‘gurus’ (you’ll often find him on PBS) who is actually the ‘real deal’ (he’s also a CPA) when it comes to dispensing well-researched retirement and taxation knowledge.

Hope you find this helpful!

Jim

 


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Three Quick Tips for Building Family Wealth

Getty Images

Jim Lorenzen, CFP®, AIF®

Here are three quick tips you might find helpful:

Choose your beneficiaries wisely when allocating inheritance money.  Leave tax-deferred accounts (IRAs and non-qualified annuities, for example) to younger family members.  They’re likely in a lower tax bracket and have longer life expectancies for taking the required minimum distributions, which means the distributions will be smaller, as well.    Highly appreciated assets are best left to beneficiaries in higher tax brackets as long as the cost-basis can be stepped up to the current price levels.  This means wealthier recipients can sell the asset with little or no tax consequences.  The high-income beneficiaries would most benefit from the tax-free benefits from life insurance policies.  Talk with your advisors.

Don’t be too eager to drop older life insurance policies.  Some may wonder why keep the policy if they no longer need it.  Those older policies may be paying an attractive interest rate, which is accumulating tax-deferred.  Secondly, those small premiums may well be worth the much larger tax-free payoff down the road.   How to tell?  Start by dividing the premium into the death benefit.  Got the answer?  If you think you’ll pass away before that number (in years), you probably should keep paying.

Convert Grandpa’s IRA to a Roth IRA.    When grandpa passes away, his IRA assets will likely be passed down to children and grandchildren, which means they’ll have to begin taking taxable required minimum distributions (RMDs) – which means they’ll probably be taxed at a higher rate than grandpa would have paid on his own withdrawals.  If grandpa converted some or all of his traditional IRAs to Roth IRAs while alive, this problem wouldn’t happen.  Smart kids might want to encourage this and even offer to pay the tax bill on the conversion now!

Hope you find this helpful!

Jim

 


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Are You Managing Money? Maybe you should be managing risk.

Jim Lorenzen, CFP®, AIF®

Markets are sensitive to risk.  We know that.  According to analysts at Lockwood Advisors, only 8% of global economies are now growing above recent averages; but, the U.S. is still the best; the G10 countries are the worst.   Headwinds do include politics:  Many market insiders are worried about a reversal of tax cuts and the anti-business stance of many incoming members of Congress.

Just like back in 1950 (remember?) the U.S. economy has been growing above recent potential, propelled by the growth spurt from major corporate and personal tax cuts; however these cuts just might have staying power since they’re not based on wealth redistribution.  The real headwinds just may be coming from two economic realities:  Demographics and the large U.S. government debt.

The aging population, increasing the percentage of the population in the decumulation stage, may apply downward pressure on growth for decades.  The Administration on Aging estimates that the population age 60 or older will increase by 21% between 2010 and 2020 and by 39% between 2010 and 2050.

Most people, it’s safe to say, think of future market returns using a frame of reference based on the past.  Indeed, most advisors – I’m guilty too – continually put-up mountain charts to show clients what’s happened before even as we tell them it’s no guarantee it will happen again.  But, the baby-boomers who remember the 1950s and 1960s – and especially the go-go 1990s – should be reminded the current is no longer flowing in the same direction.   Defensive allocations just might be the best defense going forward.

Hope you find this helpful!

Jim

 


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Here’s Your 10-Point Financial Discussion Checklist!

Jim Lorenzen, CFP®, AIF®

How does your financial future look?  Your chances for financial freedom will depend on how well you’ve covered your bases!

Here’s a checklist for your kitchen table discussions:

  1. When do you plan to retire?  Your retirement age will impact how many years of spending your retirement assets will have to cover.  It will also likely affect just how much you may spend each year.
  2. What are your retirement goals?  Get them down in writing and sort them by needs, wants, and wishes – the prioritize each goal and put a dollar amount on each of them.  For those that are recurring, you’ll not only need to put a dollar amount on each event, but you’ll need to adjust for inflation, as well (car purchases are an example).
  3. When do you plan to file for and start Social Security payments?  How will this affect your tax picture when combined with other sources of income from retirement plans, etc.
  4. How will you design your investment portfolio to provide both income and inflation protection while mitigating downside risk?
  5. Will you need to reduce living expenses?  If so, where can you cut?  Not everyone will need to, but running out of money in your old age wouldn’t be a happy picture either.
  6. Should you get a reverse mortgage?  Does it really provide the security the commercials talk about or is it just a band-aid?
  7. Have you provided for the possible need for long-term care?  Long-term care policies are available, however many are concerned about not using the benefits after paying out high premiums for years.  Some policies also have many restrictions.  It’s worth reviewing the fine print.
  8. How will you protect yourself against financial fraud?  This can take many forms, from cyber threats to the Bernie Madoffs of the world.
  9. How can your spouse and children be protected when the main breadwinner is gone?
  10. Is creating a financial legacy important to you?   This can be accomplished for children and grandchildren, but they’re not the only ones.  Some people think giving is only for the rich; but affluent people often wish to do it, too.

