SPECIAL REPORT: THE GOLDEN RULE OF WEALTH DEVELOPMENT
‘BUY ASSETS IF YOU WANT TO BE RICH’
Be Informed, Be Intentional
It’s been said that the rich work for their money, and that money works for the wealthy. Robert Kiyosaki gives this proverb meaning in his 1997 bestseller, Rich Dad, Poor Dad, when he put forward a simple formula for financial success: “You must know the difference between an asset and a liability, and buy assets. If you want to be rich, this is all you need to know.” This statement begs the question of “Which types of assets?”. The answer: “the type of assets that are expected to appreciate in value over time regardless of occasional periods of downward price volatility.” With regards to securities, this concept is related to ‘dollar-cost averaging.’ Other key assets include real estate and permanent ‘cash value’ life insurance. For the record, appreciating assets generally do not include: cars, wardrobe or technology, for example.
Permanent ‘Cash Value’ Life Insurance
One of the least understood assets is Life Insurance. ‘Whole Life’ and ‘Indexed Universal Life’ are two of the most common types of ‘cash value’ life insurance policies. They are similar in that both can cover you for life and both types of policies accrue cash value. Cash value is an important concept that differentiates it from Group and Term Life Insurance. Cash value is accrued in these policies as a portion of each premium payment is ‘banked’ for your benefit. This banked amount has interest applied to it—interest rates are often pegged to a popular index like the S&P 500—compounding year over year thereby increasing the cash in your policy beyond just the amount that is contributed by your premium payment. Unlike securities or other appreciating assets, capital gains within your policy are tax free, yearly gains are protected from loss (depending upon the insurance company) and the death benefit is tax free as well. In these policies, your money “works for you.” You have a death benefit and you have cash in your policy that you can use for any reason—education, purchasing a home(s), starting a business(es), supplementing retirement income, buying a car, etc. There is no penalty for using available cash value as you wish. The lack of restriction and penalties on the usage of your cash value makes permanent insurance an invaluable tool that can serve you in a way that a retirement account or a 529 college plan cannot.
Key Differences Between Types of Permanent ‘Cash Value’ Policies
Please note that Whole Life and Indexed Universal Life, though similar, have important differences. Generally Whole Life Insurance is more expensive than Indexed Universal Life Insurance. Further, Whole Life’s cash value is used to help the insurance company pay the death benefit. If you have $50,000 in cash value in a policy that pays a death benefit of $100,000 when you die, the carrier pays $50,000 to you and you pay $50,000 to you from your accumulated cash value in the policy, totaling $100,000. In contrast, Indexed Universal Life policies allow for ‘increasing death benefits.’ The increase is the effect of the original death benefit being combined with the cash value. With the figures used above, this would mean that the total death benefit would be $150,000: $100,000 from the insurance company and $50,000 from your accumulating cash value, all going to your beneficiary(ies). These policies can be costly unless you buy them as a young healthy individual. NOTE: they are extremely affordable for children, who at key points in their life will have cash on hand in the policy to help with buying a home, starting a business or even affording higher education. An additional advantage is the cash in your policy cannot be considered by FAFSA when determining the grant-to-loan ratio of one’s college financial package—this is not true of 529 Savings Plans or Retirement Savings Vehicles. Further, once children become adults, they can own the policies and name their children, your grandchildren, as beneficiaries, thus they have protected two generations for the price of one.
Nuanced Understanding Is Required
Insurance companies provide various types of additional benefits associated with their policies, whether Term or Permanent policies. These are specific to each company, which means that depending upon your needs and objectives one company’s policy might be better for you than another’s. Accordingly, I advise you to seek the expertise of an insurance agent to help you navigate these nuances, like SSP Benefits LLC which is highlighted here: https://www.youtube.com/watch?v=m6UrHKnexGc.
Other Types of Insurance
Employer-Provided Life Insurance
Most people secure Life Insurance through their jobs in the form of ‘Group Life’ Insurance. This is a very inexpensive means by which to make sure that there is a legacy to leave your family. The problem is, you lose it when you sever your relationship with your employer. Another thing to be aware of is that your premium is merely a fee. This money will not “work for you,” unless of course the unthinkable happens, at which point the death benefit will be worth far more than the premium. In terms of Return on Investment (ROI), the legacy that the death benefit will provide for your beneficiaries is virtually unmatchable as it relates to just about any other trusted and established vehicle for generating financial legacy. Accordingly, take advantage of your employer-provided Life Insurance.
Term Life Insurance
‘Term Life’ is similar to Group Life Insurance in that the ROI is significant, but the premium will never “work for you.” Another shortcoming is that Term Life only provides temporary coverage. When the term of your coverage ends, you either have no insurance or have to purchase more. This is a significant point because the older you are, the more negative health conditions you suffer from, the more expensive your policy costs. Whereas you might be able to maintain good health, you will get older. No matter what, the cost of insurance will go up with each successive policy. Afterall, the cost of your coverage is related to risk, the closer you are to the estimated age of mortality due to your age and health profile, the more your policy will cost. This is not to say that there is no benefit or practical need for Term Life Insurance, this analysis is merely meant to introduce you to the notion that Life Insurance is an asset and different types of Life Insurance assets yield various levels of wealth development and legacy building potential.
Guaranteed Universal Life Insurance
Similar to Term Life is ‘Guaranteed Universal Life.’ It is similar to Term except that you can purchase it to cover you for your entire life. Most types of Guaranteed Universal Life policies do not provide any additional benefit other than the death benefit, but there are some that have additional benefits which make it a great choice for adults who might not be able to afford permanent life insurance policies like Whole Life or Indexed Universal Life, yet want something more like ‘return of premium payments,’ for example. Only a few Guaranteed Universal Life policies have this feature, so find an informed Life Insurance Agent to guide you.
By: Jason J. Hinton, Esq., Business Manager
Omicron Chi Sigma Chapter
Phi Beta Sigma Fraternity, Inc.
***This thought piece reflects the opinions of Jason J. Hinton alone. The publication of his opinions here neither constitute advice nor the opinions of Phi Beta Sigma Fraternity, Inc., or the Omicron Chi Sigma Chapter or Beta Alpha Chapter of Phi Beta Sigma Fraternity, Inc.