The Financial Procast

(Complete Show Notes Below) In the 63rd episode of the Financial Procast: We are definitely putting out a show that's much more focused toward our listeners that are insurance agents and insurance company personnel.  Typically our episodes ha...

(Complete Show Notes Below) In the 62nd episode of the Financial Procast: For so many years, home ownership has been a rite of passage for Americans.  It's all part of the American Dream.  Now, before I get all sorts of hate mail and nasty comments on this topic, we're not against buying a house or investing in real estate for that matter. However... We would like to have an honest conversation about it.  Can you really consider your house to be a great investment? There are certainly a number of good reasons to buy a house but I'm not sure that any of them are necessarily great financial reasons.  For most people, buying a house and signing up for a mortgage is the largest financial commitment they'll ever make. Is that a sad commentary on the financial well-being of our country?  Is it a good thing if you are planning on your home being a "path to prosperity? What's My Problem? Liquidity or lack thereof. If you've been around The Insurance Pro Blog for any length of time and/or listened to the Financial Procast (a la Cash is King) you will undoubtedly be familiar with our somewhat obsessive tendency toward maintaining liquidity.  Brandon and I have often discussed the fact that it probably stems for our business experience more than anything. Let's just say we've both experienced some fairly lean times in regards to cashflow, that's the nature of business. So, the thought of having a ton of equity tied up in your home doesn't make us warm and fuzzy.  Many people will argue that you can always access your equity via an equity loan or a home equity line of credit (HELOC), however, if you get into a situation where you really need the money, you'll likely have a hard time getting it. Huh?  If you become disabled and can't work, you lose your paycheck.  The key ingredient when qualifying for a loan of any kind is your ability to repay the loan.  If you aren't working and your income has taken a hit, you'll find lenders not too keen on loaning to you.  Not to mention, that qualifying for any type of equity loan has become much more difficult since the financial crisis of 2008. Is it Really A Path to Prosperity? We think that most attitudes surrounding home ownership aren't rooted in logic.  Again we find like so many other things in personal finance, that we have general rules of thumb or axioms that everyone has accepted as truth and applied universally without questioning if it really makes sense in their particular circumstance. Now, there are certainly numbers that seek to prove a correlation between greater net worth and home ownership but does that really tell us anything useful? Realistically, if the value of your house increases by $100,000 your life won't be any different. Over long periods of time your house will likely prove to be an asset--in that it will appreciate in value.  However, it's the ability to tap into that value and the opportunity cost that you sacrifice along the way that gives us a bit a of heartburn. An Alternative Philosophy Buy the house but don't make an oversized down payment.  If you need to make a 20% down payment to receive favorable terms on your loan, that's fine but don't make a 50% down payment just because you have the cash available. It really makes more sense to employ your assets in other ways, outside of your house, that will be effective for you at retirement.  When you plow tons of money into a house, you are giving up the opportunity to grow a significant net worth outside of your house. It's really a matter of risk management and we've all been led to believe that owing less on your mortgage is a way to lower risk.  We'd contend that while it appears to be true on the surface but that's a little too simplistic when it comes to really evaluating risk. The truth is that having a large equity position in your house can place you in a precarious position.  What? Follow me for minute.

(Complete Show Notes Below) In the 62nd episode of the Financial Procast: For so many years, home ownership has been a rite of passage for Americans.  It's all part of the American Dream.  Now, before I get all sorts of hate mail and nasty comments on this topic, we're not against buying a house or ... Keep Reading

(Complete Show Notes Below) In the 61st episode of the Financial Procast: We’re pulling back the curtain on life insurance commissions. Yep, you read that right…we’re actually going to talk about how much commission is paid on life insurance policies. Wait a minute! If people actually know how much commission you’re making, they won’t buy ... Keep Reading

