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“Either-Or” Fixations in Life Insurance: Are You Missing the “C” Option?

Posted on September 21, 2011 by Kim Butler

Steak or lobster?
Dogs or cats?
Ginger or MaryAnn?

Why do some people insist on turning every issue into a black-or-white, either-or decision? In theory, this mindset might simplify one’s life (or simply provide time killing conversation at the local watering hole), but most of the time an either-or approach is neither necessary nor desirable; quite often, finding a “C” option is much better than choosing Option “A” and rejecting Option “B” (or vice versa). Hey, why insist on diners having to choose between lobster or steak when they can have surf and turf, right?

The either-or mentality shows up with some frequency in financial commentary. For example: Stocks or bonds?   Pre-tax or after-tax savings?    Group or individual benefits?

Looking at these “A” or “B” sample issues, it should be obvious that “C” options are both available and practical. A balanced portfolio usually includes a mix of investment vehicles, not just one type. Pre- and after-tax savings plans each serve important functions in individual finances, depending on when the accumulation might be needed. And a blend of group and individual programs can provide customized security at an affordable price. Despite an attention grabbing either-or headline, the answer to most “A”-or-“B” financial questions is usually “C” – “both.” But what about this question:  

Permanent or Term life insurance?

A quick survey of opinions about life insurance (in financial publications, at bookstores, on the Internet) finds mostly a polarity of opinions; it’s either “A” or “B,” permanent or term. “C” options, those that might recommend both permanent and term, can hardly be found. But considering how many other financial issues seem to include practical “C” options, why is the discussion about life insurance so polarized and dogmatic? There are several possible explanations.

Why people can’t seem to find the “C” option for life insurance

Permanent policies are complicated. In comparison to other financial products like stocks, bonds and mutual funds, permanent life insurance can legitimately lay claim to being the most complicated and multifaceted financial instrument available to the general public. This complexity is not only because permanent life insurance consists of a blend of savings and insurance benefits, but because different contract formats allow for an endless variation in how the cash values and insurance features can be combined to meet individual desires.

There is no uniformity in the evaluation process. How does an individual determine the financial value of life insurance? This is a challenging question, one in which there is very little consensus. For example: In a net worth statement, what is the value of a life insurance benefit? Until the insured has died and a claim has been paid, there is no recognized dollar value (for a term policy). Yet having life insurance certainly results in greater financial security. Because of the difficulty in quantifying the financial value of life insurance, the methods of comparing and evaluating life insurance are numerous, reflecting a broad range of financial philosophies. 

Even for term insurance, where the typical method of evaluation is price (the lower premium is considered the best value), other factors come into play. A 10-year term policy will almost certainly be cheaper than a 20-year term, but what about the cost of maintaining or re-insuring when the term expires, especially if one’s health changes? How can one accurately assess this factor from a financial perspective?

In some evaluations, critics of permanent life insurance will point to low rates of overall return in comparison to other accumulation vehicles. Yet permanent life insurance isn’t just an accumulation vehicle; the life insurance benefit is part of the package as well, and the two components are interrelated. How accurate is an evaluation process that attempts to separate what was intended to be combined?

There are commissions involved. Almost all life insurance is provided by agents who receive commissions from insurance companies when they help an individual obtain coverage. Permanent policies have larger premiums, and larger premiums mean bigger commissions. For some observers, this commission arrangement creates a conflict-of-interest for agents, in that they may be induced to recommend higher premium policies that are perhaps not suitable for consumers. Another frequent critique of permanent life insurance policies is that the agents’ commissions come at the expense of greater cash values for the policyholder.

Over the past few decades, the combination of complex products, poorly defined evaluation processes and implied potential for a conflict of interest over commissions has led many public “experts” to offer this advice: “Just get term insurance. It’s simple and cheap, and you won’t have to worry about getting ripped off.” In response, knowledgeable commentators within the life insurance industry often feel compelled to focus on strategies that justify permanent policies for almost every scenario, both to explain their products and defend their integrity. In a way, the strong philosophical differences about how to view the two forms of life insurance have left little room for discussing ways to make them fit together. Yet there are many workable formats for making life insurance a product with “C” options.  

The “C” Options in Life Insurance

Both term and permanent policies have a long history in the marketplace because consumers have shown a demand for both forms of life insurance. Any economist would tell you that consumer demand validates the worth of a product or service. In real life, no matter what the “either-or” fixated experts might say, consumers find both term and permanent insurance are valuable financial products. Consumers shouldn’t have to choose between the two products when they say they like both.

In general, both term and permanent insurance provide immediate financial protection, while permanent life insurance allows this protection to become a long-term financial asset. From a “C”-option perspective, a good life insurance plan would be one designed to deliver maximum immediate and long-term benefits. Fortunately, there are several ways to accomplish this objective.

Conversion provisions for term insurance. Many term life insurance policies have provisions that allow the policyholder to convert some or all of the term coverage to a permanent policy, without requiring a new application or medical exam. Convertibility provisions allow you to start with Option “A” and change to Option “B.”

Guaranteed increase options “GIOs”*. These provisions allow policyholders to increase their coverage by specified amounts at scheduled intervals. For example, a $500,000 policy may give the policyholder the option to increase the insurance benefit by $50,000 every three years for the first six years of the contract without additional underwriting. Some GIOs can be triggered by birthdays (age 30, 35, 40 etc.), while others may be available based on events (the birth of a child). GIOs are an acknowledgement that as circumstances change, there may be a desire for more coverage.

*GIO rider incurs an additional cost.

Blended contracts. Most life insurers offer contracts that blend term and permanent protection into one contract. Typically, this blend of coverage transitions over time from a high percentage of term at the beginning of the contract to a 100% permanent policy. This can be an effective way to secure maximum coverage now while providing a long term insurance asset for retirement and estate planning purposes. Some of these contracts may require adjustment over time, but blended contracts are true “C” options in life insurance.

Dividend options. Many permanent policies feature dividend payments to policyholders. Dividends are a return of premium and while the typical default option is to add them to existing cash value accumulations, dividends may be applied or distributed in a variety of ways. One common dividend option is buying one-year-term insurance, allowing a permanent policy to add some term insurance. (Yes, this is another “C” option.) Note: Dividends are not guaranteed and are declared annually by the company’s board of directors.

