MOODY'S REVIEW
DECEMBER 2000
COMMENTARY ON INVESTMENT AND PLANNING ISSUES
ERROLD F. MOODY JR.
MASTER OF SCIENCE IN FINANCIAL PLANNING
LIFE AND DISABILITY INSURANCE ANALYST
REGISTERED INVESTMENT ADVISER
WWW.EFMOODY.COM
MORE LTC: Since Medicaid generally will pay for nursing homes but not assisted living and other care, there is a perverse incentive for over-institutionalization.
LTC POLICIES: The NAIC has adopted amendments to help LTC policy purchasers understand that such policies may increase in price. The amendments list extensive information that must be supplied to an applicant so that the applicant is aware that the policy may be subject to rate increases in the future, including the rate increase history of the insurer on the particular policy form or similar policy forms nationwide. The model has also been revised to require a specific acknowledgment by the consumer that the policy may be subject to rate increases in the future.
An overview of the key provisions of the rating amendments include:
Elimination of initial loss ratio requirements. (The current 60 percent loss ratio requirement is eliminated to enable companies to set more conservative initial premiums.)
Limitation of expense allowances on increases. (All rate increases are subject to an 85 percent loss ratio on the increase and 58 percent on the initial premium.)
Reimbursement of unnecessary rate increases.
Authorization of the review of administration and claims practices.
Option to escape rate spirals by converting to currently sold insurance.
Authorization of commissioner to ban companies from the marketplace that persistently file for rate increases.
Requirement of actuarial certifications.
ELDERLY NURSING AND HOSPITAL CARE: (Journal of the American Medical Association) The study found that women 65 to 84 years old and those over 85 years of age had fewer and shorter hospital stays in 1993 compared to 1986, averaging out to three fewer nights in the hospital.
Among women, the 65-84 age group spent an average of 18 fewer nights in a nursing home per stay, and the over-85 group spent 42 fewer nights.
Men showed no significant change in hospital stays, but those over 85 years of age spent an average 33 fewer nights in nursing homes, the study said.
Of women over 85 who were asked about their ability to walk, bathe, use the toilet, and eat, 52 percent reported restrictions in two or more of the activities in 1993, compared to 63 percent with problems managing two of the activities in 1986. Men and women at least 85 years old experienced a better quality of life in the last year of life in 1993 than those in 1986.
It's no longer a question of staying healthy. It's a question of finding a sickness you like."
Jackie Mason
USELESS STUFF: I am making reference to the basic allocation portfolios that have proliferated by the hundreds (if not thousands) of computer generated software programs (as well as fund families and Internet sites) during the last 15 years and used by the vast, vast majority of financial planners and advisors. This is also the same commentary comes from a book and a new understanding of equities and economics from Robert Markham wherein he stated:
1). Under the tyrannical lash of modern portfolio theory and the efficient frontier, the sensible practice of portfolio diversification has been pushed to illogical extremes. As a result, investors have been lured into using one class of stocks to hedge against another class of stocks, a move that is doomed to failure.
My comment- REIT's are non correlated to the overall market. They did extremely well in 1994 when the rest of the market tanked. But since then REIT's- for a variety of reasons- have done absolutely horrible with little reason to expect a resurgence. Sure, they may be a great hedge but why use something with a consistent negative return. I can also include gold. "Great" hedge but it has gone no place for years. "We should also view the conventional theory that bonds were non correlated to stocks since "when one went up, the other was going down .............." But, at least since Volcker instituted his inflationary procedures, bonds tended to react for the same reason in the same way and at the same time as stocks. One analyst said he believed that bonds were 80% correlated to stocks. Now, I do not believe he is suggesting market timing- nor certainly do I. But stagnant allocation or that identified solely by computer generation misses the real world.
2). The conventional wisdom that small company stocks will out preform large company stocks is false.
My comments- well, I am not saying that they may not gain in the future. But the vast growth of small cap existed in the early 80's and has not been repeated since. Historical figures require review. But after 15 years of non repetition, is the continued commentary really that valid? Further, revised statistics show that small cap did NOT do as well as previously indicated. Even Ibbottson agrees.
3). The conventional wisdom that international investments can reduce risk and increase stock returns is false.
My comment- I remember reading a book about 5+ years ago that referenced the high correlation between the U.S. and foreign markets. In other words, as the world has shrunk, so have the parallels with the stock markets. On the other hand, look at what actually happened during the last five years- 2000 excepted. The U.S. market did gangbusters and the foreign markets were terrible. I mean terrible both in risks and volatility.
