By: DavidCLewis,RFA
Life insurance is necessary. However, most individuals do not carry enough of it. The idea behind life insurance is that we all die. If your spouse dies prematurely, a life insurance policy will make sure that there is enough income to make your family whole for the financial loss you've suffered. Pretty much every adviser agrees having life insurance is a good thing.
However, financial professionals often disagree about how much and what type of insurance one should carry. The perception is that term insurance is always the easiest and most cost effective. To this end, many advisers and financial "gurus" like Suze Orman and Dave Ramsey often suggest that their audience forget about cash value insurance and instead focus on good-sounding investments. In short...they hate cash value insurance.
Some financial advisors love cash value insurance, others hate it. Who's right? Who's wrong?
It is sometimes surprising that the financial industry is charged with the responsibility of informing and educating the rest of society about saving and investing principles, and yet many of the advisors that represent the industry seem to be less concerned about truth and honesty, and more concerned about injecting their own personal agenda.
I say that in light of the fact that on both sides of the debate, neither is doing a very good job of defending their position. Many financial professionals are simply leaving out critical information, or appear to not have a very good grasp of how life insurance really works.
Their reasons for lying can be many. Now, there's nothing wrong with pointing out the shortcomings in a financial product. In the case of life insurance; however, the attacks being made are completely baseless. This is especially disheartening because most, if not all, of these attacks are originating from well known financial "gurus". Here are a few of the lies being spread around:
Lie Number One:
Don't waste your money on cash value insurance. It is a complete waste of money because the insurance company collects premiums from you for 20 years and then when you die you only get the death benefit. They keep all of your cash and your family gets ripped off. Besides, you could make more money by buying term and investing the difference.
Fact: About 1% of all term policies pay a claim. So, your family has (roughly) a 1% chance that they will benefit from that term policy. Term insurance is cheap - IF you are only considering the cost per thousand dollars of insurance. It is guaranteed to get more expensive as time goes on (and you will see this if your policy gets repriced). Life insurance companies are not dumb. They know they can collect premiums from term life and make a killing because the turnover rate is high (people drop their policies before the term is up) or the policy owner simply doesn't die before the term is up. Life insurance companies are in the business to make money and provide a product. You have to understand how they position their products and how they make money.
Insurance companies use the Law of Large Numbers. They sample a group of people (similar age, height, weight, etc.). The larger the group of people they insure, the more accurate they are about the number of losses they will see.
Let's suppose you were to start an insurance company and you only had one customer - let's call him "Jim". You would be taking on an incredible risk by insuring just Jim. If Jim kicks the bucket, then you're on the hook for a lot of money that you may not have. You would be business very quickly (imagine: Jim gives you $20 for a $500,000 death benefit and then they die the very next day...where do you come up with $500K for Jim's family?). However, if you have thousands of customers just like Jim, then you have the unique ability to better control the risk you take by insuring Jim's life. No one can predict when Jim will die, but if you study a large enough group of people just like Jim, then you can begin to make very, very accurate predictions about the number of people just like Jim that will die in any given year. Given the accuracy of insurance companies in predicting deaths every year, what do their statistics tell us?
They say that that term insurance doesn't pay, since most individuals live until age 65. This is why I say permanent is a better deal. In the long-run, it's cheaper. I know, I know...there are probably a few of you saying "no way, it is always cheaper to buy term insurance". Oh yeah? Watch this:
Let's reuse our example, Jim. Let's assume Jim is 25 and in good health with a wife and a Kiddo. He needs life insurance, and he is looking at $250,000 in coverage. A 30-year level term policy would cost Jim around $370 per year until age 55. At that point, Jim's premiums spike to over $4,700 per year.
At age 65, he will have spent $58,780 on policy premiums. Keep in mind that this is money that the insurance company collected but never had to pay back. Since there's no cash value in a pure insurance (term) plan, the insurance contract pays off only when Jim dies.
What would have happened if Jim had just purchased the same amount of death benefit but used a universal life insurance policy instead? His premiums would have been higher - about $145 per month or $1739 per year. At age 65, Jim has paid $69,560 ($1739 x 40) in premiums. That's a little more than the term insurance, but he also has $157,000 of cash value inside the policy.
That's $87,000 more than his premium payments for those 40 years. That's also money that can be used on a tax-free basis to help supplement retirement. This is called a living benefit, and a feature that term just doesn't offer. Some of the more competitive permanent policies also offer an option to spend down the death benefit if you become terminally ill. This can be helpful if you haven't accumulated a lot of money and something tragic happens to you and you don't die...or you don't want to spend down your savings.
Lie number two:
Cash value life insurance is overpriced. You can never tell how much money you are spending on death benefit and how much money is actually going into the cash value of the policy. With term insurance, the costs are clear.
