Every time we experience a calamity, like Hurricane Sandy if you’re on the east coast, it reminds us that there are risk factors in life beyond our control. Through insurance, we transfer these catastrophic risks we cannot bear to insurance companies, but knowing HOW INSURANCE WORKS is vital to understanding why, how and what we need to insure. Take the next 90 seconds to more thoroughly understand HOW INSURANCE WORKS:
This is the 10th exercise in a series designed to walk you through an entire financial plan. The exercise is embedded in an Excel spreadsheet you can download and save for personal use. You can read the backdrop for the exercise HERE, or just jump right in with the instructions given below:
It is my hope that this is an extremely brief exercise for you, but many people who have long-term relationships with folks in the insurance, brokerage, or banking industries have a lifetime of annuities built up. If that is your scenario, it is very important that you do this exercise to get a handle on where your money is and what it is doing (or not doing).
When you did your Personal Balance Sheet or Mutual Fund Audit App, you probably pulled together the statements for any annuities you own. These statements often lack the information you’ll need for this exercise, so I also want you to pull together each of the contracts you received at the inception of your annuity policies as well. Then, using the App (link below), fill in the information cataloging the following: owner[i], annuitant[ii], beneficiary[iii], contract value, surrender value, cost basis (the sum of your contributions), and the surrender schedule. Some of this will be on your statement, but the remainder will be in your policy contract. You may have to do some digging.
Once you’ve collected the information, the analysis should start with a diagnosis of the investment value. If it is a fixed annuity, you’ll know very quickly if the rate is competitive with today’s rates. If it is a variable annuity, examine how it has performed versus the various benchmark indices. If it is an equity indexed annuity, the chances are very good that it is not a phenomenal investment, but it also probably has a very long and steep surrender charge which may make it prohibitive to move at this time.
If you determine you’d prefer to be out of an annuity contract, here are the questions to ask:
- What, if any, surrender charge exists?
- Is the surrender charge cost prohibitive?
- How much longer will the surrender charge last?
- How much have you contributed (what is your cost basis)?
- How substantial would the tax impact be (would you have to pay a lot in taxes)?
- Is there a gain on which you would have to pay a penalty if you are under age 59½?
Again, remember to make these decisions slowly because there are many moving pieces with annuities. It is best to speak with a fee-only Certified Financial Planner™ practitioner AND a Certified Public Accountant prior to making any final decisions.
Click HERE to access the Annuity Audit app!
This is the seventh exercise in a series designed to walk you through an entire financial plan. The exercise is embedded in an Excel spreadsheet you can download and save for personal use. You can find the backdrop for the exercise HERE or just jump right in with the instructions given below:
In order to know if your home and auto insurance policies are providing you with the appropriate levels of coverage, you’ll want to collect the declaration pages for all of your home, auto, condo, and renter policies. The Application Exercise online will provide a chart to fill in your various coverage limits next to our recommended minimum limits.
After you’ve tailored your desired limits with the help of an independent planner who does not accept commissions or referral fees for the sale of insurance, you can use the Application Exercise to shop your coverage with several carriers.
Click HERE to access the app!
This is the sixth exercise in a series designed to walk you through an entire financial plan. The exercise is embedded in an Excel spreadsheet you can download and save for personal use. You can find the backdrop for the exercise HERE or just jump right in with the instructions given below:
This app is designed to help you determine what your life insurance needs are for final expenses, debts and mortgages, education, and income replacement. If you conclude that you have policies you don’t need or want, and you’ve confirmed your research with an independent planner who does not accept commissions on the sale of life insurance, then you should have several options for terminating your policies. These will differ from policy-to-policy, so check with your insurer. But don’t make those decisions hastily. Even if you shouldn’t have purchased the whole life insurance policy you bought 15 years ago and don’t need or want it now, in some instances it will make sense to keep it.
Requesting an “In-force Life Insurance Illustration” and a “Policy Cost Basis Report” from your agent (or the insurance company’s home office) will help you and your independent planner determine whether the policy should be kept or surrendered based on the investment value, future prospects for growth, stability of the insurer and tax consequences of liquidating.
