Life Insurance 101

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I’m back after a fantastic spring break vacation with my guy. We did plenty of awesome and relaxing activities, but one of the many financial activities we did over our break was buy some extra life insurance. You’re probably thinking, “But Christine, you’re in your 20’s. Do you really need life insurance?” To which I would respond with a resounding, unflinching, “ YES!!”

There are two types of life insurance; term life insurance and permanent life insurance. Both types of life insurance pay out their death benefit if the policy holder passes away.  However, there are some major differences between term and permanent life insurance, three of which I plan to talk about below.  

The first major difference between the two is that term life insurance has an expiration date and permanent life insurance doesn’t. So at 30 years old you could buy a term life insurance plan that lasts ten years. It would expire when you turn 40. However, if you purchase a permanent life insurance plan at 30, it never expires.

Another major difference between term and permanent life insurance is that term life insurance doesn’t build cash value, while permanent life insurance does. With term life insurance, you pay for it, and it covers you for a specific amount of time, somewhat like care insurance or home insurance. With permanent life insurance, you pay for a specific number of years, lets say ten years again, but at the end of the ten years, when you stop paying, the policy doesn’t expire. As the years pass the policy builds cash value and you can withdraw from the policy for things like retirement income or for unexpected expenses. When you take money out from the policy, the amount you borrow gets deducted from what your death benefit would be.

A third major difference is that term life insurance tends to be significantly cheaper than permanent life insurance, especially for young people. Because of the fact that you build value over time with permanent life insurance, it is more expensive.

Depending on your situation, you may want to consider term, life, or both types of insurance. For example, if you are in your 20’s with no dependents (kids), no mortgage, and no health problems, you probably want to get permanent life insurance. It will be cheap because you are young, and the risk of you dying in the near future is pretty small. It will take you a few years to pay off, and then you will be insured for the rest of your life. Plus, it will give you an option for supplemental retirement income in the future.

If you have kids, you probably want to get some term life insurance. It’s cheaper than permanent insurance, so it will be better for your diaper and baby food filled budget. Regardless of whether you are a working parent or a stay at home parent, I recommend getting a term policy. If you’re the breadwinner, you want enough money that if you aren’t around to provide for the family, you know the family will still be able to live.  If you’re a stay at home parent, you should consider getting a policy that is enough to cover the cost of a caretaker for the remainder of your dependents’ childhood years. Remember, if you aren’t around while your significant other is out bringing home the bacon all day, your child(ren) will need care, and care is expensive.

Personally, I’ve chosen to take a balanced approach to life insurance, meaning some term and some permanent insurance. I have enough term life insurance to cover my major financial obligation, my mortgage. This way, if anything were to ever happen to me, I know that D, my fiancé, could stay in our home comfortably. Luckily, I don’t have any other debt, but if I did, I’d want enough to cover any other major debt I had. I also have some permanent life insurance. It’s more costly, but I’m using it as a financial vehicle for my retirement planning. Specifically, I plan to use it to supplement my income upon retirement. Or, in the event of my untimely passing, it would cover my funeral costs and give my family a couple thousand extra dollars for any unexpected expenses associated with my death.

The bottom line here is that you may not realize it, but you need life insurance. Whether you are single or taken, have kids or not, it’s a smart move to ensure your future financial stability and the financial stability of the people you love just in case you aren’t around anymore.  

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Thoughts About Deloreans… and Investing

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 Like most children of the 80’s and 90’s, I have a deep love for the Back the the Future movies. No, not because Michael J. Fox was oh-so-dreamy as Marty McFly in those movies. It’s really because time travel via a Delorean is just about the coolest idea ever.

We’ve all got a couple of things we’d like to take back ever having said or done, and the Delorean is certainly the tool of choice for fixing those faux pas. However, few mistakes ever will top failure to plan for your financial future. Remember, those who fail to plan, plan to fail. Which means that if you aren’t investing in your future today, you’re already planning a financial belly flop for retirement.

We all do our fair share of moaning and groaning about bills, rent, mortgage, debt, utilities, and whatever other expenses we incur from month to month. It’s already enough of a challenge to pay bills and stay ahead of the game, especially for those of us at the beginning of their careers, or on the lower end of the income scale (or both). But it’s a challenge you need to be up to if you want to secure your future financial stability.

I’d suggest starting out by taking 1% of your income – more is better – and investing it into a 401(k) program (or similar) at your workplace. Most employers offer some type of 401(k) program to their employees. For those unfamiliar with what a 401(k) is, here’s a definition, courtesy of Investopedia.com:

A qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pretax basis. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.

Chickvestor Translation: You choose to enroll in a 401(k) program and the following things typically happen:

  • You choose to have some of your pay put into a 401(k) account. This usually happens pre-tax. Pre-tax means that the money you choose to put away is taken out of your pay before Uncle Sam takes his share. You are not paying tax on the money you are putting into the 401(k)… yet. This decreases your taxable income, which in turn can reduce your tax bracket, decreasing the percentage of your income that you are required to pay in federal taxes. Any money that you don’t pay in taxes is money in your pocket!
  • Employers typically will match your contribution to your 401(k) account, up to a certain amount, usually in a percentage. Meaning, if you put away your maximum of 5% of your pay in your 401(k), and that equals $3000, your employer will put in $3000 just to match what you put in. Suddenly, your $3000 annual investment is a $6000 annual investment.
  • You earn interest on the money that you put away. That means your money accumulates value while waiting for you in the 401(k) account every year. You don’t pay tax on this money until you choose to withdraw it from your account, so let it compound interest work its magic on your money for a few years before withdrawing it!
  • Be sure to read the fine print. Different 401(k) programs have different perks and limitations. Check with your employer to find out the specifics offered at your place of work.

Although 401(k) programs are not the only programs offered by employers, they usually are the most common. Other programs include Roth IRA’s, tax-deferred annuities, life insurance, and a whole bunch of other investment tools and strategies. Your best bet is to speak to your employer to find out your options for retirement planning.

The bottom line here is that if you aren’t planning for your future, you are committing a major financial faux pas. So unless you’ve got Doc Brown’s Delorean in the garage at home, start your savings account, the sooner, the better.  

Cheers to Good Times!

Imagine this: you just got a new job!  Or a raise! Or a bonus! Or some other type of windfall.  In any case, wahoo!

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First off, congratulations. No doubt, you have earned it. Now, what to do with that extra income becomes the question. Your first impulse is probably to go out and celebrate, but should you? Maybe you should save it? Invest it?

How about all three? Yes, you can have your hard earned cake and eat it too! Try divvying up your newfound earnings in a way that allows you to feel like you are enjoying your money but making it work for you too.

To achieve this, try splitting your extra income into three equal quantities. Set aside the first third to put into your retirement, savings, or other investment account. Use the second third to pay down any debt you may have, be it credit card debt, student loans, mortgage, or whatever other bills are on your mind. Last, use your final third to treat yourself. Get a manicure, take an overnight trip, or go out to dinner with some friends.

It’s important to keep your financial psyche positive by rewarding yourself for your hard work. So be sure to take the time to invest wisely and grow your nest egg, but don’t forget to allow yourself to enjoy the fruits of your labor.

Hiatus Over

 My apologies for the hiatus, but I’ve been busy doing something I hate. Something I despise. Abhor, even. It’s been the bane of my existence (and the reason my social life has been on pause) for the past month, and it’s finally coming to a close. I’ve been moving.

Granted, my reason for moving has been positive and wonderful. I’ve taken an important step on my financial path by purchasing a multi-family home. That’s right; I’ve become a landlord.

True, I already work full time. Yes, this will add to my list of responsibilities. However, it’s done some positive things for me, such as:

  1. Diversified my income. Most of make our income by working. By purchasing a home that can get rent from, I’ve created an additional stream of income, called passive income. Passive income is money that you can make without having to work (Making money for no work? Yes please!). Lots of über-rich people do this. They call it collecting money on their investments. may not be among the ranks of the Warren Buffetts of the world (yet), but everyone has to start somewhere.
  2. Taken a significant step towards paying off my mortgage. True, I have a mortgage and it will take years for me to pay off. However, the passive income I am making from rent covers all but $300 of my mortgage each month. That means all I am responsible to pay for are the taxes, insurance and utilities/home improvements. Granted, these expenses are significant, especially in my area, but it’s more palatable when your mortgage payment is minimized.
  3. Invested in an asset. Property values have been volatile, and are down at the moment. I was lucky to get a deal on a property which I never would have been able to afford before the property bubble burst. Coupled with an exceptionally low fixed interest rate on my mortgage, I really feel like I’ve scored. With some luck, my property will appreciate in value over the years that I plan to own it, creating another opportunity to make money on my investment.

True, every investment comes with a risk. But with proper research and planning, I’ve done my best to invest in a property with the potential to appreciate and produce income. Now, readers, I’m looking for suggestions for cost-effective home improvements. Comment below!