Are Banks A Legal Ponzi Scheme?

Have you  ever wondered why banks exist?  With the current debate over healthcare and bank bailouts taking place in Washington DC it just seemed like a logical question to ask.  Let me first start off by saying that I have never really understood the concept of banks (from a business standpoint) and recent events have further fueled my skepticism.  That being said I have always been curious about one thing when to comes to banks…how do they make their money?

When I walk into a bank there is no product or service they are simply looking for a way to loan me money.  You really are either depositing money or withdrawing money and the bank charges you for the privilege of doing so.  Sure having a checkbook is nice but money orders and the internet have made checkbooks obsolete.  So I began to think…this is either the greatest business model ever created or the biggest legalized ponzi scheme enacted upon people in history (outside of the stock market).

With the recent headlines involving Bernie Madoff I thought it would make sense to start off with defining what a ponzi scheme is.  A quick search on Google bought up the following definition – a ponzi scheme is “a fraudulent investment operation that pays returns to investors from their own money or money paid by subsequent investors rather than from any actual profit earned.”  Wow…that definition blew me away!  Now substitute the words “ponzi scheme” for “bank.”  A bank is a “investment operation that pays returns to investors from their own money or money paid by subsequent investors rather than from any actual profit earned.”

It gets even worse….

There is a little main stream knowledge about the practice of these institutions called “fractional reserve banking.”  It sounds complicated but it simply means that banks are legally allowed to lend out more money than they have on hand.  This was a major reason for the meltdown in the economy that has taken place over the past year and that is still continuing with the bank failures that are happening on a weekly basis (104 and counting in 2009 alone).  So hypothetically every time you deposit one dollar into a bank they have the legal right to lend out $10.  This is also known as “leverage.”

So this seems to be how a bank makes money.  We, as depositors, deposit our money into a bank because it is safe and secure protected by FDIC insurance (as noted on the drive through window) and they turn around and lend our money back to us at a higher rate.  Think about it…what is the typical rate on a savings account right now? Less than 1% and what is the rate on your credit card, car loan, student loan, personal loan, home equity loan, and/or mortgage?  Let’s tack on fees for missing a payment, overdrawing your account, not keeping enough money in your account, not using using your credit card, etc, etc…the picture starts to become clearer.

One of the greatest legal ponzi schemes ever created…

A bank makes it money off of the money you deposit into it and they make their money off of interest payments and fees.  Now you see why it is so important for them to find ways to “catch” people with these crazy rules noted in the fine print of the applications and ever changing agreements we sign.  It behooves them to contractually be able to raise rates for any reason or without cause.

It is actually taking Congressional intervention in order to stop banks from charging “excessive” fees and the bank are fighting the legislation tooth and nail!  It’s a great business practice to allow your account to go over the limit or to sell you that variable rate mortgage.  They build in the profit margins on the front end and rake in the dough on the back end and no one is any wiser.  It is literally a multibillion dollar business enterprise built solely off of other people’s money (like the stock market).

It gets even better….

Now fundamentally just by the mere fact that a bank can lend out more than we deposit tells us something that is just common sense…if everyone went to the bank at the same time to withdrawal money it would not be there.  This is why people fear a “run on the banks” because in the back of everyone’s mind they are afraid that one day they can go to a bank to withdraw money and it won’t be there.  Sounds crazy but it can happen…think of September 11, 2001.  A bank DOES NOT have to give you your money back and they can place limits on how much you can withdrawal!

It sounds absurd that a bank wouldn’t have your money but that again goes back to “regulation” (the word absolutely hated by the banking industry) and the fact that they do not have to have money on hand to cover the loans they provide their customers.  Not to mention the amount of leveraging that takes place.  Don’t believe me ask your banker this question:  “is there ever a possibility that I could come to the bank and be denied access to my money?”  If they say “no” you already know they are lying because if that were the case there would not be a need for FDIC insurance and there would not be limits on the amounts of money that FDIC covers.