Hope you find this helpful!

Jim

 


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Should You Graduate From Mutual Funds?

iStock Images

Jim Lorenzen, CFP®, AIF®

It’s probably a safe assumption that most individual investors began their investment programs with mutual funds and have built their 401(k)s, IRAs, and/or taxable accounts with mutual funds ever since.

While those mutual funds may have been appropriate for them in those early days, are they appropriate today?

If you’re one of those who’s built your retirement portfolio with mutual funds over the years and now have more than $500,000 invested in your long-term nest-egg, you may want to consider how much you may be losing to factors that have little to do with “the market”.   It begins with the Four Pillars of Investment Success.

 

For this post, we’ll talk about the bottom-left pillar, particularly as it relates to cost.

By now, most people are aware of the difference between ‘load’ and ‘no-load’ mutual funds.  Loads are basically sales charges that pay compensation to the selling registered representative of a broker -dealer.   They’re not necessarily bad.  A small investor can seldom be economically serviced by a fee-based registered investment advisor and this economic model provides that investor access to help that otherwise may not be available.   Either way, those charges aren’t hidden; they’re disclosed.   Here are some additional charges worth discussing:

Annual expense ratio

This is also disclosed in a mutual fund’s prospectus.  For example, assume a growth mutual fund has an expense ratio of 1.40%.   You’ll find it disclosed; but here’s what that 1.4% doesn’t include:

Turnover.  Turnover is an important factor in determining a fund’s true costs.  You see, turnover impacts other costs, as you’ll soon see.

Transaction/trading costs:  When a fund manager makes a trade on an exchange, that trade incurs a commission – just like your own trade would – and the fund manager receives a `confirm’ reflecting the net proceeds of the trade AFTER commissions have been taken… the same kind of ‘confirm’ you would receive.   They report the NET proceeds after the cost of the trade.

Look on your most recent mutual fund statement – any fund.  Do you see trading costs or any other fees or expenses disclosed on the statement… anywhere?  You might think it’s all in the annual expense ratio; but think again.  Transaction costs are NOT included in the fund’s annual expense ratio!

In the book, Bogle on Mutual Funds, the former Vanguard Fund chairman estimated trading costs generally average 0.6%  I don’t know the real number, so for illustration, I’ll use his.    If hypothetically a fund’s turnover is 120% – check the prospectus for your fund’s turnover – here’s what it means in calculating expenses:Trading Costs (use a low-end figure) x Turnover = Total trading costs.  So, 0.6% x 2.2  = 1.32%.

Why use the 2.2 factor for a 120% turnover?  Simple:  You have to establish a position in a security before you can turn it over; and, that’s true for each security in the portfolio.  The entire portfolio is established, then 120% is `turned over’ in a year.   If you used 1.2, you’d be computing only a 20% turnover, far from what’s really happening.  So, trading cost  times turnover gives us 1.32% in trading costs, to add to the fund’s annual expense ratio to get combined annual expenses plus trading costs.

According to Morningstar, the typical equity fund has annual expenses of 1.4% annually.   If we use that figure for illustration – remember to look at your own funds’ prospectuses to see what applies to you – 1.32% + 1.40% = 2.72% in annual costs.

Market impact costs:   When you or I sell 100 shares of a security, it doesn’t really impact the price.  But, when an institution buys or sells huge blocks of a security, the price can be affected.  How much?   Market impact costs can range between 0.15-0.25%.   And, of course, you would apply that figure to turnover, too.   We’ll use the lower number for our hypothetical illustration.0.15% x 2.2 = 0.33%.  So our hypothetical fund with a 1.4% annual expense ratio that experiences a 120% annual turnover could actually be costing the shareholder 3.03% annually.

Annual Expense Ratio                            1.40%
Turnover 2.2 x 0.6%                              1.32%
Market Impact Costs 2.2 x 0.15%          0.33%
Total                                                   3.05%

This means, according to this calculation of our fictitious fund – the one we assumed had an annual expense ratio of 1.40% –  the total real annual expenses to the shareholder are actually 3.05%, more than twice the annual expense ratio reflected in the prospectus; and those additional costs are nowhere to be found on the statement.

Okay, you now know what to look for.  Pull out your statements and prospectuses and do your own math.  You may have to make a guess for market impact and trading costs, or you can use Mr. Bogle’s – you probably won’t be far off.

Here’s another point worth remembering.   Using our hypothetical fund example, if you’re paying 3% all-in for a $100,000 investment, you’re paying about $3,000 per year; but, the percentages don’t drop as your assets increase!  If you have a $1 million dollar portfolio, you’re now paying $30,000 per year – and, that’s just for the fund!