(Complete Show Notes Below) In the 61st episode of the Financial Procast: We’re pulling back the curtain on life insurance commissions. Yep, you read that right…we’re actually going to talk about how much commission is paid on life insurance policies. Wait a minute! If people actually know how much commission you’re making, they won’t buy the policy. Or at least that seems to be the prevailing theory amongst many folks in the life insurance industry. In fact, just a few years ago the state of New York put in place Reg. 194 which requires an agent to disclose commissions to their clients, if they client asks them directly for that information. Now, it’s not really cut and dry. The regulation actually requires the commission to be disclosed as a range over a period of time, but it’s a start. Why are some agents diametrically opposed to full disclosure? We’re not exactly sure but we have a theory: Perhaps they’re not doing the best they could for their clients and/or prospective clients and feel some guilt about the money they’re being paid as a result? Think back to a car buying experience as an analogy for this sort of a relationship. You walk on the lot of a car dealership, find the car you want, talk to a salesperson and thus begins the fun. They give you a number, you ask “is that the best you can do?”. Well actually, no, it’s not the best….so they go off to talk to the “manager” and then come back with a better deal. This process repeats several times until you actually get to the best number. Life insurance isn’t exactly the same, however, as we’ve stated many times—there is a right way to design a cash value life insurance policy to optimize cash value performance. Here’s where the obfuscation comes into play. There are a great many ways an agent can design a policy. 1. He/She can apply your given premium to a policy that is focused on maximizing the death benefit. This is the traditional way of selling life insurance and it also maximizes the commission paid to the agent. Now, long term policy performance will be okay but the short term (the first 10 years or so) will almost always have a negative internal rate of return on cash surrender value. or… 2. The way we do it—apply your given premium to the policy that is focused on maximizing your return on cash. Most often, this means we will be squeezing the death benefit to the lowest allowable level (avoiding the creation of a modified endowment contract). This is very non-traditional and it lowers the commission paid on the policy. Result: A much shorter time to see a positive return on cash, a policy that has lower internal costs (as a result of the lower death benefit and base policy premium). There are times that people will ask us, “Is this the best you can do??...Can you change this or change that?” We’re always willing to make the changes as requested but we start by presenting the best design. Which is probably the world’s worst sales tactic? Then again, we never claimed to be great salespeople—just a competent resource. We never consider how much we’re getting paid in commissions when presenting options to our prospective clients.  Our presentations just offer up the best performing contracts for the situation. Let’s Get Specific Most of what exists out in the ether regarding the exact commissions paid on life insurance products is wrong.  No way around it. That’s probably because the people who attempt to write about it or discuss it aren’t actually insiders and have very little understanding of how commissions are actually paid. Whole Life Insurance For starters, let’s look at the base premium on whole life insurance.  Most base commissions for most life insurance products sit at 50-55% of the premium. Then there is an expense allowance that is paid which brings the total to 70-110%, depending on the product. Now this is what’s paid to the agent typically.

(Complete Show Notes Below) In the 60th episode of the Financial Procast: So today we’re going to get into something we should’ve gotten into a long, long time ago.  Admittedly it’s a tad embarrassing that we’ve not compared whole life insura...

(Complete Show Notes Below) In the 60th episode of the Financial Procast: So today we’re going to get into something we should’ve gotten into a long, long time ago.  Admittedly it’s a tad embarrassing that we’ve not compared whole life insurance and universal life insurance side by side either on The Insurance Pro Blog or ... Keep Reading

(Complete Show Notes Below) In the 59th episode of the Financial Procast: Do You Have Financial FOMO? Unfortunately it seems that financial “advisors” have spent too many years trying to gain credibility with their clients by pitching them on creative ways to defer, delay or dodge taxes.  Now, we realize that this notion has some ... Keep Reading

(Complete Show Notes Below) In the 59th episode of the Financial Procast: Do You Have Financial FOMO? Unfortunately it seems that financial "advisors" have spent too many years trying to gain credibility with their clients by pitching them on creative ways to defer, delay or dodge taxes.  Now, we realize that this notion has some appeal...especially when it's done legally and well within in the confines of the IRC. However, we run into people on a fairly regular basis who've bought into using some tactic to get around a "tax problem" that exists in the present only to find out they've created a substantial problem down the road.  We've seen some schemes that people thought up all on their own and we've seen some that were recommended at great expense by an advisor of some sort. Many times the tax "problem" people perceive isn't really a problem at all.  Paying more taxes because you have a higher income, doesn't mean that you have a problem.  In fact, we'd suggest that you should just pay the tax and get on with your life. Now, before we get hate mail from your CPA...we're not suggesting you should pay more than you have to.  However, we see people spend so much time, money and energy trying to work around paying taxes only to create a major headache for themselves later in life. Let's talk more specifically about some of the silly things we've seen: -  A 162 Bonus plan pitched and put in place for a business owner on his/her own life.  More often than not, it's a lot of hassle to gain a very small advantage in terms of tax savings. -  Heavily relying upon qualified accounts to 'avoid' taxes.  You will pay at some point in the future.  The IRS has effectively created a very nice annuity for themselves by allowing you to defer taxes until you retire.  Hey look at the bright side, the taxes you pay on your qualified accounts will help pay your own social security benefits. -  "Proprietary" crazy schemes used to avoid paying taxes or at least pitched as a tax deduction strategy.  Of course, there's the cost of setting up the plan (which isn't chump change...think $5000-$15,000) and the fact that you will pay the taxes at some point anyway.  Also, most of these plans use artificially high effective tax rates in their sales presentation. Why? Because it makes the numbers much more appealing.  Many times, we see effective tax rates used as high as 50%.  Now, we're not saying that that doesn't exist but based on our experience and after working with some very high income earners in our practice, we've never/rarely seen people with effective tax rates that high. -  The idea of using a pension to buy "free" or significantly discounted life insurance.  At one time, this idea worked fairly well but for the most part, those days are behind us.  The IRS is all over this strategy and in most cases it's just more trouble than it's worth.  Honestly, we've run the numbers comparing the use of life insurance in this way, and we've rarely seen any significant advantage gained by doing this in the long run.  It's best to pay your current income tax and buy the policy outside of your pension. You will have much more flexibility and you'll be done with the IRS forever as now you have no further tax obligation surrounding the policy as long as you manage it properly. Why is Complexity So Sexy? We're not entirely sure of the answer to this question but I'll hazard a guess... Complexity is engineered because it appeals to the ego of the status-driven investor.  It gives people something to talk about with their friends on the golf course and at cocktail parties. What is the result of most status driven purchases? Well typically it's a really great deal for the person who's doing the selling.  As Brandon has often said, "It's gonna to put someone's kid through college...probably not yours but more likely the guy who sold it to you!" We encourage you to keep it simple.

(Complete Show Notes Below) In the 58th episode of the Financial Procast: TIAA-CREF Says People Don’t Trust Financial Advice According to a research report commissioned by TIAA-CREF that surveyed 1000 Americans, nearly 50% say that they aren’t really sure who to trust with regards to receiving financial advice. Now that probably means the other half ... Keep Reading

(Complete Show Notes Below) In the 58th episode of the Financial Procast: TIAA-CREF Says People Don’t Trust Financial Advice According to a research report commissioned by TIAA-CREF that surveyed 1000 Americans, nearly 50% say that they aren’t really sure who to trust with regards to receiving financial advice. Now that probably means the other half of people aren’t working with a credible resource either…they just don’t know it. Hmm… What’s even more disturbing?  It seems that 37% of those people surveyed say, “they don’t like talking to anyone about their finances.” Uh oh…that’ not good. In our experience, that means these people are likely too embarrassed  with their lack of planning to admit their failure to anyone.  So, basically we now know the percentage of Americans who aren’t totally delusional about the fact that they’re not saving enough money. That 37% isn’t doing a good job of planning and they don’t wanna talk about it. Additionally, 1/3 of those surveyed said they don’t have time to deal with it.  What? It really doesn’t take that much time, so…maybe people should start telling the truth. What’s the truth?  The truth is most people are clueless and talking about it with someone just reinforces that fact. This reminds us of the world’s most famous excuses for not exercising…”I don’t have time”, “I’m too busy for that” etc.  Really? How about that four hours of television you watch every night, you got time for that...right? The esteemed senior managing director of advisory services at TIAA-CREF, Eric Jones, says “When it comes to financial advice, trust and personal touch are key if we expect individuals to take action.” Ummm…nope, that’s not the key. We can tell you what the two most crucial factors are: 1.  Having the right knowledge and/or a competent resource 2.  You have to do something—just talking about it won’t help, people have to set the wheels in motion It’s time for a little personal responsibility to take root with regards to planning your finances.  A trusted advisor can certainly help but their advice will be much more valuable if you have a destination in mind. Life Insurance Carriers Say “Meh” (18:25) In the last couple of weeks, we’ve had a couple of people ask us specifically about how life insurers will deal with a Treasury default.  And does the whole government shutdown really matter?  Don’t life insurers invest heavily in treasuries? After all, just last Thursday, the Treasury said “In the event of a default, the U.S. economy could be plunged into a recession worse than any seen since the Great Depression.  The U.S. dollar and Treasury securities are at the center of the international finance system.  In the catastrophic event that a debt limit impasse were to lead to a default on Treasury securities, financial markets could be shaken to their core as was seen in late 2008, which resulted in a recession worse than any seen since the Great Depression.” Guess what life insurers had to say about all this? Not much. Why is that? Well, life insurance companies are pretty savvy when it comes to invest their general account money.  According to industry surveys, the life insurance industry’s general account assets show us that the most of their portfolios are invested in corporate bonds and mortgage loans.  Not treasuries. Jack Dolan, the spokesman for the American Council of Life Insurers, “Only 8 percent of our general account assets are held in long-term government bonds.  In comparison, about half of our general account assets are in corporate debt.” That’s a pretty small percentage of general account assets invested in government bonds. Also, let’s not forget that just being in the life insurance business is profitable even if your investment return isn’t so great.  The life insurance business is inherently profitable—claims are very predictable which makes underwriting profits almost a certainty.

(Complete Show Notes Below) In the 57th episode of the Financial Procast: Looks Like Some High Speed Traders Might be Too Speedy Have some high speed bond traders really defied the laws of physics?  Evidently, a couple weeks ago right on the heels of the Federal Reserve announcement some traders seem to have been able ... Keep Reading

(Complete Show Notes Below) In the 57th episode of the Financial Procast: Looks Like Some High Speed Traders Might be Too Speedy Have some high speed bond traders really defied the laws of physics?  Evidently, a couple weeks ago right on the h...

(Complete Show Notes Below) In the 56th episode of the Financial Procast: Today we are diving into a financial planning strategic philosophy.  This really serves as an overarching theme in everything that we do at The Insurance Pro Blog.  It probably comes as no great surprise to our community that we really feel traditional financial planning is too rigid. We think that rigidity can leave people in a very uncomfortable situation in the long term and only serves to back them into a corner.  Common financial advice will give you all sorts of “rules of thumb”.  I don’t guess it’s any big secret the disdain we have for distilling financial advice down to cute little blanket statements. It would be nice if it were always so neat and tidy. However, we all live in a complex world where the difference between winning and losing is decided by nuance.  Every client we engage has a slightly different situation with any number of variables that may or may not exist in other people’s financial lives. For those of you who’ve followed us for a while…none of this is new to you—you already know how we feel about this. So, why do we have our undies in a wad? We recently ran across this article from the Washington Post and we got a little fired up.  You see, it seems that professor Harold Pollack from the University of Chicago has distilled "All You Need to Know About Personal Finance" down to 11 simple rules that will fit onto a 4x6 index card. Well, isn’t that cute. What’s his sage advice?  If you listen at 5:04 you can hear exactly what each point is and you can hear our glorious commentary on all 11 points. But none of his “advice” is new…right?  It’s the same advice that personal finance gurus and financial advisors have been spewing for years.  And over the last few years the volume of all this noise has gotten louder but strangely it doesn’t seem that it translates into great financial security for Americans. Almost every report regarding financial security in America details how we’re all in worse financial shape than ever. In fact, we’ve encountered quite a few people who’ve followed all of this typical advice and get to the end of the rainbow only to find there’s really no pot of gold there.  Many times, there’s just a great big tax bill.  Saving boatloads of money in tax qualified plans sets up a very nice annuity for the IRS. In our experience, those who’ve had the most financial success don’t follow common financial wisdom.  Most financially successful people consider alternative philosophies and turn off the noise of the talking heads. Now, that we’ve digressed…let’s get back to the topic at hand. What is the Case for Cash? We are of the opinion that holding more cash or cash equivalents is always a good idea for two reasons: To be able to take advantage of opportunities Wonderful safety net when you need it Options are a good thing. The one thing that seems to unite most successful investors is that they are extremely patient.  If the growth potential isn’t there or they don’t see obvious deep value opportunities, they simply sit on their pile of cash until the time is right. Consider what Sir John Templeton had to say: “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” Sage advice to say the least—you won’t lose money if you’re holding cash in a market that is inflated and subsequently crashes.  And you’ll have the ability to cash in on the opportunity that abounds as a result of the crash. It’s probably no big surprise that we really like cash value life insurance as a place to store cash equivalents.  It provides a competitive return, tax favored status and the ready access to funds when opportunities arise. BOLI Sales Keep on Growing What is BOLI you ask?  Well,

(Complete Show Notes Below) In the 56th episode of the Financial Procast: Today we are diving into a financial planning strategic philosophy.  This really serves as an overarching theme in everything that we do at The Insurance Pro Blog.  It probably comes as no great surprise to our community that we really feel traditional financial ... Keep Reading