As many families re-examine their finances and re-assess their financial objectives we want to provide you with a list of the nine things everyone should understand about life insurance and know before purchasing a life insurance product.
#1) There is no magical formula or number as too how much life insurance you need if anyone tells you that you need 5, 6 or 10 times your annual salary than tell them to return their 1980 sales manual. The truth is that your needs will change over time and every families needs are different. There are numerous factors that should be considered in determining a suitable amount and those factors should include sources of assistance such as social security survivor benefits and more.
#2) Too many needs and not enough income. Let face the reality, that if you allow a salesman to sell you, than inevitably you will end up with a product that does not meet your protectionary needs, is too expensive and ultimately benefits the salesman’s pocketbook more than it benefits your family. The reality is that each of our families has numerous financial needs to prioritize including our ongoing expenses, debt reduction, medical costs, education savings, retirement savings and everything else; just as you shop around for a new car or auto insurance, you will be best served by taking every measure to reduce your insurance costs while maintaining adequate coverage.
#3) Types of Life Insurance: Just as with most financial products there are numerous forms of life insurance and product provisions can vary greatly from company to company. Term Insurance, by far, provides the lowest cost of insurance but your rate will only be locked in for a period of up too 30 years. Once the term expires, the coverage ends.Cash-Value Life Insurance – Includes Whole Life Insurance, Universal Life, Indexed Universal Life and Variable Life Insurance Policies. These policies are designed to provide permanent coverage with some long term cash values, but the policies are as diverse as the number of companies that offer them and are expensive.#4) The Dirty Little Secret – Now 90% of life insurance agents would entirely disagree with this statement, but then again they have been trained too. How do I know, because they trained me. The fact is that our goal is to help families address multiple needs within their budget and the fact is that only on rare occasions should families purchase cash-value life insurance. There is a need for permanent insurance in business planning, estate planning or even for final expenses for families without sufficient assets, however, for most families you should be wary of these products which are often sold as “retirement” supplements or “education” funding vehicles. The fact is that in 11 years I have never, not a single time, not once! Seen a cash value life insurance policy that has provided the cash values initially projected. Nearly every life insurance company has settled class-action lawsuits due to selling practices and unrealistic projections and despite these settlements most companies continue to practice these sales techniques. If you purchased a variable life insurance policy ten years ago (life insurance with mutual funds inside of it), then I guarantee that the internal expenses have increased while the performance has fallen far short of the 10% or 12% returns you were sold on (unrealistic from the start considering the lifetime performance of the S&P is around 6%). If you purchased a whole life insurance policy then I guarantee that the dividend has decreased over the years and the company has also lowered the interest rate on dividends. These are indisputable facts.The reality is that with proper planning, a long-term term insurance policy can provide an extremely low premium and subsequently allow you to save for your other financial needs. With proper planning you may some day lose your term insurance coverage but would have saved more than enough money to meet any survivorship needs.So why do agents sell you cash value life insurance? Simple…Commissions. For instance, an agent might push you to purchase a 100,000 Variable life policy with a $150 monthly premium. They will illustrate a high return and utilize loans to show a huge income at retirement. However, what they can’t show you is an example of a “real” client that had purchased one of these policies and been provided with that substantial income. The agent will earn a commission on this sale depending on your age of $1,000 - $2,500, plus a renewal commission of 5%-8% annually and “trail” every year. Now if that same agent sold you a $150 annual premium term insurance policy and had you save the difference in a low-expense mutual fund, their commission will drop to $100-$250 and they will earn a commission of 1%-5% on your ongoing fund contributions. Now you see the difference.
#4) Not All Companies Are Created Equally. The reality is that life insurance rates can be drastically different from company to company merely because those companies are targeting different market segments or different product focus. The company that offers the best rate to superman is typically not the same company that will offer the best rate to Homer Simpson.
#5) So you have health problem, you smoke, your overweight? No problem. There are two types of companies that exist, those who underwrite based upon stringent guidelines and health statistics, and those who underwrite the individual. Those companies that will examine every detail of your life and those that won’t even require a medical exam. There are always options for obtaining insurance, your premiums may be higher based upon certain health conditions, or your coverage may be limited, but there are always options.
#6) Products Change and so do rates. There are numerous actuarial and marketing factors that go into the pricing of life insurance products. You may have purchased a product 3 years ago and because of competition or other factors you may be able to lower your premium by shopping around today. Additionally, you may have purchased a 30 year product ten years ago and might find that a 20 year product today could lower your premiums. Competition, Claims Experience, and actuarial changes occur over time and just because you own one product today does not mean that another product might offer lower premiums 3 years from now.