In closing…

The average person spends over 30% of their after tax income on interest payments alone.  Case in point, look at the amortization schedule of any type of loan you get.  Notice that nearly all the interest is always front loaded so that the bank gets their money first and then the principal gets repaid.  A never ending cycle as people continuously refinance houses and get new cars over their lifetime.

For fun, calculate and total all your current loan payments and see how much of your income is going towards the interest…that’s banking…the great American ponzi scheme in action!!!

The Cause of Bubbles: Financial Engineering vs. Investing

Here is a interesting blog post by Mark Cuban (the owner of the Dallas Mavericks basketball team).  He makes a very interesting point as to why we will continue to have a “boom-bust” economy….His blog is at www.blogmaverick.com.

Oct 10th 2009

The only way to address executive compensation and the inevitable boom and bust cycles that will happen in perpetuity in this country is to finally recognize the difference between financial engineering and investing.  For some reason no one in any of our regulatory agencies seems to want to admit or deal with the differences.  Too much pressure from Wall Street?

In any event, the following is  a post from a year ago. I thought it was worth republishing.

Let me get this straight.  In 2008, funds trying to squeeze out another basis point or two thought they were being conservative buying insurance on heavily leveraged portfolios of subprime loans and other debt. Once those loans started to default, it created a cascading deleveraging event which lead to major financial institutions failing and the “smartest” minds on Wall Street being forced to dump everything to raise cash, which in turn lead to a crisis of confidence and deleveraging that created the worst week in the history of the stock markets. Did I get this right?

In 1987, funds, trying to squeeze out another basis point or two thought they were being conservative buying insurance on leveraged stock portfolios. Once the stock prices on those portfolios started to drop, their insurance programs pushed them to dump everything AND sell stock index futures to raise cash, which in turn lead to a crisis of confidence and deleveraging that created the worst single day melt down in the history of the stock markets.  Did I get this right ?

Think it won’t happen again? Of course it will.  Whatever money the Fed makes available to entrepreneurs and businesspeople will be used as intended, to create and grow businesses.

Unfortunately, it will also be used by financial engineers to try to find a way to make HUGE profits from highly leveraged, risk laden financial packaging. Why wouldn’t they?

If you can borrow cheap money, invest in some asset that can be marked to an increasing market, borrow against the gain and buy something else and do it as many times as possible, wouldn’t you? It’s exactly how homeowners In a bull market drove up real estate prices with a few making huge money.

If you could do the same thing, but instead of with houses, with stocks or asset backed securities, and instead of with thousands, do it with billions so you could profits in the 10s of millions or more, wouldn’t you?

Hell yes you would. You certainly aren’t going to tell yourself that you could be creating the next big bubble that could rival 1929, or for future generations, would rival 2008, so don’t do it. You would go for the money.

Which is the genesis of our problem in the US.  It’s not wrong to run with bull markets and leverage to the hilt. That can be a very good thing. But we have to make the upside based on investments, rather than financial engineering. Which is exactly why we have to change our tax code. We want to encourage investment, not financial engineering.

The financial markets were originally defined as markets that created capital for businesses to start and grow.

Today, that is rarely the case. Sure companies do come to the markets for cash for growth and that should be encouraged.  But those examples are a tiny percentage of the market.  When a stock turns over its float multiple times in a day, those are not investors buying and selling the stock. Those are traders or financial engineers.

The ONLY WAY WE ARE GOING TO END THIS BOOM AND BUST CYCLE IS IF WE DIFFERENTIATE BETWEEN INVESTORS AND EVERYONE ELSE.

Investors should be rewarded for actually owning companies and gaining returns on their investments. Financial engineers should have to pay a premium for the risk they introduce to the entire financial system. It was not investors that brought on the last 2 crashes. It was the financial engineers.

The beautiful thing about this country is that we like to work hard, and we like to take chances. Unfortunately, over the last 15 years, the incentives have been to take chances as a financial engineer rather than as an entrepreneur. We give far more money to people who play games with financial instruments than we give to people who come up with ideas for the next big thing.  That needs to change if we want to remain a leader in this world.

Here is what I would do to change things

I would change to zero the taxes on any gains from the sale of stock or bonds purchased during an IPO and held for 5 or more years. All dividends/interest paid by that stock/bond would be tax free. If you sell it prior to the 5 years, you are taxed at your personal regular income tax rate.

In addition, I would not allow the stock to be borrowed against in any way. If it was, it would be considered an effective sale. Which means you couldn’t borrow on it tax free until you have held it 5 years.  Bottom line, if you hold the stock/bond, like a real investor would, you are rewarded for it.

For purchases  post IPO, in the open market,  the same rules apply, except I would tax a personal income rates the dividends/interest  for the first 5 years of ownership.

For all other transactions, whether they are options, derivatives, stocks, bonds, whatever, all gains and losses would be taxed at personal income rates.

If you are a great financial engineer and make tons of money at what you are doing, more power to you.  If you are good at what you do, you pay more to Uncle Sam, but you still make a boatload of money.

I would keep taxes on private transactions, just where they are. Private transactions are less liquid and harder to value, which in turn makes them harder to borrow against. Which reduces leverage in the system and encourages investment. It’s hard to financial engineers a private company. I would tax gains and losses in private companies at capital gains levels, but I would extend to  3 years the marker to not be considered a short term investment. I would keep the active vs. passive rules.

Next there is the issue of leveraging. No one ever complains when cheap cost of funds creates leverage and drives a market up.  And no one ever will. So we have to set strict leverage limits. We set margin/leverage limits on day traders as the tech bubble burst. The only difference between the day traders of the tech bubble and the Investment Banks and AIGs of the world that cratered in this bubble is that the big guys started with more chips at the table. And they picked their own credit lines and there was no pit boss to watch over them. I would limit to 2x the leverage available on any asset that is insured by the government or is offered by any organization that is eligible for government insurance or tax incentives of any kind.

Of course, I would still levy a fee of anywhere from 1c to 10c on every transaction of stocks or bonds which would go into a general fund, that I will call the “Oh Shit We Missed It Fund”. It will be there to fund the inevitable situation where someone figures out how to work around whatever regulations and tax code that is created.

As an entrepreneur, I can tell you that this would not change how I ever started or invested in any business. As someone who trades stocks, It would impact my investment decisions. I would only trade out of necessity. I would be willing to take lower yields on my investments, making it cheaper for companies to raise funding.

I also recognize that it would mean that the chances of the Dow ever hitting 14k in 2008 dollars is about as likely as my catching my elbow on the rim playing basketball. I don’t think that’s a bad thing.

Sometimes It Simply Pays To Listen…

Believe it or not some people knew the financial meltdown was coming but the “talking heads” in the media refused to listen…

How The Stock Market Works

Great analogy of how the stock market really works…

Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each.

The villagers seeing that there were many monkeys around, went out to the forest, and started catching them.

The man bought thousands at $10 and as supply started to diminish, the villagers stopped their effort.

He further announced that he would now buy at $20.

This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back to their farms.

The man then increased the offer to buy monkeys for $25 each.

The supply of monkeys disappeared so that it was an effort to even see a monkey, let alone catch it.

So the man announced that he would now buy monkeys at $50 each!

However, the man said he had to go to the city on some business, and his assistant would buy monkeys for him.

When the man was gone, the assistant told the villagers:

“Look at all these monkeys in the big cage that the man has bought from you. I will sell you all the monkeys in the cage for $35 each. When the man returns from the city, you can sell the monkeys back to him for $50 each. We both make money, and the man will never have to know.”

The villagers scraped together all the money they had saved from selling monkeys to the man, and bought all the monkeys in the cage from the assistant for $35 each.

The villagers never saw the man or his assistant again, but they got all their monkeys back!

Source: Unknown

Goldman Sachs: The True Example of Wall Street’s Black Magic

It was once said that “the more things change the more they stay the same.”  Nothing can be more true than what continues to take place on Wall Street and “Main” street is none the wiser.  Goldman Sachs continues to lead by example….

When Creating Wealth “Maximum” Protection Matters.