As I said at the outset, if your portfolio is over $500,000, there’s probably a better way to get responsible management, a good investment allocation, and even professional guidance – all for less than you may be paying simply to be in mutual funds now.

You may want to check into it.   Naturally, I’d be happy to help.

Jim

 

If you have $500,000 or more and are looking for an independent fiduciary advisor, you can get started here.


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Thinking of Giving to Charity? Here are some options for giving!

iStock Images

iStock Images

Jim Lorenzen, CFP®, AIF®

Giving to charity?  While most anything can be given to charity, these are the more common forms of donated property:

Cash: Cash gifts are the easiest to give to a charity, both in terms of substantiating the deduction and in determining the value of the gift.  But, cash may be your most expensive option.

Real Estate: Real estate that is owned outright and which has appreciated in value can be given to a charity. The donor can generally deduct the fair market value of the property, up to an adjusted gross income (AGI) percentage limitation. When a charity sells donated appreciated property, the capital gain then escapes taxation, up to AGI percentage limits.

Securities: The best securities to donate tend to be those that have increased substantially in value. As with real estate, the donor can generally deduct the fair market value of the security and the capital gain escapes taxation when the security is sold by the charity.

Charitable Gift Tax Implications:

  • Gifts of cash and ordinary income property are generally deductible up to 50% of the donor’s adjusted gross income (AGI).
  • The fair market value of gifts of long-term capital gains property (e.g., real estate, stock) is deductible up to 30% of AGI. There is, however, a special election through which a donor may deduct up to 50% of AGI if the donor values the property at the lesser of fair market value or adjusted cost basis.
  • Charitable contributions in excess of the percentage limitations can be carried over and deducted for up to five succeeding years.
  • The donor must itemize income tax deductions in order to claim a charitable deduction. A portion of itemized deductions is phased out for taxpayers with an AGI above certain limits.

Life Insurance: If a charitable organization is made the owner and beneficiary of an existing life insurance policy, the donor can deduct the value of the policy as of the date of the transfer of ownership. The donor may then deduct all future amounts given to the charity to pay the premiums. If a charity is named just the beneficiary of an insurance policy on the donor’s life, no current income tax deduction is available. At the donor’s death, however, the donor’s estate receives an estate tax charitable deduction for the full amount of the policy death benefit.

 

 

Disclosures

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Tax-Advantaged or Tax-Deferred? Do you know the difference?- copy

iStock Images

iStock Images

Jim Lorenzen, CFP®, AIF®

Tax-deferred and tax-advantaged are two terms often used interchangeably and, as a result, often lead to a lot of confusion; but, the difference can be significant in planning how you will be drawing income from your nest-egg during your retirement years.  The key, of course, is to discover your options and do advance planning.

Tax-deferred investing is familiar to us.  Many employers match employee contributions up to a certain dollar amount to a company-sponsored retirement account, which usually offers tax-deferred growth.  Contributing to your account up to the employer match is a significant first step to retirement success.

However, many have found that their company-sponsored plan has proven inadequate due to contribution limits and other factors.  Most investors would likely be well served seeking out other sources of tax-advantaged retirement funds.  When used properly, tax-advantaged money is taxed up-front when earned, but not when withdrawn.  This approach may seem costly; but, that view may very well be short-sighted and far more costly.

Let’s take a look at a hypothetical example of tax-deferred and tax-advantaged money at work.  Our fictitious couple, Mitch and Laura, are starting retirement this year and will need $50,000 in addition to their Social Security benefits.  Assuming a 28% state and federal tax rate, they’ll actually need to draw $69,444 from their retirement account to meet their needs.*

Tax Deferred

Need = $50,000

Taxes = $19.444

Total Withdrawal required to meet spending need: $69,444

What if Mitch and Laura had balanced their portfolio with a tax-advantaged funding source?  What if they could pull the first $30,000 from the tax-advantaged source and the rest ($27,777) from the tax-deferred source?  What would that look like?

its-about-timeTax Deferred Combined with Tax Advantaged

Tax-Advantaged money = $30,000

Tax-Deferred money = $20,000

Taxes = $7,777

Total Withdrawal to meet needs and taxes = $57,777

Because Mitch and Laura balanced their portfolio, they saved $11,667 each year during retirement – almost 24% of their year’s living expenses each year!   Simple math reveals a savings of over $116,000 during ten years of retirement; and it they’re retired for 30 years, as many are, the savings is over $350,000, not counting what they could have made by leaving the money invested – which could be rather substantial:  At just 3.5% annualized, the total would come to over $600,000!

A Plan that Self-Completes

Most savings plans, including employer-sponsored retirement plans, are dependent upon someone actually continuing to work and actively contributing to the plan.   If work and contributions stop, the plan does not complete itself.    