Paid-up additions (PUAs). Most permanent life insurance contracts are based on fixed level premium schedules that determine the guarantees and payment periods; some permanent policies may be designed to be paid-up in 10 years, others when the insured reaches age 100. Shorter payment periods not only result in fewer premiums, but also increase cash value accumulations. PUA provisions allow the policyholder some flexibility in increasing cash values and shortening the payment period.

 One key point that doesn’t seem to get much press:  Personalized life insurance policies with features like those mentioned above aren’t something you can obtain by answering five health questions over the phone or over the internet. These policies require individual underwriting, because an insurance company wants a more in-depth picture of your health history and financial circumstances before offering a customized contract.

Since the general trend for most people is declining health as they get older, you are probably most insurable today. This makes a strong argument for applying for as much coverage as you can obtain as soon as possible (possibly this will be term insurance, with options to convert or restructure at a later date).

This brief overview of standard life insurance features should be enough to demonstrate that “C” options abound when it comes to life insurance. No matter what your current financial condition, it is obvious there are ways to design a life insurance plan that will meet both immediate needs and position life insurance as a long-term asset in your financial program.

CAN YOUR CURRENT LIFE INSURANCE PROGRAM COVER IMMEDIATE NEEDS AND BECOME A LONG-TERM FINANCIAL ASSET? ARE YOU USING YOUR “C” OPTIONS TO MAXIMUM ADVANTAGE?

(The next time someone asks you to decide between Ginger and MaryAnn, say “both.”)

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Four Mistakes that Keep People from Reaching Financial Independence

Posted on August 26, 2011 by Kim Butler

“The philosophy of the rich versus the poor is this: The rich invest their money and spend what is left; the poor spend their money and invest what is left.” – Jim Rohn

In one of our last posts, we asked if financial freedom was still attainable, and if “retirement” was even desirable! We also noted that “financial independence” might look different for you than for your parents.

Whether your goal is complete financial freedom, traditional retirement, or reaching financial independence by building cash flow while continuing to work part-time, there are many missteps you’ll want to avoid. Even smart people make these common mistakes that sabotage their path to financial independence:

1. Not saving enough, not saving earlier, or not saving consistently.
We recommend saving 20% of your income as a healthy habit that builds prosperity.

And the sooner you start saving, the better! The waiting just one year to start saving. People think they will “catch up later,” but it is more difficult than they imagine.

2. Putting your savings and assets at risk trying to “catch up.”
Trying to reach the seemingly unattainable goal of retirement, people do risky things with their money. Feeling they’ll never have “enough” to retire by earning a reliable rate of return, or trying to make up for years where they either did not save or when their accounts lost money, people make poor decisions. They look for the stock-picking genius or get-rich-quick scheme that gives them hopes of astronomical returns, perhaps “tripling” their net worth in a few short years. By relying on fantasies, hopes and promises, many have lost what little they had to start with.

But even “risk management” is a poor substitute for proper preparation. Let’s look at a recent example: the people caught in cross-hairs of market collapse of 2008-2009. Even with conservative strategies and “blue chip” stocks, retirement ranks were full of seniors seeking new employment, because their money was in accounts (even conservative accounts) that were at least partially exposed to unpredictable market forces. The results were devastating for many thousands of retirees who ended up, as financial software expert Todd Langford says, learning a new phrase: Welcome to Wal-Mart.”

Meanwhile, those who had been putting cash into their whole life policies experienced no drama, no losses, and almost no impact at all from the market crash that left others in sleepless regret.

3. Getting caught in the rent trap.
Even in this day of real estate ups and downs, you almost can’t afford not to buy a home. Some people rent their whole lives, thinking that putting a few more dollars away each month towards their retirement account is the smart thing to do. It may seem smart when you’re 40 years old, but given enough years, you will realize that appreciation – along with your landlord and your financial strategy – have betrayed you.

Let me illustrate: At 4% appreciation over 30 years, a modest $1,200 rent will balloon to $3,892 each month. By comparison, a $200,000 home appreciating at the same 4% would be worth nearly $650,000 after 30 years. So, if you purchased this home at age 40 with a 30-year mortgage, you would have a sizable free-and-clear asset at age 70 that could be sold, rented, or borrowed against. As a renter, by contrast, you would have no asset, and rent payments of nearly $4k a month!

4. Buying term and investing the difference.
Investors are coached by gurus such as Suze Orman and Dave Ramsey to “buy term and invest the difference.” The problem with that? There are many, but just to name a few:

  • Unless you die an early death, your term life insurance will be long gone (along with your premiums) and there will be no death benefit.
  • Without permanent insurance in place, you cannot “live your life insurance” by leveraging against the cash value and/or their death benefit.
  • With permanent insurance, you as a policyholder are not as dependent on accumulated assets. You can use a reverse mortgage and even spend down principle if needed, knowing that there are other options available for both you and your heirs.
  • Typically, “investing the difference” means you would be putting more money into your 401k or other qualified plan, which is largely not cash flow.

Are you making any of these mistakes? If so, what changes can you make today to put yourself on the right path? If you can save 20% of your income, invest in whole life and other vehicles with reliable rates of return, and purchase a home (and perhaps investment property, too), you’ll be taking powerful steps towards financial freedom.

Questions or comments? We’d love to hear from you below! Want to keep in touch? Follow me – Kim Butler of Partners for Prosperity, Inc. – on Twitter!

Posted in CONTROL, MOVE, MULTIPLY | Leave a comment

Life Insurance is not a Disposable Product

Posted on August 4, 2011 by Kim Butler

“Don’t worry about it. We can always get another one.” (Or maybe not…)

We live in an increasingly disposable consumer culture. Many products, from razors to writing instruments, are designed to be used and thrown out – refills and maintenance are too much of a hassle. If something breaks, it’s often cheaper to buy a new one rather than fix it.

In the financial services world, more and more products have been adjusted in response to this trend toward disposal and replacement. Where many financial instruments once included either significant up-front fees or surrender charges that encouraged consumers to keep these investments for long holding periods, many financial institutions have altered their products to lower or eliminate these fees. Now you can change your investment allocations as easily as changing your shirt, and sometimes the “substantial interest penalty for early withdrawal” from a Certificate of Deposit isn’t really that significant. If it appears the old product is no longer performing, it’s easy to dispose of what you don’t like, then get what you think you want.

But there are some things that don’t work as well when they are treated as disposable items (marriage comes to mind, as does nuclear waste). In the financial products arena, life insurance is a financial instrument that doesn’t perform well when considered a disposable commodity. This is primarily because of the unique nature of life insurance.

First and foremost, the ability to obtain personally owned life insurance is conditional on your health. For many financial products, the only barrier to acquisition is money; if you have the cash, you can buy it. But obtaining life insurance requires the prospective insured to meet the company’s underwriting standards as well as pay the premiums.

As long as you are in good health, insurability may not seem like a major impediment. But life insurance is a future-oriented product. Both the insurance company and the policyholder expect the life insurance benefit will not be used today, but sometime later (hopefully, much later). If you decide – for whatever reason – to terminate a life insurance policy, you have forfeited the certainty of your insurable status. Any attempt to obtain life insurance in the future will require another underwriting assessment. Who knows what your health status will be in five, ten or twenty years? Since future insurability cannot be guaranteed, disposing of life insurance – for any reason – could be detrimental to your financial well-being because you may not be able to obtain replacement coverage.

Life insurance is unique in another way: It is the only type of insurance where the covered event – one’s death – is 100% certain to occur. And unlike many other types of insurance, the covered event isn’t subject to changeable definitions or adjustable benefit periods. Disability can be defined in many ways, auto insurance can limit exposure through deductibles, and a homeowner’s policy can differentiate between assessed value and replacement costs. But with life insurance, there is no wiggle room for defining what is or isn’t covered – you are either dead or alive.

The only adjustments to a life insurance policy’s terms come during underwriting (when the insurance company may accept, decline or charge a higher-than-normal premium to insure an individual life), or in the premium structure (this applies particularly to term insurance). For the most part, the terms you receive on the day the policy is put in effect will remain for the duration of the policy. If you are a healthy, slim, athletic non-smoker when you obtain the insurance at age 35, your premiums will reflect that status even if 10 years later finds you an overweight, cigarette-smoking diabetic. Since the general trend for everyone is declining health over time, it doesn’t make sense to dispose of a favorable insurability status. If anything, you want to keep it for as long as possible.

This awareness, that life insurance is not a disposable financial product, should prompt you to carefully consider the long-term disposition of your life insurance policies, whether they are cash value policies or level term insurance. If you have obtained a favorable rating classification from a life insurance company, you should consider how this asset (your insurability) can be enhanced or preserved.

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Financial Independence vs. Retirement: A New Look at Old Assumptions

Posted on July 19, 2011 by Kim Butler

“Retirement at sixty-five is ridiculous. When I was sixty-five I still had pimples.” – George Burns

Once upon a time in a land not so far away, almost everybody retired at age 65. We threw a party, awarded the honoree a gold watch, and that was that.

Today, in spite of large shifts in the economic landscape, “typical financial planning” is still geared towards the traditional model of retirement: that magic day when we leave work and transition from earning and saving money to receiving money from our retirement accounts. Finally, the day arrives for which we have scrimped, saved and sacrificed. We happily ride into the future with plenty of money, work and worry-free, ready for travel and adventure.

But what if there’s something wrong with this picture? Let’s take a look…

Is financial freedom even attainable? Have you ever considered how much money you’ll need – the exact sum – to retire as you’d like and have enough, no matter how long you live? (And if you have considered it, did reaching that sum seem do-able, or did it scare the living daylights out of you!?)

As author Lee Eisenberg explores in “The Number”, we tend to go to great lengths in this culture to avoid discussing or even thinking about our “number” – the amount we’ll need to retire in guaranteed financial freedom. And now, with social security on the rocks, real-estate assets underwater, and pensions on the decline in both numbers and reliability, the number is likely a moving target in the multiple millions. For some, it raises a valid question: will we ever be able to actually “retire”?

The answer depends on many factors. Perhaps you can answer affirmatively – either confidently, or tentatively – but your neighbor in the next house or even the next office may not. And yet, we can all work towards financial independence, regardless of our starting point.

Reality check: “Retirement” is an unrealistic goal for many people. Once upon a time, people retired at 65, and the life expectancy was only 68. Today, once people successfully reach age 65, they can expect to live another 18.4 years! And yet, as of 2008, the average baby boomer had retirement savings of only $38,000, excluding homes, pensions, and social security.

Let’s face it, if you’re in your mid-fifties, in debt, and a long spell of unemployment has just wiped out your 401k, you’re not likely to build a nest egg in one or even two decades that will allow for a traditional “retirement.” (Fear not… that isn’t the only option.)

Consider this: Rather than attempting to pursue “retirement” as an unattainable goal, we can gradually achieve financial independence, one step at a time. While retirement is an “event,” financial independence is a state of mind as well as an economic reality, one that we can work towards incrementally. We can build our assets and increase our cash flow along the way, reducing our need for earned income in steps.

Does that mean we should give up on financial freedom? Not at all! We just want to avoid unattainable goals as well as the tragedy of becoming trapped in a career – and thus, a life – that we don’t want.

Therefore, we must resist viewing Retirement as a “fix” for unsatisfying work or a lack of meaning and fulfillment. Nobody wants to feel trapped in a job where they count the days (months, years) until it ends, but too many people do just that. If you’re working a job you hate, you could be sabotaging your health and well-being to make ends meet.

We encourage our clients to find purpose and meaning in their work for the long haul. Working only for the money isn’t prosperity, it’s a form of slavery that we would do well to free ourselves from. When you view your work as your “vocation” and not simply a paycheck, you’ll discover work that you won’t want to retire from.

We can seek meaningful work and move towards financial freedom incrementally, rather than seeing retirement at a certain age as a cliff we must jump off of, ready or not! And as the saying goes, “If you find something you love to do, you’ll never have to work a day in your life.” If this is something you’d like to explore further, we recommend exploring the information here at The Instinctive Life; we’ve referred dozens of our clients there, with raving reviews.