For all you movie buffs I want you to think back to a movie entitled Trading Places.  It came out in the 1980s and starred Eddie Murphy, Jamie Lee Curtis and Dan Ackroyd.  It was a movie about wealth creation and wealth uncreation (for lack of a better term).  The basic plot surrounded a bet made between two highly regarded commodities brokers on what would happen when you make a poor person rich and a rich person poor.  While the movie plays out around this premise recall a line that Eddie Murphy made in the movie (paraphrasing) “the best way to hurt a rich person is to make them poor.”  Sounds like it could apply to the times in which we currently live (insert your own Goldman Sachs punch line here).

The current debate taking place around health care really has to do with how people can lose everything when they fall ill and have to seek medical attention without insurance or insurance that does not cover a major health event that might take place.  It got me thinking about one of the tenets of wealth creation…keeping the money you made over the years.  We’ve all heard the old adage of “it’s not how much you make its how much you keep.”  Nothing could be farther from the truth. I simply wanted to take a closer more far reaching look at that notion.  After all what good is having a lot of money if you can lose it all…right?

September, as you might recall, was Life Insurance Awareness Month (LIAM) , a month dedicated to making people more aware of their potential need for life insurance or a reminder to take a second look at the coverage one might already have.  If you stop and think about it, insurance plays a major role in the lives of everyday people so much so that many believe it to be a major obstacle to actually building wealth.  I know it sounds absurd but think about how much you spend for the insurances you already have and then realize that in order to have proper insurance coverage you possibly need:

1. Auto insurance – protects you if you get into an accident caused by you or somebody else
2. Home Owners Insurance – protects your home in case something was to happen (fire, theft, etc…)
3. Liability Insurance – protects you in case you are the cause of a major incident to someone else or property
4. Health Insurance – protects against the cost of a major medical event
5. Life Insurance – protects against loss of income from the death of a person
6. Disability Insurance – protects your income in case you become disabled and can no longer work
7. Long Term Care Insurance – protects against the cost living in a nursing home,  assisted living facility or requiring home health care (averages about 80k per year and rising)
8. Legal Insurance – protects you in case on a lawsuit

So when you look at this list and see all of the insurances that are recommended (some even required) a person wonders how they can ever save money when it is going out to all of these places?  Therefore the typical person tends to forgo coverage in one of these areas in lieu of saving (or investing) during their lifetime.  Remember “it’s not what you make …it’s what you keep.”

Truth be told an event that takes place in any one of these areas has the potential to wipe out the average American’s savings or retirement plan.  Statistics (and the media) tell us this on a daily basis.  The leading cause of foreclosure is disability.  One of the leading causes of bankruptcy is medical bills.  So when approaching the need for insurance coverage you should look at obtaining the “maximum” coverage not the minimum allowable or least expensive coverage you can get.  I realize that cost will always play a factor but you must find a way to get the protection you need!  Failure to do so could wipe you out… literally.

Think about your retirement plans and how much you will have contributed over your lifetime in an attempt to “build wealth.”  Now think about the protections listed above…is it not scary to envision that at any point during your lifetime one event has the potential to erase all of your life savings?   Imagine doing everything right (i.e. building that million dollar portfolio) then someone sues you and takes it all?  Or perhaps you become disabled during your working career and don’t replace 100% or more of your income through disability insurance.  Your house burning down because the dryer vent was not cleaned out (true story happened to a friend of mine).  Having a stroke and staying in the hospital for weeks without medical insurance then getting the bills in the mail a couple weeks later.  How about losing 50% of your retirement account the year before you were scheduled to retire?  The list goes on and on…

The point I am trying to make is that having proper insurance protection protects you from losing your wealth. The conversation should begin with what is the MOST protection you can get AND then you work back from there to what you can afford.  I realized this not too long ago with my auto insurance.  When I initially obtained my auto insurance I had the “minimum required by the state” I believe it was 100,000 for bodily injury (capping at 300,000 per occurrence) and 100,000 for property damage with deductibles at $500 comprehensive and $500 collision.  Then this thought occurred to me…how much extra would it cost to get the most insurance coverage my company would allow me to have?  You see I have already been in that major car accident years ago, falling asleep while driving and going off a cliff waking up upside down in my car.  I know the unexpected can happen.

