How To Save More and Create Wealth Why Life Insurance Is The Best Place To Park Money
How to save more and create generational wealth using the power of life insurance. Saving money today can be difficult, especially since in recent years artificially low interest rates have punished savers. The economy has also taken a squeeze on income and ordinary people are saving less and being subjected to unnecessary risk. Thus, the lines have been blurred between saving and investing, making it difficult to determine the best place to park money.
Saving money and investing money are two entirely different things. They have different purposes, and can result in drastically different outcomes. Both are important in your financial strategy and to your bottom line, but before you begin your journey to creating wealth you should make sure you understand the differences between saving and investing.
Pigs versus Bulls, should you be saving or investing?
Saving Money
The concept of saving money has been around since the beginning of time, and there are many reasons to do so. A prudent person wants to have their money protected and growing, but that can be a delicate balance. So the question becomes, where is the best place to park your money?
Generally, the money we save should be safe from loss, so most are willing to accept less growth for protection. And, liquidity is important because you want to have access to your money in case of emergencies and opportunities.
How To Save
There are many theories on how to save and many reasons to save. The simplest of these is just is to put aside money for the future, and having access to capital for an emergency should be at the top of the list. Recent surveys have shown that many Americans live paycheck to paycheck, so if an emergency arises, often times credit is used to pay for the expense.
In my experience as a financial advisor I’ve seen just about every scenario when it comes to saving. It really doesn’t matter how much money someone earns, we all face the same financial problems. And, we all should should have money set aside for a rainy day, or an emergency fund. If you just think about the what ifs in life, there are plenty.
Reasons to Have an Emergency Fund Medical Automobile Home Repairs Storms School Financial Etc…
There is really no real reason to invest your money before you have an adequate amount of money saved for emergencies. Of course there are differing opinions as to how much money we should have saved in an emergency fund, but in my humble opinion it should be at least 50% of your annual income.
Opportunity Fund
Another, not so obvious reason to save and have access to capital is for opportunities. All of us have come across opportunities that had the potential for profits, but for whatever reason we did not have access to capital at the time. These opportunities may come in the form of investments, but that doesn’t have to mean the stock market. Once you have your emergency fund and your income is protected, then you may want to consider investing.
Investing Money
People invest money for many reasons, primarily it is the hope for a gain. In most cases we invest in assets that can produce a return on our investment. These can be paper assets such as stocks or mutual funds or they can be hard assets like real estate or physical gold. Along with this probability of a return is the probability of loss, so there is risk involved.
The type of investment one makes typically depends on their experience and their comfort level with volatility. The majority of Americans invest in mutual funds, typically through their IRA or 401(k) at work. Unfortunately, people do not always understand exactly what they are investing in or the risks involved. Furthermore, there are so many options and so much uncertainty that most people just turn their money over to financial institutions with little to no knowledge of the underlying investment.
There are many ways to invest money and there should be a balance through diversification. True diversification isn’t owning multiple individual stocks in a mutual fund, it means owning multiple asset classes.
Types of Investments Stocks and Bonds Mutual Funds Gold and Silver Real Estate Businesses Annuities Etc…
Ultimately, we all want to accumulate more wealth. Whether this money will be used for our lifestyles today, our future retirement, or our children, the purpose of investing is to have our money grow.
How To Save
Pay yourself first
Make systematic savings
Choose effective financial tools
Saving should come first before paying expenses. If you want to create wealth over time you have to pay yourself first. Disciplining yourself to save on a regular basis requires effort and sacrifice. Making systematic savings towards an asset that provides a return, enables compounding and growth. Effective financial tools provide multiple benefits and tax advantages.
Over time, liquidity, use and control of this accumulating asset is what we ultimately should want. Having access to your capital through collateralization will your savings to grow with uninterrupted compounding and by avoiding lost opportunity costs. Transfers of wealth come in many areas, but the biggest culprits are taxes and inflation. The problem with most savings plans is that they do not protect against these eroding factors of money.
How to Save More using Whole Life Insurance
So, how do you save more and eventually create wealth? Should you save more money or try to get a higher return? Saving more takes discipline and requires effort. Earning a higher return often requires taking more risk.
One asset that offers protection and growth is dividend paying, whole life insurance. A participating policy from a mutual life insurance company offers multiple benefits not found in other financial products. It provides the perfect balance of protection, savings, growth and liquidity allowing for more effective and efficient wealth creation.
In general, we’ve been taught to save as a percentage of income, and the number thrown around is typically 10%. Unfortunately, most Americans today are only saving about 5% of their income according to the Federal Reserve (see chart). But, what’s worse is that the average American family spends over 30% of their income towards interest and fees.
Personal Savings Rate
We have and entirely different approach to saving. Our approach is to save at least 20% of your income, and reduce or eliminate debt and wealth transfers. A properly structured whole life insurance policy offers a safe place to park money and have it work harder towards accomplishing these goals.
Ideally, you want to start saving early in your life and have your dollars compounding over time. Most of us are familiar with the term compound interest, but unfortunately the compounding gets interrupted when we use our money for purchases or expenses. There’s another term used in the financial world when this happens, and that’s lost opportunity cost. Lost opportunity costs come when your money could have been growing, but instead was used for an expense.
The Ideal Asset
What does the ideal asset look like? Ideally we’d like our assets to provide multiple benefits. Typically though most assets offer only a few real benefits. The list below are some of the benefits offered with whole life insurance.
Liquidity
Safe Haven
Competitive Return
Creditor Protected
Contribution Options
Tax Deferred Accumulation
Disability Benefit
Collateral Options
Privacy and Control
Use and Access to Capital
Critical Illness Benefit
Long Term Care Benefit
Tax Free Distributions
Estate Tax Free
Why life insurance is the best place to park money…
Life insurance is one of the oldest financial tools known to man. The concepts of life insurance date all the way back to 100 B.C. in ancient Rome. It has been tried, tested and proven over centuries. Life insurance is engineered by actuaries and underwritten based on millions of lives.
If you read the major publications out there, you’ll find various opinions on the best places to park money. The most common are, CD’s, money market accounts, real estate and the stock market. And, some people just like having their cash on hand, perhaps in a safe or even under their mattress.
Bank Recommended
Seldom will you ever hear of life insurance as being a good investment, unless you talk to someone who actually owns it. The reason you don’t is because the financial institutions do a good job at convincing you to park your money with them. Ironically, the very financial institutions (BIG BANKS) that recommend you don’t use life insurance for savings, own more of it than anyone else.
Just as all the major banks own life insurance (BOLI) for safety and guaranteed growth, you can use it in your life. A properly structured life insurance policy can be used as a financial tool providing your family with multiple benefits throughout your lifetime, and others that live on long after you’re gone.
Financial Education
And, when combined with other financial assets, life insurance can provide substantial increases in wealth and cash-flow. Using whole life insurance as a financial tool requires education, but it’s not rocket science.
It wasn’t that long ago when whole life insurance was the preferred method of saving. Only in recent years has the industry and public’s opinion changed. However, whole life insurance has withstood the test of time and is still one of the greatest financial tools ever created.
In general, the life insurance industry has done a poor job at relaying this message to the public. And, the financial gurus that harp against using whole life insurance for saving are ignorant of the real benefits. For instance, whole life insurance is a safe place to park money because it offers guarantees. And, the cash-values can be accessed at any time for any reason providing liquidity.
Expanding the Uses of Life Insurance
Furthermore, specific riders can be attached to life insurance policies providing multiple benefits that allow your money to work harder. Riders, such as the waiver of premium, pay the policy premiums in the event of a total disability. No other asset that I know of, provides this tremendous benefit.
The accelerated benefit rider can be used to access the death benefit while you’re alive in the event of a critical or terminal illness. Though they may differ between carriers, these terminal illness and critical illness riders allow acesss to cash to live life or to help cover the financial burden of ongoing medical care.
Paid-up additions (PUA) riders allow options for contributions and future dividends with access to cash-values for liquidity.
The Death Benefit and Future Generations
Ultimately, all permanent life insurance policies are designed to pay a death benefit. The benefit is tax free to your beneficiaries as determined by you as the owner.
This death benefit makes your financial plan self-fulfilling in the event of your death. Think about that, in the worst case scenario, you can know that your family and dreams are secure and protected.
So, there you have it, how to save more and why life insurance the best place to park money.
Please comment and let me know how you have used your life insurance to save money and create wealth.
Learn how you can save more and create wealth using life insurance. Follow this link for a personal financial review
Until next time, Barry Page, RFC
Barry Page is a Registered Financial Consultant, Managing General Agent and Founder of Legacy Insurance Agency, PLLC. He helps clients with tax-advantaged investment alternatives, and specializes in showing families how to protect their assets, income and lives utilizing a macro-financial approach to planning.
