This blog post is a continuation of a 7 part series on life insurance. You can find the first post here: http://www.your-insurance-experts.com/why-get-life-insurance-part-1/

How to Outpace Inflation Using Life Insurance

There are lots of different types of investments that people use to outpace inflation. It’s reasonably safe to assume that every investor desires to sacrifice capital now for a greater amount of capital in the future. The difference is how people plan to get the greatest return on their investment given their ability to tolerate risk. Some like stocks, bonds, or mutual funds. Each one of these investment vehicles have the potential to have very competitive gains. However, the downside is the risk to lose the gains in a down year.

When your money is in a market that can lose investment capital, you might be surprised how long it takes to recover from the losses. For example, let’s assume you are aggressive, and you decide to take some market risks for potentially attractive gains. You invest $100,000, but the market goes in the wrong direction and you lose 50% of your portfolio. Looking at the math, the value of your portfolio is now $50,000. During the following year, the market recovers and goes back up by 50%, how much do you have in your portfolio? If you answered $100,000, your response was the same as 75% of the people in which we ask this question. The correct answer is $75,000 because 50% of 50,000 is $25,000. This exercise is not meant to be a tricky math lesson, but more of a way to illustrate that losing your money to market loss is dangerous because it takes two-percent of an increase to recapture every one-percent loss.

The cash you place inside of permanent life insurance depends on how you prefer to combat inflation. One approach is to place the cash value directly in the market. With this strategy, you can participate in all of the gains that the market has to offer, but you also participate in all of the losses from the market. Someone who has a high risk tolerance may choose this approach if they have the discipline to think long-term and the discipline not to react emotionally when the market conditions are temporarily unfavorable. As stated before, a one-percent loss creates the need for a two-percent gain.

Another strategy that you can use is an equity indexed life insurance approach. In this case, the money you earn is not actually in the stock market so it is not subject to the losses. In other words, when the stock market has a positive year, your cash value will experience a gain up to a percentage that each insurance company determines. That “cap” rate is typically around 10 percent; some companies are slightly higher and some are slightly lower. If the market gains more than the cap, you will earn what the cap rate allows. If the market, however, experiences a loss during a year, you will not risk any of your principle due to market loss. This strategy is for a moderately conservative person who is willing to forego some of the market gains to eliminate the market losses.

In the next blog post, I will explore how to use Life Insurance to Save on Taxes. 

This is part one of a 7 part series on why you should obtain life insurance. Please check my next blog posts regularly for the rest of this series on life insurance.

Most of us have been told that life insurance is for people who plan to pass away. Contrary to popular belief, life insurance serves a much more significant purpose than most people could possibly imagine. With a real deficit that is around $17 to $75 trillion, the truth of the matter is that the government has allowed the proverbial can get kicked so long that it has morphed into an out of control freight train. Increasing what you pay out of your pocket to reduce this deficit is inevitable, and that payment plan is going to be drastic, at least for those of us who do not have a plan to combat this.

Now that we have a clearer picture about what lies ahead, we must understand what hinders our money from growing with maximum capacity. There are four wealth snipers that you must know about before you make life insurance work the most efficiently for you. These snipers camouflage themselves and silently watch while you meander through life, oblivious to their presence. They patiently wait for you to make a mistake out of ignorance or misguided beliefs that place you on a path that leads you to the center of the sniper’s cross-hairs.

Sniper one – Inflation

One morning, you go to the grocery store because the kids eat when they are not full instead of when they are actually hungry. Today, you don’t mind because it’s a beautiful day in Southern California. You get your shopping cart and go down every row in the store to make sure you didn’t miss anything. As you scan the enormous selection of ice cream, you zero in on cookies and cream because it has enough vanilla flavor to satisfy an adult palette and enough cookies for the little ones at home. As you pick up the ice cream, the price tag seems to be the same, but the half gallon of ice cream you remember buying is now 1.5 quarts. You are busy so you don’t really think too much about it, so you keep shopping.

As you get to the junk food aisle, you notice that the bag of chips has a lot more air inside and the dish-washing liquid seems a little more diluted than before. Suddenly, you become more observant as you go down the cereal aisle. You recognize that the prices have sharply increased. The same is true for bread, orange juice and especially produce.

The prices of these staple commodities continue to increase and rob us of our wealth.  These snipers steal from us every time we take our cars to the gas station or check our bags into an airport; long gone are the good ole’ days when a ticket price included luggage and a hot meal. Certainly, we can choose not to travel, but we can’t opt out or boycott the grocery stores because we have to physically survive. In short, as the cost of the goods and services we buy increases, the amount of money we have to invest decreases.

Please check out my next blog post on life insurance which discusses Life Insurance Sniper 2:  Taxation.