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How much life insurance should I get?

I have been getting this question lately.

The answer is very straight forward. You would assume that most families know how much they need. If you noticed I said families... because most people who understand the value of life insurance are the one who is married, aged 25 years or older, with children, paying some kind of rent or mortgage or own a home, and with income.

To understand how much you need, let's talk about what is life insurance and what it is not. Insurance by itself is the second layer in the financial planning pyramid.

Life insurance takes effect when you no longer able to provide to your family economically because you passed away.

Life insurance is not a luxury but a necessity.

Life insurance is not just about covering funeral expenses but should be enough to cover family expenses when they are grieving. Most families lose their wealth because when the breadwinner dies, they don't have enough money to continue living because the breadwinner did not plan for the unexpected and were forced to fire sale their assets. Fire sales are selling your assets cheap because you need the money right away.

Now let's figure out how much you need. It actually depends who will need it. You buy life insurance if somebody will suffer financially when you die. Simply put, you don't buy life insurance because you are going to die, but because those you love are going to live.

To start, lets calculate your economic worth. How old are you now? Then, when are you going to retire?

Calculate how much you'll make on your job or any income between now and when you retire. The answer is your economic worth.

Retirement Age - Age Now x Annual Income = Economic Worth

This is how much your family will be missing when you die. So there are two ways to use this formula. First, you can sum up all your earnings from now until retirement age and use that amount. Or you can multiply your annual income to 10 so you can provide up to 10 years of support to your loved ones and give them time to recover from your lost. For most families, 10 years is acceptable to make their life continue economically.

Reference:
https://www.moneyunder30.com/financial-planning-pyramid-11294

https://lifehappens.org/blog/4-things-life-insurance-is-not/


© Jamie Grill/Getty Images

Financial guidance by GoFSD using the 7 Simple, Free Moves Guaranteed to Make You Richer by MSN Money.

http://www.msn.com/en-us/money/personalfinance/7-simple-free-moves-guaranteed-to-make-you-richer/ar-AAkXk9f?li=BBnb7Kz&ocid=iehp

Page 1. Someone told me that it has been the same ratio (97/3) year after year after year.

97% of the wealth in the United States are owned by 3% of the population.

97% / 3%

So what is the 97%? They are the average Americans who are trapped in the rat race. The only thing you can do to be wealthy is to jump to the other side of the 3%. It means that you have to do the opposite of what the majority (97%) is doing to be ahead of the game.

Page 2. Set a Goal. Write it down then do the action. A goal not acted upon is just a dream. So stop dreaming and take action. Have a plan to take you from point A to point B. A good way to start is using a T goals. Write your goals on top. Then draw a horizontal line just under your goals then a vertical line in the middle splitting two sides. Left side will be the goals and steps you have planned. On the Right side are the results. Meaning, writing down what you did to accomplish that task. Some other organization call it Schedule and Result (S&R).

Page 3. Create a budget. You need to be positive on your cashflow every month. That extra discretionary income will be used to save to build your wealth. By the way, budgeting is like money management to ensure that you are not overspending. You cannot plan your month to be on the negative cashflow or else you will be in debt.

Page 4. Track you expenses. This is used so you know what to cut down on expenses. I have seen a presentation that teaches you to cut on your lattes, eating out, water and energy consumption, and etc... You will be surprise how much you can save in a year to put towards your wealth building strategy.

Page 5. Living below your means. I can't say this enough but this is the only way you can be positive on your cashflow every month. By paying yourself first, meaning that after receiving your paycheck, set aside money for savings,... It could be your retirement account, maximum funded life insurance for tax free retirement, emergency savings account, etc...

Page 6. I though this article will not mention paying off the debts. Paying off your debts will save you on losing money. Every penny that you pay for the interest charges are money that will never be recovered. A god article or strategy about this is Dave Ramsey's baby steps. But that is about it. After you have paid all you debts, you should start building wealth.

Page 7. Have more money coming in than going out. A good book to read on this is a book written by Robert Kiyosaki, Rich Dad Poor Dad. You need to understand the concept of being positive on you cashflow every month. It could be saving on taxes, reduce unnecessary spending, getting more income by having a side business, garage sale, having a lower interest on credit cards, signing up for cash reward cards, etc...

Page 8. Think of the future and not today's needs. Remember that you are stronger now and weaker when you get older. So beat the temptation on spending more than you make and start paying yourself first and not get in to bad debt.

For the most part, this article will get you started to the road of the wealthy. If you have any questions or needs some advice, please feel free to contact us at www.GoFinacialsd.com

There are two kinds of loan rates when you talk about using the loan provisions in life insurance. Actually, this is the most powerful aspect of having a permanent life insurance. It allows you to get grow your money tax deferred inside a life policy and allows you to get it tax free through loans to be used mainly for retirement at any age.

Now that you know the secret of tax free retirement, let's talk about the diferrence between Variable Loan Rate (VLR) and Fixed Loan Rate (Fixed).

1. VLR - allows you to take loans while leaving your money in the policy and accrue interest based on your index. insurance companies will then charge you a variable loan rate base on the

When you are planning for retirement, you have to account for two points:

1. Inflation
2. Spend down of your accumulated assets

This means that we are going to use two kinds of calculators.

1. Inflation Calculator from Bankrate.com. First step is to put how many years in the future you want to see how much your money is worth. The calculator can only do up to 45 years from today. Next is the Amount currently invested. If you are going to add monthly contributions, make sure that you fill it in as well. Then, calculate the expected inflation rate. Bankrate uses 3% as average from 1925 to 2014. But you can do your own estimation by going to usinflationcalculator.com. I use the last 10 year average to calculate mine. Lastly, I put everything else Zeros to get how much my money is worth to my specified timeframe.

2. Spend Down Calculator from Bankrate.com as well. You can fill in all the blocks. But I will caution you that you use my recommended interest rate of 7.07% to maybe up to 9% conservatively. I will update this article for the suggested conservative interest rates. Make sure to check back every six months.

2015 (1 Sem) - 8.01%
2015 (2 Sam) - 7.07%
2016 (1 Sem) -

Taxable Equivalent Yield
One way to measure the difference between taxable and tax-deferred investments is by determining the taxable equivalent yield of a tax-deferred asset. The taxable equivalent yield is the yield necessary on taxable investments to grow the same amount of money as a tax-deferred annuity according to an individual's income tax bracket. The taxable equivalent yield formula is:
Tax-deferred yield / (100% - tax bracket)
Example:
An individual in the 33% marginal income tax bracket owns a deferred annuity that is presently earning 5% interest. This individual's taxable equivalent yield is 7.46% [calculation: 0.05 ÷ (1.00 - 0.33) = 7.46%].
That is, this individual in the 33% income tax bracket who owns a tax-deferred annuity yielding 5% would need a taxable investment yielding 7.46% to generate the same amount of money.


VS.

Tax-Deferred Yield
The flip side of the taxable equivalent yield is the tax-deferred yield, which defines the amount of tax-deferred yield needed to match the yield of a taxable investment. The tax-deferred yield is:
(100% - tax bracket) × taxable yield.
Example:
An individual in the 33% marginal income tax bracket owns a taxable investment that is presently earning 6% interest. This individual's tax-deferred yield is 4% [calculation: (1.00 - 0.33) × 0.06 = 4%].
That is, this individual in the 33% income tax bracket who owns a taxable investment yielding 6% would need a tax-deferred annuity yielding 4% to generate the same amount of money.

EXAMPLE:

Your client, Arthur, is in the 35 percent marginal income tax bracket. If he is considering a
corporate bond with a yield of 10 percent and a municipal bond with a yield of 7 percent,
which would be more beneficial, assuming they possess the same degree of risk? If we
plug the variables into the formula above, the result is as follows:

Tax-exempt yield ÷ (1 − Marginal income tax bracket) = Taxable equivalent yield
7% ÷ (1 − .35) = Taxable equivalent yield
7% ÷ .65 = 10.77%

The taxable equivalent yield of the municipal bond for Billy is 10.77 percent. If we reverse
the formula, it looks like this:

Taxable equivalent yield x (1 − Marginal income tax bracket) = Tax-exempt yield
10.77% x (1 − .35) = Tax-exempt yield
10.77% x .65 = 7%

What that means is that if Arthur buys a corporate bond that pays 10 percent, or $1,000,
after paying taxes on the $1,000 in the 35 percent marginal income tax bracket ($350),
the net yield on the taxable bond will be 6.5 percent, or $650 ($1,000 − $350 income tax).
Therefore, if all else is equal, the income-tax-free investment that yields a net of 7 percent
is more profitable for Arthur because the taxable corporate bond would have to pay 10.77
percent or more to outperform the municipal bond at the 35 percent marginal income tax
bracket.

Tax-free investments are a powerful retirement planning tool.

When should your prospects start planning and saving for retirement?
Since most clients will have to reach their retirement goals by making small
investments in regular amounts, they must begin saving early to make
compound interest work and to enable their money to grow for the long term.
The importance of investing early also applies to how early in the year they
make their investments. Investing at the start of the year gives money a
full 12 months to grow.

It takes discipline to save regularly. Beginning a savings plan often means
balancing current lifestyle against future needs. Unexpected emergencies
can arise to compete for savings dollars. Moreover, deviating from a regular
saving schedule may cost money. Prospects will lose earnings because they
will miss the full benefit of compounding on the investments they delayed
or skipped.

Cost of Waiting

It is easy to delay starting a plan of savings in favor of current spending
needs. Often, you will find your competition is not with other forms ofinvestments. Rather, it is the prospect's choice of spending today versus
saving for tomorrow. The following example may help you convince prospects
that they lose by waiting to save or by interrupting their savings.

EXAMPLE:

Kim and Chris are both aged 25. Kim decides to start saving $2,000 each year, Chris wants
to wait. After 7 years, Chris finally starts to save $2,000 annually. At the same time, Kim
decides to stop saving and let her account accumulate interest. If both accounts earn 10
percent interest compounded annually, what will their account balances be in years to
come?