So I call up my insurance company and simply asked ”how much extra would it be for me to get the MAXIMUM coverage you will allow and what would that be?”  It was as easy as that.  The lady on the phone told me essentially I could get 2,000,000 across the board for everything and my monthly premium would increase by around $11 per month.  Yes ONLY $11 PER MONTH!  Needless to say I increased my insurance coverage (with $1000 deductibles) and immediately thought about the insurance agent who initially recommended my coverage and how exposed I had been left for a measly extra $132 a year.

Note: Raising your deductibles is a good way to get maximum protection and keep the costs down at the same time.  Remember a deductible (or waiting period) is your out of pocket expense and where applicable should be as HIGH as you can afford.

So could the same thing be happening to you?  Do you have maximum protection through your insurance policies?  We are all simply one event away from a financial disaster and obtaining proper maximum insurance protection in all aspects of your financial life will allow you to keep what you have worked so hard to acquire.

So What Does A Trillion Dollars Look Like?

All this talk about “stimulus packages” and “bailouts”…

A billion dollars…

A hundred billion dollars…

Eight hundred billion dollars…

One TRILLION dollars…

What does that look like? I mean, these various numbers are tossed around like so many doggie treats, so I thought I’d take Google Sketchup out for a test drive and try to get a sense of what exactly a trillion dollars looks like.

We’ll start with a $100 dollar bill. Currently the largest U.S. denomination in general circulation. Most everyone has seen them, slightly fewer have owned them. Guaranteed to make friends wherever they go.

A packet of one hundred $100 bills is less than 1/2″ thick and contains $10,000. Fits in your pocket easily and is more than enough for week or two of shamefully decadent fun.

Believe it or not, this next little pile is $1 million dollars (100 packets of $10,000). You could stuff that into a grocery bag and walk around with it.

While a measly $1 million looked a little unimpressive, $100 million is a little more respectable. It fits neatly on a standard pallet…

And $1 BILLION dollars… now we’re really getting somewhere…

Next we’ll look at ONE TRILLION dollars. This is that number we’ve been hearing so much about. What is a trillion dollars? Well, it’s a million million. It’s a thousand billion. It’s a one followed by 12 zeros.

You ready for this?

It’s pretty surprising.

Go ahead…

Scroll down…

Ladies and gentlemen… I give you $1 trillion dollars…

Notice those pallets are double stacked.
…and remember those are $100 bills.

So the next time you hear someone toss around the phrase “trillion dollars”… that’s what they’re talking about.

Source: Pagetutor.com

FAQs About Life Insurance

As Life Insurance Awareness Month comes to an end I thought I would share some frequently asked questions about life insurance…

What is life insurance?

In its basic definition life insurance is a contract between an insurance company and an individual that is designed to provide financial compensation to the policy owner’s beneficiaries in the event of the policy owner’s death.  So prior to buying life insurance you should ask yourself one simple question “who will suffer financially if I am not here?”  Since life insurance is typically used as for income replacement the answer to this question for many people  dictates whether or not they need life insurance.  As with most things, there are exceptions to this rule of thumb.

What are some of the purposes of life insurance?

Life insurance can also be used to:

• Pay off existing mortgage
• Pay estate taxes
• Fund college education
• Protect key employees in a business
• Create an estate
• Provide money a spouse / children
• Supplement retirement income

So as you can see from the list above life insurance can have a variety of uses when it comes to planning for the future protection of loved ones among other things.  Its flexibility is one of the reasons most people require it.

How much life insurance is enough?

One of the most overlooked areas of life insurance is determining proper coverage amounts.  Most people are under insured.  The reason being they have no idea how to determine how much coverage they require.  You should take the time to decide exactly what you want to happen if something were to happen to you.  My suggestion….the most you can qualify for.  This will serve as a minimum guideline in determining the amount.

