Life Insurance Part 2: HOW?

Just this past Thursday, we dove into the topic of life insurance with the not-so-existential question—WHY?  What is the case for life insurance at all?  If you didn’t take (a little over) 90 seconds to watch that one, you can do so by clicking HERE to see my list of life insurance “NEEDS” (those things that would be required to keep anyone you leave behind on track financially) and “WANTS” (those things that could better be described as “bells & whistles” in life insurance planning).

Today, we provide you with a primer on HOW you can begin to calculate an appropriate amount of life insurance for you as well as the type of insurance that would best suit your needs.  We hope you both learn from and enjoy “Life Insurance—HOW? (in 90 seconds).”

WHY Do You Need Life Insurance?

Life insurance is a heavy topic with all sorts of emotional baggage and economic bias surrounding it. While some over-simplify the process (suggesting a mere multiple of one’s salary as a recommendation), many over-complicate it on a quest to make a big commission through the sale of a bells-and-whistles life insurance policy.

It’s a challenge to summarize this topic at all, but that didn’t stop me from trying… This 90 Second Finance video is Life Insurance, Part I: WHY? and I’ll be following that with Part II:HOW? this coming Monday. So how about dedicating 180 seconds to better understand the role of life insurance in your financial realm?


Over the weekend, I was watching a television program on which a financial advisor made his claim that, “The market has always come back and I think it always will.”  Sadly, this has been the sales pitch of stock brokers for generations and only some of those generations have walked away with a positive rate of return.  For this post, I’d like to share with you the open to the fifteenth chapter of The Financial Crossroads titled “Risk Management Investing."  We call into question the now institutionalized thought in the financial industry of “Buy and Hold,” Asset Allocation and Modern Portfolio Theory to remind all of us of the mathematical truth that IT’S EASIER TO LOSE MONEY THAN IT IS TO MAKE IT! 

From “Risk Management Investing”:

"I am more concerned about the return of my money than the return on my money." (Mark Twain)

Mark Twain was the first to wittily claim that he was more concerned with capital preservation (the return of my money) than growth (the return on my money), but it is interesting to note that Twain passed away in 1910, prior to the Great Depression.  Oklahoma’s favorite son, Will Rogers (who died in 1935), also later made this a notable quote.  I have another that I’d like you to chew on.  “It is easier to lose money than it is to make it!”  

That’s not a catchy slogan or tagline.  It’s a mathematical fact.  If you have $100 and you lose 10% of it, it will take an 11% rate of return to become whole.  If you lose 20%, you’ll need to make 25% to get your money back.  What if you lose 50%?  What rate of return would you need to make your money back?  The answer is an astonishing 100%!  I’m not being “tricksy” as Tolkein’s character, Gollum, called the Hobbits in the Lord of the Rings trilogy.  See for yourself:

  • $100 x 90% = $90; $90 x (100% + 11%) = $100
  • $100 x 80% = $80; $80 x (100% + 25%) = $100
  • $100 x 50% = $50; $50 x (100% + 100%) = $100

Once you’re down 50% and facing that big 100% hill, it will take you around seven years, if you’re able to make an annualized rate of 10% per year, to get back where you started.  If you’re making closer to 7% each year, you’ll be waiting a full decade to break even.  If you earn 4% on your money, it will take you 18 years to recover from a 50% fall.

But you say, “I always learned that you need to buy and hold.   The market will go up and down, and we can’t time it, so we shouldn’t try!  It’s not timing the market.  It’s time in the market!”  It is true that market timing is a very dangerous business——betting, if you will.  However, if and when you’re able to see the bearish train coming down the tracks, would it not make sense to get out of its way?  The price of staying in can be disastrous.  From the day the market peaked on September 7, 1929, it would have taken until 1954 to break even if you bought, and held.  That is a pretty long time to wait, especially if you were planning to retire in 1932.

And today?  For the last decade, the market is down over 20%.  You will find that the current logic that runs the financial services realm at the institutional level was developed in one of the best stretches the market’s ever seen.  From 1982 until March of 2000, the market ran upwards with little impedance.  Objectively speaking, Buy-and-Hold and strict Asset Allocation concepts, born in that 18-year stretch, worked very well.  But what about the stretch from 1964 up until 1982?  Believe it or not, that span represented yet another 18-year stretch where the buy-and-holder would’ve made nothing——zip, zilch, nada.  And we in the United States have it good!  Japan’s staring at their 20th year of an atrocious run that leaves the Nikkei still 70% south of its peak at 40,000.  So, eight years into a rough losing streak for the U.S. market——and following a colossal financial demise brought on largely by ignorance and greed on the part of the U.S. government, corporations, and citizens——would you rather be buying-and-holding the Dow or the Nikkei?

