Cash Value Life Insurance

So one of the reasons I decided that financial education was so important is because I see a definite need across America.

About ten years ago, I was a student. I was one of the few students who did not have a computer or laptop to work with while going through school. One day, I saw some people selling laptops on the street, for a discounted price. I had both my oldest son and my oldest daughter with me at the time, so I was in a little bit of a rush. However, I decided to get $300 from the bank and purchase a laptop. I got home only to find out that the laptop I purchased was really a box full of newspaper! So I had been had. Most people would be upset and for a while I was disappointed. However, in the end I looked it as a learning experience to help me make safer decisions in the future. Shaping a winner's mindset versus a loser's mindset is actually a part of having a strong financial system, but that is a whole other blog in itself.

A few years ago, people were signing up for 0% down home mortgages. They were told that they would pay a certain amount for a few years and then their payments would spike up in a few years. For some reason people are often unrealistic about their finances. They think that in a few years they will be making more, so they will be able to pay more. Or they think this deal or that deal will pan out, so they will get a certain amount of money. That may be true if you "pay yourself first", but most people just spend more when they get a pay raise. When making financial decisions, one should expect the same income in the future as they have today, in some cases planning to make less, or prepare for the possibility of making less. This is why one should put 20% down. This is a convincing argument that one can actually make payments on the house. In addition, this allows for some options during hard times in the future. People who put a little bit of thought into planning tend to be lucky. The reason is that they plan as if the value of the house will stay the same and that their payments will stay the same. Then, if the value increases or their payments can increase, they receive the icing on the cake, feeling lucky. During the subprime mortgage crisis, many people had been had. Hopefully, those people are looking at this as a reason to get educated and a way to turn this previous failure into a driving force for a future success.

All right. Starting with those stories, lets look at something out there today. I recently read a book over 100 pages, which was an awesome book and had some great information. There is reason I am not releasing the name of this book, because good information in the wrong hands is dangerous. This book talked about accumulating cash for retirement, protecting the principal of your investment, protecting the gains of a positive year, tax deferred growth, tax free access to cash accumulation, the age 59 1/2 rule, the age 70 rule and probate fees.

This book is a great selling tool if you sell cash value life insurance. As I was looking at various companies, I actually met two individuals who sold this combination of protection and investment. When I sat down with the first individual, it was very difficult to even find out what services this person provided. When you visit your doctor of financial planner, ask a lot of questions. Ask so many that you might be considered annoying. Why? Because no one else is going to ask or protect you and it may be the difference between life or death (financially).

The second person, laid out the policy and gave a lot of good information. This person even admitted that variable universal life policies were a bad investment.

Alright, so lets crack open, my analysis. There is probably a better analysis, but I want to just give some things to think about. Here are some details of the policy.

• The death benefit was $400,000
• The policy had a cash value
• The death benefit increased over time to always be more than the cash value
• The initial payments were about $5000/month for two years
• After two years, the payments were basically $12000/month
• A 7.82 interest rate was used to estimate the policy's growth

When I was first given this policy, I thought it was a solid deal. I then read the book mentioned above and thought it was really good. Then, I decided to actually look at the numbers. Here are the disadvantages I found.

• I could probably get a million dollar policy for $60/month
• The payments increase to 2.5 times in two years (subprime mortgage crisis)
• Most of my payment would go toward life insurance rather than growing at an 7.82 interest rate
• The increasing cost of insurance was hidden, covered by the 7.82 interest rate
• Policy termination due to hardship would yield a terrible result. For example, termination after 10 years would give 115,000 and payments would have totalled 106,000
• The IRS has limitations on cash to coverage ratios, meaning that the tax free access is severely limited

Companies love contracts because they mean cash flow. However, one should be wary of the contracts they get involved in. Brokers love cash value life insurance because it means big commisions for them. That is basically where all the money goes for overpriced life insurance. I decided to work with a company that only sells term life insurance, providing a moderate commission, but in certain cases an excellent product for the consumer.

After doing the analysis myself, I checkout out You Tube, to see what Suze Orman and Dave Ramsey had to say. Their advice was to buy term life insurance and invest the rest. They both have given out a lot of good information.

If you've bought some of this stuff, check out your own policy and do the numbers. Or shoot me an e-mail, give me the numbers and I'll give you my opinion. Some policies are definitely better than others.

The book I read actually enlightened me on something. Back in 2008, when everyone's 401(k) was dipping (I know a guy who had $300,000 drop to $175,000), mine was growing. I was not really sure why, but now I know. The theoretical concept was this. Imagine, you stick 100% of your money into a bond, which is a fairly safe investment (assume you will hold the bond for the entire term and ignore comparison to other investments if inflation and interest rise). Assume the bond yields 5% and you take 4% to purchase options. This investing strategy will yield a minimum of 1% per year but has the potential to make larger returns depending on how the options pan out. This concept was also hinted at in The Big Short, because options don't pan out often but when they do, their return is usually fairly large.

As always, I appreciate your feedback and support to start my venture as a financial planner. Based on some feedback I've already gotten, here is what you can do to support my cause:

1. If you believe in my cause, visit www.izuservices.com and donate $1. Thank you for those who have already donated. If you want to donate more than $1, see option 2 below. I ask for only $1 because I believe my mission has value but it helps to know others believe my mission has value.

2. Donate to SAGE. The UC Berkeley SAGE (Student Achievement Guided by Experience) is a self-funded experiential leadership program that provides education, professional development, mentoring and internships to UC Berkeley students who come from poverty and low income backgrounds. I serve on the Leadership Council for SAGE and want to help raise money for their cause. Visit sagescholars.berkeley.edu for more information.

3. Help me raise some startup money for my business. Spend ten minutes to check if you can save some money on your auto insurance. I believe in the concept of “expanding the pie”. Perhaps you can save some money, I can get a small referral bonus and we both win.

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