For example, if income were your major concern you might use it as the basis for your calculation.  Most insurance companies suggest 8-10 times your income as a rule of thumb.  So a person making 30,000 a year would require 300,000 in total insurance coverage.  This is the easiest way of deciding the amount of coverage however it may not be the most comprehensive.

I suggest a more comprehensive analysis of your needs by taking into consideration not only your income but your current and future expenses as well.  Your current expenses versus future expenses may not be the same and thus should be taken into account.  If it is reasonable that future expenses will be greater than your coverage amount should be increased accordingly.  Once you have decided how much coverage you need the next step is determining the length of coverage.

How long do I need insurance coverage?

Determining the length of coverage is easy to calculate and will actually determine what kind of insurance you should buy.  You should take a number of factors into consideration, such as:

• Your age and/or your spouse’s age
• The age(s) of your children
• Your health and/or spouse’s health
• Your future financial obligations (i.e. mortgage, college education, etc.)
• The number of years until your retirement

So now you should have a idea of  how much coverage you need and for how long, the next step is figuring out what kind of coverage you need.  Life insurance comes in two forms, temporary (term) and permanent (whole).

What type of insurance coverage do I need?

Term Life Insurance is simply life insurance for a specific period of time or term (5 to 30 years in most cases). Term life is, generally, the type insurance offered through group plans (like through most workplaces), credit insurance (credit cards, personal loans, etc. – the structure is the same, but the cost is usually higher for credit life), and some accidental death policies. Term life is the most affordable type of insurance in terms of cost versus death benefit. The policy is payable only upon death of the insured within the term as prescribed in the contract. The two most common variations of term life insurance are level term and decreasing or declining term.

Level term means the premiums and the death benefit remain the same or level for the entire term of the contract. This type is often used to coincide with the age of maturity for the policyholder’s children (coverage until their kids reach age 18 or 21). This way, there is a consistent benefit until the children reach an age to provide for themselves. Level term is also often used as an affordable starting point until people are better able to afford another policy type.

Decreasing or declining term policies offer a gradually decreasing/declining death benefit with a level premium. The most common use for this type is as mortgage insurance. People establish a declining payout that matches the balance of their outstanding mortgage(s) over time.

Whole Life Insurance offers a consistent death benefit (typically to age 100) with the same premium for the life of the policy and a “cash value” which accumulates over time. You get coverage for your entire life, so long as the policy is in force (the premiums are paid). Whole life is commonly used for long-term coverage needs like supplementing retirement, consistent income for a surviving spouse, death taxes, or estate liquidity. Compared to term life, the premiums are usually more expensive to start, but less than renewing or converting a term policy later in life.

The underlying “cash value” of your policy builds gradually over time. A portion of your premium is invested on behalf of your policy to generate income for the policy. The rate of return varies from company to company and policy to policy. For the most part, this is not an aggressive investment and should not be relied upon as a primary source for retirement – only as a supplement. If you cancel your policy, you will receive the cash value that has accumulated to that point, if any. The cash value may also be borrowed against for whatever purpose you choose, reinvested into premiums, or left to build until maturity. The policy is typically structured to accumulate a cash value equal to the death benefit.

There are definite benefits and advantages to a whole life policy. Many people use them as a backbone in their protection plan with term life supplements or riders. The package best suited to your needs can be difficult to put together on your own. Consulting a professional can help to narrow your selection and find you the best coverage for your situation.

Universal Life Insurance is engineered with flexibility in mind. It offers a flexible policy where you can vary the premium payments or face value, so long as you pay enough to cover the insurance part of your policy. The premium you pay (reduced by expenses) goes into a policy with an investment attached – usually a short-term money instrument with a modest yield. You are typically guaranteed a minimum yield over the life of the policy.

The premiums are often lower than a whole life policy, but there is also more uncertainty about the accumulation of cash value. You have more control over the face value and premium payments – for instance, you may decrease the face value over time to match a mortgage balance (similar to a declining term policy) or increase your premium payments to accumulate cash value more quickly. If your premium payments plus earnings fall below the cost of maintaining the policy, your value will decrease and if the value falls to far, the policy may lapse. It is important to monitor the performance of your policy.

