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Understanding Life Insurance in the Simplest Form

Getting a life insurance policy is not a very simple decision to make and it takes a lot of thinking first. One of which is the fact that you are uncertain to have one when you think about its significance and the need for it. But for individuals who think about their financial future in case of death of any family member, they consider getting a life insurance.

Life insurances also offer built-in cash value, reaping dividends and tax-free investment aside from the fact that it gives protection to you. If you purchased it with due discretion, you can utilize it as a liquid cash to help you with your different needs.

There are different types of life insurances that can cater the different needs of various people. It is also a wise decision if you consult a financial expert to help you pinpoint the right policy for you by also considering the number of dependents you have right now.

There are two basic forms of life insurances: the whole life insurance and the term life insurance. A term life insurance policy is also known as the short-term life insurance or a the temporary life insurance. This can only serve and give benefits to those individuals whose death belong to the period of the validity of the policy they got. But when the person insured gets to live beyond the time specified in the term insurance policy, he will not get any money at all.

Those availing short-term policies are those individuals that are young and already have dependents or a house or car loan and they prefer this because it is much cheaper than having a whole life insurance. During the initial years, the premium you pay is low but as the insured’s mortality risk increases as he age, the premium cost also increases making the premium almost equal to that of a whole life insurance.

There are two types of term insurances and these are the level term (decreasing premium) and the annual renewable term (increasing premium). The level term premiums are higher at first compared to renewable term but it gets lower in the later years.

If you want features like ingrained cash value and life protection, you are looking for the whole life insurance. The thing is that the initial steep premium of this insurance might have exceeded the actual cost premium. The surplus you get from it or the cash value is added to a separate account that you may use for a tax-free investment to reap dividends or it can also give a level premium on the latter part. Aside from this cash value, death benefit can be gained on the maturity of this policy or upon death of the insured person.

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Despite a recession-like economy weather, Toronto shines like a boss as numerous investors have started to take interest in the high-rise industry. Now what triggered investors to crave this industry anyway?

Someone came up with a proposition -since we can’t sell condos on such a bad economy, why not turn them into rent-to-owns? An excerpt from Financial Post states “in one case, Toronto’s red-hot Liberty Village, a neighborhood being transformed in the city’s western downtown core, saw Urbancorp cancel a major project -with industry insiders saying the project was sold en masse to one investor.” The Day Trading Academy warns investors to wait for the most opportune time first.

Another institutional investor followed suit by purchasing one of Cityzen’s buildings.

If there’s one thing I am most proud of it’s that I became 100% financially independent (meaning I relied on no other entity or person for income or financial assistance) before the age of 30. Yes, there was a certain degree of luck that went into that (e.g., if I’d started my first company in 1999 or 2008 at the stock market peaks I almost certainly wouldn’t have survived it independently), but I also followed a very simple set of broader financial management rules that allowed me to achieve financial independence at a relatively young age. Here is a basic outline of those rules:

  1. The key to financial success isn’t saving more. It’s investing more. In yourself. You have to maximize your primary source of income by making yourself valuable to other people in some way. Saving more isn’t how most people become wealthy. Wealthy people maximize their primary source of income.
  2. Never stop learning.  Education is the gateway to differentiating yourself from the crowd and constantly improving yourself so you can adapt and evolve with the ever changing economy.  The internet is a gold mine of information and educational resources. Use, Khan Academy, my Understanding Money page and empower yourself with the most powerful tool you can have – knowledge.
  3. Don’t do something you love. Do something other people will love you for doing. Very few people earn a living doing something they truly love. But many successful people love what they do because other people value them for doing it.
  4. Keep your finances simple. Reduce the number of bank accounts and credit cards you have. Consolidate your brokerage accounts. Make your financial life more manageable. Use a personal finance app like Mint to track your finances so you can stay on top of your income, spending and investments.
  5. Automate your finances. Make sure you have auto bill pay set-up and automatically transfer funds from a savings account to an investment account on a monthly basis.  Automate your investment account in a systematic plan of some sort so you don’t get caught up in the allure of “stock picking” and trying to become the next Warren Buffett.  Reduce your taxes and fees as best you can. This means taking a moderately long perspective with your investments (at least 12 months plus) and never paying for high fee investment accounts and managers.
  6. Follow the 50/30/20 rule. Spend 50% of your after tax income on essentials (housing, utilities, food, etc), 30% on personal needs (vacation, toys, leisure, etc) and save 20% of your income.
  7. Stop spending money on useless “stuff”.  It’s very unlikely that all that extra stuff you’re buying is making you happier. In fact, it’s probably just putting a strain on your financial budget. Don’t spend to impress your friends and your neighbors. You’re not winning any gold stars for owning things you can’t afford. As I said in my book: “The person who mistakes ‘money’ for ‘wealth’ will live a life accumulating things, all the while mistaking a life of owning for a life of living.”
  8. Get in the financial markets!  But think of your portfolio of financial assets as a Savings Portfolio and not a get rich quick “Investment Portfolio”.  Allocate your savings in a diversified portfolio of stocks and bonds. Do not leave your cash sitting in the bank earning 0%. Max out your company 401K at least up to the match. Then invest in a Roth, SEP or 529. Invest the rest in a taxable brokerage account via low fee diversified index funds via an approach that follows a specific plan that is in accordance with your financial goals and risk tolerance.  If you need an advisor to help you maintain your investments then don’t pay him/her more than 0.5% per year!  Make sure they adhere to a fiduciary standard.
  9. You might need life insurance at some point in your life. As a basic rule of thumb only buy life insurance if you have family members whose financial lives would be substantially altered for the worse if your income was lost. This is most common for people in their working years when they have young children. In the vast majority of cases buying a term insurance contract that covers this period (usually 20-30 years) will be the least expensive and most prudent approach to use.  Do not buy variable annuities or whole life insurance as a form of life insurance.
  10. Reduce your debts.  Pay off your credit card every single month.   Thinking of buying a home? Don’t think of it as an “investment”. Think of it as a massive long-term expense that will barely keep up with inflation. A house is place where you will live, not a place that will make you rich. Use Khan Academy’s buy/rent calculator before you decide to “invest” in the “American dream”.  If you buy a house then pay it down as quickly as you can. “Mortgage” is Latin for “Death contract” for a reason!
  11.   Work your ass off.  But remember that you don’t live to earn money. You earn money to live. Balance is better than excess.
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