It’s been my experience that relatively few individual investors have self-completing retirement plans, while a rather large percentage of high net-worth investors do.

What financial tool can accomplish the goal of being self-completing?  Not stocks, bonds, mutual funds, or even government-backed securities of any type.   There’s only ONE I know of – and, it’s tax-advantaged, too.   Believe it or not, it’s a “Swiss Army Knife” financial tool called life insurance.    It’s not your father’s life insurance; it’s specially designed

It can ‘self-complete’ a retirement plan – and it doesn’t matter if the individual dies early or lives a long life.  Few people realize they can win either way.    As I said, stocks, bonds, real estate, commodities, and company retirement accounts simply can’t match it; but, the design must be customized.

If you’d like to learn more about this and other smart retirement strategies, feel free to contact me.

————–

 

*This has always been a source of misunderstanding for many individual investors:  The fact is not all the money in Mitch and Laura’s retirement account belongs to them.  Their retirement account might show a $500,000 balance, for example, leading them to believe they have $500,000.  The truth is less comforting.  The truth is, given a 28% tax-bracket, that $140,000 of that money belongs to the government, not Mitch and Laura.  They’ll likely never see it.  Their real balance – the one the statement doesn’t show them – is $360,000; and, as we’ve seen, they’ll need to draw-down $69,444 each year to meet their needs.  How long do you think that money will last?

 

 

Disclosures

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Your Cash Value Life Insurance Has Value!

Getty Images

Jim Lorenzen, CFP®, AIF®

People often purchase cash value permanent insurance, throw the policy in a drawer or filing cabinet, and forget about it.   This could be a big mistake.

Most all permanent insurance has a cash value and that cash value has real value you shouldn’t ignore!  First a quick word about  what permanent insurance is.

Term vs Permanent

The terms themselves should tell you something.   Term insurance is simple:  You’re renting death benefit protection from an insurance company.  It’s like a lease, in a way.  You’re premiums stay level until the end of the lease.  You can renew your lease, but the rent will be higher.  How high depends on the length of the initial lease.   If you’re 40 years of age, and in good health, the purchase of a 20-year term policy means the ‘lease’ will be up when you’re age 60.  If you no longer need the death benefit, you simply let the policy expire.  If you do, you’ll either have to renew at what will likely be a much higher rate or buy a new policy, which means re-qualifying health-wise.  You might be able to convert to a permanent policy with the same company if your term policy offers that feature, but you’d still be paying the higher premiums.

Permanent insurance isn’t a rental.  This is a purchase on a sort-of installment plan.   Examples are whole life, universal life, and many other iterations that are now available.   In most policies, premiums do not increase and your protection doesn’t go away unless you fail to maintain the policy.  These policies have cash value and that brings us back to our topic.

Cash Value has Value!

Someone will end-up with the policy holder’s cash value:

A)The policy holder

B)The policy holder’s beneficiaries

C)The insurance company

If the policy holder dies before accessing cash value, the answer is C!  The insurance company pays out the death benefit but will keep the cash value.

What can you do to make sure you make the most of your cash value?  Here are some simple strategies you might consider:

  1. Use your cash value to make premium payments

    Why not use your cash value for premium payments to keep ‘paid-up’? You’ll not only save money each year, but maintains your death benefit protection.
  2. Increase your death benefitUse your cash value to purchase a larger death benefit! Life insurance death benefits generally go to beneficiaries income tax-free!   If you have a $500,000 insurance policy with $250,000 in cash value, you might want to take your cash value to zero and increase your heirs death benefit  to $750,000.   Better that than your heirs getting $500,000 and the insurance company taking $250,000 (which means they had only $250,000 ‘at risk’).
  3. Take a loanYou can borrow against your policy’s cash value at rates lower than your typical bank loan. In some cases, the net loan interest rate might be close to zero (the cost of the loan could be close or equal to the policy’s interest crediting rate).   Here’s the good part:  You’re not obligated to pay back the loan since, in effect, you’re borrowing your own money (you should know that any amount you borrow, plus interest, will be deducted from the death benefit when you die).   Here’s a smart strategy many people use:   They borrow money from policy cash values to pay cash for their new car, the make ‘car payments’ back to the policy.  The money they borrow is tax free.  And, in many policies, the money they took out to buy the car is still ‘on the books’ in their policy for interest crediting.  Every five years or so, they buy a new car almost interest free.
  4. Withdraw the moneyYou can withdraw your cash value—which could reduce or eliminate your death benefit. Don’t do this without checking with your agent.  Calculations may not be dollar-for-dollar.
  5. Surrender the policyNo more death protection, however.
  6. Supplement retirement incomeThis is a 10-15 year strategy that can provide excellent benefits and protections. Talk to your advisor—preferably someone who is independent of the companies and a CFP® professional.  Now, if we only knew where we could find one…..

 

Jim


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.