Layering Life Insurance

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There are two basic categories of life insurance: term and various forms of cash value life insurance. Today, I am going to talk about term life insurance and ways to use it more creatively to not only obtain a more appropriate amount of long-term protection, but also to save money.

Term life insurance is simple. You pay a fixed annual premium in return for a promised amount of protection from the life insurance company during the term of the policy. The face value of the policy is paid to the named beneficiaries only if the insured person dies during the specified period. So, term life insurance is similar to homeowners insurance in that if nothing happens (during the term), you continue to pay the premium, and if something happens, the insurance company pays the claim. Term life insurance policies are generally quite affordable because most people buy and hold them during periods of youth (say under age 60). Therefore, since the risks are lower, the costs are lower.

Naturally, if you are 30 years old and buy a $1million 5-year term life insurance policy, the annual premium will be lower than if you were to buy a $1 million 10-year term life insurance policy since younger ages are covered during the period.

Another important aspect about life insurance need is that it declines as you age. This makes intuitive sense because insurance is designed to provide instant wealth needed to replace the lost future income, or to cover future expenses that the insured’s income won’t be able to cover. The younger you are, the more insurance you would need to replace future lost income. However, as you age and begin to build wealth, the less need there is for life insurance.


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New Video - Build Wealth by Paying Taxes Now

In my last blog post, I wrote about the use of Tax Bracket Smoothing as a technique to build wealth. In the video below, I expand on the concepts presented in the newsletter, and provide some demonstrations of how the strategy works, and how to confirm the value of such strategies.

Simply click on the image below to launch this educational video.


Build Wealth By Paying Taxes from Bill Starnes on Vimeo.

Build Wealth by Paying Taxes

What if I told you that you could build wealth by paying taxes—and paying them now instead ofincomeacceleration later? Most clients don’t want to pay taxes at all, let alone sooner rather than later. In fact it is common wisdom to defer income taxes as long as possible. How do you defer income and therefore taxes? The table to the right shows some typical income acceleration / deferral strategies.

Deferring income makes a lot of sense—especially during the years where income is quite stable or high. However, it is also true that income deferral (and therefore tax deferral) is the wrong strategy at other times. For many wealthy and retired clients, a tax-deferral strategy can result in getting clobbered with higher taxes down the road, at higher tax rates than you would have otherwise paid today. So, what if you could realize income now (in order to pay a smaller tax) instead of realizing it later and (paying a larger tax)? If you have to realize this income at some point anyway, would you rather realize it now at a lower tax rate, or later at a much higher tax rate? This multi-year tax planning is called Tax Smoothing and it can build wealth by saving money on taxes.

bracketsCurrently, there are seven tax brackets. – 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. As your income rises, it fills the lower brackets and then moves to the next higher bracket. For example, for married clients the first $18,000 of taxable income is taxed at 10%, the next $55,000 is taxed at the 15% tax rate, etc. With a tax smoothing strategy, you would avoid/defer income out of the higher tax brackets and accelerate it into the lower tax brackets.

However, this is not done on just an annual basis. The biggest benefits are realized when tax smoothing evaluates your anticipated tax rates over time as illustrated in the table below. Looking at tax rates this way is especially useful during the years where there is much variability in income (and therefore tax rates). Generally these variable years occur between the time of employment and age 70. When there is a lot of variability of income, there is a lot of opportunity for tax planning and tax savings.

To take advantage of tax smoothing, you must know which acceleration and deferral techniques fit with your own projection of taxable income and future tax brackets. Even more so, you much know which tax brackets to maximize. Some clients should maximize the 15% tax bracket, while others should maximize the 25% tax bracket.



Take a moment to study the chart above. Notice how “bumpy” it is. It is bumpy because this client’s income is changing quite dramatically. Think of tax brackets as buckets you may want to consciously fill with income in order to take advantage of low rates now. Then you don’t have to face them as severely in the future.

Low brackets are something you USE—not celebrate!!


The original length version of this article was published in the October 2015 edition of the Mallard Flyer which can be accessed at this link: Build Wealth by Paying Taxes.



Your Information is for Sale!


With the recent IRS related fraud issues (IRS imposters, and IRS security issues) I have been thinking and reading more about fraud, identity theft, and methods of protecting clients from such problems.  


Identity theft occurs when someone uses your name, Social Security Number, date of birth, or other identifying information, without permission, to commit fraud. For example, someone may have committed identity theft by using your personal information to open a credit card account or get a loan in your name.


Last Sunday on 60 Minutes, the program highlighted the problems at the IRS which allowed countless criminals to participate in identity tax refund fraud, thereby collecting (at least) $5.2 billion dollars in unrecoverable tax dollars. Per Steve Kroft, "Proving once again what every con man already knows: there is no underestimating the general dysfunction and incompetence of government bureaucracy." The IRS commissioner seemed to blame the outdated systems that the IRS is built upon.


Just in the last year, the Office of Personnel Management (twice), JP Morgan Chase, and Home Depot have also had well publicized data breaches. However, these were just the big ones. Worse, the Identify Theft Resource Center reports that in 2014 there were actually 783 major data breaches. See the following link for an outstanding visual of major data breaches over time:  VISUAL  


It also may not be the major breaches that get you. As mentioned on 60 Minutes, con artists buy patient names from office workers in small dental offices (and likely other similar small offices) with access to very sensitive information.    


So, it is obvious that our information is not safe, and worse, that it is already for sale! Therefore, since our information is already out there, what can we do to protect ourselves? Most of the following tips come from either KrebsOnSecurity website or ConsumerReports:




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Numbers You Should Know

It is easy to get lost in numbers, projections, and spreadsheets. Getting so deep into the weeds is an easy way to lose sight of where you are headed and what figures are really important to stay focused on. When it comes to your physical health, there are several very important numbers: your blood pressure, weight, BMI, cholesterol.  When it comes to your finances, there too are also several very important numbers that can signal your financial well-being.

There are several important numbers and I will review one in turn which include:

1) Your Savings Target

2) Your Equity Allocation

3) Your Marginal Tax Rate (not bracket)

4) Your Mortgage Interest Rate

5) Your Credit Score

6) Your Total Annual Lifestyle Spending


1. Your Savings Target

Saving is clearly the single most important factor in determining your future financial security. This is because saving ensures you are living below your means and without savings, you would have no money to invest. First, you have to move from an attitude where saving is painful to one where you obtain a sense of satisfaction and accomplishment from saving. This move can come sooner if you set up a process for regular saving and you see the results—more choices now and in the future. The big question, however, is HOW much should you be saving given your situation. 


Rule of Dumb: Save 10% of your income.


The amount you should be saving each month or year is determined by many factors and therefore, there is no simple rule of thumb answer. While young people who have not yet begun to save should aim to save at least 10% of their income, that does not hold true for everyone else. Instead, at Mallard, we evaluate our client’s financial security considering every known detail in order to calculate the needed savings rate. Some employed clients don't need to save at all (having done well), while others should be saving 30% of their income as a result of falling behind over time. Perhaps a divorce, business failure, or the desire to live for today for too long resulted in being behind the curve.  Some clients with regular monthly income should be focused on their monthly savings percentage, while others, due to their highly variable income, need to be focused on an annual savings target (in dollars). 


Only real financial planning that considers all of the details of your situation will provide the correct answer to how much you should be saving. You must know this number and keep it in the forefront of your mind.


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