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November is Long Term Care Awareness Month.  It is a good time to review your planning and coverage.

What?  You are only in your thirties with young kids?  Great!  Review your parents’ coverage!  Why?  My grandparents went into a nursing home when I was young and spent several years there.  And my parents used most of the money that they had been saving for my college to help pay for it because there was no long term care insurance.  I am still paying off student loans, something my grandparents would have never wanted.  My parents have long term care partially to make sure that my siblings and I do not have to chose between our parents’ care and our kids’ future.

LIAM  is about understanding life insurance and its applications.  So let’s take a look at an application that maybe you haven’t thought of: insuring your parents.

The first thought that many people have on this is “That’s morbid!”  Death is an inevitable part of life, and understanding that death will eventually come allows us to embrace life even more, to be able to plan ahead with clear thoughts instead of emotional reactions.

Life insurance is designed to create an estate at death, whether it is when you are thirty and have young children and a mortgage that need to be taken care of, or when you are eighty and have grandchildren.  Assuming that Mom and Dad want to create a legacy to help their grandchildren or to assist grown children financially, life insurance is a smart financial planning tool.  Let’s look at a case study.

Assume that Mom and Dad are 70 and have three kids.  One of the kids is very successful, one is OK, and one is a financial mess because they just are lazy and has never grown up.  Let’s for simplicity say that each of the kids has two kids, so there are six grandchildren.  Mom and Dad are retired and aren’t going to worry about money, but aren’t lavish.  They have “enough, but not too much”.

Successful son knows that ultimately his brother that is a mess is never going to be able to send his kids to college nor own a house because of his inability to be a financial grown up (he has no mental or physical disabilities, just lazy and made a lot of mistakes).  The OK one will not be able to send his kids to school without a tremendous amount of student loans even though he is hard working and intelligent because of his career choice.  The successful one is not concerned about his children’s education or his own financial future, but does not want to be his brother’s keeper for the rest of his life.  So what should he do to make sure that he helps his relatives while not coddling or insulting them?

He buys life insurance on Mom and Dad.  He names the other brothers and their kids as the beneficiaries (and his kids too so that his wife doesn’t complain).  And he makes sure Mom and Dad sit down and explain the planning to his brothers.

When they pass on, each grand child and the other two brothers get one eighth of the insurance proceeds (say $100k each for ease of discussion), expected in a bit over a decade.  This will be enough top cover state school education for each of the grandchildren, guaranteeing at least a basic level college education.  If they want to go to a higher level school or for graduate work it will be the kid’s responsibility to cover the additional costs, but getting the threshold education covered is a huge help and very important to Mom and Dad.

There is also enough money for the OK child to either supplement their children’s education or their retirement savings, basically making sure that they too will be financially OK for the rest of their life.  They won’t be rich, but they will not be completely stressed about money.  The insurance makes their life a bit easier.

And the brother that is a mess?  His kids will have the chance for their education, something he would have never been able to achieve.  There will be an influx of cash to allow him to eventually buy a house if that is the goal, or actually be able to save for retirement.  Yes, he could blow it on stupid things like muscle cars and beer, but with some pre-planning by Mom and Dad that too could be avoided and this child protected from themselves (especially if they have a chemical addiction).

And the successful son, what does he get?  Peace of mind!  He knows his nieces and nephews will get a decent education so that they have a shot at success.  He knows his OK brother will continue to be OK, even a little better than that.  And his mess of a brother will not be his financial responsibility ever again.  Successful brother has basically bought himself independence from the financial and emotional burden of the rest of his family by planning ahead with Mom and Dad.

And Mom and Dad get to spend more money on themselves and their grandchildren while they are still here because of the life insurance planning.  They have a guarantee of a legacy for the future, so can go ahead and spend a bit more and spoil their grandchildren like all good grandparents do because now they can do so with a clear conscience.  All because of the life insurance.

 

Let’s talk about life insurance insurance for a few minutes as it is Life Insurance Awareness Month, or LIAM. Specifically let’s talk about how much life insurance you should have.