Fact: With whole life insurance it is often difficult to determine how much the death benefit is costing you. If that bothers you, then don't buy whole life insurance. However, universal life insurance is, in actuality, a term policy with a separate savings account - often called 'the pot of money'. As such, you can easily determine the cost per thousand dollars of insurance, how much is going to pay the death benefit, and how much is going into the cash value of the policy. Cash value insurance can seem expensive in comparison to term insurance because of the front load (commissions and administrative fees) nature of the contract and the fact that you are forced to save money in a cash account. This is a point that is really driven home by the anti-cash value life insurance crowd.
Be thankful that you pay some of the fees that you do. It makes saving and investing money a lot easier than having to fire a lawyer to negotiate every individual contract you sign. A life insurance contract can be set up to maximize the death benefit (maximizing the cost of the contract), or it can be set up to focus on cash accumulation (minimizing expense charges to .5% - 1% of the interest earned over the life of the policy). The expenses associated with a permanent life insurance contract can be made just as efficient and in some cases more so than what the antagonists suggest as an alternative - which is usually some type of mutual fund - without sacrificing the practicality of owning the contract. But again, why are the antagonists trying to compare the cost of insurance to an investment?
In the long run, you will usually get all of your money back that you put into a cash value policy and then some. You can even structure the policy so that it provides substantial cashflow in retirement. The only exceptions to this are variable life insurance contracts. There really aren't any guarantees on them.
Lie number three:
If you are smart with the money you have today and you get rid of your mortgage, car loans and credit card debt and put money into retirement plans you don't need insurance 30 years from now to protect your family when you die.
Fact: You may not need life insurance in 30 years to protect your children from financial ruin when you die. But you may need it to protect your beneficiaries (whoever they may be) from taxes. And, even if you are "smart" with your money, you can't predict the investment returns in a mutual fund (or a stock for that matter) inside of a 401(k) or IRA unless you are very good at researching stocks (hint: 99% of the general population is not). It takes years of practice, and even some of the best stock brokers and financial analysts don't always get it right. The stock market ebbs and flows, and goes through cycles of boom and bust. If your investments take a hit right before you are ready to retire, it doesn't matter how "smart" you were with your money.
Still don't think life insurance is necessary as you get older? Consider that dying isn't free. What does the average funeral cost in your home town? Ask a funeral director how quickly the costs double over any given time period. You will be shocked...shocked I tell you. Also, ask any child whose parents left them a sizable IRA what they paid in taxes and if it was financially disruptive.
The cash value life insurance that your financial guru told you was evil and that you didn't need could have prevented all of this by bypassing probate, providing an income tax free death benefit and, inside of a life insurance trust, completely avoided the estate tax thereby giving your heirs, your favorite charity, or your church 100% of the money you wanted to give them.
Although many so-called experts try to compare life insurance to an investment, don't be fooled. Yes, life insurance, if properly structured, can build very strong cash values that rival investment products (my guess as to why the investment folks are upset). They try to tell you what a lousy investment cash value life insurance is. But comparing this type of insurance to investing is nonsensical. It's like asking "how many walkmans does it take to equal an Ipod?"...cash value insurance serves a different purpose from an investment. Each has their own different objectives.
Before you make a final decision on whether to buy term or cash value life insurance, consider what you are really looking for. If you are looking for an investment, then be prepared to look for stocks, bonds, no load mutual funds, options, and other various financial derivatives (and learn how to research them). If you're looking for a long-term savings tool, then cash value life insurance can fit that need very well.
