COMMENTARY ON ECONOMIC AND PLANNING ISSUES
ERROLD F. MOODY JR.
MASTER OF SCIENCE IN FINANCIAL PLANNING
LIFE AND DISABILITY INSURANCE ANALYST 0626414
REGISTERED INVESTMENT ADVISER
If you are in Los Angeles (dates are January 11th and February 22nd) or San Diego (February 21st) or San Francisco (March 14th, April 26th), I will be conducting evening seminars for the Learning Annex.
LTC RISES MORE THAN 5% - The average daily cost of a private room in a nursing home in the United States is $203 per day, or $74,095 annually, up 5.7% when compared with 2004's $192. The highest rates once again were in Alaska, $531 per day, and the lowest were in the Shreveport area of Louisiana, $115. The study also found that the cost of a home health care aide averaged $19 per hour nationally, up by $1, or 5.5%. The average stay in a nursing home is 2.4 years, for a total average cost of $177,828. There are about 1.3 million people in 17,000 nursing homes in the U.S.
WORK: At least 2.2 million people die of work-related accidents and diseases around the world each year, up about 10% from 2002. The number of work-related illnesses and deaths decreased slightly in industrialized nations, but the number of accidents -- particularly fatal ones (5,000 workers a day) - appears to be on the rise, notably in some Asian countries. Working-related deaths among men are largely due to accidents, lung diseases, cancer or asbestos poisoning, while women are more likely to fall victim to work-related diseases such as malaria and bacterial infections as well as long-term musculo-skeletal disorders.
INFLATION: (Economist) INFLATION was supposed to be dead. Yet back-of-the-envelope estimates by The Economist suggest that in September America's 12-month rate of consumer-price inflation will jump above 4%—the highest since 1991. If so, this more than justifies the Federal Reserve's decision this week to raise its fed funds rate by another quarter of a percentage point, to 3.75%. Despite calls from several American politicians and economists for a “compassionate pause” in the Fed's tightening, because of fears that Hurricane Katrina could depress economic output, the Fed is more worried about the risk of higher inflation than about slower growth.
Note that comment was in September. So what happened? Oil prices have sagged. And Consumer confidence is way up in December. Apparently the American consumer has forgotten about Katrina, Iraq, Social Security and more. I am still awaiting Christmas spending, but it also looks like that was very strong- a complete reversal to what I had expected. If all is positive, then I will enter the market more aggressively.
All that said, there is a fundamental problem in the economy- short term rates are as high as long term rates. It is called a flat yield curve. I does not, by itself, caution a recession, but it does dramatically presumes a fundamental flaw that will need to be corrected. Long term rates MUST go up. They must. Or you look to another recession and another lowering of short term rates to spur the economy.
JOBS: A survey of 1,515 hiring managers found that 75% want employees who are compatible in a team setting, while only 20% look for employees with ambition. 57% would be turned off by inarticulate candidates or those who are vague about previous experience, while only 15% would be turned off by candidates who are late to the interview or lack knowledge about the company.
BAD 401(K): (NY Times) 30 percent of employees do not participate in company plans. That fact, they say, combined with meager savings rates of those who do participate, poor allocation choices and misguided corporate policy decisions are evidence that 401(k)'s are not operating on all cylinders.
64 percent of plan sponsors who responded to a recent survey said that the 401(k) was now their company's primary retirement vehicle, up from 35 percent a decade ago. "Yet we have not seen a corresponding trend in the utilization of the plans.
The failure of many employees even to participate in their 401(k)'s - or to save enough in them for retirement when they do sign up - now has the attention of corporate boards. (Yea, like a Board has a clue to "diversification" and will hire entities who know either. Harsh? The fundamentals of investing have never been taught to a broker.)
Investors have also been less enthusiastic about managing their 401(k)'s since the bear market of 2000 to 2002. And overseeing a plan is also proving more difficult for companies. There is also a river of research showing how current plan policies fail to encourage participants' success. "All the behavioral finance research that documents the pull of inertia and inaction in our investing decisions perfectly applies to 401(k)'s,"
Academic research also suggests that corporate boards have their own 401(k) shortcomings. Two finance professors at Emory University examined the hiring and firing of investment managers by about 3,700 plan sponsors from 1994 through 2003. They found that companies tended to choose investment firms to manage plans based on the firms' recent returns, but that those managers tended not to beat their benchmarks after the hiring. And when companies dismissed firms after underperformance, the firm's returns tended to bounce back.
Sponsors are also concluding that too much choice may not be good; while just 35 percent of plans surveyed by Hewitt in 2001 offered a lifestyle fund - a one-fund-does-all choice holding a mix of stocks and bonds - 63 percent offer this simplified solution today.
While the average amount saved is 7.9 percent of salary, some 22 percent of participants don't even save enough to get the maximum company match.
Corporate sponsors aren't much help. In plans with automatic enrollment, 58 percent set the participant's default savings rate at just 3 percent of salary, while 22 percent set it at 2 percent.
The growth in managed accounts is another controversial development. By signing up for a managed account, a participant cedes investing decisions to a third-party manager who charges an annual fee - typically 0.5 to 1 percent of assets. That fee is on top of the expenses of the plan's underlying funds, so the combined fees paid by participants can add up to a hefty 2 percent or more a year.
All in all, employees get the short end of the stick. You have corporate entities who are clueless to their fiduciary responsibilities and hire firms with little real life knowledge of the economy. Hence the reason why over 1 trillion was lost in 2000- 2002. Employees need guidance. They cannot get them from the traditional sources since such entities are devoid of a formal knowledge base in investing. Hence the huge losses sustained in the last few years. Buy and hold is a poor excuse for losing your retirement funds.
INCOME PAYING FUNDS (WSJ) At many traditional funds, fees are so high there is little left over for investors. Stocks in the broad Dow Jones Wilshire 5000 Index are yielding just shy of 1.7% in dividends. Among U.S. stock funds that pay dividends, Morningstar Inc. calculates the average yield at just 1.55%.
"On a lot of funds, the expenses eat up all the dividends that a fund gets. Over time, only a handful of actively managed funds have successfully paid out solid yields while delivering steady growth, such as Franklin Income, American Funds' Income Fund of America and Vanguard Wellesley Income.
SMOKING: The Society of Actuaries said that the direct costs of secondhand smoke exposure are $4.98 billion, including expenses related to the treatment of heart disease, chronic pulmonary disease, lung cancer, asthma, and other sicknesses. According to Reuters, the study also detailed indirect costs of $4.68 billion, stemming from lost wages, reduced services, and costs associated with disabilities.
ALZHEIMERS: Elevated levels of insulin, the hormone that regulates blood sugar and is vital for normal body function, may lead to inflammation and play a role in the onset of Alzheimer's. Excess insulin may also be associated with high levels of beta amyloid, the toxic protein that builds up in the brains of those with the disease. Scientists hope that better understanding of the role of insulin in the development of Alzheimer's may lead to new therapies to control or even prevent the mind-ravaging disease.
But they also said it was aluminum, purely hereditary and more. Reminds me in the 50's and 60's when they said they were about to find a cure for cancer. Then, they found out that there were MANY types of cancer. Same situation here, I believe.
MARKOWITZ THEORY: (Shane Finneran) "At the Brandes Institute, we are not sure that returns, volatilities, and correlations can be predicted with the precision required by the Markowitz approach. In fact, we hesitate to embrace modern portfolio theory, and its reliance on forecasts of developments that we consider unpredictable is no small part of our skepticism."
Well, what't the problem? Planners and brokers bow to the theory as the savior for investors. True, the theory is valid BUT ONLY AT THE TIME THAT THE PORTFOLIO IS INITIALLY IDENTIFIED. After that, everything changes- certainly correlations.
Take the S&P 500. The difference in the index’s returns for adjacent 10-year periods—such as 1953-1963 and 1963-1973—averages an annualized 4.9% over the half-century examined at right. In other words, from one decade to the next, the typical swing in per-year performance was nearly 500 basis points.
The volatilities of stocks and bonds also have varied over time. For the S&P 500, the annualized standard deviation of 10-year returns has tended to drift between 12% and 16% over the last 5 decades. For bonds, changes in volatility have been more pronounced, with 10-year standard deviations ranging from less than 5% to much more than 10% in select periods. In addition, historical correlation numbers also appear to offer limited predictive value: The 10-year correlation between the two assets averaged 0.18 during the 50-year time frame, but its value in individual decades dipped as low as -0.25 and reached as high as 0.5.
How might the instability of these numbers affect a real world investor? To find out, we examined the performance of five hypothetical “60/40” portfolios—with initial allocations of 60% to the S&P 500 Index and 40% to long-term US government bonds—formed at 10-year intervals between 1953 and 1993. Specifically, we compared the expected results of these portfolios (based on the assets’ previous 10 years of returns) with the portfolios’ actual results over the subsequent decade. As the chart at right shows, actual results often diverge from expectations. In four of the five 60/40 portfolios we studied, for example, expected 10-year returns and actual 10-year returns differed by close to 5% per year. While expected standard deviation and actual standard deviation (not shown) tended to be more closely aligned, we believe the overall results for these 60/40 portfolios demonstrate that investors who expect the future to behave like the past could be in for a surprise.
In 1952, Harry Markowitz wrote that the key to forecasting might be found in a mixture of “statistical techniques” and “the judgment of practical men.” After mathematically deriving tentative return, volatility, and covariance estimates—whether from historical data or somewhere else—investors could adjust these estimates “on the basis of factors or nuances not taken into account by the formal computations.” In essence, Markowitz acknowledged that anticipating the future could be as much an art as a science.
IT'S WHO YOU KNOW, NOT WHAT YOU KNOW. (NY Times) If labor markets were truly efficient, pay among workers with similar credentials would not vary much. But within groups of similarly situated workers, income inequality has risen in recent decades. "Observable characteristics like intelligence, education, experience and age explain only half of the difference."
The more connections you have, the more you end up being paid. Why? Companies that make judgments based solely on a résumé are flying blind, to a degree. By contrast, if a job applicant once worked with a current company employee, or attends the same church as a company worker, the company can glean hints about how that applicant will perform. Such personal information - about reliability, or a sense of humor - can lead companies to bid more aggressively for someone's services. But such data is conveyed almost exclusively through personal network connections. And if the information is available to 10 potential employers instead of 2, wages are more likely to be bid higher.
EXECUTIVES AND RETIREMENT PLANS: (The Todd Organization,) America’s 50 largest financial institutions each use one or more supplemental retirement plans (a.k.a. “nonqualified plans”) to help retain and attract key employees.
96 percent of institutions offer one or more voluntary deferred compensation plans;
74 percent of institutions have a defined contribution matching program;
80 percent of institutions offer a supplemental executive retirement plan that will pay a defined benefit.
The study also found that 44 of the institutions, or 88 percent, also offer at least one type of enhanced insurance benefit to executives. The most common benefits offered are post-retirement medical coverage (offered at 76 percent of the institutions studied), supplemental term life insurance (30 percent), and supplemental disability coverage (18 percent).
RECENCY BIAS: People tend to focus too much on what has happened recently.
Anchoring: Some investors become "anchored" to certain reference points that influence their decisions. Say an investor buys a stock at $50 and it falls to $40 because the fundamentals have changed or bad news has come to light. The best thing to do might be to sell the stock for $40. But he says many people are prone to wait for the price to recover to the amount they have become anchored to: $50.
Loss Aversion: Investors are reluctant to realize losses, and conversely, investors are inclined to sell (sometimes too early) because they want the positive reinforcement that comes from securing a gain.
Mental Accounting: This is the idea that we treat money differently based on where it came from or where we hold it.
TOO MUCH MARKETING (Yankelovich study) 60% of consumers have a much more negative opinion of marketing and advertising now than a few years ago; 61% feel the amount of marketing and advertising is out of control; and 65% feel constantly bombarded with too much marketing and advertising.
-- 59% feel that most marketing and advertising has very little relevance to them
-- 64% are concerned about practices and motives of marketers and advertisers
-- 61% feel that marketers and advertisers don't treat consumers with respect
-- 65% think there should be more limits and regulations on marketing and advertising
-- 69% are interested in products and services that would help them skip or block marketing
-- 33% would be willing to have a slightly lower standard of living to live in a society without marketing and advertising
DIVORCE RATES: (National Center for Health Statistics)
Divorce rates can vary significantly. Here are the percentage-point increases in the probability of divorce or separation during the first 10 years of marriage, depending on a variety of factors:
Annual income under $25,000 vs. over $50,000 +30
Having a baby before marriage vs. seven months or more afterward +24
Marrying under 18 years of age vs. 25 or over +24
Own parents divorced, vs. intact family of origin +14
No religious affiliation +14
High-school dropout vs. some college +13
Central-city vs. suburb dweller +9
Couples who live in the South are 10 points more likely to divorce or separate than couples from the Northeast or Midwest. (That's when they find out they are related)
The lifetime divorce rate such as it is appears to be falling -- to roughly 43%, according to the National Marriage Project at Rutgers University.
Also, living together before marriage has become so common that it no longer seems to be automatically linked to higher odds of divorce, as it once did.
IT'S ALWAYS SOMETHING: A national survey of employed adults showed that nearly one-in-four (24%) cited the presence of other financial priorities as the number one factor preventing them from saving more or participating at all in their company's retirement plan. Other leading barriers cited include the absence of a company-sponsored retirement savings plan (23%) and lack of extra money for savings (20%). Only 4% responded that "savings for retirement isn't important right now," though this number is significantly higher for younger respondents (17%).
HEALTH COVERAGE: The ranks of the uninsured are growing: 41 million people nationwide and rising. What's more, 80 percent either work or are in a family where at least one adult does.
BARIATRIC SURGERY: Separating Fat From Fiction, (Kathleen Thiesen National Underwriter)
At a time when government figures show 27% of Americans are obese, it’s no surprise that the public’s and the insurance industry’s awareness of "bariatric surgery," or gastric bypass surgery, has grown.
The treatment is potentially effective, sometimes dangerous and definitely expensive.
For brokers and agents helping companies find the right match of health care against a picture of rising health care costs, here is a quick primer on the insurance issues surrounding this treatment.
For the industry, the most urgent need is to look for cost-effective answers with good outcomes, because obesity has far-reaching implications.
Questions about the cost and popularity of bariatric surgery for morbid obesity gained steam in mid-2004 following an announcement by Medicare officials that the program will consider covering obesity itself as a disease, rather than covering only so-called "co-morbidities." Major "co-morbidities" include hypertension, heart disease, type-2 diabetes, sleep apnea, stroke and a range of cancers.
The bariatric surgery issue has many facets:
• Results of clinical trials measuring the short-term and long-term outcomes of bariatric surgeries vary depending on the type of surgery completed, the experience of the surgeon and hospital or other facility, how "sick" the candidates are before surgery, the impact and compliance of post-surgical behaviors, and the general risk of surgery for morbidly obese patients. Good results with one study have not always carried over to the next.
• Mortality rates for these procedures are between 1% to 3%. Per the Journal of the American College of Surgeons, the risk of death within 30 days after gastric bypass surgery was nearly 5 times greater if the surgeon had performed fewer than 20 procedures. In addition, about 20% of all bariatric surgery patients require follow-up procedures to treat complications. Despite the risks, experts support the results of evidence-based studies, reaffirm the need for informed consent and acknowledge that the risks for these individuals may be worth it in the long run.
• Even though Medicare decisions on coverage usually have helped lead the industry toward universal reimbursement, many third-party payers are hesitating due to the extreme costs associated with complications for this high-risk population. Some 140,000 bariatric procedures will be performed in 2004, according to an article that appeared in the Journal of the American Medical Association. Multiply that number by an average cost of $25,000 (with no complications), and these 140,000 procedures will cost a jaw-dropping $3.5 billion.
• While self-insured employers may choose to cover the procedures, fully insured employers cannot choose, thereby creating an adverse selection by obese employees to secure reimbursement for the surgery. While the treatment likely will decrease long-term direct health care costs, the cost burden can be amortized over 3.5 years, according to a recent study in the journal, Obesity Surgery. Unfortunately, many employees change jobs before companies can realize these health and financial gains.
• All surgeries are not created equal. The Roux-en-Y gastric bypass, which costs about $25,000, has come to be known as the "gold standard" for its longevity with appropriate candidates. Because cost is a factor, new procedures are entering the arena, including laparoscopic methods that reduce hospital length of stay, physician time and the recovery period. The "mini gastric bypass," costing just $17,000, produces results with major weight loss, and requires less operating and recovery time. Unfortunately, there is not yet enough evidence to ensure this procedure’s safety or to confirm favorable outcomes.
So, what does the future hold? The American Society of Bariatric Surgeons has begun a process for identifying and credentialing "Centers of Excellence" for bariatric surgery. Its goal is to establish guidelines for a procedure never before regulated; investigate, evaluate and examine candidates for certification to provide these services; participate in education and research in the field; and provide data management for outcomes.
In the interim, health insurers are looking at their options: Eliminate coverage, increase out-of-pocket costs or offer selective reimbursement only for procedures consistent with good outcomes.
It is clear that health care providers need to do the research and develop comprehensive programs of care for obesity patients before they are in the operating room. The successful programs are out there, as are the experienced physicians. Rarely before has the phrase "buyer beware" had as much financial impact as it does here.
WHAT DO YOU WANT?: According to the Principal’s Well-Being Index, when asked what employee benefits American workers wished their company would add, 22% cited defined benefit pension plans, up four percentage points from 2003. Benefit satisfaction was down across the board, with scores for health insurance taking the largest dip, down 12% from 2002 to 35%, but the benefit rated most important by working Americans was health insurance (92%). Defined contribution retirement plans, cited by 74%, were 2nd most important.
MEDICALLY UNDERSERVED: (National Association of Community Health Centers) An estimated 36 million Americans, many of whom are insured or eligible for Medicare or Medicaid, have no easy access to a doctor or other caregiver. These people are separate from the estimated 43 million Americans who lack any kind of health insurance to pay for their care.
Half of the 36 million people with no regular access to a doctor have some form of health insurance, either through an employer or through Medicare, Medicaid and other aspects of the state-federal health insurance system. But they cannot use it because local doctors do not accept their insurance or there are no health care facilities nearby. "At 28 percent, Latinos have the highest concentration of medically unserved people
COLLEGE GRADS: (MonsterTRAK) More than half of college graduates (51%) are not optimistic about the prospects for a job offer when they graduate (only about a third are worried about off shoring affecting their job chances). Sixteen percent have opted to head on to graduate school, and 57% plan to move back in with their parents upon receipt of their diplomas. Half of last year's graduates are still living at home with their parents, according to the online recruiter.
Recent statistics show that companies are going to hire in 2006 but they want skilled workers.
CFP TRAINING (Bloomberg) The article noted that the curriculum is antiquated. It is- though I do not necessarily agree with all the statements. One student noted that the mandatory use of the financial calculator was offensive to many. One stated that that is why they have software and the hand calculator was useless. I disagree. I am sure many have seen my comments at my HP12C page and this is noted by a prior teacher at the CFP school: " I spoke with a number of "CFP" students who said that they didn't see the value of learning the time value of money on a calculator since they used a computer at work. I agree with you that if you can't use the calculator, you probably don't know what you are talking about. The process of using the calculator helps you learn what result to expect.") . I do understand the necessity of software. I just think that much of the mandatory thought process has been eliminated. That is why so many planners simply use software for asset allocation. That's why so many consumers have lost money starting in 2000. There is little independent thinking. (I mean, didn’t anyone look at the Inverted Yield Curve???) And what there is is sophomoric at best. Why's that? Simple. The CFP training amounts to one semester of college. It now requires one 10 hour exam. Anybody remember what they went though in college? I had 18 to 21 credit hours per semester. Five courses required quizzes, a midterm and finals of 3 hours apiece. That's 15 hours right there. There is no way a singular 10 hour exam is sufficient to handle anyone's finances
And more- "the CFP curriculum is off the mark, outdated and badly in need of an overhaul. Critics claim that the training programs don't supply necessary planning, communication or practice management skills. Others cite the major problem the curriculum's failure to tie together the various topics as a unified body of knowledge: all CFP students get drilled and redrilled on technical issues, yet they rarely learn who to integrate all those issues to develop a financial plan for a real client."
I got my CFP in 1984 and stated, “I don’t think I know that much.” I was right. So I got the MSFP. Much, much better but still didn’t pull the various study areas together. It has taken additional years and years of intensive study to make this work. But has soon as you think you are good- they change the rules and products (taxes, insurance, hedge funds, etc.). That’s why it is a never ending “battle”.
FRAUD: (Kiplinger Tax Letter) "Tax cheating is on the rise, despite IRS' efforts to curb it. For 2001, the IRS projects it lost out on about $280 billion in revenue, a threefold increase from 1992. The size of that estimate is staggering. Individuals who hid income accounted for the biggest chunk. $148 billion, of which about $51 billion resulted from non-compliance by self- employeds. And those who didn't file at all cost the government around $30 billion. It's enough to make law abiding citizens feel like suckers."
MARKET TIMING-(WSJ) Peter Bernstein, a very prominent analyst and friend of Nobel Laureates Sharpe, Samuleson and Markowitz and a previous staunch supporter of stay the course investing, is now saying that market timing may be the thing to do. "If investors are to meet their financial goals, they need to be more flexible and opportunistic. What if we can no longer be so confident that stocks are necessarily the best place to be in the long run. What if moving around more frequently is now a necessity rather than a matter of choice.
Another "analyst" in his a new book on market timing says, "You do not automatically do well just buying stocks every month". "When stocks get to the certain level of ridiculousness, it is time to get out."
The article continued, The idea that investors should set financial goals and decide how much risk they can tolerate and then keep a steady mix of mostly stocks and bonds likely to produce those risk/reward goals seems like an eternal truth on Wall Street. Yet the emergence of that asset allocation strategy as the dominant conventional wisdom has been largely coincident with the bull market in bonds and stocks during the last 20 or so years.
During a a time of extended rallies, jumping in and out of market means more often that not an investor will end up missing out on gains.
But as the lengthy bond market rally appears to have reached its limit and stock prices bounce back and forth for an extended period, the difference in returns between stocks and bonds could narrow, but without decline in the volatility of those assets. In such an investing environment where the chances of losses are the same but the rewards are smaller, the risks of being out of the market when it goes up are much les if the upswing is short run rather than a long run development.
It is not easy for investors to time the market. But Bernstein notes: How easy it to manage portfolios when market fluctuations drive asset allocations away from their targets? How easy is it to decide when to rebalance assets in a portfolio. How easy is it to make changes in long term asset allocation decision."
My comments- I have been teaching this for years. While the market was going gangbusters in the 90's, I still counseled students to be aware of 1973/74. It did not go in one ear and come out the other. It never even got to the ear without being summarily dismissed. That's not to say I had all my clients out of the market. We were fully invested to take advantage of the upswing (momentum investing). But once March 2000 came along- and the specifically November 2000- I made wholesale changes to the portfolio over to cash, bonds and bond type instruments.
So, are these comments of mine new just to tie in with Bernstein? Long time readers know it is not. Further, my 2004 book already contains all the items Bernstein addressed.. I have pursued that element far sooner than almost anyone in the business. The only one I know of who has addressed this issue in the same format is Bill Jahnke ,who is also well quoted in my book.
Dollar cost averaging is a sucker bet.
Stay the course is almost destined to underperformance as well as excessive risk. Risk drives allocation- not returns. I repeat- the Inverted Yield Curve was an absolute indicator of a major economic upheaval. Right now, the yield curve is flat- another signal for caution irrespective of Consumer Confidence which reached a high at the end of December. Consumer spending seems to have been (just) O.K.. What will I do? Not known yet- the yield curve needs to make a move. Either long term rates go up- possibly killing the housing market and creating a recession right there- or short term rates must drop (not a chance).
FIDUCIARY LAW: (Scott Simon) All fiduciaries involved in different fields of investing--including ERISA fiduciaries, fiduciaries of public employee retirement plans, fiduciaries of foundations and endowments, or fiduciaries of private family trusts--have one thing in common. They are required to live up to the standard of trust law because the assets they are responsible for are held in trust. The standard of trust law is the highest known in law.
"By declaring that all retirement system assets are held in trust…public employees are guaranteed the highest standard of conduct in the management and investment of assets for retirement that the law can establish. A trustee…carries the greatest burdens of care, loyalty and utmost good faith for the beneficiaries to whom he or she is responsible.”
I am going to laugh now. Not a single trustee have a clue to the proper definition of diversification. Without that, you cannot get to risk. And without risk, you cannot get to suitability.
TEACHING IS HARD: Teachers see fewer students per day than 40 years ago, and get more prep time. The average teacher also spends three more hours a week on the job than in 1961, and has less time for lunch.
UNDERSTANDING WHAT A VIATICAL SETTLEMENT IS: A viatical settlement is a financial option that allows you to sell your life insurance policy and receive a portion of the benefits today. The company that purchases your policy will take over ownership of your life insurance policy and also become the beneficiary. In exchange you will receive a cash settlement based on numerous factors such as your insurance premiums and health. Here are four facts that you will find useful when determining if you want to proceed with a viatical settlement.
Your beneficiary will not receive any of the death benefit.
You will not have to pay any premiums after you sell your life insurance policy.
You will receive your settlement federal income tax free.
ANY TYPE of life insurance can be sold at all. This means Term, Group, and FEGLI, etc.
Evaluating The Needs of You, Your Beneficiary, And Your Family
Since your beneficiary will not receive your life insurance proceeds, its important to really evaluate the needs of your beneficiary. For some families a life insurance policy can become expendable because of other funds available. For others the proceeds from that life insurance policy will be needed after the passing of that family member. Discuss the importance of the life insurance proceeds and decide if a discounted percentage of that money would be more useful for your loved ones now. In some cases there may be debt incurred that would be easier to eliminate now then wait to eliminate in the future. Even if you are not sure if you want to take part in a settlement consider speaking with a viatical settlement broker to get an idea of what takes place.
Know The Time It Takes To Complete A Viatical
A viatical settlement is not an instant transaction, it can take four to five weeks to get offers to purchase your policy and up to three weeks after that to actually get the money for policy. It is important to keep this in consideration if you are keeping a viatical as an option, but want to wait and possibly apply at a later date. Remember submitting your information can save time if you plan to make a decision at a later date. Just remember to let the broker know you are keeping a viatical settlement as a secondary option so they do not do unnecessary underwriting.
Seeing If You Qualify For A Viatical Settlement
The typical viatical settlement client (viator) has some type of life threatening illness that is going to limit their life expectancy by less than two years. However over the last several years, viatical companies have been providing viatical settlements to people that have life expectancies of up to five years. These clients receive less money and may be subject to state and federal taxes on their settlement. For someone with a life threatening illness like cancer that cannot afford to pay premiums or is in desperate need of money, a viatical settlement can be a viable option. In regards to your life insurance policy, companies require that your life insurance policy have a minimum of $20,000 in death benefit and be from an insurance company with a well known.
Choosing A Viatical Broker
There are many viatical brokerage firms right now that are actively seeking your business. When choosing a viatical broker, follow the same basic principles as choosing a mortgage broker or insurance agent. Select someone that you are comfortable with or someone that you are recommended to. Here are a few tips you can use when you are in the process of a viatical settlement. There are a good amount of viatical companies that purchase policies so it is not necessary to work with a company that uses private funding sources. Second, for any viatical settlement transaction, you as the client (viator) should never incur any fees at all. Finally, viatical settlements are setup so you can change your mind at any time, you should never be told you are required or obligated to complete a viatical settlement. The ultimate decision to complete a viatical is your decision.
The stress that a serious illness puts on you mentally and financially can sometimes lead to you not thinking with a clear head. Always take the time to make an informed decision about what company you want to work with. There are many good companies that serve your needs and that can take the time to get the job done right. Also take into consideration the viatical industry is not that large, most of the companies all work with the same funding sources, so it is important not to send your policy out to every company you see. This can lead to your policy losing value because of a lack of interest in who is actually handling your settlement. Try working with one or two reputable viatical brokers, this will save you time and stress of multiple companies being in contact with you.
When Its Time To Get Paid For Your Viatical Settlement
Use these important tips when you are considering an offer you receive through a viatical settlement.
Expect to be paid for your settlement with in three business days after the transfer of your life insurance policy
Ask the name of the Escrow Company or Escrow Agent that will handle the transfer of your life insurance policy.
Remember that even after you sign contracts you can back out of the transaction if the funding company will not provide the name of the Escrow Company or Escrow Agent.
Implications On Your Benefits
Since a viatical settlement can be considered income it may affect any public assistance programs you are receiving that are income based. This means that programs like Medicaid could be affected if you receive income through a viatical settlement. The income you receive on a viatical settlement is based on the amount you receive through your viatical settlement minus any premiums that you have paid into your life insurance policy. The best recommendation is to speak with someone knowledgeable who works for that program to see how a viatical settlement would affect your benefits.
Other Options
A viatical settlement is a viable option, however it is not the only option. Consider the following options as alternatives to a viatical settlement.
Borrowing money from a friend or family member.
Borrowing money from the beneficiary of your life insurance policy.
Take an accelerated death benefit (ADB) on your life insurance policy. ADB's provide a portion of the death benefit to you with the remaining death benefit going to your beneficiary. You are required to continue paying premiums, you must prove via a letter from your doctor that your life expectancy is less than twelve months, and there must be an ADB rider in your life insurance policy.
REAL ESTATE AND AN ALTERNATIVE TO THE 1031 TAX DEFERRED EXCHANGE: A tenants-in-common structure is a form of joint property ownership whereby two or more individuals each own an undivided interest in the property. Tenants-in-common shares are not required to be of equal size or value, and—unlike partnership interests—they may be bought, sold, and left to heirs independently of the approval of other owners. And, also differing from partnership interests, they are tax-advantaged to boot.
TIC structures have been used for years, but they existed in a gray area of tax law before the Internal Revenue Service issued guidelines for them in March 2002 (Revenue Procedure 2002-22). The guidelines don’t provide a safe harbor ensuring the qualification of all such programs for use in a 1031 exchange, but they do establish 15 conditions under which the IRS will consider issuing a private-letter ruling (see “A Framework for Building TIC Deals,” on page 18). “The revenue procedure’s true impact was legitimizing the TIC structure by acknowledging there is a proper way of structuring one,” says Kevin Fitzgerald, president of U.S. Advisor, a sponsor of these investments in Napa, Calif.
With the IRS guidelines in place, tenants-in-common structures are increasingly being packaged for advisers’ consumption on behalf of their clients. Though they are used for other purposes as well, about 95 percent of the arrangements function within a 1031 exchange, estimates Julianna A. Clementi, vice president with Cole Taylor Deferred Exchange, a qualified exchange intermediary affiliated with Cole Taylor Bank in Chicago. One reason they’re popular for 1031 exchanges is that they come in various sizes—some as small as $50,000 or $100,000 increments so investors have greater flexibility in finding appropriately valued replacement property within Sec. 1031 deadlines. To qualify for tax deferral, investors must identify replacement property within 45 days of the original sale and complete its purchase within 180 days of the sale date. Finding a single property at the right price in a hot real estate market can be very difficult. But as more and more TIC ownership interests become available, program sponsors say, advisers and their clients will be better able to identify suitable exchange candidates, as well as backups, within the allotted time frames. Equity invested in commercial real estate using tenants-in-common is expected to exceed $2 billion this year, double the amount invested in 2003.
GOING BACKWARDS: The odd connection between investment losses and rising fund expenses might be most painful in the tech-fund category. At the end of 1999, the average tech fund had more than a billion in assets and carried a 1.77% expense ratio. Today, average assets are down to $331 million and expenses are a smidge above 2%, compared with about 1.5% for the average stock fund. That's a 14% rise for a category that averaged a 30% annual loss over the past three years.
NO NONSENSE FINANCE
McGRAW HILL
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This is not Suze Orman fluff!!! Be prepared to learn.
COGNITIVE DISSONANCE: Kahneman and Tversky published a paper that included results from subjects who answered two comparative money problems. And their responses appeared to reveal systematic deviations from rationality: In problem No. 1, subjects were given an imaginary $1,000 and asked to choose between (a) a 50 percent chance to gain $1,000 and a 50 percent chance to gain nothing and (b) a sure gain of $500. In problem No. 2, subjects got $2,000 and were asked to choose between (a) a 50 percent chance to lose $1,000 and a 50 percent chance to lose nothing and (b) a sure loss of $500. The results? In the first problem 84 percent chose (b). In the second, 69 percent chose (a). What's odd here is that if the majority opt for the $1,500 of (b) in problem No. 1, the majority therefore ought to take the same $1,500 payout in answer (b) in the second problem. But instead the majority is willing to take the risk to try to ''break even'' when the problem is framed in terms of losses. Irrationally, people feel differently about losing than they do about gaining, even if either choice produces the same outcome.
ERROLD F. MOODY JR.
BSCE, LLB, MBA, MSFP, PhD
Life and Disability Insurance Analyst
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San Leandro, CA 94577
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LONG DISTANCE CARING: (WSJ) A new study of 1,130 long-distance caregivers set for release today shows the out-of-pocket cost of caring for an elderly relative who lives more than an hour away has doubled since 1997.
Long-distance caregivers' average out-of-pocket spending has risen to $392 a month, compared with $196 seven years ago. That puts the average long-distance caregiver's costs at more than $4,700 a year, on a par with the $4,694-a-year average cost of a public-college education. The sharp rise in drug and medical-supply costs are partly to blame, and government cutbacks are shifting more long-term care costs to families.
An estimated seven million Americans are long-distance caregivers, defined as someone who cares from afar for a chronically ailing person.
Among the 80% of long-distance caregivers who are employed, 44% have rearranged their work schedules and 36% missed days of work, with an average of 20 work hours a month lost to caregiving duties.