The 1% solution (sometimes 2%) is an economic theory of protecting assets and human capital with 1% of your entire assets during your working years. Many advisers use it as a rule of thumb, but like all theories there are exceptions to the rule. But that being said, it’s an easy method to remember and apply. Consider the financial applications in everyday life.  Protecting family income by insuring the family breadwinners is one of the cornerstones of defensive financial planning. Life insurance can not only replace the income lost due to the death of the breadwinner, but also can pay off indebtedness and fund the future dreams of its surviving family members. And along similar lines of thought, it’s wise to protect business partners with life insurance that can fund the succession plan or protect a key employee of the firm. Spending or setting aside 1% of your total assets can deliver meaningful protection and some peace of mind Some degree of wealth accumulation is a financial goal of most Americans. Setting aside 1% of your total assets to fund tax deferred accumulation and tax-free distributions is a play on saving for retirement as well as a way to create   Read more…

Non-working spouses may be the most underserved financial partner of a family unit. But valuing a non-working spouse can be economically advantageous. As an example, a non-working spouse can contribute to an IRA without reportable income. That means non-working spouses under age 50 can contribute $5,500, (over age 50 -$6,500). If the effective tax bracket is 25%, you saved $1,625 with no corresponding income. But how do you put a price tag on a stay-at-home, non-earning spouse. If that spouse is running the home, raising the children and participating in the community, how do you value that? Consider if that non-working spouse were no longer alive. How would the surviving spouse cope with all the functions that were performed by their deceased partner? Child and home care alone could run up a very pricey tab. Life insurance is the most economical solution for maintaining the lifestyle of the household. What about insuring children and grandchildren? Most people don’t want to profit from the death of a loved one, especially a child or a grandchild. But nevertheless life happens, and sometimes life happens to you. But having life insurance on children isn’t for the low odds of such a dreadful scenario.   Read more…

Life insurance is generally calculated on debt, future obligations and dependent charities, but rarely is the notion of calculating and replacing human capital for a breadwinner or key employee. The average person in our western democracies can work between 35 and 40 years. What does a person earn during their working lifetime? What is their earning power worth? What is the value of their human capital? How can you replace income generated from a family member, business associate or a contributor from a charity? Consider economist Tom Hegna’s explanation of lifetime earnings and human capital. “Let me explain… When you begin your career, you have a greater proportion of wealth in human capital because you have many more years to earn compared to the time you’ve spent acquiring financial capital. As you progress through your career, the numbers change and your financial capital outweighs your human capital because you’ve been accumulating financial capital over the years, and you will have fewer prime earning years.” There are calculators that can generate a rough estimate of your human capital. It’s not a quantitative assessment, just a good place to start. But a good example of lifetime earnings can be found in your   Read more…

Most people have some kind of debt. Your home mortgage is debt. Your auto loans are debt. Your student loans are debt. Many in the middle have significant credit card debt. The American household just seems to run on debt. So all debts are financial liabilities. Families have obligations, whether it’s college education, future weddings or a charity that depends on your contributions. Future obligations are also a financial liability. Most households today run on two incomes. All debt, mortgages and future family dreams are built upon two incomes either DINKs (dual income no kids) or DIRKs (dual income raising kids.) So the American family’s finances are generally predicated on two incomes. When you have two breadwinners, the potential loss of one can be economically catastrophic. Could a family continue in its present lifestyle if one of the breadwinners was suddenly gone? Most families would suffer, not only the loss of a loved one and the immediate expense of medical bills and funeral costs, but the loss of their lifestyle as well. The economic equation of two earner households requires financial protection that only life insurance can secure. You need to cover both breadwinners to protect the financial stability of   Read more…