Thursday, February 12, 2009
10 Tips For Buy-To-Let Investment Success
By: james copper
The Buy-To-Let market place is booming. More and more people are investing in a second property as a long term investment plan. As attractive as the proposition sounds, there are a number of potential pitfalls that need to be taken into consideration. Use the steps below to ensure that your Buy-To-Let investment is a success. #1 Choose The Right Property The location is extremely important. Make sure that speak to a number of local letting agents to determine the supply and demand in the area. Look at such things as whether there are local employers or a university. You can get the details of letting agents near you by contacting The Association of Residential Letting Agents. #2 Choose The Right Mortgage You will need to check with your lender to how much you eligible to borrow. Most lenders will allow you to borrow 85 percent of the properties value. Also most lenders will take into account the expected rental income when they are deciding how much they will lend. Make sure that your rental income covers 125 percent of your monthly mortgage payment. #3 Work Out Costs And Income Work out how much your monthly mortgage repayment will be and whether the expected rental income will exceed this. Checking out the rental prices of similar properties advertised in newspapers in your area will give an indication of whether this is possible. Also look at whether you could afford your mortgage if interest rates shop up and the property is unoccupied for 3 months. #4 Consider Hidden Costs You will have to pay solicitors fees, estate agents fees, building insurance, mortgage arrangement fees, stamp duty and possibly service charges and ground rent. #5 Budget For Ongoing Costs You are responsible for ensuring that the property meets health and safety standards. Local authorities require that you comply with fire regulations, which could mean you have to put in fire doors and smoke alarms. #6 Choose A Professional Letting Agent You might want to consider using a professional letting agent. They will find tenants, collect deposits and the rent and arrange the inventory and tenancy agreements. But expect to be charged anything from between 10 to 18 percent of the gross rental income that you get. #7 Ensure You Have The Right Insurance As you are the owner it is your responsibility to insure the structure of the property, which includes permanent fixtures and fittings. You will need to check your policy as most buildings insurance policies exclude buy-to-lets. #8 Sort Out Your Tax Position You have to pay income tax on any rental income you receive, but you can deduct some expenses and you will probably be liable for Capital Gains Tax when you sell. You would be well advised to speak to your accountant before you proceed. #9 Get A Fully Flexible Mortgage These types of mortgages are well suited to the buy-to-let market. This is because you can fluctuate your payments in line with rental income. #10 View Buy-To-Let As A Long Term Investment Do not expect to make a quick profit on rental income and equity gain in the property. You look at the longer terms for profits. Generally about five to ten years.
The Buy-To-Let market place is booming. More and more people are investing in a second property as a long term investment plan. As attractive as the proposition sounds, there are a number of potential pitfalls that need to be taken into consideration. Use the steps below to ensure that your Buy-To-Let investment is a success. #1 Choose The Right Property The location is extremely important. Make sure that speak to a number of local letting agents to determine the supply and demand in the area. Look at such things as whether there are local employers or a university. You can get the details of letting agents near you by contacting The Association of Residential Letting Agents. #2 Choose The Right Mortgage You will need to check with your lender to how much you eligible to borrow. Most lenders will allow you to borrow 85 percent of the properties value. Also most lenders will take into account the expected rental income when they are deciding how much they will lend. Make sure that your rental income covers 125 percent of your monthly mortgage payment. #3 Work Out Costs And Income Work out how much your monthly mortgage repayment will be and whether the expected rental income will exceed this. Checking out the rental prices of similar properties advertised in newspapers in your area will give an indication of whether this is possible. Also look at whether you could afford your mortgage if interest rates shop up and the property is unoccupied for 3 months. #4 Consider Hidden Costs You will have to pay solicitors fees, estate agents fees, building insurance, mortgage arrangement fees, stamp duty and possibly service charges and ground rent. #5 Budget For Ongoing Costs You are responsible for ensuring that the property meets health and safety standards. Local authorities require that you comply with fire regulations, which could mean you have to put in fire doors and smoke alarms. #6 Choose A Professional Letting Agent You might want to consider using a professional letting agent. They will find tenants, collect deposits and the rent and arrange the inventory and tenancy agreements. But expect to be charged anything from between 10 to 18 percent of the gross rental income that you get. #7 Ensure You Have The Right Insurance As you are the owner it is your responsibility to insure the structure of the property, which includes permanent fixtures and fittings. You will need to check your policy as most buildings insurance policies exclude buy-to-lets. #8 Sort Out Your Tax Position You have to pay income tax on any rental income you receive, but you can deduct some expenses and you will probably be liable for Capital Gains Tax when you sell. You would be well advised to speak to your accountant before you proceed. #9 Get A Fully Flexible Mortgage These types of mortgages are well suited to the buy-to-let market. This is because you can fluctuate your payments in line with rental income. #10 View Buy-To-Let As A Long Term Investment Do not expect to make a quick profit on rental income and equity gain in the property. You look at the longer terms for profits. Generally about five to ten years.
Wednesday, February 11, 2009
Diamonds, For Investment Or Pleasure?
By: otaffy
Most diamonds sold to the general public are known as slightly imperfect. Slightly imperfect diamonds are not easily spotted by the trained eye. The regular person would probably never even notice the imperfections. After the slightly imperfect stones come those that are frankly imperfect. Frankly imperfect stones have rather large or numerous flaws and visible carbon spots. Imperfect stones imperfections can sometimes be spotted by a normal observer without a glass! Frankly imperfect stones are great for people who want big stones but do not want to pay the money for fine gems. Frankly imperfect stones give the buyer more bang for the buck. At a little bit of distance the stones may appear brilliant. It may be a better idea for purchasers to buy better grade diamonds. If someday you have to dispose of your diamonds they will almost always be appraised by those who are trained to detect flaws and bad color. The resale value of a fine stone will always yield better money than a larger more imperfect one. Large imperfect diamonds sell, but they rarely ever sell themselves. Fine diamonds will almost always find a buyer if they are offered a little under the market price. A few words as to the best means of detecting flaws in diamonds may not be out of place. You must always possess a good lens. A good lens is key for detecting flaws and color. A good light is also a necessity. The inspector needs a light that falls freely upon it. Diamond forceps should always be used to hold the stones. A persons fingers are to big and clumsy. Peoples fingers also soil stones and make them dull and dirty. It is extremely important to always examine a stone unset, the mounting may hide some imperfections. Many diamond owners and dealers have found imperfections in set stones months after ownership and examination. To properly observe a diamond one must start with the back of the stone, first dimming it with the breath. Often diamond cutters will often leave flaws so they are not visible from the front, but they are often very evident from the back. This is why examinations usually begin from the back. If no flaws are evident, examine the stone slowly and carefully through each rear facet. Then turn the stone over, dim it, and check the front of the stone for flaws. If none are seen, look through each of the front facets turning the stone slowly. While examining a stone make sure that any apparent defects are not actually small spots of dirt sticking to the opposite surface. It is also very important not to mistake a reflection of thick spots on the girdle for flaws. Some times stones are cut too shallow. These stones will often times show reflections through the table. These stones are less brilliant, and also far less desirable. These stones may seem imperfect when actually they may be perfect in crystallization, although not in make. If no defects are discerned, rest the eye for a few moments and inspect the diamond once again. This time look for small specks and feathers. Be on the lookout for small reflections on the surface as well as on the interior of the stone, as cracks that have reached the surface may be discerned. Sometimes diamonds have knots, or spots where part of the diamond does not go with the grain. These spots are very hard to polish correctly and often times cannot be made completely flat. It is essential to find this type of flaw if it exists. This type of defect is very hard to spot. Often times it will never be noticed by the general public, and sometimes not even by the dealer. When a valuable gem is in question, and time is not of the essence, save a final decision till after a second thorough examination on another day.
Most diamonds sold to the general public are known as slightly imperfect. Slightly imperfect diamonds are not easily spotted by the trained eye. The regular person would probably never even notice the imperfections. After the slightly imperfect stones come those that are frankly imperfect. Frankly imperfect stones have rather large or numerous flaws and visible carbon spots. Imperfect stones imperfections can sometimes be spotted by a normal observer without a glass! Frankly imperfect stones are great for people who want big stones but do not want to pay the money for fine gems. Frankly imperfect stones give the buyer more bang for the buck. At a little bit of distance the stones may appear brilliant. It may be a better idea for purchasers to buy better grade diamonds. If someday you have to dispose of your diamonds they will almost always be appraised by those who are trained to detect flaws and bad color. The resale value of a fine stone will always yield better money than a larger more imperfect one. Large imperfect diamonds sell, but they rarely ever sell themselves. Fine diamonds will almost always find a buyer if they are offered a little under the market price. A few words as to the best means of detecting flaws in diamonds may not be out of place. You must always possess a good lens. A good lens is key for detecting flaws and color. A good light is also a necessity. The inspector needs a light that falls freely upon it. Diamond forceps should always be used to hold the stones. A persons fingers are to big and clumsy. Peoples fingers also soil stones and make them dull and dirty. It is extremely important to always examine a stone unset, the mounting may hide some imperfections. Many diamond owners and dealers have found imperfections in set stones months after ownership and examination. To properly observe a diamond one must start with the back of the stone, first dimming it with the breath. Often diamond cutters will often leave flaws so they are not visible from the front, but they are often very evident from the back. This is why examinations usually begin from the back. If no flaws are evident, examine the stone slowly and carefully through each rear facet. Then turn the stone over, dim it, and check the front of the stone for flaws. If none are seen, look through each of the front facets turning the stone slowly. While examining a stone make sure that any apparent defects are not actually small spots of dirt sticking to the opposite surface. It is also very important not to mistake a reflection of thick spots on the girdle for flaws. Some times stones are cut too shallow. These stones will often times show reflections through the table. These stones are less brilliant, and also far less desirable. These stones may seem imperfect when actually they may be perfect in crystallization, although not in make. If no defects are discerned, rest the eye for a few moments and inspect the diamond once again. This time look for small specks and feathers. Be on the lookout for small reflections on the surface as well as on the interior of the stone, as cracks that have reached the surface may be discerned. Sometimes diamonds have knots, or spots where part of the diamond does not go with the grain. These spots are very hard to polish correctly and often times cannot be made completely flat. It is essential to find this type of flaw if it exists. This type of defect is very hard to spot. Often times it will never be noticed by the general public, and sometimes not even by the dealer. When a valuable gem is in question, and time is not of the essence, save a final decision till after a second thorough examination on another day.
Subscribe to:
Posts (Atom)
