The debate of purchasing Term life insurance vs Permanent life insurance has been going on for years. Many would suggest to not mix insurance with investments and simply go with Term insurance, however its not one-size-fits-all solution and in most cases careful planning for long term needs leads to having a combination of Term and Whole life insurance.
What is Term Life Insurance ?
Term life insurance is the temporary, cheapest, simplest type of life insurance. Term life insurance provides coverage for only certain number of years for example 5, 10, 15, 20, 30. It guarantees fixed death benefit to the beneficiaries if you die before the end of the term, after the end of the term insurance terminates. You can choose for your premium to increase each year or to remain at the same amount for a fixed number of years.
As term insurance is the cheapest life insurance, it could be used to purchase high coverage at small premium especially when your family is young and growing and dependent on you to provide for them.
Biggest drawback of term insurance is that it ends after the term you purchased it for. As you grow older the chances of developing health issues increase and hence the premium to purchase insurance would be much higher during later years of your life.
What is Whole Life Insurance ?
Whole life insurance is a type of permanent life insurance. Premiums are much higher than term premiums primarily because part of the money is put into an investment or a savings program. Whole life insurance builds cash value by generating a return on the amount that is put into savings program. The longer the policy has been in force, the higher the cash value, as more money has been paid in and the cash value has earned interest and dividends.
Some insurance companies let you select how long you pay premiums, this basically allows you to coordinate the number of years you want to pay the premiums with your personal financial goals and timetable. For example you could plan it such that once your kids starts college you want to stop paying insurance premiums and direct that amount to pay for college tuition (The whole life premiums would be higher as you decrease the number of years you want to pay premium).
Does it make sense to purchase Whole Life Insurance?
[ continue reading... ]
Traditionally Americans have relied on Social Security to cover their expenses during retirement however as the fate of Social Security becomes uncertain many Americans have started to shoulder the responsibility of funding their own retirement. Many rely increasingly on their 401(k) retirement plans to provide the means to meet their income goals during retirement.
What is a 401(k) plan?
401(K) plans are tax-deferred retirement savings plans for employees. The employer sets them up and each company has a slightly different 401(K). They are part of a family of retirement plans known as “defined contribution” plans – the amount contributed is defined by the employer or the employee – for 2011 each employee can contribute up to $16,500 (individuals aged 50 and older could contribute additional $5,500 a year). There are several advantages to sock away money into 401(k) plan – primary ones are
- Tax deferral – A traditional 401(k) plan allows you to defer taxes on the portion of your salary contributed to the plan. Your taxable income is reduced by the amount you contribute, which in turn lowers your tax burden for the year.
- Compounding – Earnings generated produce a compound effect on your return on investments. As the earnings are also tax deferred, these earnings would generate more earnings over the years
- Employer match – In addition to its favorable tax treatment, one of the biggest advantages of a 401(k) plan is that employers may match part or all of the contributions you make to your plan. Typically, an employer will match a portion of your contributions, for example, 100% of your first 6%.
Like any good planner you have been contributing maximum to 401(k) plan and taking advantage of employer match, what else can you do to grow your wealth? The next logical step is to consider a Roth IRA.
[ continue reading... ]
It’s time again, let’s reflect upon the year gone by and plan for the year ahead. Federal Reserve recently published latest numbers on consumer credit; it’s again on the rise after a short blip during 2008 pullback.
Consumer borrowing has been rising for last 40 years
It has been increasing for last 40 years, while the standard of (material) living has improved, American households’ need to borrow money also increased to either buy luxuries or going into debt was the only way to afford basic needs due to flat wages. In either case it’s a viscous circle – amount left after paying interest on borrowed money is not sufficient to meet the needs so you borrow more.
The only way to break this viscous circle of debt and achieve financial freedom is to understand your spending patterns. Create a strategy to spend less than you earn so that you can accelerate the process of getting out of debt by paying your creditors sooner – let’s call it defensive strategy. Of course you can play offensive and increase your earnings, however no matter how much you earn if you don’t play defensive sooner or later you end up joining viscous circle.
“Beware of the little expenses; a small leak will sink a great ship.” – Benjamin Franklin
First things first – Do you know how much your family spends each year on various categories such as Food, Clothing, Interest payments on borrowed money ?
[ continue reading... ]