Basically you should have enough life insurance to make sure that any obligations you have are taken care of, and that any dreams you have don’t die with you. There are all sorts of calculators available from the major life insurance companies or LIFE (The Life Insurance Foundation for Education), but instead of an esoteric black box gadget I want to give you a few basic back of envelop ways to figure out ballpark how much coverage to purchase.

First, how much debt do you have? You should start with that much coverage (total) so that you do not burden others with your debts. AS for the mortgage, it makes sense to purchase the full amount owed to create a cushion and flexibility but to generally not pay it off for tax reasons.

Add to this number expected end of life needs. The last number I saw was the greater of $15,000 or 4% of your net worth, unless you are in a “complex scenario” meaning you have a business, particular property (like the family cabin in the mountains that everyone wants), or will have to pay estate taxes. We believe that this number is a little conservative because it does not take into consideration more than the most rudimentary medical bills or if there are any special desires such as my huge Irish wake, but it can be a good starting point. Dying is more expensive than most people believe.

If there are any future expenditures (like college costs, Sweet 16 Party, etc), add the current price of these in. Yes, college is going up faster than the general inflation rate, but we will take this into account in a few different ways to make sure that the kids still graduate from Whatsamatta U.

Add to this what is needed to produce the income stream that is needed. First calculate the net income needed (after taxes) on a monthly basis, then subtract from here the after tax income that you can count on (spouses income, pensions, Social Security, etc.). This leaves the monthly income shortage. To cover this we need insurance that will generate an income stream upon death, and a good rule of thumb is $1 Million buys $2,000 a month of income, after taxes, adjusted for inflation, for the rest of your lifetime. So if you need an additional $1,500 per month of income for your wife to supplement her income and the Social Security, the calculation would be:

Income Generation # = $need/month x ($1M/$2,000/month)

= $1,500 x ($1M/$2,000)

= $3/4 M

=$750,000

Then you add up the debts, the final expense costs, future needs, and the amount needed to generate the income. If you have any existing insurance subtract it from the total, and you get the total amount of insurance you should be buying to make sure that your dreams don’t die with you. It is probably more than what you thought. But insurance is designed to replace you as an economic entity,m and you are going to be dead a long time so that income needs to be replaced.

One note, we didn’t put in the safety factor yet. Take the number you got and add 10% and you have a good financial engineering fudge factor to cover stock market declines (like now), bonds having low interest rates (like now), spiralling property tax bills (again, like now) and the sundry other things that can affect the best laid plans.

Remember that this is just a back of the envelop calculation, but it makes a good starting point for your planning if you want to verify what an agent has told you or want to try and figure it out on your own.

Question: Should I pay off my student loans ASAP?

Answer: Generally not, for a number of reasons.

One, the interest rates on student loans tend to be fairly low, much lower than credit cards or other debts.  As such they should be fairly far down the list in terms of which debts to attack.  Add to it the fact that the interest is usually deductible, so the rate is actually even further down the priority scale.

Secondly, you need to compare the rate of the loan with the opportunity cost of paying it off.  Using a conservative rate of return (even 6%, a good assumption for 10 year returns in accumulation.  Add 1% per full decade thereafter assumption up to 9% for retirement oriented savings), it is pretty easy to see that paying off the loan quicker actually sacrifices the returns, thus creating negative wealth by paying off the debt faster.  Yes, it might FEEL good, but looking at the numbers it is the wrong move.  Paying off 5% faster than earning 8% is a net LOSS of 3% per year, which is actually fairly substantial over an extended period.

So hopefully those student loans got you an education where you learned enough to think about the situation before gut re-acting.  If it did, than my logic is intuitively obvious and you will make the right move.  If not, maybe you should get a refund for college.

I am in the process of getting “The Financial Mistakes of New College Grads” in college bookstores across the country.  The idea here is to allow propecia instructions parents to see the book and say “Hey, this would be a good graduation present for Johnnu or Suzie.” 

It is also in line with the concept from “The Untouchables” where Sean acomplia online pharmacy without a prescription weight loss Connery tells Agent Ness “If you want a good apple, go straight to the tree”  By getting the book right there where they get their other books, it increases the receptivity for the message.