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Kindle Notes & Highlights
by
David Bach
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November 19 - December 27, 2018
Ideally, you want to purchase enough coverage to enable those you love to live comfortably should something happen to you.
1. Who relies on our income right now?
2. What does it cost those who depend on you to live for a year?
3. Are there any major debts that would need to be paid off or unexpected expenses you might incur?
4. Does either of you have a company policy?
My ballpark recommendation is that you take out a policy with a death benefit that totals somewhere between 6 and 20 times your annual spending needs. For instance, if it takes $50,000 a year in spendable income to cover all your obligations, you may want to consider a death benefit of between $300,000 and $1 million.
There are basically two types of life insurance—term insurance, which builds no cash value, and permanent insurance, which does.
Term insurance is very simple. You pay an insurance company a premium, and in return the insurance company promises to pay your beneficiary a death benefit when you die.
The main advantage of term life insurance is that it’s relatively inexpensive. Indeed, term insurance is the most inexpensive type of life insurance around.
Level Term Under a level term policy, both the death benefit and the premium remain the same for a period of time that you select when you first sign up. The period can range anywhere from 5 to 30 years. While this type of term insurance is initially more expensive than annual renewable term, it can actually turn out to be cheaper over the long run. For this reason, I usually recommend this type of term insurance to clients.
The most sensible deal is probably to sign up for a 20-year policy.
Whole Life Imagine paying for term insurance but adding a 50 percent surcharge to the cost of the annual premium and having some of that extra money put in a money-market account, where it can grow tax-deferred into a little nest egg for your old age. That’s what whole life is. It’s a term policy with a little cash-value basket added onto it.
Variable Universal Life (VUL) Insurance If you feel strongly about purchasing permanent insurance—which is to say, if you want life insurance that can also double as a retirement vehicle—you might consider a VUL policy or an IUL policy (covered next). With VUL you get a cash-value policy that allows you to control how the savings portion of your premium is invested.
the cash value of your policy can grow tax-deferred. That is, you can change investments, buying and selling funds as market conditions dictate, without having to pay taxes on any gains.
Indexed Universal Life (IUL) Insurance This is the biggest change in permanent insurance since this book was originally written. Often referred to as IUL or equity indexed universal life, this type of permanent life insurance takes a “hybrid” approach. Basically, you are able to get a guaranteed rate on your policy (a minimum fixed rate) and then an indexed account option. The best way to explain this in plain language is that you get the security of a universal policy with the potential growth of a variable policy linked to an index (for example, the S&P 500). The catch is that you don’t get
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Keep in mind that IUL and VUL are complicated insurance products that are often sold to the wrong people. At the very least, you shouldn’t even consider them if you’re not already fully utilizing a 401(k) plan, deductible IRA, or other tax-deferred retirement account.
SAFEGUARD NO. 5 Protect yourselves and your incomes with disability insurance.
What this means is that the greatest threat to your ability to finish rich may be the risk the two of you face of serious injury or illness! And the younger you are, the greater your risk actually is.
Here is a list of some of the larger firms that provide disability insurance. Again, talk to your insurance professional first if you work with one; he or she should be able to assist you. LifeHappens.org This nonprofit site (backed by insurance companies) provides additional educational materials on all forms of insurance including disability insurance. They have a nice section on disability insurance, and I like their simple-to-use calculators. Aflac (866) 632–4648 www.aflac.com Colonial Life (800) 325–4348 www.coloniallife.com Geico (800) 207–7847 www.geico.com Mutual of Omaha Insurance
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SAFEGUARD NO. 6 If either of you is in your sixties, it’s time to consider long-term care coverage.
I recommend looking for a five-year benefit with a six-month waiting period up front. What this means is that your policy will take longer to go into effect. Most LTC policies start paying off within 90 days after you enter a nursing facility or put in a claim for home care. By stretching that out a bit, you can bring down your premium costs quite nicely.