4). Volatility and risk are not equivalent. Equaling the two leads to short term tactical moves intended to reduce volatility. Instead, these moves wind up penalizing long term performance.
My comments- I look at and attempt to interpret current and future economic conditions and the impact on the investment. I am not (normally) concerned about short term elements- and for that matter, neither is Greenspan.
As the article notes, "much of the trillion dollar investment industry is built on half truths, incorrect interpretation, flawed data, unrealistic expectations and absurd contradictions." I am aware of volatility, but I have to look beyond it to find the reasoning. Computer programs neither have such current info nor, certainly, the insight. Bill Jahnke said it best: "The view that there is nothing to be gained by an ongoing evaluation of investment opportunities and the positioning of client portfolios in response to those opportunities is extreme and dangerous. The fact that assessing further prospects is difficult and subject to error is no defense for not doing it. Given that most allocated investment solutions are poor interpretations of investment theory and have little to do with meeting financial objectives, the advice to "stay the course" is especially hollow."
I have been studying software provided by major mutual fund and software companies and have found that it reflects remarkably few of the lessons learned after decades of the development of financial theory and its implementation by and for large institutional investors
Bill Sharpe
The fund companies, et al, make the selection "simple" in that you can merely click a button after answering 10 sophomoric questions. But "simple" eliminates an understanding of investments fundamentals, is seriously flawed, shows a higher risk and is primed to failure.
MEC: These are life insurance policies that fail the 7 pay test. In essence, the amount of the one time (normally) initial funding exceeds the premium that would have been paid annually over 7 years. Any loans do not meet the tax free status and are taxable. One other problem is if there is an attempt to use the MEC as security for a loan. The IRS requires that such loan is taxable. Probably like constructive receipt.
OPTIONS (NY Times) When companies were rolling, employee stock options were the cat's meow- and good for the company. "An increasingly large component of that growth came from stock options that are used to pay employees but are not considered an expense. Options, which cost stockholders in share dilution, cost companies nothing to issue and actually saved them money on payroll costs. Those savings go to the bottom line, making earnings growth at many companies look artificially high." Pat McConnell estimated that earnings among the companies in the Standard & Poor's 500-stock index were overstated by 6%, on average, last year because of generous option grants."
This is fine on the way up. But what happens when the values drop? "Stock options work as a compensation device only when share prices are rising. When stocks plummet, the options become unexercisable and possibly worthless, and the construct starts to crumble."
The problem is that workers may now want (GASP!) money instead of options and further compound the problem in a down- or sideways- market. The article noted that "40 % of options held by Amazon.com employees and at least 36 % of those held by workers at Microsoft are now unexercisable. Almost 16 % of options held by workers at Dell Computer and perhaps more than that at Lucent Technologies are below the price at which they were issued. Around 14 % of options held by employees at Intel and Yahoo were issued at prices higher than can be found in the current market. At Priceline.com, an estimated 28 % of outstanding options are under water. "
LIFE INSURANCE: Here is a life insurance tax problem I bet no one gets right. Assume mom, Betty, buys a $1,000,000 policy on her husband, Sam, and the proceeds are to be paid to her child, Mary. Sam dies. O.K., how much does Mary get? $1,000,000. How much does Betty have to pay the IRS for Mary to get the $1,000,000? $125,250 What is this all about? Betty actually made a gift of $1,000,000 to Mary since she had a complete incidents of ownership. Bet a lot of people do this without recognizing the tax consequences.
MORE LIFE INSURANCE: If you transfer two policies under a 1035 for a second to die policy there is a tax in that any built up gains in the original policies must be recognized as taxable income. As an example, mom has a policy as does dad. They want to combine into a lower cost second to die. But now they pay taxes.
IRREVOCABLE LIFE INSURANCE TRUST AND THE PAYMENT OF ESTATE TAXES. Lastly, if you have a ILIT, be sure the trust makes NO mention of the requirement to pay estate taxes. (Remember, tax laws to NOT have to make sense- a major failing of some trust. Of course, everyone knows what will be done (O.K., what should be done), but if there is a requirement to pay taxes, the IRS, under a technical advice memorandum, would include the insurance in the estate.
ADL's: (AARP) states that in 1994 some 9.5 million Americans aged 50 or older received help for one or more ADLs and/or IADLs. Of those, 1.6 million received help for two or more of the five ADLs. The ADL needed most in that population was bathing, followed by dressing, transferring, toileting, and eating, in that order. The IADL needed most was heavy housework followed by shopping, light housework, meal preparation, managing money, and using the telephone.
