Power of Compound Interest
I paid $89 for gas today.
My vehicle is a gas guzzler.
Living on a budget is not easy.
Earning your first $100K isn't either.
But your second $100K is easier.
Why is that?
Compound Interest
This is a mental model you need to understand yesterday.
Because if you're not winning here, you're losing to inflation.
Imagine your investments earn 7% interest every year.
This is being generous, considering the S&P makes on average 10%.
Your money grows by 7% each year on average total.
$100 × 1.07 = $107
Next year, it earns another 7%
$107 × 1.07 = $114.49
Now, while this is only 2 years with $100. Let's compare that with a $100k.
$100,000 × 1.07 = $107,000
$107,000 × 1.07 = $114,490
But of course, every market has the potential to crash, and this keeps people up at night.
Indexed Universal Life Insurance (IUL)
But you can avoid this market loss with IUL if it's within your means.
Life insurance with built-in indexes.
Indexes are groups of investments.
So your money can continue to grow during the growth years and avoid the loss years.
Compound interest is more easily achievable today thanks to this investment vehicle, not many utilize.
It also has the benefit of life insurance and insurance riders.
3 great life insurance riders
Accelerated Death Benefit Rider:
Allows policyholders to access a portion of their death benefit early if they are diagnosed with a terminal illness, usually giving them 6-12 months to live. This can help cover medical expenses and living costs or fulfill final wishes without having to wait.
Waiver of Premium Rider:
If the policyholder becomes disabled and can not work, this rider waives the premium payments for the duration of the disability. It ensures that the life insurance policy remains in force without additional financial burden during tough times.
Long-Term Care Rider:
Provides an additional benefit if the policyholder needs long-term care, such as nursing home care, assisted living, or home health care due to chronic illness or disability. This rider can pay for care costs directly or reimburse the policyholder, thus protecting their assets from being depleted by long-term care expenses.
These riders can significantly enhance the flexibility and usefulness of a life insurance policy, providing benefits during one's lifetime as well as after.
Because life insurance is not death insurance.
These benefits are taking out of the death benefit, not your investment component. Which continues to grow.
A nest egg, some would call it.
Other Nest Eggs
But, not everyone can easily invest in IUL due to its complex nature, health requirements, or upfront costs.
This is where you would want to consult with a financial guru like yours truly.
A 401K is another option with a company matching your investments. Tax exempt but suffer taxes later.
A Roth IRA can also accomplish this.
Pay taxes now for tax-free growth.
But both can suffer market losses.
Which can potentially halt your compound interest from ever taking flight. At least not in the timeframe a natural human can live for.
The smart investor will diversify his investments to cut his losses anyway.
If you're interested in a comparison between IUL and other investments.
Check out the images below.
This graph was developed by World Financial Group (WFG) for illustrative purposes only.
Not an actual representation and each persons situation will be different.
Enjoyed what you read?
Subscribe to the newsletter for more on topics like this.
Note: None of this information should be taken as financial advice. It's just a financial scenario.
Timothy Cortez is a licensed insurance producer & financial broker in the state of California.