QUESTIONS TO ASK BEFORE YOU SIGN UP
There are five major services that rate insurance companies (A. M. Best, Standard & Poor’s, Moody’s, Duff & Phelps, and Weiss), and you shouldn’t buy a policy from any company that hasn’t earned a top grade from at least three of them.
Before you buy any LTC policy use Google to search and review the insurance rating. Also use Google to check for “complaints” about the company. I recommend purchasing LTC insurance through a professional independent insurance agent—let them do the work of explaining these policies and shopping for the best one for you. If you don’t have an agent, here are some websites to use as starting points: www.LTCtree.com, www.Prepsmart.com, and www.AALTCI.org
One of the greatest things I’ve learned in my life is that almost anything is possible if you just plan for it. As I explained earlier, the key to achieving your goals is to make them specific and measurable. You put them in writing and then you chart your progress toward them. This is as true for dreams as for anything else.
write up your own list of dreams first. Use the Dream Worksheet on the next page to list your top five dreams. Then get your partner to do the same thing. Once you’ve each finished your individual lists, get together and make a “we dream” list. The “we dream” list is what you should focus on. Nothing will solidify a marriage or a partnership faster than having a “dream plan” that you work on together, as a team.
In this exercise, write down the top five things that you want to do with your life that sound like “fun”—things you might not consider realistic but you would really like to do.
So now you know what your dreams are. Hopefully, the prospect of making them real has the two of you excited. The question now is, how are you going to pay for them? The answer is simple. You need to create a systematic investment plan devoted solely to funding your dreams. I call this process filling your dream basket.
you’re going to fund your dreams by committing to pay yourself an additional fixed percentage of your income that will go into your dream basket.
The key to making this work is to fund your dream basket on a regular basis. This is what is known in the investment industry as “systematic investing.” With a systematic investment plan, you commit to putting a certain dollar amount into a specific investment on a monthly or weekly—or sometimes even daily—basis.
HOW MUCH IS ENOUGH? The amount that you contribute to your dream basket is totally up to you. I suggest that you start by kicking in at least 3 percent of your after-tax income. That is, before you pay bills, sweep at least 3 percent of your take-home pay into your dream basket.
I’m going to suggest that you fund your dream basket by investing in mutual funds or exchange-traded mutual funds, which I will cover in greater detail in a few pages.
In Charles Schwab’s Guide to Financial Independence, he defines a mutual fund as an investment company that pools the money of many investors and buys various securities (such as stocks or bonds). Investors who own shares of the mutual fund thus automatically achieve the benefit of a diversified portfolio without having to buy individual investments themselves.
WHY INVESTING IN MUTUAL FUNDS MAKES SENSE
They are easy to invest in.
They offer instant diversification.
They offer professional money management.
They are cost-efficient.
They are liquid and easy to monitor.
They are boring.
FOR SHORT-TERM DREAMS (LESS THAN TWO YEARS)
In my opinion, there is only one sensible investment that meets these criteria: your money should go into a money-market account.
So what we call a “plain vanilla” money-market account—that is, one without any frills or features—may be all you need. A money-market account is a mutual fund that typically invests in very liquid, very safe, very short-term government securities.
These accounts are not only incredibly safe (to my knowledge, there has never been a money-market default), they are also quite stable.
What’s more, money-market accounts are liquid, which means you can pull your funds out at any time without ever having to pay a penalty fee.
FOR MID-TERM DREAMS (TWO TO FOUR YEARS)
if you’re looking for more of a return—and can handle a little more risk—you should consider what’s known as a balanced fund. Short-term bond funds invest in really short-term government bonds, typically Treasury bills with maturities ranging from six months to four years. These types of bond fund are very safe and relatively stable (meaning the price won’t fluctuate much).
Balanced funds are mutual funds that invest in both stocks and bonds. A typical balanced fund will have about 60 to 70 percent of its assets in stocks and the remainder in bonds (usually Treasuries). Because it’s so well diversified, this type of fund is less risky than a pure stock fund.
Typically, a balanced fund will generate about 75 percent of the returns you would get from a similar-sized investment in the stock market.
These are by far my favorite “starter” investment. These are also good for long-term investment dreams.