Remember, Retirement is only an option, and it’s not for everybody. Consider the word “Retirement.” It literally means, “To take out of service.” Whoa! Perhaps it is no coincidence that one study demonstrated that that those who retired at 65 were 89% more likely to live another ten years than those who retired a decade earlier. Everybody wants to feel useful, needed, and appreciated, and work – as well as other forms of service – can help to provide that.

My father retired from being a school principal in his mid-sixties. And even though he lives on a farm in Oregon, he was bored. Mentally and psychologically, he missed working with the kids and the teachers. When inflation and the 2008 financial crash impacted his pension, he could have simply tightened his belt strap a bit and continued his retirement. Instead, he said “Yes” when a local charter school asked him to come and help when they encountered problems with their current principal. (As industrialist Henry J. Kaiser observed, “Problems are opportunities in work clothes.”)

He helped the school solve their current mess, and then he said “Yes” to becoming their part-time principal! He just loves it. It not only provides him with a little extra income, which serves his own financial independence, but it lets him serve. He’s so much happier and “alive” with his new part-time job!

We encourage our clients to consider working longer (even if it’s part-time or volunteer work), but also to take vacations and long weekends. We shouldn’t have to feel we have to choose between “work now” and “fun later.” We can embrace both as a part of a fulfilling, joyful, sustainable life.

Whether your goal is travelling the world financially free, or reaching financial independence a step at a time while continuing to work, there are specific strategies that work better than others. In our next post, we’ll examine several common mistakes, and discuss ways to move you towards financial independence (including looking at the implications of renting vs. buying when you’re trying to save and invest!)

Until then, we’ve love to hear your thoughts and ideas about retirement…

How did these ideas strike you? Are you open to expanding your definition of retirement? Do you see yourself wanting to work beyond the age of 65, or even retire to start a new part-time career? We’d love to have your comments below.

Would you like to keep in touch? Follow me – Kim Butler of Partners for Prosperity, Inc. – on Twitter! 

Posted in MULTIPLY | Leave a comment

Financial Independence and The Pursuit of Happiness

Posted on July 1, 2011 by Kim Butler

“An attitude to life which seeks fulfillment in the single-minded pursuit of wealth – in short, materialism – does not fit into this world, because it contains within itself no limiting principle, while the environment in which it is placed is strictly limited.”- Charles Edwards

As we head into this long holiday weekend, we wanted to leave you with a Fourth of July contemplation about financial independence and one of the inalienable rights, according to The Declaration of Independence, the pursuit of happiness.

Happiness is something assumed by our forefathers to be worthy of pursuit, indeed, by all men. (We’ll assume women, too.) Merriam-Webster defines happiness as “a state of well-being and contentment: joy.”

But there is another, more “obsolete” definition offered: that of “good fortune: prosperity.” For our founding fathers, the pursuit of happiness was not simply an emotional state, but the ability to seek one’s own financial independence and prosperity.

Today, money and happiness are still assumed to be closely linked. But are they? From lotteries to promotions to investments, we are constantly in pursuit of more money. And like the chicken and the egg, we’re not sure which came first – a lifestyle that requires ever-escalating financial means, or the money to fund the laptops, flatscreens, and tropical cruises we didn’t even know we needed a couple decades ago.

In 1957, American’s per person income was $8700, expressed in today’s dollars. Fifty years later, it is $20,000. We have twice as many cars and eat out 150% more often. “Luxuries” such as dishwashers, clothes dryers and cars with air conditioning are now considered the norm.

So, we have more economic power, and more “stuff.” Are we happier? David G. Myers, author of The Pursuit of Happiness: Who is Happy, and Why, asserts that we are not.

Since 1957, the number of Americans who say they are “very happy” has declined from 35 to 32 percent. Meanwhile, the divorce rate has doubled, the teen suicide rate has nearly tripled, the violent crime rate has nearly quadrupled (even after the recent decline), and more people than ever (especially teens and young adults) are depressed.

Myers calls this soaring wealth and shrinking spirit “the American paradox.”

More than ever, we have big houses and broken homes, high incomes and low morale, secured rights and diminished civility. We excel at making a living but often fail at making a life. We celebrate our prosperity but yearn for purpose. We cherish our freedoms but long for connection. In an age of plenty, we feel spiritual hunger.

Apparently, life is in the living, not in the buying. But how did we get here? As we examine why our 21st century lifestyles have failed to escalate our joy along with our materialism, we cannot underestimate the affect of being bombarded with never-ending advertising.

The average American encounters between 3500 and 5,000 daily marketing messages, a number that has essentially tripled since the 1970’s. We’re suffering from “Affluenza,” a never-ending escalation of lifestyle, the need for more money, and an advertising machine whose sole purpose is to make us dissatisfied enough to keep buying more than what we have.

Despite our race for “more,” researchers have found that the link between more money and greater levels of happiness is weak, only raising happiness significantly in low income brackets where people struggle to make basic ends meet. Even Forbes’ 100 wealthiest Americans were surveyed to be only slightly happier than the average American. As Maslow’s hierarchy explains, once we have our basic needs covered (food, clothing, shelter, safety), our attention turns towards things like connection, acceptance, love, self-esteem, and personal growth.

“There are certain things that are fundamental to human fulfillment. The essence of these needs is captured in the phrase ‘to live, to love, to learn, to leave a legacy.’”– Steven R. Covey

If we are yearning for greater levels of happiness and fulfillment, neither money nor “things” will suffice. What then, will? The solution is to listen… listen carefully to your soul, you’ll hear what it’s calling for. Are you yearning, craving for…

  • Another pair of shoes?
  • Happy hour drinks and appetizers?
  • The latest electronic gadget?
  • A nicer, newer car?
  • A bigger house?

In the marketing din, our lists of all the things we desire but don’t have grow so long that we forget to listen to that voice within for clues of the things we really want.

When we close the catalogs and tune into our interior world, sometimes we discover that what we really wanted wasn’t on our shopping list after all. What we really wanted was…

  • A day without our cell phone. (You know, they have “off” buttons. I dare you!)
  • A long walk in the woods or on a beach.
  • The smile of a long-lost friend we’ve been “meaning” to see.
  • The joy of dusting off our old paintbrushes, music instrument, or roller skates to see if we’ve “still got it.”
  • Quality time with the family we so often rush past.

Managing our assets wisely gives us more money, and with that, more options and choices. And as many financially independent people will attest, by-passing the need to have “newer-bigger-better” enables us to save more and accelerate our wealth. But there is no requirement for us to live any particular lifestyle to keep up with the hypothetical Joneses.

Financial independence gives us nothing more than choices, options. Money can be used to dig a well in Africa or purchase a private jet. And as research in The Millionaire Next Door suggests, the real value of financial independence isn’t in  consumerism, but in the freedom to do the things that the self-made wealthy love to do the most – spend time with friends and loved ones, attend their children’s and grandchildren’s sporting events, and take pictures of the people and experiences that are important to them.

We at Partners for Prosperity, Inc. wish you a Happy, Fulfilled Fourth of July Holiday. Relish the time with your family. Treasure your loved ones. Choose wisely how you spend the minutes of each day, because your life is comprised of such moments.

We always welcome your questions and comments.  Please let us know what’s on your mind!

July is Freedom and Independence month! We’re excited to tackle topics on our Partners for Prosperity blog that relate to your financial independence such as:

  • Bottom-line advice on managing your assets for financial independence
  • Financial independence vs. “Retirement”
  • Freedom from financial stress and debt
  • How to break free of banks using whole life insurance (and why you want to – we’ll examine if your money is really safe…), and
  • Alternative investment strategies that could free you from the stock market.

If you don’t want to miss our updates, sign up for our Prosperity Pack! You’ll receive bi-weekly articles, plus a Podcast and Summary Sheet for Partners for Prosperity, Inc’s 7 Principles of Prosperity™, a special Audio Report of Robert Kiyosaki and Kim Butler on “Creating Your Prosperity” and more.

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Managing Assets for Maximization with the 7 Principles of Prosperity

Posted on June 28, 2011 by Kim Butler

7 Principles of Prosperity“Principle:
A basic truth, law, or assumption.
A fixed or predetermined policy or mode of action.”
- American Heritage Dictionary

In a recent survey, our readers expressed an interest in nuts-and-bolts advice. We’ve also been exploring Partners for Prosperity, Inc.’s 7 Principles of Prosperity™. Today, we want to bring it all together by offering a summary of the principles, along with specific action steps for managing your assets to accelerate wealth-building.

Each principle is summarized below, along with an understanding of the problem it solves, and several action steps you can take to put it into practice. To find out more about any of the seven principles, just click on the capitalized word in each principle.

Prosperity Principle #1: THINK from a Prosperous Mindset.

The Problem: When we see “scarcity” as the basic truth of our world, we operate from a poverty mindset that leads us to poor financial habits and decisions.

The Principle: Our ultimate results will come from our thoughts, our beliefs, and our consciousness about money.

Action Steps:

  • Work on your personal development and mindset – YOU really are your most valuable asset, and your thoughts determine your results!
  • Don’t hoard money, use it! Hoarding money comes from a scarcity mentality, not a prosperity mindset.
  • See prosperity as more than just money. Thinking holistically and living in gratitude is important at all times, but it’s critical when cash flow or assets are impacted by job losses or crisis. Your finances will recover much more quickly if you continue to think from prosperity and abundance.

Prosperity Principle #2: SEE the Big Picture of Your Personal Economy.

The Problem: Sometimes we try to do the “wrong” things in the “best way” when we’re not looking at the whole picture! For instance, we compare interest rates or quotes on car loans, life insurance or savings rates at banks, without first asking how a car loan, a certain type of insurance, or a CD affects the rest of our personal economy.

The Principle: We must see and consider our whole economic picture and how the elements affect each other. We have to look at the forest, not simply the trees.

Action Steps:

  • Understand that everything is related and connected in your personal financial “ecology.”
  • Don’t look at the rates and impact of any individual debt, investment, or even “purchase with cash” strategy without considering how the puzzle pieces of your financial puzzle fit together.
  • Ask an advisor to help you run the numbers on the impact a financial decision will have on your overall prosperity.
  • See the big picture of how the remaining principles can work together to create “out-of the-box” strategies, such as buying a house to get a boat!

Prosperity Principle #3: MEASURE Your Opportunity Costs.

The Problem: We’re not trained to consider the cost of our money in financial equations. Nelson Nash said it well in Becoming Your Own Banker: “You finance everything you buy. You either pay interest to someone else or you give up the interest you could have earned otherwise.”

The Principle: We must measure and consider opportunity costs in all financial decisions.

Action Steps:

  • Ask an advisor to help you understand the hidden costs of saving to buy cars and similar purchases with cash.
  • Measure the real costs of paying down your mortgage early to “save on interest” by considering opportunity costs.
  • Consider the opportunity costs of term insurance payments. Utilize permanent life insurance as much as possible to ensure that your premiums are not wasted.
  • You may even want to consider the “opportunity costs” of a private college education to both parents and children. Many savvy families are finding ways to spend less on education.

Prosperity Principle #4: Focus on Cash FLOW, Not Net Worth.

The Problem: Most financial planning focuses on future net worth, but does little to facilitate cash flow in the meantime.

The Principle: Dollars should be flowing both in and out of our investments and personal economy.

Action steps:

  • Don’t put your money in qualified plans such as 401k’s and other retirement plans where the money is “locked up” for long periods of time.
  • Choose investments where dollars can flow both in and out, or where the returns are realized in months or years, not decades.
  • Don’t reinvest your dividends – use the money in other ways.
  • Consider ways to generate multiple streams of income and increase your savings.

Prosperity Principle #5: Keep Your Money under your CONTROL

The Problem: We lose control of their assets when dollars are put under institutional or governmental control.

The Principle: We want to keep the decision-making power over our dollars whenever possible.

Action steps:

  • Don’t lose your profits to management fees.
  • Keep your money out of qualified plans such as 401k’s, 403b’s, traditional IRA’s, and 529 plans, except in cases where accepting an employer match may make sense.
  • Don’t escalate mortgage payments to pay down extra principle. (We’ll look at this in more detail in a future post – it may seem counter-intuitive, but the calculators don’t lie!)

Prosperity Principle #6: MOVE Your Money Through, Not “To” Your Assets

The Problem: Money stagnates when it is “locked up” to accumulate and cannot move. Wealth-building slows.

The Principle: Just as consumer spending increases wealth as it circulates money through the national economy, likewise we want to circulate dollars through our personal economies. The movement of dollars increases the velocity of money.

Action Steps:

  • Move your money through whole life insurance, then utilize the policy to generate cash for other investments and purchases.
  • Use investments such as bridge loans and investment real estate rather than qualified retirement plans where money cannot be moved and re-purposed.

Prosperity Principle #7: MULTIPLY Your Money by Getting it to Multi-Task

The Problem: Typical Financial Planning teaches us to compartmentalize our money into different accounts for different purposes – one for retirement, another for emergency funds, another still for education… but that approach in inflexible, unrealistic, and ultimately stunts the growth of our wealth.

The Principle: We can multiply the potential uses and jobs of each dollar. Furthermore, we can use literally “multiply” our dollars themselves through leverage or collateralization.

Action steps:

  • Treat your assets like a smartphone, using your dollars for multiple purposes.
  • Utilize the power of leverage, for instance, using life insurance or real estate as collateral.

Summary: By looking at our dollars and our financial decisions through the lens of the 7 Principles of Prosperity™, we can see how to

  • maximize our dollars efficiently and effectively
  • increase our cash flow sooner rather than waiting for “retirement”
  • increase our net worth steadily and safely, and• move ourselves towards financial independence.

Get our Prosperity Pack – free!  You’ll receive a Summary Sheet of Partners for Prosperity, Inc’s 7 Principles of Prosperity™, a Podcast explaining the Principles, a special Audio Report of Robert Kiyosaki and Kim Butler on “Creating Your Prosperity” and more. Just click here to get yours.

Posted in CONTROL, FLOW, MEASURE, MOVE, MULTIPLY, SEE, THINK | Tagged , , | Leave a comment

Manage Your Assets like a SmartPhone to Multiply Your Money

Posted on June 23, 2011 by Kim Butler

“Be fruitful and multiply.” – Genesis 1:28.

The last of our 7 Principles of Prosperity is MULTIPLY. Of course, we’d like our dollars to multiply, but exactly how do you manage your assets to do that? In addition to following our other Prosperity Principles, we want to multiply the ways we use each dollar. You might say the secret is getting your money to “multi-task.”

Think of your dollars like a smartphone. For many decades, phones were only used to make phone calls. They did one job. Today, a smartphone is a multi-tasking device (such as an iPhone) that acts as

  • a phone
  • a camera
  • a mini-computer with internet access
  • an address book
  • a calculator
  • a calendar
  • a GPS mapping and guidance system
  • a video player
  • a recording device
  • an alarm clock and stopwatch
  • a music library
  • an instrument that sends and receives texts and emails

And that list is just for starters!

You can still go out and buy a separate phone, camera, palm pilot, pager, GPS system, stopwatch, alarm clock, iPod, mini-laptop, etc. But that wouldn’t be efficient if you were only trying to duplicate the tasks that your smartphone performs. You would waste money and energy, separating tasks and duplicating efforts, rather than multiplying the uses of one smart-phone.

What does this mean for your prosperity? Managing your assets separately like 10 different devices wastes money and energy. Having a 529 for savings, a 401k and IRA for retirement, savings accounts and certificates of deposit for your emergency fund slows down your prosperity.

You want your dollars to be flexible and to do as many jobs as possible. You want your money to be as smart as your phone!

Let’s see some real-life examples of how this works. Here are the multiple jobs your dollars can do in whole life insurance:

  • pay for premiums
  • build cash value
  • waiver of premium
  • guarantee a death benefit
  • be used for leverage (such as borrowing against your cash value from your insurance company or a bank)
  • increase the death benefit over time
  • the capability for paid up additions.

Meanwhile, the velocity of money is increasing, because money can “move” through the policy, and leveraging your policy gives you endless options for further cash flow.

Now, let’s look at how money does multiple jobs in investment real estate.  When you purchase investment real estate, you can immediately have your dollars doing up to 7 jobs:

  • purchasing and improving the property itself
  • mortgage payments
  • appreciation
  • depreciation (a tax advantage which offsets cash flow)
  • leverage (the ability to multiply dollars by borrowing against the property or using it as collateral)
  • disposition (the ability to sell or give property away in a tax-favored way)
  • and cash flow

Finally, let’s see how to move and multiply your money combining both whole life insurance and investment real estate:

A. Use life insurance to buy property. If you have been steadily storing money in your whole life policy, you can borrow against your cash value for a down payment of a piece of investment real estate. (First – make sure the property gives you adequate cash flow without too much overhead! We can help you determine that…)

B. Use cash flow to fund a policy. As rents rise, the loan for the down payment shrinks, and your mortgage stays the same, you’ll find yourself with increased cash flow on your property. At this point, you might want to consider a way to store some of that cash flow in a vehicle where it can grow tax-free such as… in a whole life policy!

Many wealthy people have multiple real estate investments and multiple smaller life insurance policies to allow themselves greater flexibility and many options.And while real estate and insurance aren’t the only options, they are excellent vehicles that follow our 7 Principles of Prosperity and help you accelerate your wealth.

Move and manage your assets with multi-tasking in mind… and your dollars will MULTIPLY and be fruitful!

Get our Prosperity Pack – free!  You’ll receive a Summary Sheet of Partners for Prosperity, Inc’s 7 Principles of Prosperity™, a Podcast explaining the Principles, a special Audio Report of Robert Kiyosaki and Kim Butler on “Creating Your Prosperity” and more. Just click here to get yours.

Questions and comments? We’d love to hear! Just enter your question or comment below.

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Move Your Money to Accelerate Prosperity

Posted on June 21, 2011 by Kim Butler

“Move it or lose it!” – Unknown.

Cash flow may be King, but cash accumulation can actually slow down your prosperity. Your money must MOVE to accelerate prosperity – our 6th Prosperity Principle.

What do we mean by “move”? The movement of money is the opposite of what is often recommended, which is to accumulate money in separate accounts earmarked for particular purposes. You know the drill: save for retirement in your 401k and/or IRA, save for college education in a 529, save your emergency fund in a money market account or a savings account.

When we move money, we don’t just move it “to” investment vehicles; we move it “through” them. Another way to look at this is that you’re getting one dollar to do more than one job. This is an abstract concept, so let’s look at a couple of examples that demonstrate this principle.

1. Buy a house to get a boat.

In this example, let’s say that a middle-aged couple has been saving up to buy a boat to enjoy. And we’re not talking about a rowboat – no, they want a boat they can vacation on, sleep on… perhaps a beautifully restored sailboat, or a newer Regal Express Cruiser.

Let’s say they find a boat they want for $100k, precisely the amount of cash they have. They can now take the $100k they’ve saved and buy the boat. Done deal. Or… they could take the $100k and buy a rental home, and use the cash flow from the rental house to make loan payments on the boat!

Why would they do it this way? By moving money “through” the rental property instead of simply “to” the boat, they have now doubled their assets. They have a rental house worth $100k plus a boat worth $100k. Best yet, as the boat depreciates over time, the rental home (in most markets!) will appreciate and therefore help to offset any loss of value in the boat.

Likewise, Robert Kiyosaki says that although he loves sports cars, he won’t buy a sports car unless he first acquires assets that support it. This is a brilliant way to “splurge.”

When we allow our assets to support our lifestyle; our cash flow pays for our sports car, boat, vacation, or a Harley Davidson. Then, if we decide to sell the boat or vehicle later (or not take a big vacation next year), we still have the asset that provided us with the cash flow in the first place!

2. Use your insurance policy to further your education.

In a previous post, we talked about ways to use your insurance policy to get cash when you need it. And in these days of high unemployment and volatile markets, many Americans have needed a cash injection or two! Some people have been out of full-time work for years, and more than a few have returned to school to update their credentials or obtain new degrees.

Unfortunately, many students are leaving college or graduate school saddled with literally hundreds of thousands of dollars in education loans. For those who have been putting consistently putting money in their whole life policies, different options are available.

One option may be to simply use your cash value for books and tuition. For those unsure of their ability to pay back a loan in a timely manner, this may be a good option, as no payments will be required.  Another option that allows the returning student to keep control of their cash value and continue to use the equity they’ve built is to borrow money from the insurance company (or a bank), using the cash value as collateral.

How is this different from simply taking out a student loan? By using their whole life policy and flowing money “through” that vehicle, the cash value keeps growing – tax free! In this way, the accumulating cash value offsets most of the cost of the loan.

This strategy also allows the policyholder to maintain cash flow and control. For instance, it may be possible to use the dividends from the policy to pay for premiums, thus, lowering the needed cash outlay while returning to school full or part-time.

We’ve seen in these examples how moving money through – and not just to your assets can keep your geese laying those golden eggs, while you enjoy your time on a boat or build your professional credentials. The movement of money allows you to build prosperity and abundance!

Get our Prosperity Pack – free!  You’ll receive a Summary Sheet of Partners for Prosperity, Inc’s 7 Principles of Prosperity™, a Podcast explaining the Principles, a special Audio Report of Robert Kiyosaki and Kim Butler on “Creating Your Prosperity” and more. Just click here to get yours.

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Are You Losing Control of Your Assets?

Posted on June 17, 2011 by Kim Butler

“He who has the gold makes the rules.” – Unknown.

As we discussed in our prior post on cash flow, a common pitfall of investors is to “lock up” their money in a 401k, IRA, or other one-way street where money gets trapped for many years. In order to build true prosperity, you’ll want to follow the 5th Principle of Prosperity and keep your assets under your Control.

How do we “lose control” of our assets? Simple. We put the government or other institutions in charge of our money. People do it all the time. Well-meaning investors lose control of money by putting it where it cannot be accessed, where it cannot be used as they please, or where it is in an unpredictable environment with no guarantee that it won’t shrink or vanish. Some popular ways to lose control:

A qualified retirement plan such as a 401k, 403b, 529 or an IRA puts the government (and whoever manages your employers’ plans) in charge of your money. Sure, you get a tax-break on the front end, but is it worth it? That may depend on factors such as your employer’s contribution, if applicable.

In spite of the reputation of the 401k as a mainstay of a personal finances, it boasts many disadvantages, as Garrett Gunderson details in his book, Killing Sacred Cows. The downsides are too often ignored, such as penalties for early withdrawal, restrictions on how the money is used and invested, and limitations on how much can be withdrawn and when. To compound the problem further, 401k’s are often used to purchase investment vehicles that cause further loss of control.

Additionally, investors should be aware that these sacred cows might not be so sacred. A proposal has been presented to Congress to further tax and control 401k’s. Though the bill did not pass, it may have opened a dangerous door. Recently, the media rumored that the US Treasury Department and Department of Labor were considering mandating qualified plan savers to invest a portion of their funds in government-approved investments backed by government bonds.

Stocks and Mutual Funds are another common way investors lose control. Perhaps nothing better demonstrated this recently than the market crash in the fall of 2008, when many 401k’s became “201k’s”. During the painful, drama-filled slide downwards, investors either stood by and watched helplessly as their account values plummeted, or worse, sold near the bottom, fearing further catastrophic losses.

Few analysts predicted that crash, and most investors and stock brokers alike experienced a profound lack of control. When your advisors and experts can’t see a disaster coming, how is the average investor supposed to do any better? The fact is, they can’t.

Stocks and mutual funds carry a risk factor that we at P4P find dangerous. The market and the economy are affected by too many factors that are simply out of our control. We don’t recommend gambling as an investment strategy, therefore, we don’t promote stocks and mutual funds as appropriate investments.

Pre-paying mortgages is another way that well-meaning investors lose control of their assets. Author of Missed Fortune and Missed Fortune 101, Douglas Andrew details how pre-paying a mortgage can actually leave you more vulnerable to loss and foreclosure while slowing the growth of your wealth overall.

When you accelerate mortgage payments, you give your lender extra cash that will earn no rate of return and that you cannot get back in times of emergency, unemployment, or grand opportunity. As many homeowners have recently experienced, if you suddenly become unable to make your payments, you’ll wish you had that extra money back in your hands. It is much safer to grow a “side account” which is a liquid investment that will remain under your control.

Additionally, paying off your home equity line of credit early does not guarantee that it will be available for use at a later date. We have seen lenders close accounts even with responsible borrowers as property values have fallen and banks have scrambled to better protect themselves.

The solution? To get a “CLUE” with your money!

Control – Keep the control yourself rather than delegating your money to institutions, the government, and an uncontrollable economy. One way to keep control is to put your money in predictable investment vehicles (such as bridge loans) with stable rates of return.

Liquidity – You want at least some of your assets liquid and accessible to you. The first place to start with liquidity is an emergency fund, but you don’t want to stop there! You’ll want to continue to put cash into vehicles that allow you to access your money when you need it, not 20 years from now.

Use – Do you get the use of your money, or does the bank? Granted, there is often a “funding” stage before the cash flow will start coming back your way again, but you do not want to lock up your money for decades out of your own reach.

Equity –. You want your investments to build equity that you can leverage, such as real state and whole life insurance. In this way, you can keep the asset (as opposed to selling it) while controlling its value.

If you follow the “CLUE” guidelines, you will avoid the major common pitfalls and you’ll stay on the Path to Prosperity.

Get our Prosperity Pack – free!  You’ll receive a Summary Sheet of Partners for Prosperity, Inc’s 7 Principles of Prosperity™, a Podcast explaining the Principles, a special Audio Report of Robert Kiyosaki and Kim Butler on “Creating Your Prosperity” and more. Just click here to get yours.

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Focus on Cash Flow to Build Your Economic Prosperity

Posted on June 14, 2011 by Kim Butler

“Cash is King.” – Anonymous

The fourth Principle of Prosperity is FLOW. We teach our clients to focus on cash flow, not simply (or even primarily) net worth.

In a “typical” financial planning environment, the goal is to build net worth vs. cash flow. Net worth is built through various means until hopefully, one day, there is enough net worth to live off the interest or investment proceeds in a phase of life commonly referred to as “retirement.” First, accumulation, then, disbursement.

In our philosophy of Prosperity Economics™, the focus is on building a sustainable personal economy that will provide the financial abundance you need to live the life you want. This goal is reached sooner, not later, and a little at a time, not all at once on some distant future date.

Net worth will also be built with this model, but it is not the guiding factor. Instead, decisions are made according to cash flow. Here are some do’s and don’ts to focus on cash flow:

1. DON’T send your money down a one-way street.
401k’s, 403b’s, IRA’s, and 529 funds all share one undesirable characteristic: They are built for accumulation, not cash flow. Money flows in, but unless you want to pay stiff penalties and (often) taxes, it’s not easy or cheap to get the money back out.

2. DO choose investments where cash can flow in both directions.

  • Bridge Loans.
    Investing in bridge loans brings favorable interest rates to the investor who doesn’t want their money tied up for years (or decades) at a time. The money is typically loaned for 6 months or less, and brings low double-digit (annualized) returns. Additionally, the bridge loan is secured against freshly appraised real estate. 

    We explored bridge loans in a bit more detail in our popular post on “Investing Outside of the Box: Alternative Investments,” and we’ll be covering them in more depth in future posts.

  • Rental Real Estate.
    Cash-flowing rental real estate has been a mainstay of successful investors for centuries. According to Stanley and Danko in The Millionaire Next Door, about 2/3 of millionaires and multi-millionaires own investment real estate (even if it is not their primary source of income or wealth). 

    Real estate is also a key component of a healthy, truly diversified portfolio, according to “Rich Dad” financial guru Robert Kiyosaki. And for good reason: you can buy real estate using mostly your lender’s and your tenants’ money! You can also refinance and borrow against the property, typically with no income or capital gains taxes. Thus, rental properties can provide for cash flow in additional ways than just rents.

  • Whole Life Insurance.
    As discussed in this article, there are many ways that a life insurance policy can be used for cash flow or cash injections when needed. Not exactly an “investment” in the traditional sense, a whole life policy is a great place to store cash where it can grow (typically tax-free) and give you a lot of flexibility in your financial options.

3. DON’T reinvest your dividends.
If you receive dividends from investments, mutual funds, or savings vehicles such as CD’s or money market funds, don’t simply dump the earnings back into the investment. Put your dividends to use doing something else, such as paying an insurance premium, a bill, or purchasing something for you.

We recommend this for two reasons: First, it makes financial sense, particularly when the investments and dividends grow to sizeable amounts. Over time, reinvesting dividends will have unfavorable tax consequences. And secondly, we want our clients to focus on cash flow because it helps them think from a prosperous mindset. Using the cash flow from dividends is a simple way to receive cash flow, even for investors just starting out.

4. DO consider a side business or additional streams of income.
Increasing your income is an obvious but often overlooked way to increase your cash flow. Even if you have a good steady income, you shouldn’t overlook the possibilities of “supplementing” what you already have. And if you find yourself temporarily unemployed or under-employed, increasing your income could really help fill the gaps!

  • Get paid to enjoy your hobby.
    Perhaps it’s time to turn playing music or tinkering with off-road vehicles into a side-business. See where you can monetize what you’re already doing.

    •  

  • Get paid for what you know.
    Are you knowledgeable about something that others want to know about? Whether you’re a software expert or you’ve opened a chain of successful restaurants, you can offer yourself as a consultant to others.

    •  

  • Get paid to refer services or products.
    Network marketing (or direct selling) is a way that millions of people have added small (and sometimes large) extra streams of income to their households. Find a product or service you believe in and start sharing!

5. DO save consistently.
Cash flow typically begins with the “out” flow. Money flows “out” of our purses and wallets into investment vehicles, real estate, insurance, and savings. It is this out-flow that allows for more cash to flow “in” later. Just as giving is the flip side of the coin from receiving, so saving is an essential counterpart to cash flow.

But DON’T wait for age 65, 70 or a gold watch to allow cash to flow back in! You can build cash flow now by making wise financial decisions and practicing the 7 Principles of Prosperity™.

Get our Prosperity Pack – free!  You’ll receive a Summary Sheet of Partners for Prosperity, Inc’s 7 Principles of Prosperity™, a Podcast explaining the Principles, a special Audio Report of Robert Kiyosaki and Kim Butler on “Creating Your Prosperity” and more. Just click here to get yours.

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