Financial Survival Kit

August 31, 2006 by  


By Bob Wood

If you think like I do—and I hope you’re getting help if you do—you tend to see financial implications where many others do not. We can draw parallels to the markets or our own financial situations from the strangest places. Recently, a television show on survival in the wild has provided inspiration for me.

On Friday nights on The Discovery Channel, I sometimes watch the show “Survivorman,” featuring Canadian Les Stroud. As described by the program’s web site, the premise of the show is: ‘‘No food, no shelter, no fresh water, no tools… no camera crew. One man—alone in the wild for seven days with only his wits and stamina to sustain him.’’

Stroud is sent to the remotest, least habitable places, where he survives, using only items found in surrounding swamps, deserts or remote mountains. He exists in places where survival would be almost impossible for most of us. Given only warm clothing, he relies on himself to find food, water, shelter and tools for hunting and fishing.

Oh, surely there is a safety net of sorts, should he not find food, falls victim to illness or an accident, or meet an unexpected alligator or venomous snake. Surely The Discovery Channel wouldn’t leave him to die for dramatic effect or publicity.

So where am I going with this? What parallels do I see in your financial future? Well, to start, I see a need for building the proper foundation for your family’s financial future. In other words, what would happen if your family unexpectedly found itself in a fight for financial survival? Perhaps too many of you rush into the stock markets without having built that vital financial foundation with life insurance.

And I’m talking about large amounts of that survival stuff! Let me illustrate. Have you heard of someone who died and left a surviving spouse and children with too much money? Or have you heard of someone dying unexpectedly when far too few assets were available to replace a lifetime of income? Too often, the surviving spouse and children are left to fend for themselves. At times, they find themselves in foreboding circumstances like the “Survivorman” hero Stroud. Yet Stroud is uniquely prepared to scratch out the basic necessities for survival, while most of your loved ones, when left behind, are not.

Why would anyone be in a hurry to buy stocks or mutual funds without first buying loads of life insurance? The answers befuddle me. And, yes, I’ve already heard all the objections, since I once sold insurance! But never, ever have I heard a good excuse for not buying at least enough insurance to enable your family’s meeting obligations in the event of your unexpected death.

In my local paper today, I see death notices for six people under the age of 50. Premature death happens, perhaps more often than we realize. The six were all men. And it’s a fact of life that we men tend to die sooner. But what becomes of our family members left behind? Do they continue their lives as before, staying in the same home, making sure the kids get to the colleges of their choice, as envisioned all along?

In most cases, the answer is “No,” which is a really bad thing. Life insurance is easy to get and extremely cheap, too, considering the benefits of a good policy. I know what you’re thinking: “If it was so cheap, I’d have some!”

You probably think that anyone selling insurance is really just looking to make a big commission at your expense. Actually, in the case of term insurance, commissions are rather small. And so are the premiums, since term-insurance pay-outs occur less often than the superior, more permanent coverage. But what could possibly be more comforting to your surviving dependents shortly after your death than an insurance agent arriving at your front door with a large check in hand, made out to them? What is the agent’s value then? And how big would you like that check to be?

Another frequent objection to insurance is that if you live a long life as expected, those premium dollars were wasted. That is a lame reason for not keeping your family out of the financial wilderness if you should die early. Look at it this way: if you live long enough to outlast your life insurance coverage, you had sufficient time to amass the financial resources needed by your family at your death. Either way, the family wins.

The idea that you would rather grow your IRA or brokerage account with the hope of accumulating sufficient retirement income plays into the false hopes that have failed to pay off for millions of stock market investors in the past few decades. Life insurance is a sure thing; the markets are far from it.

I am convinced that putting money into the stock market before buying a big life insurance policy is making one of the worst financial decisions possible. It would be like “Survivorman” Stroud entering the wilds without a couple of basic tools, such as a Swiss Army Knife.

And that is the best analogy I can make for the best kind of insurance policy to buy. Commonly referred to as “the Swiss Army Knife of financial planning,” a permanent life insurance policy is the best kind to own. And the most expensive of these policies is the best ever! Hey, where did everybody go…?

Let’s face facts here. As with anything else we buy, the less we spend, the less we get. And we would all like to think of leaving our survivors with as much as possible with the highest degree of certainty, right? So why skimp on something so vitally important to their lives after losing you? How much are you worth to them? Ask them!

So if this topic is hitting home for you, get on the phone with your insurance agent and ask him to meet with you and discuss the wonders of permanent life insurance, notably a Variable Universal Life policy—the most expensive kind. But it’s the most expensive for a reason: it is the best coverage to have. And even better, you don’t have to die to realize the benefits!

Let’s assume that you live to a very old age and never need a big check for your family’s survival. You covered your obligations with your earnings. But you may still want to leave something for your children and grandchildren upon your death, while still enjoying added benefits in your old age. How about tax-free income? Does that sound good?

If you are going to invest in the stock market anyway, doing so along with this type of insurance coverage allows tax deferred growth, similar to your IRA or 401(k) plan. And you have the benefit of mutual funds in these policies.

Even better, when managed properly—with the help of a qualified agent, your new best friend—these policies can produce eventual cash accumulation, which can be taken as loans against cash value at current market rates. And those withdrawals are tax free.

Of course, for this benefit, you will have to put a lot more money into the policy than required to cover the cost of insurance. I recommend adding as much as allowed for as long as you can. Should you live long and need more coverage due to bigger home mortgages or more children, the policy’s death benefit can also rise without the need for additional policies.

As you get older, sufficient cash accumulation can reduce or eliminate the need for premium payments during retirement. And with personal income tax rates sure to rise in future years due to massive fiscal imbalances in our collective accounts for Social Security and Medicare obligations, taking tax free income from your policy will look better than the tax scalping your IRA funds may well suffer.

The idea of buying life insurance is not a popular one. But having that fat policy will make all the difference in your survivor’s ability to continue a normal life without your help. And since I no longer sell life insurance and will make not one cent from your rushing out to buy it—as you should, I hope you will take my advice in the manner intended.

If you’re still balking, a low-cost alternative to Variable Universal Life coverage does exist. Fidelity and other financial groups offer no-load policies that pay no commissions to selling agents. However, I do not recommend them. Life insurance is a legal contract, and these financial life savers are far too important to do “on the cheap,” just to save a few dollars. Your agent is worth what he makes—and many times over that, if the worst happens to you.

The best time to buy coverage is when you are still young. The cost of insurance is at its lowest then, and you’ll have plenty of time to accumulate cash value. And if you live long, the estate planning opportunities are numerous, so you will always find wonderful reasons for having this tool in your financial survival kit.

Go now and buy the biggest policy you can afford. Then we’ll talk more about what to do with the rest of your discretionary cash in the stock market. Go. Now!

Have a great week,
Bob

Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., bwood44@tampabay.rr.com.

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