Variable or Adjustable Life Insurance policies allow you a variable death benefit and premium based on the performance of investments you choose through the insurance carrier. The cash value accumulates through investment in bond funds, stock funds and real estate funds offered through your insurance company and chosen by you. The investment portion of your policy functions very much like a mutual fund selection.

The greatest distinction between whole life and variable life is you are responsible for the performance of your policy. You have control, yet you assume more responsibility. Great care should be taken when working with variable life. Unlike term or other insurance products, you must be very active in maintaining your account. You assume the risks typically associated with stock investments. If your investments do very well, your level of protection is increased and the long-term benefits enhanced; however, if your investments do poorly you may loose your underlying cash value and consequently your coverage.

A variable policy can be a great product selection, however careful research and proper guidance are paramount. Insurance agents who offer variable life must be licensed securities dealers and registered with the U.S. Securities and Exchange Commission. Do your research into the investments available through different companies and take care to invest wisely. An experienced insurance professional can help you select a solid company with strong investment opportunities.

The Secret Value Of Permanent Life Insurance

If whole life insurance achieved a high rate-of-return, wouldn’t everyone want it?

Or … if your life insurance could be permanent—lasting your lifetime—without ideally any additional out-of-pocket outlay, is there any reason why you wouldn’t want it?

The problem is, we’ve been taught to look at life insurance as a “product,” rather than the key player in a financial “strategy.”

How can whole life insurance protect wealth from creditors, help us continue to save money during a disability, reduce taxes, give us more income to spend at retirement, and leave a legacy to the ones we love?

The real issue is whether adding whole life insurance to a financial plan gives us more benefits, more options, more efficiency, more liquidity, and more wealth.

The real issue is whether whole life insurance gives us more value during our lifetime—making our life better while we live and helping us realize our dreams.

If it can do all of that, can you think of any reason why you wouldn’t want it?

Whole Life Insurance sometimes gets a bad rap. Some people view it to be an unproductive way to accumulate cash over the long haul.

They need to think outside the box.

Whole life insurance is one of the best tools for accumulating capital. As the key component of a financial strategy, here are some of the benefits of whole life insurance:

• A way your long-term savings can continue during a disability
• Protection of your hard-earned savings from creditors
• A guaranteed growth of your money
• An interest rate that is very competitive among “safe” saving accounts
• If structured correctly, tax-deferral without 59½ rules
• Withdrawals from cash values on a tax-favored basis
• The ability to save Term Insurance premiums

The overall “productivity” of whole life insurance is found in the imagination of the policy owner.

Here are some examples of how smart people have utilized life insurance cash values to help fulfill a dream … and create a fortune.

James Cash Penney

J.C. Penney was the son of a poor Baptist preacher. He had a vision for selling dry goods through retail stores. He began with one store in a small Wyoming town. His dream grew to be valued at over $14 billion. The retail store that bears his name is a nationwide empire.

In 1929, when the stock market crashed, Penny’s dream was nearly wiped out. He rebounded with money borrowed on his $3 million life insurance policy. That fresh infusion of cash was enough to keep him in business. How productive was that policy?

Walt Disney

Walt Disney had a mental picture of what an amusement park should look like. His standard of excellence was radical at that time. After pursuing traditional means of financing, Disney realized that if his dream were to become a reality, he would have to provide his own financing.

It made his wife nervous, but Walt Disney began to collaterally borrow money from his life insurance cash values. By the time he had $100,000, he had decided on a name for his new venture: “Disneyland.”

Doris Christopher

A home economist with two daughters, Doris Christopher started her business while searching for a new career. Using $3,000 she borrowed from a life-insurance policy, Christopher bought some basic inventory—kitchen shears, spatulas, etc. and some lumber for crates to hold her products.

Her $3,000 seed money, grew into a multi-level marketing business that Warren Buffet bought in 2002 for $1.5 billion. Her house wares enterprise: “Pampered Chef.”

