Thursday, July 29, 2010
Quick Tip: Review Your Risk Tolerance
Now that the market has recovered much of 2008’s losses, now is a great time to reconsider your tolerance for risk. If you have a hard time sleeping due to recent market declines, perhaps your investment portfolio is too aggressive. Most financial professionals have great tools to identify an asset allocation of stocks, bonds, and cash that will maximize your chances of reaching investment goals while providing increased stability. This tip will spare you the stress of checking market updates every hour.
Tuesday, July 27, 2010
Quick Tip: Utilized Retirement Simulators
Within investment circles, the 2000’s are known as “The Lost Decade.” During the ten-year period the S&P 500 achieved an annualized return of -.99 percent. This has put many baby boomers behind their personal savings goals. Consequently, investors must now re-evaluate their retirement plans and make adjustments. People may need to delay retirement or reduce their anticipated standard of living. Retirement calculators can provide these insights and illustrate where you currently stand compared to your goals. They can be found online, or a fee-only financial planner can help you with these calculations.
Thursday, July 1, 2010
Different Types of Insurance
Term or Cash Value Policies
A phrase you may have heard when considering insurance is to "buy term and invest the difference." (You likely don't hear this from insurance agents because they are paid a higher commission on cash-value policies.) To implement this strategy, buy low-premium term insurance from a highly-rated insurer, and put the money saved from not buying a cash-value policy into a true investment account like an IRA, Roth IRA, etc... This provides your family with the protection it needs and an efficient way to save for retirement. Hopefully, over time, the investment account will grow and the need for an insurance policy will be eliminated.
I, like most fee-only financial planners, am a proponent of the "buy term and invest the difference" strategy. However, there are certain occasions when a cash value policy may make sense. For instance, buying a cash value policy may be appropriate if your need is permanent, such as caring for a special needs child. Additionally, cash value policies may make sense if your need is certain, such as if you have the policy and are then diagnosed with a terminable disease.
Universal Life
Universal life is a slightly different kind of cash value policy, but at death it works the same way. Before death, however, the cash-value grows at varying rates, depending on the ups and downs of interest paid on bonds and savings accounts. With most cash value accounts (whole life), the interest paid is fixed.
Variable-Universal Life
Variable-universal life policies are very similar to universal life policies, except the cash value can be invested in a pool of stocks or bonds rather than at the insurance company's current interest rates. However, the fees on these policies can be extremely high, and in almost every circumstance the "buy term and invest the difference" strategy is more efficient.
Canceling a Policy
Canceling a term policy is simple - just stop paying the premium, and your heirs will no longer receive a death benefit if you pass away. If you cancel a cash value policy, your refund will be the cash value minus any unpaid loan and interest. It will be further reduced by surrender charges. If you cancel a variable universal life policy, you will also pay ordinary income taxes on the profits inside the policy instead of lower capital gains rates that would be incurred if the investments were separate from insurance. Chances are, your insurance agent forgot to mention these things.
Bottom Line
Insurance is clearly a complicated product. For many, it is a necessity. However, don't speak to a "financial planner" who is an insurance agent because his advice will certainly be to buy life insurance. Speak to a fee-only financial advisor who is never compensated based on the product recommended to get an objective opinion of whether you and your family have adequate coverage.
A phrase you may have heard when considering insurance is to "buy term and invest the difference." (You likely don't hear this from insurance agents because they are paid a higher commission on cash-value policies.) To implement this strategy, buy low-premium term insurance from a highly-rated insurer, and put the money saved from not buying a cash-value policy into a true investment account like an IRA, Roth IRA, etc... This provides your family with the protection it needs and an efficient way to save for retirement. Hopefully, over time, the investment account will grow and the need for an insurance policy will be eliminated.
I, like most fee-only financial planners, am a proponent of the "buy term and invest the difference" strategy. However, there are certain occasions when a cash value policy may make sense. For instance, buying a cash value policy may be appropriate if your need is permanent, such as caring for a special needs child. Additionally, cash value policies may make sense if your need is certain, such as if you have the policy and are then diagnosed with a terminable disease.
Universal Life
Universal life is a slightly different kind of cash value policy, but at death it works the same way. Before death, however, the cash-value grows at varying rates, depending on the ups and downs of interest paid on bonds and savings accounts. With most cash value accounts (whole life), the interest paid is fixed.
Variable-Universal Life
Variable-universal life policies are very similar to universal life policies, except the cash value can be invested in a pool of stocks or bonds rather than at the insurance company's current interest rates. However, the fees on these policies can be extremely high, and in almost every circumstance the "buy term and invest the difference" strategy is more efficient.
Canceling a Policy
Canceling a term policy is simple - just stop paying the premium, and your heirs will no longer receive a death benefit if you pass away. If you cancel a cash value policy, your refund will be the cash value minus any unpaid loan and interest. It will be further reduced by surrender charges. If you cancel a variable universal life policy, you will also pay ordinary income taxes on the profits inside the policy instead of lower capital gains rates that would be incurred if the investments were separate from insurance. Chances are, your insurance agent forgot to mention these things.
Bottom Line
Insurance is clearly a complicated product. For many, it is a necessity. However, don't speak to a "financial planner" who is an insurance agent because his advice will certainly be to buy life insurance. Speak to a fee-only financial advisor who is never compensated based on the product recommended to get an objective opinion of whether you and your family have adequate coverage.
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