At the end of 40 years, Kim's account is just $4,204 less than Chris's, yet Kim's total cash
outlay was $14,000 versus $66,000 for Chris.

Table 4-10
Example 1: Cost of Waiting (Estimated Return: 10%)
End of
Year          Kim's Balance            Chris's Balance
5              $13,432                   $0
7              $20,872                   $0
10            $22,780                   $7,282
15            $44,740                   $25,159
20            $72,055                   $53,950
30            $186,892                 $174,995
40            $484,750                 $488,954

Postponing the start of a savings plan costs money at retirement. One of the greatest
advantages of starting as early as possible is the compounding of the earnings.

EXAMPLE


Assume a prospect is depositing $3,000 per year into a nondeductible tax-deferred
annuity. Also assume the average earnings rate is 8 percent and that there are 15 years
until retirement. If the deposits remain level, multiply the factor from fact finder Table 3
for an 8 percent accumulation rate over 15 years:


29.324 × $3,000 = $87,972


However, if the deposits grow by 3 percent per year, you can use fact finder Table 1 to
estimate the average dollar amount of deposits for 15 years, and then multiply that figure
by 29.324. The approximate inflation adjustment to $3,000 deposits for 15 years can be
found using the 3 percent column of fact finder Table 1. Take the factor that appears in
this column that corresponds to the mid-point year between today and year 15, which is
assumed to be the number of years until the prospect retires (year 8). Multiply that factor
(1.2668) by $3,000. Next, multiply that amount by 29.324 from fact finder Table 3, which
equals $111,443, the approximate lump-sum value accumulated by making deposits of
$3,000 that increase by 3 percent per year for 15 years and earn 8 percent interest each
year:


1.2668 × $3,000 × 29.324 = $111,443


Then determine the projected income generated at retirement from the lump sum
accumulated, using either the capital-retention method or the capital-liquidation method
discussed previously. Thus, $111,443 multiplied by .08 will provide a level income
of $8,915 every year in retirement. This number will constitute the SOURCE 4 dollar
amount at the bottom of fact finder page 9, and you should also enter it as the SOURCE
4 dollar amount on page 6.


If, on the other hand, $111,443 is divided by 13.23, which is the retirement income divisor
factor from fact finder Table 4 for 8 percent interest, 3 percent inflation, and a 20-year
liquidation period, $8,424 will be generated in inflation-indexed dollars during the 20-year
retirement. You should enter this indexed income from deposits and earnings.

A more difficult problem, and one that is much more common in retirement planning, is determining how much to invest each year or each month to accomplish long-range retirement income objectives. Fortunately, this calculation can also be made using a variation of the formulas we have already studied and the factors from the compound interest tables.

Remember that we calculated a future value of periodic investments using the "One Dollar Per Annum in Advance" table and the formula FVSS = I (FVif). This assumed that we knew how much we wanted to invest each year (I) and needed to calculate what its value would be in the future. This time, we know how much we want to have, but we need to calculate how much to invest to get there.


EXAMPLE:

Your prospect determines that she wants to have $100,000 for retirement in 15 years. She believes she can maintain a steady 7 percent rate of return. How much does she need to save each year?


To determine the amount she needs save each year, you can use division in the formula, drawing the interest factor (if) from the "One Dollar Per Annum in Advance" compound interest table:

Annual saving required = FVSS ÷ FVif

                                 = $100,000 ÷ 26.888

                                 = $3,719


Thus, your prospect needs to invest $3,719 now and each yeartoaccumulate $100,000 at the end of the 15-year period.

Check the MSN calculators at: http://www.msn.com/en-us/money/tools/savingscalculator

GoFSD is not affiliated with MSN.

FA 261 use Table A-2.

 

Previously, we discussed how to calculate the present value of a single sum that is due or needed at some time in the future. Now we will discuss how to compute the present value of a series of level future payments. This is a present value problem if the payments are made at the beginning of each year.

Retirees want to know how long a specific sum of money will last them, once accumulated. The answers can be found using the factors from the compound discount table titled "One Dollar per Annum" in appendix A.


EXAMPLE

Suppose your 65-year-old client wants to know how much $200,000 will provide him each year over 20 years during retirement. He feels he can earn 6 percent interest on this money, and he will receive the payments at the end of each year.

To determine the answer, you can use the factors from the compound discount table titled "One Dollar per Annum" in appendix A. In this example, you are trying to solve for the income that a present value ($200,000) will generate over 20 years. You can calculate the answer by dividing the lump-sum present value by the appropriate present value of periodic payments (PVPP) factor that corresponds to the 6 percent interest column and the 20th year.

The formula and calculation are as follows:

Annual income = PV ÷ PVPP factor

                          = $200,000 ÷ 11.470

                          = $17,437


Thus, your client will receive $17,437 at the end of each year for 20 years, but he will have exhausted the present value of $200,000 at the end of 20 years.

 

Check the MSN calculators at: http://www.msn.com/en-us/money/tools/savingscalculator

GoFSD is not affiliated with MSN.