Additionally, if you are considering replacing a current policy with a new policy that is more appropriate or economical, it is very important that you do NOT cancel any existing policies until you have received and paid for the new policy. This is to ensure that no issues arise throughout the course of your underwriting that would disqualify you from receiving the new insurance policy.
Especially in these economic times, it is important to ensure that every dollar of yours is working hard for you, and that includes the dollars channeled toward life insurance.
Click HERE to access the app!
This is the fifth exercise in a series designed to walk you through an entire financial plan. The exercise is embedded in an Excel spreadsheet you can download and save for personal use. You can find the backdrop for the exercise HERE or just jump right in with the instructions given below:
The best way to see activities through a risk management lens is to go through some ideas of your own, like the example of my car accident, and discuss or jot down the ways in which that risk could have been managed with each of the four methods. It doesn’t have to be something as dramatic or painful. It could easily be a risk management success story that you can now better understand.
Examine both the personal and the financial risk using all four of the risk management techniques. After doing that exercise, discipline yourself to analyze a few other examples throughout the course of your days. If you’re bold enough, teach the technique to a friend or family member (there’s no better way to learn something than to teach it). Eventually, it won’t be work, and you’ll see your options more clearly. Then, when you examine your existing insurance products or new offerings, look for ways you can reasonably avoid, reduce, or assume the risk before paying someone else to do it for you.
Click HERE to access the app!
Most of the time, we expect those in the financial sales realm to sell us MORE of something than we may need, because the more they sell, the more money they make, right? But in one very interesting example—home and auto insurance agents—they may actually have an Economic Bias to sell us LESS than we need. Please take 90 seconds to learn why:
I’ve learned more about life in the last 6 years than in the previous 28 combined. It was 6 years ago when I became a father, and I now have two incredible boys—Kieran and Connor—who’ve likely taught me more than I them. Parenting is a glorious challenge that tests every area of our lives—our marriage, family, and friendships, as well as our productivity, creativity and often times our mental stability! Financially, being a father is… expensive. And for those dads who have a tendency to evaluate financial expenditures as a “return on investment,” the return on investment in our children presents a confounding dilemma. After all, the expense is cold hard cash and the return is nebulous and may not be realized for decades.
In the end, we dads must relinquish our desire for tangible benefits of parenting and pour our life (and often
times, our money) into these little ones, unconditionally. It is through this sacrifice that we begin to realize that the real benefits of parenting have nothing to do with dollars and cents, but instead intangible blessings and unexplainable joy. And who wouldn’t trade that—dollars for lasting joy? Fathering, then, turns out to be an incredible investment after all!
Practically, here are four financial planning areas that every dad needs to address:
Will – Most of us dads think that we’re generally indestructible, but the truth is that the one thing we can be sure of in life is that we will eventually… die. That inevitability requires us to have a will. And especially for fathers of young children, the most important financial planning recommendation in your world is to acquire or update a will—most importantly, to stipulate who your children’s legal guardian will be in the case of your untimely demise.
Life Insurance – The one thing that many dislike almost as much as the thought of their own death is the notion of talking to a life insurance agent. But the truth remains that if we would be leaving behind a spouse and children who are at least partly reliant on our very existence for our portion of the household, we need some life insurance. The vast majority of us will ably fulfill our life insurance needs with TERM life insurance.
Education Planning – As dads, we’re not legally or ethically bound to pay for our children’s college education, but if that is something that we’ve pledged to do, we should save for it so that it doesn’t wipe us out once our kids start graduating from high school. Consider saving 50% of your expected college expenses in a 529 college investment savings plan.
Work/Life Balance – Dads tend to put a lot of weight into our role to “provide and protect” in our households, but if we’re to be honest, we’d acknowledge that we occasionally abdicate ourselves from other roles and duties in the household. Simply put, our kids grow up fast, and if we make them feel like our work is the most important thing in the world, they’ll quite naturally conclude that they aren’t. Adults understand the difference between the quality of time and the quantity—but for kids, it’s often just about the quantity!
I had an opportunity to share these same thoughts with viewers of WBAL-TV (NBC) in Baltimore yesterday – Father's Day. If you want to view the video simply click HERE or click the image!