Should I purchase term insurance or permanent coverage? If you're in the market for life insurance, sooner or later, you'll need to make this decision. The Michigan Association of Certified Public Accountants outlines the characteristics of both term and permanent insurance—and its variations, including whole, universal and variable life—to help you decide which is best for you.
Term Insurance Provides the Largest Death Benefit for Your Premium Dollars
Term life insurance provides pure income protection at a low cost. As its name implies, you can buy it one year at a time or for a specific term, typically 5, 10, or 15 years. If you die within the term selected, a benefit is paid to your beneficiary. If you outlive the term, no death benefit is paid.
The cost of term insurance gradually rises as you age.
There are two basic types of term policies from which to choose. One type is an "annual renewable policy," in which the premiums increase each year. The other is a "level premium policy," which allows you to lock in a premium for a fixed number of years.
Permanent Insurance Combines a Death Benefit with an Investment
Permanent insurance policies such as whole life, universal life, or variable life, combine a death benefit with a savings feature. Premiums can be several times higher than you would pay initially for the same amount of term insurance because, in addition to a death benefit, part of your premiums are invested and build up a cash value. Any earnings are tax-deferred until you cash in the policy or it is distributed to your beneficiaries. If your beneficiary receives the earnings, they are exempt from federal income tax.
Whole Life Insurance
Whole life is the most common type of permanent insurance policy. Both the death benefit and your premium, which is based on your age and other factors, remain the same, year after year. You can borrow against the policy at a rate that is typically lower than the market rate. If the loan is not repaid, the outstanding balance is deducted from the benefit paid at your death. You can withdraw some of your cash value and still remain insured, or you can surrender the policy and retrieve its full cash value. Since commissions and higher initial premiums slow the cash value accumulation in the early years of the policy, whole life insurance is best used as part of a long-term plan.
Universal Life Insurance
Universal life insurance offers more flexibility than a standard whole life policy. With a universal life policy, you can vary the amount of the premiums you pay and choose the amount of death benefit you want. That means, with the same premium dollars, you can choose a lower death benefit and a larger cash buildup, or a smaller cash buildup and a higher death benefit. For this flexibility, expect to pay higher fees and administrative costs.
Variable Life Insurance
With variable life insurance, the policy holder controls the investment of the cash value portion of the policy, choosing from investment options with varying degrees of risks and rewards offered by the insurance company. Earnings generated by the policy are not taxed while the policy is in force.
Since the value of the death benefit and the cash buildup fluctuates depending on the performance of investments you choose, these policies come with a certain level of risk. Good investment performance will lead to higher cash values and death benefits. The reverse holds true, although most policies come with a minimum death benefit.
CPAs say that life insurance serves different purposes at different times in your life. But keep in mind that its most important function is income replacement, so make every effort to buy as much protection for your family as you need. Once you've determined your needs, shop around. Look for a company and an agent who can help you get the right type and amount of insurance at an affordable price.
You seek the expertise of CPAs at tax and audit time, of course. But CPAs also promote personal and professional financial security year round. Visit the CPA Referral Service on the MACPA website to search for a CPA in your geographical area or specific area of expertise.
This article was submitted by the Michigan Association of CPAs.
Understanding Yield Curve
Have you ever heard the term “yield curve”? If you haven’t, you’re not alone. But you might be interested to know that the yield curve is an important tool for investors.
Why the Treasury Market
Although a yield curve can be determined for the spreads between maturities of bonds for any sector, the term “yield curve” is most often used to refer to the curve determined by the U.S. Treasury Bill market. Risk-free discount rates can be derived from Treasuries to match most maturities. This information can be used as a benchmark to determine the value of other investments, and whether or not their returns are worth their risks.
Treasury securities are debt instruments that have a face value, market price and maturity date. Upon maturity, the bond pays the holder the face value. Longer-term bonds also have a coupon value and pay interest over the life of the bond. To put it simply, the sum of the interest payments and the final face value payment, divided by the price, make up an investor’s return or yield.
Although Treasury securities have fixed face values, maturities and coupon rates, their prices may vary because they are actively traded. Price changes may occur for a number of reasons. As the price changes, so does the yield.
The Yield Curve
The U.S. Treasury offers bonds with many maturities, varying from one year (a T-Bill) to 30 years. The yield curve plots the maturities and yields for all of these securities. Generally, the longer the time until maturity, the more risk a security holder bears, and therefore, the higher a return they expect. However, as market forces adjust the price for various securities, this may not be the case.
What the Shapes Mean
The yield curve’s slope or “shape” always fits one of three descriptions:
As you plan your portfolio, remember to keep an eye on the yield curve and the spread between short- and long-term Treasury securities. If the spread has been flattening for months, it might be a good idea to shift your allocation to steadier investments. If it’s growing, that’s generally a sign that you can feel good about equity investments. Just remember, all indicators should be taken with a grain of salt!
Haggling for Fun!
Haggling is near the top of the list of skills that no adult should be without. To the uninitiated, it may feel uncomfortable or rude. Indeed, applied improperly or in the wrong situations, it very well may be. But for those in the know, haggling isn’t just a way to save money and reach a fair price: for these lucky few, haggling can be a great deal of fun!
What is Haggling?
Haggling is the art of negotiating a favorable price or deal. It differs from negotiation in that it is usually a very informal process. Haggling involves body language, facial expressions and, occasionally, even storytelling. Sometimes, a haggling session may result in bonus items rather than price a adjustment. Never buy a new suit without trying to get a tie thrown in for free!
When Should You Haggle?
In the right setting, haggling is not only okay, it is expected! Here are some examples to help you feel out when to haggle and when not to.
Situations good for haggling:
Haggling is best initiated by asking, directly or indirectly, how flexible a marked price is. This will be followed by the salesperson either offering a discount or asking you what you’re willing to pay. Common practice is to go back-and-forth a few times, so you should always start 20-30% below sticker price. If you think the piece has been sitting on the shelf for a long time and the salesperson is desperate to move it, you could try going as low as 40 to 50%. Anything lower than that is unrealistic, and you’ll risk insulting your haggling partner.
As any economist will tell you, prices are determined by supply and demand. If it’s clear that you can’t walk away from a deal, you won’t have any bargaining power to push down the price. When you see an item you like, inspect it to make sure it’s the genuine article. Once you’ve determined its authenticity and that you’d like to purchase it, set it back down and walk away (unless you absolutely must have it, no matter the price). After perusing the rest of the shop, return for the item and approach the salesperson to make an offer.
Sometimes an item may not be marked, or you may be inclined to purchase something that doesn’t seem like it’s for sale. Doing so is often possible, but requires delicacy and tact. For example, maybe a piece of décor at a local restaurant has caught your eye. Open up by asking if the owner would be willing to part with it for a certain price. If you don’t like the price quoted, but have something in mind within 20-30%, don’t name your price immediately. Be polite by saying something like, “Oh I thought it might be just a little less expensive.” If your counterparty is willing to entertain a lower offer, they’ll then invite you to name a price and from there you can haggle as usual. Otherwise, the negotiation is over.
You should haggle a little whenever it’s appropriate. As long as you don’t push too hard, you’ll always leave your transactions feeling satisfied that you reached a good deal.
Preparing for a Layoff
If you’re faced with a layoff, here are some things you can do to prepare:
Most people aspire to become financially independent, but few actually think about or take the actions necessary to reach independence.
Financial independence means having sufficient financial resources to comfortably choose whether to work or not work, or perhaps work in a highly desirable job that otherwise couldn’t support your standard of living. It means being able to withstand the inevitable financial storms along the way. But what key steps does it take to achieve financial independence?
Auto Buying: Rebate or Low Financing?
Manufacturers often market vehicles by offering a rebate or exceptionally low financing. Should you take the rebate or the special financing? The dealer does not give you both.
For example, you have decided to purchase a vehicle for $20,000. The dealer is going to give you a rebate of $3,000 or a finance rate of 0%. Which deal is in your best interest?
Here is a comparison of the loan payments with the dealer’s reduced financing and a credit union’s standard financing.
0% APR financing for 36 months on a $20,000 loan
Monthly Payment = $555.56
Total of Payments = $20,000.00
5.5% APR Credit Union Financing* for 36 months on a $17,000 loan
($20,000 minus the $3,000 rebate)
Monthly Payment = $513.33
Total of Payments = $18,479.88
$1520.12 is saved over the term of the loan with credit union financing. In addition, if you were to sell the car during the time you were paying on the loan, more money would come back to you because you had a lower loan balance.
Here are a few other things to consider:
Auto Research: Buy vs Lease
Buying a new vehicle doesn’t need to be an overwhelming experience. Just do your homework before you visit the dealership, and you’ll be prepared to find the car you want—not just the car they want to sell you. Before you go to the dealership, you should do the following:
Decide exactly what you want this car to do for you.How many people will you be carrying? What options do you want in order to be comfortable? Know exactly what you want before you set foot into the dealership and stick to it.
Research dealerships. Make sure that you find one close to you. If your vehicle needs service, it will be much easier to establish a relationship with the service manager if the location is convenient.
Know the car you want to buy before you go shopping. The Internet is an excellent way to find information. There are numerous sites specifically for supplying consumers with information on the make and model of the car you want to buy. Most sites include information such as dealer price, equipment listings, specifications, safety features, and warranty details.
Find out how much insurance is going to cost for the new vehicle. If you can afford the car, but you can’t afford the insurance, then you should purchase a different vehicle.
Try to determine the actual value of your trade-in. Use the market guide books for an estimate, and then visit various used car lots to get a bid on the car.
Auto Repair Tips
Have you ever paid $1,000 for a major auto repair you’re not sure you needed? If so, as you left the shop, you probably entertained the idea of doing your own auto repairs in the future, or at least learning enough to know whether you’re getting ripped off. With the right guides, some internet videos and basic tools, you’ll be surprised how many mechanical maladies you can learn to relieve on your own.
When dealing with serious car repairs, there’s serious potential for injury if you don’t take the proper precautions. Negligence can result in burns, or worse, electrocution! Spend some time reading up on basic safety guidelines, and always check out specific concerns for each repair you undertake.
Where to Begin
The first thing you need to do is find an official “workshop manual” or “factory service manual.” These tomes are pricey, often running $100 to $300. However, the expense is worth the amount you’ll eventually save by doing repairs yourself. Inside, you’ll find clear diagrams and instructions about how to fix up the guts of your vehicle. Be sure to purchase the correct manual for the specific make, model and year of your vehicle. If you own a very recent model, the manual may be in the form of an interactive CD or DVD instead of printed text.
Because these manuals aren’t aimed at the consumer market, you may have to use some Google-fu to find one. Your initial search may not yield reliable results, but don’t give up! Chances are there’s at least one forum of home mechanics who own the same model and have leads on where to find the manual.
Getting to Know Your Car
If you never took an auto shop class, you should watch a few online videos to familiarize yourself with all the systems that make up a modern automobile and how they generally operate. There’s a lot of information, but don’t be intimidated! Vehicles don’t run on magic, and you don’t need a Ph.D. in manifold theory to grasp how it all works.
Once you’re comfortable with the main ideas, start watching videos on how your particular vehicle operates. The biggest struggle for a rookie DIY mechanic is correctly diagnosing problems. By watching videos of other people doing various repairs on your model and occasionally browsing through your service manual, you’ll develop an intuitive ability to understand any symptoms your vehicle exhibits.
You don’t need a full garage with hydraulic lifts or a pneumatic drill to mend things under the hood. Most components are held in place with standard fasteners you can handle with common tools. In general, you’ll need the following:
Taking Care of Business
The biggest caveat to handling your own repairs is the amount of time it takes. While an experienced mechanic may be able to take care of a job in just an hour or two, your first attempt could take the whole weekend. However, if you can muster up the confidence and free time, you can expect to save thousands of dollars in labor costs.
Naturally, for some catastrophic problems, like a transmission failure, you may have to bite the bullet and visit a professional mechanic. However, armed with all your knowledge, you’ll be sure to recognize whether they’re giving you the runaround.
Our BALANCE Financial Guide is dedicated to helping you balance life’s important decisions.
Financial Resource Guides: