Kelly O'Connor

Navigating the world of insurance and contributions can often feel like venturing into uncharted territory. One common question that arises is, How do you determine the right amount to contribute to your insurance policy? Today, let’s unpack this query, taking inspiration from an insightful discussion on structuring contributions.

Insurance As A Wanted Product:

First and foremost, it’s crucial to understand that insurance is not a necessity; it’s a choice. Unlike essential needs such as food and shelter, the amount you contribute to insurance is a subjective decision based on your financial aspirations and goals. Ultimately, insurance is a “want” product” not a “need” product.

Mapping Your Financial Buckets:

Imagine your finances as a set of buckets, each representing a different tax treatment. You have your ordinary income bucket, capital gains bucket, tax-free bucket, and potentially tax-exempt bucket. The distribution of your assets across these buckets plays a vital role in your overall financial strategy.

Old Money and New Money

To decide how much to contribute to your insurance policy, it’s essential to differentiate between “old money” and “new money.” Old money refers to capital you’ve already accumulated, while new money represents funds you’re contributing to build your accounts. Old money resides in existing assets, such as current investments, while new money includes contributions to accounts like a 401(k) or an IRA.

Creating an Decreasing Tax Plan:

Contributions to your insurance policy can help balance your tax exposure. An “decreasing tax plan” involves directing new money towards tax exempt accounts, aiming to shift the balance from being heavily taxed on one side to being more evenly distributed across buckets.

Analyzing Contributions and Funding Strategies:

The key lies in analyzing your old and new money distributions to determine the optimal contribution strategy. By understanding your financial picture, you can strategize on how to best allocate funds to various accounts. This decision could involve systematically transferring assets between buckets or using new money contributions to balance tax exposure.

The Teeter-Totter Effect:

Imagine a teeter-totter where one side represents heavily taxed assets (401k, 403b, IRA, etc.) and the other side represents tax exempt assets. The goal is to achieve equilibrium by distributing assets strategically. By maintaining both sides, you create flexibility in the future for optimizing distributions based on varying tax rates.

Choosing Funding Strategies:

Two primary funding strategies come into play: full funding and short funding. Full funding involves consistently contributing over several years to build cash value quickly. On the other hand, short-term funding aims to create room for future assets, making it an excellent choice when anticipating significant future inflows from real estate sales, business ventures, or inheritances.

Empowering Your Decision:

Understanding how to decide on insurance contributions is about aligning your strategy with your financial objectives. By assessing your old and new money, considering various funding strategies, and factoring in potential future inflows, you can design a contribution plan that complements your unique financial landscape.

Accessing Valuable Insights:

If this information piques your interest, investigate thorough resources that delve further into the world of insurance contributions and strategies. Equipping yourself with knowledge empowers you to make well-informed decisions aligned with your financial aspirations.

Remember, there’s no one-size-fits-all answer to how much you should contribute to your insurance policy. Your financial journey is uniquely yours, and a personalized approach tailored to your goals and circumstances will yield the most effective results.

As you embark on your journey to maximize your financial potential, consider seeking guidance from experts who can assist you in analyzing your old and new money, aligning your contributions with your goals, and ensuring that your financial teeter-totter is balanced for a secure and prosperous future.

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Kelly O’Connor is a master coach and trainer with a decades-long career in sales, marketing, and insurance. An industry leader, alongside top producers developing programs, he quickly became Colorado’s #1 speaker within the charter school system, traveling the state to speak in front of thousands of people and financial planners. A true visionary and figurehead for the community, he’s invested hundreds of thousands of dollars in marketing, coaching, and training masterminds and mentors.

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