"In 1994, 7.3 million Americans needed long term care (LTC) services at an average cost of nearly $43,800 per year. By 2000, this number will rise to 9 million Americans at nearly $55,750 per year, and due to inflation, by 2060 it will skyrocket to 24 million Americans paying over $250,000 per year to receive long term care." (Long Term Care Insurance National Advisory Council)
401(K) PLANS: (Hewitt Associates, NY Times) The level of employer matches in 401(k) plans has risen slightly since 1997, Hewitt found, with 19% of employers providing dollar-for-dollar matches. Still, the most common match is 50 cents per dollar, the survey found, at 32%. In a 1999 survey of 491 employers with a total of 3.3 million participants and $295 billion in assets, Hewitt found that plans offered 11 investment options, on average, up from 8 in 1997. 86% of employers said they provided investment education, up from 59% in 1997. And 62% use the Internet for such purposes, up from 20% in 1997.
A Hewitt employee noted, "the fund companies providing the plans would advise employees on how to allocate funds by asset class "It's a simple choice but a lot of times it paralyzes people."
Sorry, allocation is NOT a simple choice nor are fund companies providing competent advice.
401(k) (ICI) A full 50% of American workers' 401(k) assets were in equity funds in 1999. It will be curious to see the 2000 statistics and find how many sold stocks.
To err is human; to forgive, infrequent.
Franklin P. Adams
LARGE: At the end of August, mutual fund total assets were about $7.4 trillion.
PRESCRIPTION COSTS (Jupiter communications) A strong demand for prescription drugs will push spending online for health care products and services to $9.8 billion in 2004, up from just $200 million in 1999
FUTURE PERFORMANCE: (Sharpe) We argue that neither Morningstar's measure nor the excess return Sharpe Ratio is an efficient tool for choosing mutual funds within peer groups when constructing a multi-fund portfolio --the ostensible purpose for which Morningstar's rankings are produced.
You can go a long way with a smile. You can go a lot farther with a smile and a gun.
Al Capone
NICE THOUGHT- NEVER WILL WORK: "Surgeon General David Satcher's blueprint aims for 30% of Americans to exercise 30 minutes each day - today only 15% of the population does - and reduce by half the number of overweight or obese children, which now stands at about 11% of kids."
Remember, the American obesity rate increased 50% in the last 7 years.
LIFE INSURANCE: If you own a large life policy , it will be taxed in your estate. Most of these policies should not have been sold in the first place. If you want to grow money in a permanent insurance policy and you will never have much of an estate, the point is relatively moot- you won't have assets above $675,000 if you died this year- $1,000,000 after 2004. But if someone is purchasing a policy above $500,000 or so, then you need to address the estate tax implications AT THE TIME OF PURCHASE to determine the subsequent impact of the cash buildup. You may want to gift the policy to an Irrevocable Life Insurance Trust or to an individual. There are sizable tax implications.
One insurance agent says you can get around this problem by "simply make someone else the owner " and that takes care of the problem.
My comment to him "Simply make someone else the owner??? Now there's a good one. You use up part of your lifetime exemption unnecessarily by using the wrong type insurance to begin with or you potentially have a transfer for value."
Essentially, if you bought a standard policy that ended up with $500,000 in cash and transferred it to a ILIT, you will reduce your lifetime exemption by $500,000 to only $175,000 (current). Anything in an estate over that starts getting taxed at a minimum 37%. But let's say you bought a different policy that only had $200,000 in cash. Now your lifetime exemption is $475,000. You shelter a lot more assets. The difference in tax between the two values at 37% is $111,000. Don't you think an agent should inform you of that exposure at the time of sale? Well, I can tell you that in the classes I have done in estate planning as continuing education for insurance agents, at least 2/3rd's to 3/4 of the students don't have a clue to the estate considerations. It's certainly not addressed in the licensing training required by the state and is rarely mentioned in subsequent continuing ed by other instructors. But no one can tell me $111,000 is chump change.
Anyway, the use of the second type policy is called "planning" and it costs you a LOT, LOT, LOT less because it was never designed for cash value in the first place. It was designed as insurance. Big difference.
And here is something else in the gifting that is obviously(?) simple. Assume Dad had a $1,000,000 policy with $300,000 in cash and a $200,000 basis. He takes out a loan of $300,000 to avoid the reduction of the estate for the gift and gives it to his daughter. Simple enough, isn't it? Now tell me what the tax consequences are for both and the implications for the transfer for value rule, if any. You will be graded.