#7) Don’t assume group term insurance is in your best interest. If you work for a government body or larger company you may have been offered the opportunity to purchase additional life insurance, without an exam. Although at younger ages or for those with medical conditions this premium may be low, most of these plans have an increasing premium over time and are designed to create a situation in which your premiums become so expensive that you eventually cancel coverage. In addition, changes in employment, health or federal tax laws (in regards to your employer) may create a situation in which you want coverage but it may no longer be available.
#8) You may as well use an agent, you’re paying for it no matter what. When it comes to purchasing any type of insurance product then you should know that purchasing through a 1-800 number or online is providing you no benefit. Yes, you are not dealing with an individual insurance agent or financial advisor, but you are still paying for it. Insurance companies cannot legally discount or offer lower rates to those who purchase any type of insurance directly; as a result you are paying for service that you deserve and will never receive. So give us a call or give an independent agent or advisor a call and make sure they are not captive to a single company.
#9) No one is invincible. There is one unfortunate side effect of growing up, we all come to know the reality that life is chaotic and that none of us are immune. For most of us, our family comes first, and now is the time that we all take steps to make sure that if tragedy were to strike our family, they are at least financially protected.
Guest Post
HCM Financial
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Monday, March 23, 2009
Wednesday, March 4, 2009
Obama's Honeymoon Likely To End March 31st!
Every President experiences a honeymoon period and although President Obama's agenda, including his administrations housing plan, budget and stimulus bill have failed to gain widespread support, his personal approval numbers remain high. For new Presidents this honeymoon period can last up too a year, but for President Obama there is one event that will occur on March 31st that will end his honeymoon period and apply a great deal of pressure on the approval numbers politician's cherish.
March 31st is the end of the first quarter and in the following days, tens of millions of Americans will begin receiving their investment statements. When they do, watch out. In reality, many Americans have tuned out of the news, no longer able to hear the ongoing negative news that they are bombarded with. In addition, those same Americans have tuned out of their retirement and investment portfolios, afraid to look up the values, afraid of the sticker shock that awaits them.
I recently met with an individual who had taken a voluntary retirement package (forced retirement in lieu of layoffs). A portion of the package provided for 1 years salary based upon his years of service, he plans on finding another job, but is in no hurry at the time. When I asked about his stock option and 401(k) plans he admitted that he had not even opened his year end statements, merely because he knew it would be bad. Last week he finally opened the statements and had seen his portfolio shrink by 32% through year end. When he looked up the values through the end of last week, his accounts had dropped by another 23%. This is the sticker shock that awaits so many Americans who are in the same position, fearful of opening their statements.
The Obama administration has less than a month to change their rhetoric and begin to demonstrate and install some confidence into the markets. If they cannot, then those millions of Americans will open up their investment statements, see losses that match those of last year and immediately begin wondering what this administration is doing. Those Americans will begin to wonder why a Chinese Stimulus Plan sent GLOBAL markets soaring overnight, while our own administrations record-breaking plan sent Global markets down. Those same Americans will begin to wonder why the markets haven't responded to any of the Obama administrations plans and why we're rushed into those plans, much as we were with the Bush Administration.
Americans tune out when political debates occur; they overlook partisan bickering and blame. Americans however do not tune out when it comes to their own pocketbook, and trust me if they have no hope for their savings, then they will have no tolerance for the current administration.
March 31st is the end of the first quarter and in the following days, tens of millions of Americans will begin receiving their investment statements. When they do, watch out. In reality, many Americans have tuned out of the news, no longer able to hear the ongoing negative news that they are bombarded with. In addition, those same Americans have tuned out of their retirement and investment portfolios, afraid to look up the values, afraid of the sticker shock that awaits them.
I recently met with an individual who had taken a voluntary retirement package (forced retirement in lieu of layoffs). A portion of the package provided for 1 years salary based upon his years of service, he plans on finding another job, but is in no hurry at the time. When I asked about his stock option and 401(k) plans he admitted that he had not even opened his year end statements, merely because he knew it would be bad. Last week he finally opened the statements and had seen his portfolio shrink by 32% through year end. When he looked up the values through the end of last week, his accounts had dropped by another 23%. This is the sticker shock that awaits so many Americans who are in the same position, fearful of opening their statements.
The Obama administration has less than a month to change their rhetoric and begin to demonstrate and install some confidence into the markets. If they cannot, then those millions of Americans will open up their investment statements, see losses that match those of last year and immediately begin wondering what this administration is doing. Those Americans will begin to wonder why a Chinese Stimulus Plan sent GLOBAL markets soaring overnight, while our own administrations record-breaking plan sent Global markets down. Those same Americans will begin to wonder why the markets haven't responded to any of the Obama administrations plans and why we're rushed into those plans, much as we were with the Bush Administration.