Ray Kroc

Ray Kroc didn’t have the recipe … but he had a marketing idea that changed the world. On the threshold of his life-changing decision, Ray was a distributor for a milk shake equipment company.

One of Ray’s customers was a pair of brothers who had a very successful drive-in restaurant. The neon sign in front of their Southern California restaurant simply read: “McDonald’s Hamburgers.”

When the two brothers failed at an attempt to franchise their hamburger joint, Ray joined their team.

During his first eight years, Kroc did not take a salary. Taking an even bigger risk, he personally borrowed money from the bank and his life insurance to help cover the salaries of key employees.

Eventually, Kroc bought out the McDonald brothers and built his hamburger kingdom. Today, McDonald’s serves over 50 million people each day through more than 30,000 restaurants in 119 countries.

By Brad Skiles

The “Living” Benefits of Life Insurance

With September being Life Insurance Awareness Month I thought I would use the occasion to talk about life insurance. One of the problems when discussing life insurance is the perception that someone has to die in order for life insurance to be of benefit to anyone.  Nothing is further from the truth.

Life insurance inherently has benefits that can used while you are alive but these never seem to get mentioned.  Television personalities like Suze Orman and Dave Ramsey say emphatically that “term” life insurance is the ONLY way to go and use the extra money to invest in mutual funds.  This does not work, the mantra of buy term and invest the difference has turned out to be “buy term and spend the difference.”  It simply illustrates that people “don’t know what they don’t know.”

Term life insurance is straight forward.  Its cheap life insurance that covers you for a certain number of years (typically 10-30) after which it terminates.  Whole life insurance however is the opposite…it covers you for your entire life, is more expensive than term insurance and accumulates a cash value (term does not).  To use an analogy, whole life is like buying a house (builds equity) and term is like renting.  If this were the only difference than the television pundits might have a case however the devil remains in the details.

It is my belief that a whole life insurance policy should be the foundation to any financial plan even ahead of a qualified retirement plan (i.e. 401k).  Before you think that I have committed blasphemy let me explain what you get in whole life insurance and compare it to a 401k.

First the Qualified Retirement Plan (401k):

1. Tax deferred /Tax Deductible
2. IRS approved
3. Limits on contributions
4. Employer match…sometimes
5. Can invest in stock market

Now lets look at whole life insurance:

1. Tax Deferred (Not Tax Deductible)
2. No limits on contributions
3. Tax Free income and withdrawals
4. Tax Free to Heirs
5. Penalty Free Access under 59.5
6. No required distributions at age 70.5
7. Has guarantees
8. Can take out a loan over 50K (no limits)
9. No loan repayments required
10. Unlimited Investment Options (i.e rental real estate)
11. Can be used as Collateral (i.e. for loans / small business)
12. Estate Tax Free
13. Liquid (access to funds at anytime – no hardship required)
14. Disability Protection – automatic funding of retirement if you become disabled
15. Use as your own bank
16. Self Completing – if you die spouse (retirement) and children (college education) are paid for
17. Judgement Proof – protection against creditors and lawsuits
18. Potential for Dividends – more beneficial than employer match as it can potentially guarantee future tax free retirement income
19. Protection from future income tax rate increases
20. Guaranteed to grow every year
21. Not stock market based – protection against market risk
22. Long Term Care benefits – protects against the costs of health care in retirement
23. Retirement Income Flexibility -Allows you to spend down your other assets in retirement and have peace of mind
24. Provides money for terminal and chronic illnesses
25. Last but not least…death benefit – money when you need it most.

Why aren’t these benefits ever mentioned by the media?  Because it costs to obtain them or is the status quo more easy to get across to people?  Max out your 401k and buy term insurance.  I realize how hard it is for people to look outside the box for alternatives from what they have been told for years to do.  However when you look at the benefits provided by whole life insurance I would argue the extra perceived cost (versus term insurance and qualified retirement plan) is certainly worth it.

Qualified retirement plans like the 401k were never meant to be a primary source of retirement savings but were deemed a supplement to social security.  Whole life insurance deserves a look as another foundational element to any retirement plan at any age.