If the owner takes out a loan and transfers the policy, you need to recognize that he has been forgiven of a debt- the $300,000. Subtract the $200,000 basis and you have a $100,000 income taxable event. And the daughter faces a transfer for value policy. And so on.
THIS IS NOT SIMPLE! As a Life Analyst I can assure you that life insurance is the most mind numbing area of planning that is still being done incorrectly. And though I am considered to be an expert, I honestly believe I have touched on only 60% of the true intricacies of the asset.
MORE RIDICULOUS LTC: A few months ago, USA Weekend magazine had an article stating Don't buy insurance you may not need!
My reply: First, didn't anyone notice the ludicrousy of the "Don't Pay for insurance you may never use?" What do you think insurance is all about? It is to NEVER use the insurance. Insurance, properly utilized, is nothing more than a pool of money to reimburse those that have a misfortune befall them. The others simply get the emotional protection for a loss that never occurs. That's what insurance is all about. And think about this: I bet every one of the people that will read this letter has fire insurance on their house. Why? The odds of losing a house to fire is so remote that, by inference, all your readers would have to be the dimmest of bulbs to continue its use. So how about auto insurance? I haven't had an accident in 35 years. Should I simply discontinue coverage? But the statement requires statistics since it is the odds of use that may override. According to the Journal of the American Society of CLU, 1996, the chances of using your homeowners insurance are about 1 in 88. The odds of using your auto insurance at about 1 in 47. The chances of using your LTC insurance is about 2 in 5. Other statistics say it is as high as 60% afer age 65 with a 25% probability that a family caregiver will be required. One out of two women and one out of three men will spend some time in a nursing home. One of the spouses has a 10% chance of spending 5+ years in a nursing home- 13% of the women in a study, compared to 4% of the men. The New England Journal of Medicine previously stated that about 43% of the elderly will enter a nursing home at some time during their life. 24% of the elderly over age 65 will need nursing home care for more than one year. Admittedly, many of the stays are short term- only 1 in 3 will spend three months or more in a nursing home. But about 1 in 4 will spend one year or more in a nursing home; and about 1 in 11 will spend five years or more in a nursing home. In other words, 2 out of 3 people who turned 65 in 1990 will either never spend any time in a nursing home or will spend less than three months in one. By 2030, the number of Americans age 85 or older- NEARLY HALF OF WHOM WILL NEED ASSISTANCE WITH DAILY ACTIVITIES- will be 8.4 million- up from the current 4 million. But the point in all insurance, do you know who the individuals specifically are? NO! That's why people buy insurance- they MAY be one of the unlucky ones. And with a 33% chance of a major cost regarding long term care, that's the other reason a policy is a necessary consideration. It's also the reason it is expensive. The insurance companies WILL have to dole out significant sums simply because the odds are so high for its use- specifically for home health care. The average yearly cost in 1998 for staying in a nursing home was $47,000; for the services of a home health aide, $36,000; and for assisted living, $26,000.
As for the use of Medicaid- that is a patent absurdity by anyone with money because those with assets are LIKELY to go broke if they need care for an extended period. At an average cost of $50,000 annually, the cost- at a 5% inflation rate- would exceed $132,000 annually in the next 20 years. A 2.5 year average stay and you have a minimum cost of $332,000. Not too many middle Americans could take that hit without destroying retirement for both spouses. It is possible for those with assets to use various "techniques"to spend down such assets to qualify as "poor" since Medicaid is designed for the medially indigent. Among Americans aged sixty-five and over, only 12% are below the official poverty line-and fewer than 7% receive means-tested cash assistance under the SSI program. But over half of seniors get a Medicaid subsidy from the day they enter a nursing home. [Actually, 78 % of people are already eligible for Medicaid when they enter a nursing home. Source: CLTCF]
But the issue is quality of care. From the various comments under my Long Term Care Commentary: "The National Committe to Preserve Social Security and Medicare study compared 1988 staffing data to an expert recommended minimum staffing standard. ONLY 5% OF US MEDICARE AND MEDICAID CERTIFIED NURSING HOMES MET THAT STANDARD. Over $4 billion additional expenditures for basic nursing care were needed in 1988 to meet just that proposed minimum standard." Next, "Industry officials say Texas nursing homes lost money every day on Medicaid patients in 1999. Health care providers say the state's $78-a-day average payment was one of the lowest in the country last year while liability coverage has tripled since 1998. But nursing homes don't usually like Medicaid patents and have tried to evict such patients since it does not provide the same daily rate as the private patients. In California, Medicaid pays $84 per day while the average private