Popular opinion states staying debt free and investing in mutual funds allows you to achieve your financial goals. Many advise avoiding specific financial products, sighting they are too expensive and will ruin your finances.
It’s important to understand that financial products are neither good nor bad. If this is the case, how did some get a poor reputation?
- Opinions from popular financial personalities. I say, judge these products on their own merits. Do they increase your income? Provide peace of mind? Allow you to leave a larger legacy?
- A bad experience. Perhaps the products were sold improperly, the features weren’t understood, or we’ve failed to think about future ramifications.
- A product is deemed “too expensive.” Before nixing a product, its cost should be weighed in tandem with the benefits received.
The following five controversial financial products can actually help you:
1. 30-year mortgage
Still the most common home loan, it’s fallen out-of-favor with some in support of the shorter 15-year mortgage, citing the higher total interest paid.
Conversely, a 30-year loan has a much lower monthly payment.
As we point out here, it’s important to consider the options you have with your additional cash flow if you choose a 30-year mortgage. By investing the difference earlier, you could end up with more money down the road.
2. Student loans
No one loves student loans, but they can be beneficial to your bottom line! Think of them like an investment.
As a young person, your greatest asset is your future income. Growing your human capital (knowledge, skills and talents) through further education will likely grow this asset. The trick is aligning your potential earning power with the decision to get this student loan.
3. Whole life insurance
Whole life insurance provides permanent lifetime coverage (unlike a term policy). It also has a cash value component with steady growth.
Why is whole life controversial? Detractors point out three things:
- It’s much more expensive than term life insurance.
- You won’t need life insurance when you’re older.
- The stock market is a better place to invest than the cash value in your whole life policy.
These points are made in a vacuum, without context to its potential benefits. In fact, case studies show incorporating a whole life policy not only increases retirement income, it supports a greater amount of legacy at end-of-life.
4. Annuities
An annuity is an investment with a life insurance company that often comes with certain guarantees, typically involving an immediate or future pension-like income stream. Annuities are a powerful tool because they can provide higher distribution rates in retirement than relying on withdrawals from an investment portfolio.
Annuities can protect a retiree against longevity risk —running out of money because their planning horizon was longer than expected. Annuity income is guaranteed regardless of how long the retiree lives.
While these annuity payments can be guaranteed as long as both spouses live, an even higher income can be generated if based on the life of just one spouse. Since this is a risky proposition (having the annuity income end at the death of one spouse), having whole life insurance in place gives the retiree the confidence to make this tradeoff. If one spouse dies prematurely, the surviving spouse has the life insurance death benefit.
Now we are using two controversial financial products—whole life and annuities. The result can be a more efficient retirement—higher income and higher legacy.
5. Reverse mortgages
A reverse mortgage is a way for senior homeowners to access equity in their house. The closing costs on a reverse mortgage are high, and loan balances rise over time if not paid down. However, there is a secret to making this controversial product work for you.
People don’t realize a reverse mortgage is a line of credit. Not only does any loan balance increase over time, your line of credit limit also increases. Here’s the secret—get a reverse mortgage early in retirement, preferably on a paid-off house. But don’t take any cash out yet. Instead, let your line of credit grow.
What can your reverse mortgage line of credit be used for?
- An alternate source of retirement income. If you’re relying on investment withdrawals and the market has a bad year, take the next year’s withdrawals from your reverse mortgage line of credit. This allows your investments time to recover and prevents you from selling after a market decline.
- Unexpected spending shocks. Most would consider a reverse mortgage at this point—when needed and as a last resort. However, starting the line of credit early gives you much higher access to funds later on.
How are you utilizing financial tools?
There is no shortage of financial products competing for your attention. Fortunately, you don’t have to figure them out alone. Stewardship is here to help. Need some guidance?
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