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5 Ways to Take Dividends From Your Life Insurance Policy

Everyone at some point gets a Life Insurance policy. Why? Because if you die and you’re a parent, what is going to take care of your kids? If you have a spouse, what will keep your spouse running?

But I’m not here to argue whether you should or shouldn’t have life insurance.

I’m also not hear to deep dive insurance or explain the process of buying insurance.

This is about what you do when they ask you “How would you like to take your dividends?” My what? Aren’t dividends a stock thing? (Some maybe even asked, “What’s a dividend”?) To be brief: Dividends are the little extra bits a company pays to you for owning their stock. Some companies don’t give dividends because they reinvest earnings. Many life insurance policies pay dividends in some form, any policy that either invests in the market directly, or allows you to control the investments in the market will yield dividends.

There are 5 ways you can receive dividend payments. Here’s the simple way to remember: CRAPO

Cash

Reduces your basis and is not taxable. Basis is how much money you’ve put into the investment. If you’ve invested $2000 in a stock, and then sell it for $3000 later. You made $1000 dollars. Your basis is that $2000 you put in. With this option you’re reducing your basis by the amount paid out. This also has no tax consequences immediately.

Reduction of Premiums

This is just reducing your premiums. Premiums are how much you pay for your insurance contract. So, you can use the dividend money to make your expense a little less.

Accumulate Interest

With this option you basically keep the dividends invested. The insurance company keeps this money in the same account, but tracks its earning separately. The reason for this is that it’s taxable in the future. The rest of your invested money is still in that tax advantaged insurance.

Paid-Up Additions

Think of Paid-Up as “Paid-In-Full”. You utilize the dividends to add a tiny little bit of permanent insurance to your policy that you no longer pay premiums for. A lot of life insurances have options where you can convert your entire policy over to a permanent paid-up insurance. Of course, this reduces the amount of coverage, or money you get at death, due to the fact that you’re no longer paying into it.

One Year Term

Term insurance is a lot cheaper than Paid-Up insurance. This is when you use the dividends to buy term insurance that lasts one year then expires. The reason someone may do this is because they decide Paid-Up doesn’t add very much. If you look into the cost of permanent insurance compared to term insurance, you’ll see really quickly that term insurance pay-outs can be huge compared permanent insurance. The other real difference though, is term insurance expires. So, if you don’t pass away during the time, then it expires.

Most people usually go with Paid-Up additions, but depending on your situation you may choose another.

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7 Types of Financial Companies

There are 7 basic types of firms that provide financial assistance, support, guidance, education, investments, and solutions/products.

There are Registered Investment Advisors (RIA), Broker Dealers (B/D), Insurance Companies, Robo Advisors, Accounting firms, Tech Companies, and Discount Broker Dealers.

First we have our Registered Investment Advisors. These are, as a general rule, partnerships or smaller corporations that manage the overall financial situation of clients, and in some cases institutional investors as well. They must be registered with the Securities and Exchange Commission (SEC) for each individual state that they have clients in.  An RIA Financial Advisor will conduct information gathering, Risk tolerance, and spend time getting to know your goals and needs. Most of the time they also educate a client as to what the implications are of making different financial decisions. One of my favorite things about an RIA, is that many of them will be full service. They’ll help with investments, real estate, insurance, estate planning, power of attorneys, wills, and more. They may outsource part of it, or bring in an expert to do estate planning, etc. But they keep you aware of the broad scope of protecting, growing, and sheltering your money. You may not have heard of any of these, but here are some RIA’s: Geneva Advisors, HighTower Advisors, Mill Creek Capital Advisors, Ferguson Wellman Capital Management, Swan Global Investments, and True North Advisors.

Broker/ Dealers are those companies that are like The Wolf of Wall Street. I mean, except that fact that they aren’t awful money laundering devils. They call people to sell them financial products, usually in the form of stocks or bonds. Investment advice is given, and they range from small boutique firms to large commercial companies and investment banks. The difference between an RIA and a Broker/Dealer is a B/D historically purchases their own securities (stocks and bonds and other products) and then sells them to the customer, whereas an RIA buys securities on the client’s behalf. The Broker of a B/D is buying and selling on behalf of clients, the Dealer side is when the company trades their own securities. Examples of Broker/Dealers include Raymond James, Wells Fargo, AXA, Waddell & Reed, Voya, and Edward Jones

Insurance Companies usually deal with just that… Insurance! Northwestern Mutual, Geico, Allstate, State Farm, Progressive, Farmers, Liberty Mutual, and New York Life are a few examples. Most of the ones that have huge TV ads. There isn’t much else to say. These companies are very important, and having specialized skills in specific insurances can be very beneficial in reducing premiums and having quicker turnaround times when claims are made. Some RIA’s and B/D’s will have specific individuals/teams in their group that specialize in either selling insurance, or working with insurance companies to get your insurance. One thing I like is how an RIA can work with many insurance companies, whereas an agent for a specific company only sells that Insurance. Some insurance agents will be licensed with several companies and can sell you policies from different companies depending on your needs.

The way of the future is Robo-Advisors. The basic concept here is that you can break down risk tolerance and needs into numbers, and computers can then spit out information about what you should do, or you can authorize a computer to auto-invest and rebalance and work out your investments for you based on your information you give it. Very smart people back these up and as a result of mass users for one program it can be cheaper to use a Robo. Remember though, that holes are usually left, and Robo’s can only do so much.

Tech companies are companies that leverage tech with finance. Lending Club is an example of that. You add money that is utilized in creating loans that then pay you back as the person pays back lending club. Robinhood is a financial app that has free stock trades. Stripe is a payment taking company. Some finance companies create platforms for making trades like TDAmeritrade or TradeKing, (though some may be better classified as Robo-Advisors, depending on how they are used). Some create plateforms for financial planning, like MoneyGuidePro, or SilverTree, that allow you to maintain and track financial data and policies for insurance and estate documents all in one location. One company local to Utah is TradeWarrior, which can auto rebalance any portfolio while taking specific needs and illiquid assets into account.

Accounting Firms are our next stop. These are a finance tracking type of company for businesses and self-employed individuals. They may provide book keeping for paying employees, create budgets and financial statements for companies, and also deal with tax-returns. I suppose they are for everyone in the sense of tax-returns, many individuals go to accounting-firms for taxes, though some companies will specifically only do taxes. Beyond the actual tax returns, accounting firms can help consult on risk management and tax implications of certain operations.

The last of the seven is Discount Broker/Dealers. These are just really really low-cost Broker/Dealers. Think Fidelity, and Vanguard. Vanguard is the most notorious of all of these, as the regularly create huge market changes. Some of their funds will have expense ratios of 8 Bips, which to be simple is nearly three times cheaper than most funds to invest in.

Which ones you’ll want to work with depend on your needs, interests, comfort, and knowledge surrounding the individual companies. Many people want to lump all companies in one category as ‘good’ or ‘bad’ or ‘lazy’ or ‘smart’, but the truth is, there are losers and winners all around. You just have to find someone who is trust worthy, and has a good track record of helping people achieve their goals.

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Auto Insurance: What’s Inside The Paperwork?

Your Auto Insurance has six main parts

Part A: Liability Coverage

Part B: Medical Payments Coverage

Part C: Uninsured Motorists Coverage

Part D: Coverage for Damage to Your Auto

Part E: Duties after an Accident or Loss

Part F: General Provisions

Woah, what? Let’s break it down.

Part A: Liability

This is how much the Insurer will pay out for any damage you as the insured become legally responsible for. Most of these have Split Limits, and Example of which would be 250/500/100

These three numbers show how much the insurance company pay for what damages.

The first number is bodily injury coverage per person maximum, the second is maximum amount coverage for bodily injuries per accident and the third is property damage.

For 250/500/100 that means $250,000 in coverage per person, up to $500,000 total per accident, and up to $100,000 in property damage; Remember that these are only for amounts you as the insured are liable for.

If you are on the policy, you are insured, plus your family, plus anyone you legally allow to use the vehicle. This is why it’s often beneficial to consider a temporary insurance policy on a vehicle for another to use it, so your insurance isn’t liable if they get in an accident.

Part B: Medical

Within 3 years of an accident, insurance companies promise to cover medical and funeral expenses caused by the accident. Surgery, Dental, X-Rays, etc, can be covered here. There are limits, some place a limit of $1000 per person, others could be $10,000. This coverage is specifically for the insured person being injured. This wouldn’t be like Coverage A, where the company is paying for your damages to others, this is for damage to you and your family.

This is regardless of fault, so even if you are found at fault, you will still get this coverage on your policy.

Part C: Uninsured/Underinsured Motorists Coverage

If you get hit by another vehicle, and it’s found to be their fault then you’re fine, right? What if they have no coverage. Remember that Coverage A only is your fault to others. The point of Uninsured Motorist Coverage is that if another person hits you without insurance, your insurance company will pay for your coverage. In some states, the percentage of drivers that are uninsured can be as high as 20! (Insurance Research Council, Recession Marked by Bump in Uninsured Motorists, News Release, April 21, 2011)

The maximum amount for these is frequently the same as your Part A coverage , but your policy can say differently.

Part D: Damages to your Auto

This is the part of your policy that says “Collision” and/or “Comprehensive” coverage.

Collision: This is when your car overturns on icy roads, or you find your car fender dented after a grocery trip. These are paid no matter who is at fault.

Comprehensive: Seperated from collision because some don’t want to pay for collision insurance, a comprehensive need is when there is a fire, theft, riot, or windstorm. Additionally this covers damages for riots, for a bird or animal breaking your car, flood and hail, or an earthquake damaging your vehicle.

Part E: Your Duties

This part in your insurance policy explains what you are required to do to obtain your coverages. There are some things you should do, like call an ambulance, the police, and get the other drivers information, but requirements from insurance companies may include: Not admitting fault, Notify your insurance company within a certain time limit, cooperating with their investigation, sending in legal paperwork in a timely manner, taking a physical exam, authorizing the insurer to obtain your medical records, and taking reasonable actions to protect your vehicle from further harm after the initial accident.

Basically, you need to cooperate with your insurance, or they aren’t required to cover your losses. That’s why a lot of online companies are harder to get coverage from, because they aren’t your personal advocate that you know or have met. It’s always nice to get auto insurance from someone you’re able to contact freely, and whom you honestly feel you can trust.

Part F: General Provisions

Provisions are details about your policy that include the ways you and your insurer can end your policy and also endorsements for your policy.

A policy has 4 ways of being ended.

  • Cancellation: simply return your policy and give a written notice that you’re done, the insurer can cancel a policy too within 60 days of giving it and giving you a 20 day notice. After 60 days they can cancel your policy if you haven’t paid, have had your license suspended or revoked, or you were deceitful in any way on your application.
  • Nonrenewal: at the end of your coverage period, the insurer can decide to not renew your policy.
  • Automatic: at the end of each insurance period, if the insurer renews, but you don’t accept the renewal, then your policy will automatically end.
  • State rules: many individual states have laws that change up the first 3, or extend time periods for renewals. It’s important to check your state laws for specific auto policy termination rules.

Endorsements are modifications to your policy. The most common being a motorcycle endorsement. Many companies adjust how much physical coverage they will have, or will have huge premiums they will only reduce when you remove or change certain coverages on a motorcycle.

To get your information simply call your auto insurer and request your coverage information. Tell them you want to see all the endorsements, riders, and Parts A-F of your insurance, and not just the fact sheet, though that can be simple and helpful too.

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The Worst Financial Mistake I’ve made + 2 Keys to Consider in Going to College

So, I’m Jacob Brad Johnson, I’m a ginger, I’m a Personal Financial Planner major at Utah Valley University(UVU), but was a Computer Science major at Brigham Young University (BYU) for 3 semesters before.

High School

After I graduated High School and I applied for many schools with my 3.86 GPA and 30 ACT score, I figured it’d be a cinch to get scholarships. I wanted to go to BYU, I wanted to study computers.

4 years later, I was wrong, and the worst financial mistake of my life was made.

“Congratulations Jacob on your submission to Utah Valley University,” the letter began. Later on it exclaimed these proud words, “The University would love to extend the Presidential Scholarship to you as you attend… This scholarship is renewable each year pending academic resilience each school year”

Presidential! I looked it up, screaming with delight at what I saw. This scholarship included full tuition, books, and partial housing reimbursement ($300 a month or something, as I recall for the housing portion).
2 days later I was reading another letter from BYU, my dream school. “You have been accepted to Brigham Young University, beginning Summer of 2012,” The words jumped out at me. YES! I’m IN!
I read the rest.
Reread it.
One last time to check for errors.
There was no scholarship, no anything. Oh. wait.
Nope, nothing. I received notification via email a few days later that I’d received a $300 book scholarship per semester for being a relative of some person who’d made a large scholarship fund for his descendants. That was good. ‘good’.

You Already Know What I Did

This is the moment where you all already know what happened. “Jacob, you’re such an idiot”, “What were you thinking!” “…” or other thoughts may have passed through your head.
Here’s the kicker, I had a 1/2 tuition scholarship to anywhere in the state because of the New Century Scholarship program, for graduating High School with an Associate Degree from a University. I’d have been PAID to go to UVU.

Mistake is made. BYU was attended. Computer Science studied. After a few years I didn’t like it. It wasn’t my cup of tea. Ended up transferring. Where to?

Back to Utah Valley University, studying Personal Financial Planning, sans scholarship.

Now, Money mistakes are a super common occurence, and there are much bigger mistakes that one can make (I’m talking more than $40,000 decisions). When you make one of those, you’ll know.

Do These 2 Things Before You Choose Your University

1. Know your Major. 

If you haven’t determined your major, how will you know what school is best? BYU had a better computer science program. UVU has a better Financial Planning major. If you still aren’t sure, try going to a community college or other cheaper college. Why pay the price of the expensive colleges when you can get the undergrad cheap at your local community college? It sometimes may make sense to get your associates from a different school before going to the one you’ve chosen to attend for your bachelor’s or higher degree.

If you don’t know which major to choose, or are struggling between a few, Act on THIS article I wrote recently. Basically, its how to get the thoughts and who you are down on paper to make decisions easier and with more knowledge out loud.

2. Know your scholarships. What are the implications of attending your school of choice? How will you pay for it? UVU gave me scholarships, BYU didn’t. Do you have to take on debt, is the cost that significant.

Will your major pay for the cost of going to school?  You need to know How Much Your Degree Makes to consider how much debt you could take on if you don’t have the scholarships.

Here is what I mean: Determine how much income your major going to bring, and how much debt it’ll take. Can that justify the debt you would get from going to the more expensive school? Here are 8 majors that just don’t justify their cost.

What’s your biggest financial mistake you’ve made! Share your confession with me here or tweet it at me @FinancialGinger and I’ll make it into a post you’ll see featured on my twitter and Facebook.