pay is $104; Massachusetts Medicaid pays $109 while private pay rates are at $130. Georgia Medicaid rates are closer to private pay- $75/$78." And, "Kelley Schild, administrator of the Floridean Nursing and Rehabilitation Center in Miami, Fla. told the congressional panel that her family-owned facility is reimbursed a flat rate of $87.04 per day for residents receiving Medicaid, while the actual costs for residents can reach as high as $133, resulting in a daily loss of $45.95 for those residents. Schild said her facility copes with the disparity between actual costs and Medicaid reimbursement rates by managing the mix of private-pay to Medicaid residents. Lastly, "Congress is currently looking at legislation that prohibits a nursing home from dumping a Medicaid patient or simply by dropping out of the Medicaid system." This is not a diatribe on Medicaid per se. It simply is a reflection of the (usual) substandard care due to a lack of money. Medicaid can neither hire the best employees nor the numbers needed for proper care. "Suggesting" its use for those with assets diminishes the government's intent for care for the poor as well as lowering the care for all such coverage. My focus is that Medicaid IS a likely source of coverage for those that do not plan for a contingency of $130,000+ when needed and absolutely contains those middle class workers within the $200,000 to $1,000,000 asset range. (Most coverage starts around age 80 though that is going up as the elderly become more health. Unfortunately, being healthy only forestalls the inevitable problem. Further, being healthy only lengthens the stay- thereby increasing the costs.) One will need a LOT of money to cover this risk in order to avoid Medicaid.
As for Weiss research reports- I do not believe the $49 is worth the analysis. I contacted them previously and the issue is this- why would anyone want prices from bunches of companies? AM Best stated in a report last year (also at my site) that there are only (perhaps) 50 experienced underwriters in the business. As such, you only get rates from the 8 - 10 that qualify- and they all have high Best rankings. The rest of the companies tend to be also rans and not worth the print. As regards an "experienced" agent- frankly, having taught many that have been in the business for awhile, I don't think many are truly that sophisticated. The major point is the use of tax qualified versus non tax qualified. Is Weiss addressing that? Here is the point with tax qualified- what is "severe"? Answer that and perhaps someone is qualified. (The point being- there is NO answer). Secondly, assume you had a tax qualified policy that paid $50,000 and had a separate AGI of $50,000. How much is taxed? Assume the same scenario with a non tax qualified policy. How much is taxed? That is the pressing question for LTC. As for the premiums increasing and changing- well so have life policies over the years. So has medical insurance. So has property and casualty. And most others. If a purchaser has money and wants to limit exposure, use one of the 1 or 10 year paid up policies. That dispenses with the problem of increasing rates. These are the topics that need professional research.
Lastly I think the use of a life insurance policy (using the cash value as a loan to pay the LTC) that must have a cash value approaching $330,000 is absurd. Even purchasing a policy at age 60 to provide a subsequent $130,000 cash value for a one year stay at age 80 is going to be one whale of a large life insurance policy. Further, if one had to take out $130,000, then the policy would almost assuredly lapse and cause taxation of all the gain. And was there a need for insurance in the first place? In most instances, if you don't need life insurance, don't buy it. Even more ludicrous is the fact if one needs coverage at, say, age 70- well before any cash value has built up. Now where does the money come from? That's why people buy insurance- they can't save up enough money in case of a claim well beforehand.
In summary, I fully admit that LTC policies are not "easy" to figure out. But most insurance policies are sold by agents the consumers trust- not researched properly (though even then they are hard to figure out). However getting a Weiss report is absolutely inadequate since most of the analysis is superfluous (you don't even consider 95% of the companies) and does not address the TQ and Non TQ issue in any case. I am also aware that a policy cost of $30,000 over 20 years ($1,500 annually) is not a insignificant sum. On the other hand, very few middle Americans could afford a $130,000 one year cost without going broke- certainly $330,000. And you NEVER want to use Medicaid which would end up to be the default position. And I am really surprised that one would suggest a VERY expensive life insurance policy.
Your use of the above with the headline "Is the security worth the cost" is clearly a disservice to readers since that is the element about literally ALL insurance. And the odds for costly LTC in future years is a far greater statistical certainty than for other insurance coverage. You need to set the record straight."
Guess what happened? You guessed right. Nothing.
"Never attribute to malice what can be adequately explained by stupidity."
Nick Diamos
GOOD OR BAD? (Cornell) "A first
class brokerage company doesn't necessarily imply a first class stock broker
or investment counselor."
"A high overall performance of a stock brokerage company doesn't necessarily relate to the performance of your investments managed by a broker in that company."
And a high overall performance may have nothing to do with capability- just statistical luck..
MORE WEISS RESEARCH? This company presents itself as the consumer's friend in analyzing insurance companies and products. It says that long term care policies are not perfect and that many changes will occur. All true. But then they suggest that in order to buy the most updated policy, don't buy one until within 10 years of needed use. Absolute garbage.
First of all, 40% of people needing long term care are younger than 65. And then do you know when you will need care? How about Michael J. Fox? Didn't he know he was getting Parkinson's disease?? How about Janet Reno? When should they have purchased- age 35, 45, 55, 65??? Admittedly most of the elderly won't need it till about 80, but if you wait till age 70, many people won't be able to get it because they are in ill health of some kind. It is akin to saying don't buy fire insurance till at least a year before the house burns.
All policies change. If you look at disability policies, the old ones had far more coverage at far cheaper prices. If you waited, it will now cost you an arm and a leg (there's a pun there- work it out.)
"This isn't right. This isn't even wrong."
Wolfgang Pauli, on a paper submitted by a physicist colleague
LTC, MEDICAID and TECHNOLOGY: (Kathy Robertson) Her article did not directly focus on the use of Medicaid planning but was detailing the cost of technology in nursing homes.
"For example, there a vacuum assisted high technology sponge on the market that promotes blood circulation. It heals wounds four times faster than traditional methods but costs $130 per day versus $3. Most nursing homes can't afford it. "Government reimbursement would't pay the fare- or else makes the approval process so cumbersome that it takes a real advocate to get by the roadblocks." Basically, technology in our system is very limited because 70% of our patients depending on government funding."
Just put that into perspective. If you go into a home with lots of Medicaid/government sponsored patients, there is not a lot of money- if any- for advanced treatment since there is less money overall, less staff with normally less experience. So why would you expect to get the better care- even good care- particularly since you attempted to give all your money away so the state would take care of you? Just because the "Medicaid promoters" suggested you were entitled since you paid taxes? (That's their key selling point.)
"Medicare and Medicaid try to keep up with the high technology developments. But overall reimbursements to nursing homes is so low that they simply can't cough up the money for a procedure that costs more than their $85 daily allowance (California) for each patients."
About 62% of nursing home patients in California are covered by Medicaid. An additional 8% are Medicare patients. "The state will pay some additional medical equipment costs in skilled nursing homes but prior approval must be granted. It has to meet the medical needs of a specific patient and it has to be the lowest cost item that meets their medical needs."
No, private care is not perfect. But if you have money and can afford to pay for a nursing home policy, do so. Don't try to opt for Medicaid. Then, if you have to go into a home, find one with few- if any- Medicaid patients. Spending 70 good years on this earth only to be offset by dying unnecessarily badly when you have money to do otherwise seems a contradiction of values.
MUTUAL FUNDS: In 1990 there were 1069 diversified stock funds. Earlier this year there were 3,906. Fewer than 1/3 of the 505 diversified stock funds that were around for 10 years beat the S&P during the 90's. I would have looked a lot worse if the hundreds of funds merged or now defunct were included.
VARIABLE LIFE: (Dick Weber 2000) A variable universal life premium calculated at the maximum allowable 12% gross rate of return- and current scale of cost of insurance- in many instances has LESS than 20% chance of sustaining the policy to age 100 when policy values are recalculated with long term historic stock market performance returns.
HOMES: Many homebuyers, according to the California Real Estate Inspection Association, believe that foundation problems make up many common building defects. But the organization lists 10 other problems that they call more common:
Roofing defects -- problems due to aging material or improper installation. These don't always require replacement, but they likely mean maintenance.
Ceiling stains -- these may indicate past or present roof leaks. Some may be the result of roof problems, while others are related to plumbing.
Water intrusion into basements or crawl spaces -- this type of faulty drainage can warrant simple action such as regarding the exterior grounds or adding roof gutters, but often warrants costly drainage repair.
Electrical safety hazards -- often present in older homes, these can result from construction errors, but are also often due to additional wiring done by unqualified electricians.
Rotted wood -- if left unchecked, areas where wood remains wet for long periods of time can create extensive damage.
Building additions or upgrades without permits -- where additions are made by owners, codes are often violated. Check with your inspector.
Unsafe fireplaces and chimneys -- wood-burning fixtures can be poorly maintained or shoddily installed, and can create fire hazards. They often remain undiscovered until a roof fire occurs.
Faulty installation of water heaters -- many water heaters violate plumbing code requirements. Common violations include improperly installed overflow piping, unsafe flue conditions or faulty gas piping.
Gas heaters -- most gas heaters need some sort of maintenance. In some cases, gas heaters have defects that, if left unchecked, can kill. These range from fire safety violations to the venting of carbon monoxide into the home.
Firewall violations in garages -- special fire-resistant construction is required by law for walls and doors that separate a garage from a home. But violations are common, due to faulty construction, damage or changes in the garage itself, or changes in code requirements.
TELLING THE TRUTH AND LYING ALL AT THE SAME TIME: Arthur Levitt, chairman of the SEC, told investor's "ask the tough questions, beware of high fees and make your judgements thoughtful rather than emotional." Lovely words. Too bad they are not backed up by deeds. Literally every variable annuity brochure sold by every broker dealer firm, banking institution or insurance company is produced with fraudulent and deceptive numbers that have no basis in reality with the deceptive intent of inducing the least capable and knowledgeable of our society (though even the educated get emotionally hooked) to purchase a product with a tax deferred format that will never work as projected. Part of it actually has to do with fees. For example, I tell you that putting $10,000 into the tax deferred investment for 10 years at 10% will produce a return of $108,3477*. However, by going to their asterisk, it is noted that "if fees had been included in the calculation, the return would have been less". True statement- but leaving it there is useless since neither the agent, rep, attorney nor consumer literally ever has the access or ability to use a financial calculator to figure out the true return. Take a look at an average fund fee of $1.25%. What's the 25 year return now? $81,420. Say, I think that $26,927 or a 33% reduction in value is worthy of mention. But the SEC and the NAIC don't. I am not allowed as a registered investment adviser to make misleading claims as literally every variable brochure I have seen. But apparently it's O.K. for institutions to do it.
And we also have the Investment Company Institute saying "we take very seriously our responsibility to help people have realistic expectations." Bite me.
Don't use a big word where a diminutive one will suffice.
QUIPS: "QUIPS are quarterly income preferred securities. They often are found in the stock listings near the common stock of a company, typically a utility. QUIPS are like preferred stock in many respects. They are a way for companies to raise capital without impairing the credit rating of their principal unsecured debt securities."
ANNUAL RATES OF RETURN
Number of years Interval S&P 500
34 1926- 1959 10.3
8 1960-1967 9.6
5 1968- 1972 7.5
10 1973-1983 8
13 1984- 1998 17.9
DISABILITY INSURANCE (Health Industry Association of America) More people are likely to have life insurance than disability insurance -- roughly 70 % versus 40 %. The association says that about 30 % of people 35 to 65 will suffer a disability for at least 90 days, and about one in seven can expect to become disabled for five years or more.
A good way to judge people is by observing how they treat those who can do them absolutely no good.
OLDER WORKERS (NY Times) "As early as 2005, when some boomers begin retiring early, a sharp increase in the number of workers over 55 will be needed to maintain the percentage of the population that is employed.
HOLD THEM OR FOLD THEM: Holdr's are securities that track specific industry sectors. Holdr's have advantages over mutual funds. Annual expenses are low, at 8 cents a share, and even those are waived if dividends don't cover the amount. There is usually no turnover. And because they are created and redeemed by the swapping of the underlying stocks, Holdr's don't generate capital gains or losses for investors until their are sold.
AMAZON.COM: (David D. Alger and NY Times) "One holds that (Amazon.com) is eventually going to make money and it is irrelevant how much they lose now if they keep their foot to the floor and grow revenues and customers. The other pole is that this is a complete fraud, a business model that leads to only one place, bankruptcy."
TRANSFER FOR VALUE: - What are the tax ramifications if I sell my life insurance policy for "valuable consideration"? Let's say I own a $100,000 policy that I sell to you for $20,000 (which effectively would be based on the present value of my remaining actuarial lifetime). You make premium payments for the next few years totaling $10,000. I die and you receive the $100,000 of benefit. How it is taxed? It is based on the basis in the policy- what monies you had been taxed on. It would therefore include the initial $20,0000 plus the additional $10,000 (we'll forget dividends for this example) for a total of $30,000. Therefore you subtract this from the proceeds of $100,000 for a net $70,000. But since you bought the policy, the entire $70,000 is now taxed as ORDINARY INCOME.
Are there exceptions to the rule.?
When the transfer is to the insured such as when you leave a corporation and have the policy transferred to yourself.
To a partner of the insured
A partnership in which the insured is a partner
A corporation in which the insured is an officer or shareholder
Also included are a tax free corporate organization or reorganization
a true gift
But remember as I indicated previously, you can't have strings attached. For example, taking out a loan and then gifting the assets is not a bona fide gift per se. You would relieve yourself of a liability and need to (potentially) recognize a gain.
Isn't this fun???
ELDERLY HOSPITALIZATION (British Medical Journal) "In a random sample of patients hospitalized in two American states, the rate of preventable error that lengthened hospital stay or caused a disability was nearly 1.6% for patients under the age of 65 and almost 3% for older patients. The mishaps were most often related to drug reactions, falls, and invasive procedures. The only variable that correlated with the error rate was the severity of illness, as measured by the diagnosis-related group."
EXERCISE: (USA Weekend) In 1998, the average American spent $4,000 on health care for premiums, deductibles, co-payments, etc, But according to the Health Affairs journal, private health care premiums increased 8.2% in 1998. Medicare costs went from $37.5 billion in 1980 to $216.6 billion in 1998- over a 10% annual increase. Medicare costs more than tripled as a %age of the GDP for those years. The report indicated that for the 97.8 million men in the U.S., the least fit 25% spent $4.1 billion more on hospitalization and doctor's visits that the most fit- twice as much.
BOOKLET: "Talking With Your Parents About Medicare and Health Coverage," a free booklet from the Henry J. Kaiser Family Foundation (800-656-4533). About 50% of the elderly still think Medicare covers Long Term Care. It is effectively ZERO. Do not assume they have read very much or understand the nuances at all. Also call your local Area Agency on Aging.
AND THE POOR GET POORER: As I have repeatedly stated, there will be a maelstrom by 2010 as the haves and have nots separate even further. It is not necessarily based on stereotypical racial lines but will be noticeable anyway since many have less income. Here is a new report from the University of Michigan study that despite the economic boom for many, blacks actually had a DECREASED net worth between 1994 and 1999. The median household assets of Americans overall increased 9% to $59,500.
Greenspan also warned of the too strong "wealth effect" and the tendency for people to spend too freely when their stock holdings or other assets have increased in value.
All Americans have been guilty of overspending the study noted. However 84% of white households kept some of their wealth in savings or checking accounts in 1999 versus only 57% of black households. A main statistic in my mind is the fact that only 17% of black families have IRA's or hold stock versus 71% of white families. They suggested that the way to get people involved in stocks is through education and more exposure to the market. However, with a mistrust of the white controlled stock market, blacks (and Hispanics as well, I believe) don't feel comfortable with the market as a whole. Couple that with the increased advertising of get rich schemes and day trading and society has a ways to go to earn their trust.
ADVANCE DIRECTIVES: these are written documents indicating what is to be done in the latter stages of life. Mandatory documents if you want to retain control. (Journal of the American Medical Association). Researchers found that the increased use of advance directives did not have an effect on the number of deaths reported in the nursing homes, nor did it affect the level of satisfaction with care reported by participants in the program.
DEATHS PER YEAR
Smoking - 434,000
Secondary Smoke- 53,000
Alcohol- 105,000
Auto accidents 49,000
Suicide- 31,000
AIDS- 31,000
Homicide- 22,000
Fires- 4,000
Cocaine and Crack- 3,300
Heroin and Morphine- 2,400
FRAUD: (HIAA) Health insurers saved $11 for every one dollar they spent on antifraud activities in 1998). This number represents a 64 % increase in the $7.50 to $1 savings ratio realized by insurers in 1995. Eighty percent of the reported health fraud cases were attributed to health care providers, and 10 % of the cases were attributed to consumers. The remaining 10%- classified as "other"-are attributed to fraud involving laboratories, pharmacies, durable medical equipment (DME) suppliers, billing agencies and unlicensed healthcare providers.
LTC (LifePlans) The top 20 writers of private long term care insurance sold 535,000 policies to individuals and associations in 1999, up 10 % from 1998. But such effort does not come "cheap". Unum spent $30.4 million of its $106 million in individual LTC premium revenue on sales commissions.
57 % of primary caregivers for impaired persons age 70 and older are either the spouses or adult children of the care recipients, and adult children account for 42 % of all caregivers for unmarried elderly recipients (McGarry, 1998). Between 1982 and 1989, the proportion of primary caregivers working full-time increased from 15.8 % to 19.3 % (Boaz, 1996).