Americans tune out when political debates occur; they overlook partisan bickering and blame. Americans however do not tune out when it comes to their own pocketbook, and trust me if they have no hope for their savings, then they will have no tolerance for the current administration.
Monday, March 2, 2009
As Market Drops Below 7,000, is there any refuge left for investors?
As the Dow dropped to a 12 year low yesterday, many retirees and near-retirement baby boomers who have remained invested in the market are seeing their lifelong savings drop like a rock. The struggle for those without the insight to move out at much higher values is whether or not to continue to hold. I hate to say it, but the more than 50% drop in the market has created a mindset among many investors that they must now hold their current financial positions in hopes of a quick recovery. The truth, however, is that now is the time that everyone should be considering a comprehensive review of the retirement, education and other savings and re-evaluating their risk/reward positions.
It’s easy to make no changes, after all during a typical recession the vast majority of the market recovery comes in the months immediately following the end of the recession. This recession, however, is not you typical recession. The government is injecting itself into the private sector at a pace never-before seen and the refusal to let giants such as AIG, Bank of America, Citi and other die while sacrificing smaller companies is only contributing to long-term economic concerns. Unlike previous bear markets, coinciding with recessions, that last on average 13 months, our current market pullback is nearly twice that of the average bear market drop.
The truth is that market indices have dropped over 50% off of their highs with nothing but uncertainty as to when a bottom might possible come. The other truth is that at this point, investors who remain fully invested will have to earn over 100% in order to recoup their losses. The truth also remains, that this drop has been so large that it will take years to recoup losses.
The truth also exists that more than 80% of all investors have been in the market for less than 14 years, with the largest influx of new investors entering the markets between the years of 1998 and 2000. As a result, a vast majority of investors who entered the markets at the height of the tech bubble have seen their gains erased by the 2000 recession, erased again by the 2002-2003 recession and no erased by the current recession. A study performed by DALBAR in 2005 found that the average non-institutional investor had earned slightly over 2% on their investments during the preceding 10 year period, that rate is now negative. In other words, this recession is hurting the average investor more than previous recessions because they have no long-term performance.
So the question remains: What now?
Well first re-evaluate your budgets, short-term and long-term goals; then visit with a qualified financial professional to seek help and discuss your risk/reward objectives. Regardless of your financial position, there are products that will fit your individual needs. Products that may offer low expenses, may offer minimum guarantees, may offer income protection and may work in conjunction with your other savings to meet your goals. Of course, products will vary from company to company and although one company may offer a flexible and consumer-friendly financial product, another company may offer the same type of product but with greater fees, less liquidity and more restrictions.
There are products you should be wary of, for instance Variable Annuities, Whole Life, Variable Life and other life insurance products being offered as savings vehicles, managed accounts whereas the same investments could be held without excess fees outside of the account, junk bonds and of course my new favorite, mortgaged-back securities. There are downsides to every type of investment and savings vehicle, the real question is not the downsides but rather if the product fits your needs, objectives and risk/reward requirements. The objective with everyone’s money should be simple, not to measure results by short-term performance, but rather to maintain consistent upward growth, something that most investors have yet to experience.
Guest Post
HCM Financial
It’s easy to make no changes, after all during a typical recession the vast majority of the market recovery comes in the months immediately following the end of the recession. This recession, however, is not you typical recession. The government is injecting itself into the private sector at a pace never-before seen and the refusal to let giants such as AIG, Bank of America, Citi and other die while sacrificing smaller companies is only contributing to long-term economic concerns. Unlike previous bear markets, coinciding with recessions, that last on average 13 months, our current market pullback is nearly twice that of the average bear market drop.
The truth is that market indices have dropped over 50% off of their highs with nothing but uncertainty as to when a bottom might possible come. The other truth is that at this point, investors who remain fully invested will have to earn over 100% in order to recoup their losses. The truth also remains, that this drop has been so large that it will take years to recoup losses.
The truth also exists that more than 80% of all investors have been in the market for less than 14 years, with the largest influx of new investors entering the markets between the years of 1998 and 2000. As a result, a vast majority of investors who entered the markets at the height of the tech bubble have seen their gains erased by the 2000 recession, erased again by the 2002-2003 recession and no erased by the current recession. A study performed by DALBAR in 2005 found that the average non-institutional investor had earned slightly over 2% on their investments during the preceding 10 year period, that rate is now negative. In other words, this recession is hurting the average investor more than previous recessions because they have no long-term performance.
So the question remains: What now?
Well first re-evaluate your budgets, short-term and long-term goals; then visit with a qualified financial professional to seek help and discuss your risk/reward objectives. Regardless of your financial position, there are products that will fit your individual needs. