Fixing Hidden Wealth Eroders So You Don’t Have to Chase Returns – part 2

Key Takeaways

  • With homeowner’s and auto insurance, it’s tempting to keep your deductibles low. But how much are you really saving with these necessary, but rarely used policies?
  • If impacted by a job loss or sudden drop in income, 2020 might be a good year to consider a Roth conversion.
  • Cash value life insurance is a tremendous vehicle for storing safe dollars and it comes with significant tax benefits.

In my last post, I explained how many of you are doing a great job of saving for retirement—much better than most Americans. But at the same time, you’re giving away thousands of dollars a year in interest, fees and other unnecessary outflows from your various investments and loans. That’s money that could be building wealth for you instead. Don’t let all that hard work go for naught.

Here I will talk about how you can save on insurance premiums and tax-deferred savings vehicles, so you can put more of your hard-earned money to work for you 24/7/365.


Insurance premiums

When it comes to your homeowner’s insurance and auto insurance, it’s tempting to keep your deductibles low, so you’ll pay very little after making a claim. But, think about it. How often are you likely to make claims on homeowners and auto insurance? Suppose you raised your annual deductible from $250 to $1,000? That would substantially reduce your premiums and you could invest the savings or use the money to reduce other debts. Meanwhile, every five or ten years, when you actually do have to make a claim, you can easily use the savings you’ve built up from lower premiums to pay the $1,000 deductible out of pocket.

Most people don’t review their policies frequently and end up paying way too much in premiums. Review your policies every year and raise your deductibles on insurance you don’t use often.

Term life insurance can be very useful for protecting your family against income loss if you die prematurely. However, it’s not an optimal wealth building strategy as the vast majority of term life policies (98%) never pay out. With term, you not only see 20 years of premium payments go out of your bank account every month, but you generate no investment returns on that money. You also forego a large death benefit when the policy expires, and term life can be prohibitively expensive to maintain later in life.  That could be a hit amounting to $1 million or more in foregone wealth to your family for retirement and legacy.



Taxes are the biggest expense most of us face in our lifetimes. Imagine $1 doubling every year. Believe it or not, that $1 would be worth $1,024 dollars after 10 years. Sounds great, but with just a 10% tax rate on that money every year, your money would only be worth about $613 (40% less) after 10 years. After 20 years, the account would grow to over $1 million without tax, but would be worth only $376,000 (67% less) after factoring in a modest 10% tax rate. It’s even more sobering when you consider that taxes are likely to go up in light of $26 trillion in government debt, unfunded liabilities for social programs, historically low tax rates, etc.).


Roth Conversion and Cash Value Life

If you have recently lost your job or expect to have a substantial reduction in income this year (and hence find yourself in a lower tax bracket) this might be a good time to do a Roth conversion. You might also consider a Roth conversion if you expect the government to raise taxes substantially in the future—a very likely scenario since today’s historically low tax rates and big deductions are set to “sunset” at the end of 2025—possibly sooner depending on the election outcome. By rolling over your traditional tax-deferred IRA or SEP into a Roth IRA, you pay tax now on the income at your temporarily lower tax rate. As a result, you won’t have to pay any tax when it comes time to take distributions in retirement.

Another reason a Roth conversion might make sense is that Roth’s, unlike traditional IRAs, are not subject to required minimum distributions (RMDs) after you reach age 72. So, if you’re lucky enough not to need to take money from your Roth IRA, you can just let it continue to grow and leave it to your heirs someday. NOTE: Roth conversions do not have an income limit, but you have to be mindful of bumping up to the next tax bracket by doing the conversion.

That’s where Cash Value Whole Life Insurance comes in. Cash Value Life is a tremendous way to store safe dollars and it comes with significant tax benefits. Similar to a Roth IRA/401(k), money is contributed to the policy on an after-tax basis and it grows tax-deferred.  Unlike Roth IRAs, there is no income limit for utilizing a cash value whole life policy and your contribution limits can be substantial, based on the size of the policy. Also, since the policy is a private account within a life insurance company, there aren’t government restrictions telling you the age at which you can use the dollars you’ve accumulated (e.g. age 59-1/2). Even better, withdrawals of your contributions can be taken tax-free and any gains in the policy can be tax-free via a loan from the life insurance company while your money continues to grow inside the policy. Lastly, the death benefit which can be many times the cash value, is passed tax-free to your beneficiaries and/or charities. This allows you to leverage a large asset with smaller dollars.


My video (How Whole Life Insurance Works) has more.



When it comes to building wealth and achieving peace of mind, it’s not about how much money you make; it’s how do you make the most of your money. My video (Maximize Potential) has more. If you or someone close to suspects your money is not working as hard as it could be working for you, please don’t hesitate to call.