Is Insurance an Investment?

Posted on June 22, 2018April 26, 2024 by Brian Colvert

Is Insurance an Investment?

The simple answer is no. You don’t view car insurance as an investment, so why would life insurance be?

If insurance is not an investment, why do we have insurance? Simple, it is for protecting your assets and for protecting your loved ones.

Think about this… You have car insurance and homeowner’s insurance, but why? It’s so you will be covered if you get into an accident, or are stuck in an unreal hail storm, or if the water heater breaks and floods the basement, or in the unlikely event your house catches fire.

In all these cases people purchase insurance to make sure that they are not going to have to pay the full amount to get back to whole after something terrible happens. That’s it.

We have yet to meet a person who bought car or homeowners insurance as an investment thinking they were going to make money or get returns off the insurance.

Why is life insurance different?

It’s so that your loved ones are taken care of if something happens to you. If you are no longer here, who or what is going to replicate the income you generate? Most people say that if they pass on early or unexpectedly they want their family to be able to maintain the same quality of life.

The important questions to ask yourself are:

How much do I need to achieve the goal?
What is the most effective and inexpensive way to achieve that goal?

There are certain factors to think about that will help determine what kind of insurance to buy and how much. These factors include your time frame, health, and resources (other investable assets).

When you ask these questions you are looking at insurance from a needs-based approach. It helps you find a solution that fits your particular situation. When acting from this point of view, very rarely does a whole life or universal life product make sense. Term life insurance normally gives you the greatest amount of coverage for the least amount of money.

Why do people say life insurance is an investment?

Well, have you ever gone to see a movie and walked out a little disgruntled saying “Man, the best parts were in the trailer, why did I even go?!” That is the feeling most people get when they buy insurance as an investment. The story or sales pitch was better than the product and the only winner was the one selling the insurance.

In the end, people often say “my advisor said it would be like a forced savings that I can borrow against, but I have no idea what it is” or “they said it grows tax-free or something like that” It is one thing to waste your money on a $15 movie, it is another thing to waste thousands of dollars on insurance you think is an investment but in reality doesn’t meet your needs.

If your financial advisor has tried to pitch you insurance as an investment, you don’t have a financial advisor, you have a salesperson.

Insurance is not an investment.

Here are some facts on whole life insurance, universal life insurance, portfolio or permanent life products that should help bring some perspective:

They cost a lot more to get the same amount of coverage as a term policy.
There are hidden fees. You can find them buried in the 8 pt. font 20+ page contract. Are you up for some “light” reading?
These products pay big commissions to the insurance salesmen, which they do not have to disclose to you.
If you borrow against it, your death benefit will be reduced, and your loved ones will be left with less.
If you do mix investment with insurance, i.e. you ‘invest’ in insurance products like endowment or money-back plans, your returns are bad, and limited at best. Usually less than 3 or 5%.
When you die with a cash value, they only pay out the face amount, not the extra money you’ve put into it. Your extra investment vanishes- they keep it.
And finally, you are borrowing the money so there is interest to be paid, which means you pay even more.

These products have many moving parts and are quite convoluted. Many clients come to us asking for help to understand what they bought from someone else and how it works.

In most cases, we end up having to call the insurance company to get full indoctrination of the product so that we can understand that if this happens, that happens, and so forth and so on. Whole life and universal life products simply have too many variables.

Insurance unfortunately is unnecessarily complicated, but it doesn’t need to be.

If you understand that insurance is not an investment, the picture can come into focus. Term life is more than often the best solution for the lowest cost. The best way to buy it is through a broker or advisor who shops several companies to get you the best deal. Which, by the way, is what we do.

We’d love to discuss this more with you and truly find a solution that meets your needs, so give us a call and join us around the fire.

4 Reasons to Hire a CFP ®

Posted on June 15, 2018April 26, 2024 by Brian Colvert

4 Reasons to Hire a CFP ®

Managing your finances can be difficult and time-consuming. However, finding someone to handle your finances can be just as challenging. Want a tip to make it easier? Hire A CFP ®.

People often ask us what is a CFP ®, how are they different from other financial advisors, and the reasons to hire a CFP ®. We are going to be breaking all that down for you today.

What Is a CFP® Professional?

First, it’s more than just an acronym. Unlike some designations that are worth little more than the paper they’re printed on, the CFP ® (CERTIFIED FINANCIAL PLANNER™) designation is one of the most esteemed financial certificates around. Each CFP ® is held to an extremely high standard and requires an immense amount of work. Typically nine months to two years of study.

In the US there are only 81,109 CFPs ® and only 2,274 in the state of Colorado, according to the CFP® Board professional demographics. The exam itself is a grueling 7-hour test that assesses the financial advisor’s ability to apply principles of financial planning. It covers all areas of insurance, investments, income taxes, retirement, estate planning, ethics and conduct, and financial plan development, among many other skills.

Beyond the test, there is so much more that goes into the certification. We have condensed it down to the top 4 Reasons to Hire a CFP®.

4 Reasons to Hire a CFP ®

Fiduciary Standard
Ethics Code:
Fitness Standards:
Experienced Life-Long Learners

1. Fiduciary Standard:

Currently, the SEC has NO uniform fiduciary standard that applies to all financial professionals who provide personalized investment advice. This means there is no oversight to protect consumers and clients from paying excessive commissions or receiving substandard performance. Consumers are exposed to even greater and unnecessary risks from products that may be deemed suitable (more on that here) for them but are inferior to other available options and not necessarily in their best interests.

The CFP ® Board has a Code and Fiduciary Standards that require CFP ® professionals to act in the best interest of the client at all times when providing financial advice. So, as a CFP ®, we have a legal requirement to act in your best interest, all the time. In addition to this standard, Bonfire Financial is also a Registered Investment Advisor which furthers this obligation.

2. Ethics Code:

All CFP ® practitioners agree to abide by a strict code of professional conduct, known as CFP ® Board’s Code of Ethics and Professional Responsibility, that sets forth ethical responsibilities to the public and clients. This ensures we act with honesty, integrity, competence, diligence, and offer services objectively.

It’s a pledge to protect the confidentiality of all client information, avoid or disclose and manage conflicts of interest and always act in the client’s best interests.

3. Fitness Standards:

Further, the CFP ® Board has also established specific character and fitness standards for the CFP ® certification. This ensures that an individual’s prior conduct would not reflect adversely upon the profession or the CFP ® certification marks. This helps you know that if you hire a CFP ® you won’t find out later that they have:

- A felony conviction for theft, embezzlement, or other financially-based crimes.
- A felony conviction for tax fraud or other tax-related crimes.
- Revocation of a financial license (e.g. registered securities representative, broker/dealer, insurance, investment advisor).
- A felony conviction for any degree of murder or rape.
- A conviction for any other violent crime within the last five years.
- A felony conviction for non-violent crimes (including perjury) within the last five years.
- Personal or business bankruptcies.

4. Experienced Life-Long Learners:

CFP ® professionals are required to complete 3 years of experience related to delivering financial planning services to clients. They also must have a bachelor’s degree prior to earning the right to be a CFP ®. This real-life experience means that CFP ® professionals have practical financial planning knowledge. They can truly help you create a realistic financial plan that fits your individual needs.

Once certified, CFP ® professionals are required to maintain technical competence and fulfill ethical obligations. Every two years, they must complete a minimum of 30 hours of continuing education to stay current with developments in the financial planning profession and better serve clients.

Need more reasons to hire a CFP ®? We’d love to answer any other questions on what it means to have a CFP ® working for you, feel free to contact us.

At Bonfire Financial we pride ourselves on having a team of CERTIFIED FINANCIAL PLANNERs™.

Differences Between an IRA and 401k

Posted on June 5, 2018April 26, 2024 by Brian Colvert

IRA vs 401k: What’s the Difference:

There are some common misconceptions about the difference between an IRA (Individual retirement account) and a 401k plan. While these two are very similar there are some distinct differences that make each unique.

Before we tackle the difference between an IRA and a 401k it’s important to note that these are not investments. They are simply accounts. Just because you have an account open does not mean you have an investment that will grow and help fund your retirement. Much the same way that just because you own a refrigerator doesn’t mean you actually have any food in it. You have to add to it.

To continue with this analogy… in your fridge, you can have a variety of different types of food (juice, pickles, eggs, beer, and anchovies- if you’re into that sort of a thing). In an IRA and 401k you can have different investments too. Such as stocks, bonds, mutual funds, ETFs, commodities, real estate, and more. You can also change or “throw out” the investments in your IRA or 401k if you’ve left them in the back of the fridge for too long. You know like that 3lb. jar of mayo you bought for that party that one time.

Now that you are hungry, let’s get to the dive-in.

Overview of an IRA vs. 401K:

You probably know fundamentally that saving for retirement is one of the single best things you can do financially. You don’t want to rely on social security, you don’t want to run out of money, you don’t want to be a financial burden to your children, and you want to enjoy your golden years. All great reasons to have a retirement plan! So which retirement plan is best for you?

Both IRAs and 401Ks have tax benefits and are among the most common defined contribution plans. The good news is that you don’t have to choose one over the other. To maximize your retirement savings, you can and should, if possible, contribute to both an IRA and 401k.

The key to note is that a 401k, named for the section of the tax code that discusses it, is an employer-based plan and an IRA is an individual retirement plan. Got it?

First up let’s look at how a 401K and IRA are alike.

The Similarities:

Both allow you to put money in on a tax-deferred basis. Meaning that taxes are not due at the time when you add money. For example, if you make $50,000 and decide to invest $2,000 of it into your IRA or 401k, the $2,000 is not going to be part of your taxable income.
Your money within an IRA or 401k can be invested in a variety of ways.
The money that is invested is allowed to grow tax-deferred. You do not have to pay taxes on the gains from your investments until you take the money out. If you make $1,000 off of your $2,000 investment, you now have $3,000 in your account and you will not have to pay taxes on that gain until you withdrawal the money.
When you do withdrawal the money for whatever amount it will be considered part of your taxable income. You will own taxes on the withdrawal amount. Let’s say you withdrawal the $2,000 and your current annual income is $50,000 after the withdrawal your taxable income will be $52,000.
Since an IRA and 401k are designed for retirement the money that you invest is not supposed to withdraw until after the age of 59 ½. You read that correctly -the government added in a half, well, because your inner 6-year-old knows it’s that important. If you withdraw the money prior to 59 ½ you will pay a 10% penalty on the money plus the amount withdrawn is now part of your taxable income.
Also, the government mandates that at age 71 ½ (again the half) you have to take out a Required Minimum Distribution (RMD). Basically, they tell you the amount that you must pay taxes on. Quick note, if you are still employed at age 71 ½ and not the owner you can delay your RMDs.

The Differences:

While an IRA and a 401k have many similarities, they do differ is a few very key areas. The main one being that an IRA is Individual Retirement Account, so it is yours and yours alone. Anyone can have one. A 401k is company-sponsored, so you can only participate in it if your employer offers one. Some other key differences are:

Since a 401k is employer sponsored typically the employer will match a percentage of their employees’ contributions up to a certain limit or percentage. There is no option for this in an IRA.
Consequentiallybecause a 401K is employer-sponsored your investment options are limited to what the employer offers. Whereas an IRA will allow you to have more variety in terms of stocks, bonds, real estate, etc.
Loan or hardship withdrawals are available for 401ks. However, IRAs generally do not permit loans or early
withdrawals.
An IRA has certain income limts and a 401k does not.
Finally, the contribution limits are different and change from year to year. Check with your financial advisor or go here to learn about the current years’ limits.

Difference Between an IRA and 401k- A Venn Diagram

Which is Right For You?

It depends really. If you have the option of putting your money into an employer-sponsored 401k or an IRA you should do both. Max them out if possible. We recommend prioritizing the 401k first especially if your employer offers a match and then adding to an IRA if you are within the income limits.

This hopefully gives you a good overview of the differences between an IRA and a 401k. While there are many factors to consider, the most important thing to remember is that both are great tools to use to help achieve your retirement goals.

Are you interested in learning about a Roth? We’ve got a great article here for you.

Have other questions? Setup a call with us HERE!

Month: June 2018