It’s not my intent to scare you, so let’s go back, and I can try to give you some answers and some hope.  The world’s best investors are not buy-and-holders, asset allocators, or Modern Portfolio theorists.  They’re risk managers.  These are folks like Sir John Templeton, Jean-Marie Eveillard, Jim Rogers and yes, Warren Buffett.  They spend more time worrying about how not to lose money than they do trying to make it.  I’m not talking about leaving all your money in T-Bills and CDs.  I’m talking about resetting your brain to focus first on managing risk in your investments, then, on your return. 

How to Spend $1 million at Starbucks (in 90 Seconds or Less)

It's good to enjoy nice things.  It's good to be detached enough from the currency in our pockets that we're willing to part with it for the occasional extravagence.  But the cost of habitually indulging in what may even be seen as a little thing–like a cup of coffee–is nothing short of amazing.

In this short video, I tell a TRUE STORY about a friend of mine who found himself on a path to "spending" $1 million at Starbucks.  Check it out to see how!



Your “Personal Money Story” A.K.A. “How to Lose Your Spouse”

Do you love money more than your spouse, boyfriend or girlfriend?  How about your parent, brother, sister or child?  Best friend?  Most people would never acknowledge, "Yes, I love money more than my spouse," but yet we send these messages all the time to our loved ones.  How?

See how I almost (and probably should have!) lost my wife before we were even married:

For a more in depth look, read the first chapter of The Financial Crossroads entitled "The Power of Money" online for FREE by clicking HERE

And if you learned enough in 90 seconds and you'd like to do your own Personal Money Story, you can click HERE, then select "Personal Money Story (Excel Spreadsheet)".  I'd love to hear your questions and comments!


Guest blogger, Jim Stovall, on “Spending and Saving”

One of the most important things I've learned in educating and advising in the arena of personal finance is that no one person has the market cornered on wisdom… and I'm certainly no exception!  Therefore, in order to make the information in this blog as comprehensive and beneficial as it can be, I will be inviting guest bloggers of varying specialties on a semi-regular basis to share their wisdom with us. 
It could be no more appropriate, then, that my first guest blogger is Jim Stovall.  Jim has more illustrious titles than I have letters in my name, but my personal favorite is co-author.  Indeed I'm humbled that in addition to selling over 5 million copies of The Ultimate Gift, Jim saw fit to put his name beside mine in our recently released collaboration, The Financial Crossroads: The Intersection of Money and Life.  This week, Jim shares with us from his weekly column, Winners Wisdom.   

Spending and Saving

by Jim Stovall

Whether you make millions of dollars a year or earn minimum wage, there are only three things you can do with your money: You can spend it, save it, or give it away.
Your spending may range from absolute necessities to outrageous luxuries. Your savings may be prudent investments or coins in your piggy bank. And your giving may be coins you drop in a donation jar or launching your own foundation. But there are still only three things you can do with every dollar.
Financially successful people make sure that each dollar is divided between spending, saving, and giving. Traditionally, Americans have been a very giving and generous group of people. This generosity fluctuates some but remains strong, even during difficult economic times. If you’re not giving away part of every dollar you earn, you’re missing a great opportunity and one of the true joys in life. While, as a society, our giving can always improve, we seem to be doing fairly well overall.
The problem arises when we make the decision between spending and saving. Savings rates in America are dangerously low and, in some sectors of the population, the savings rate statistically actually drops below zero. You may wonder, as I did, how it is possible to save less than zero.
When I researched the statistics, I found that many people today are spending significantly more than they earn, and the disparity is showing up in their credit card balance, line of credit, or other debt instrument. This is a dangerous practice as without long-term retirement investments, your golden years may seem more like aluminum foil than gold. Without some emergency savings, you are like that pilot flying his plane 50 feet off the ground. While it might work for a little while, sooner or later, you will crash and burn if you don’t leave some margin of error in the form of a cash reserve.
When we look at global savings rates, we find that Europeans save 20%, Japanese save 25%, and the Chinese save over 50% of their income. This is fascinating when we consider that economic growth is thought to be fueled by spending, but China has one of the fastest-growing economies while their people are saving half of their income.
Global statistics are interesting for study or theoretical discussions but really don’t matter to you and me. The economic conditions on Wall Street or The White House should not concern us nearly as much as the financial picture on our street at our house. There are many ways to calculate the best way to spend, save, and give our money.
In my newest book, The Financial Crossroads, my co-author Tim Maurer and I explore a number of ways you and your family can win with money. We offer many calculators and other tools you can use to get the information you need so you will know what to do; however, it’s important to realize that financial information abounds. As in most things, with money we don’t fail because we don’t know what to do. We fail because we don’t do what we know.
As you go through your day today, commit to get the information you need to make quality financial decisions and then act.
Today’s the day!
Jim Stovall is the president of Narrative Television Network, as well as a published author of many books including The Ultimate Gift. He is also a columnist and motivational speaker. He may be reached at 5840 South Memorial Drive, Suite 312, Tulsa, OK 74145-9082, or by e-mail at