Recent comments from Fed Chairman, Janet Yellen, indicate that she thinks we'll never see another financial crisis like we saw in 2008. She's probably right but is that really a profound observation?
Well, the day of reckoning has come and gone. The new Department of Labor's new Fiduciary Rule is largely in effect across the financial services industry.
Discussion over the rule and its implications have been debated over the last couple of years with a fair degree of intensity. Still it seems that the smoke screen has worked.
The new rule expands the definition of a fiduciary as it relates to giving investment advice regarding retirement accounts.
We're not trying to explain the rule in today's episode…as far as I can tell from attending several informational webinars/meetings regarding the implications of the rule there's no agreement or real understanding of what it means for advisers.
Big surprise, right?
We aren't all that concerned with procedural issues (disclosures, paperwork etc.) as much as we're concerned about how this new rule warps the definition of “best interest” and what it really means to act in the capacity of a fiduciary.
Our issue isn't really about a rule change, that's just what's visible. What's more troubling is that policymakers are attempting to fix a perceived problem that they don't really understand. A new rule will not fix the problem.
According to information published by the Insurance Research Council, almost 13% of all automobile accidents in the U.S. are caused by people who have no insurance. Yet, it's illegal to drive without insurance in almost every state.
I got some breaking news for you…some people do bad things and writing new rules won't change it.
The new rule implies that what's in your client's best interest has an absolute right or wrong. And before you think it…yes, fraud is always wrong.
But…what's in my clients best interest is highly subjective and that has not changed–rule or no rule.
Are increasing COI charges really a problem with universal life insurance? Or could it be that competence in understanding policy design (from the outset) and management is actually more important?
Today we're discussing an ongoing lawsuit between a family and Nationwide regarding a couple of variable universal life policies that are owned by an ILIT (irrevocable life insurance trust).
Episode 70 marks only our second FAQ episode since we started the Insurance Pro Blog Podcast. But it proves that we do indeed love the questions that we get from our audience, so keep'em coming our way. We'll do our best to get to them in our upcoming Q&A episodes.
We were planning to answer three questions today. Alas, our attempts at brevity fell short and so we only answered two questions.
Here's what we tackled in episode 70:
1. Is the waiver of premium rider worth the cost and what does it really do for you if you become disabled?
2. How do you distinguish a “good advisor” from all the rest? The financial services industry views an advisor/agent/producer as top notch if they generate more revenue than everyone else. But…is that the metric you (the client) should be using?
And seriously, keep the questions coming our way, we may address your questions in a future broadcast or mash them up with other questions if we believe it provides a better context for understanding.
Today's episode revolves around a discussion of the LEAP system and how it contributed to the revocation of an insurance agent's license.
An agent in Ohio had his insurance license revoked after using the LEAP system to sell life insurance as an investment. Now, this happened back in April 2016, so I wouldn't consider it breaking news, however, it's still a discussion worth having.
At the core of our episode…is LEAP the real problem (as depicted) or did the agent lose his license because the policies he sold were structured incorrectly?
The headlines and structure of the case documents themselves would lead you to believe that LEAP is the core of the problem but we're not so sure about that. You have to read between the lines on this one and look harder at the actual numbers revealed in the case to reverse engineer what REALLY happened.
Please note: This episode is not intended to disparage the use of LEAP or any other methodology for selling life insurance. We believe the actual problem in this case is that the former agent represented the life insurance as functioning one way and delivered something completely different.
In fact, if you want to better understand how this sort of thing actually happens, I encourage you to read a piece we published several years ago, The Third Dimension of Cash Value Life Insurance. It will shed some light on how this sort of thing happens.
We often hear stories of sorrow regarding evil life insurance companies.
Stories that depict how a person paid thousands of dollars in premium only to have the insurance company steal all their cash and cancel their coverage.
But does it really happen that way?
Anything is possible I suppose, however, when we took a look at a couple of whole life insurance policies that have not been paid as planned over the years we discovered something a bit different.
Turns out that participating whole life is indeed a special product that can “limp” along for years while the client pays a fraction of what was the initial planned premium.
Hmmm…that doesn't align with the stories of woe we see the media reporting, in fact, its pretty amazing.
But how and why does it work that way?
Listen to find out.
How could life insurance fit into your overall retirement income plan? That's what episode 67 is all about. For most people going forward, relying on pensions to form a stable foundation for their retirement will not be an option.
That means that most will be faced with two income sources:
- Social Security
- Income generated from investment portfolio (stocks, bonds, mutual funds, ETFs, real estate etc.)
Some have suggested that if you just follow the 4% rule everything will work out fine. We believe that's way oversimplified and fails to take into account the substantial risk posed by having significant drawdowns in your portfolio during the early years of your retirement.
Why not be a bit more selective in how you choose to take income and perhaps consider using cash value life insurance as a foundational component of the strategy?
It's been a while since we've done any sort of FAQ episode. So, today we remedy that with three of the most commonly asked questions we get about life insurance policy design when seeking cash accumulation as your primary goal.
We answer the following questions:
- What is the 7 pay test and is it okay to fund my policy right up to the limit?
- If my policy illustration shows that my policy becomes a MEC in 52 years (for example) should I be worried when I'm only planning to fund it for 15 years?
- What's the worse case scenario if for some unknown reason I can't pay my premium in any given year? Does this ruin everything?
Over the last few years…basically since the beginning of the Insurance Pro Blog going back to the summer of 2011, we've been preaching the gospel of whole life insurance.
Sure, there have been plenty of people who've come along to tell us how wrong we are and how a simple investment in an index fund could certainly outperform the return on the cash value of a whole life insurance policy.
To this, we've never disagreed.
Yes, in fact, we too believe that a long term investment in stocks or equity funds of any kind should…outperform the return on cash in a whole life policy. But that's kind of like us all agreeing we'd live a much longer and healthier life if we only ate raw vegetables and less prime rib smothered in butter.
Data is one thing, human behavior is another altogether.
Our point is that while average annual returns for various index funds and the indices themselves look great, most people aren't able to achieve returns anywhere close to those numbers.
Here's a more detailed rundown of the key points from the DALBAR report:
- In 2016, the average equity mutual fund investor underperformed the S&P 500 by a
margin of 4.70%. While the broader market made gains of 11.96%, the average equity
investor earned only 7.26%.
- In 2016, the average fixed income mutual fund investor outperformed the Bloomberg
Barclays Aggregate Bond Index by a margin of 0.19%. The broader bond market realized a
slight return of 1.04% while the average fixed income fund investor earned 1.23%.
- Equity fund retention rates decreased in 2016 from 4.10 years to 3.80 years.
- Fixed Income retention rates increased by almost 2 months in 2016, from 2.93 to
3.09, eclipsing the 3.0 year mark for the first time since 2012.
- Asset allocation funds experienced the a significant decline of retention rates in 2016. The
average retention rate shortened by over 5 months, decreasing from 4.53 to 4.09.
- In 2016, the 20-year annualized S&P return was 7.68% while the 20-year annualized return for
the Average Equity Fund Investor was only 4.79%, a gap of 2.89% annualized.
- The gap between the 20-year annualized return of the Average Equity Fund Investor and
the S&P 500 continued to contract in 2016 (from 3.52% in 2015 to 2.89% in 2016).
Just further proof that behavior rarely aligns with reality.
Psychology and emotion play a very large part in long term financial success. It's better to build a plan to “control the control-ables”. It's not sexy, it involves more planning and probably requires you to save more money because you're accepting a plan based on lower average returns.
But in the end, if you plan conservatively, and end up with more money, you'll be happier than if you over-project higher than average returns and miss your target. I've yet to have anyone complain that they had too much money.
You can't buy groceries with average annual returns. And averages also mean that half the people get less than average returns. How do you know you'll be average or better?
If we've done our job effectively and you feel like this is a concept that you'd like to explore for yourself, feel free to reach out to us, by contacting us here.
A million bucks ain't what it used to be. There is a movement afoot to liberate people from their life of indentured service aka “a job”. While we believe it's a noble pursuit to pursue financial freedom–having a passive income that exceeds your living expenses–we also feel that people are going to need more money than they think to safely make this happen.
That's what we're discussing in today's episode.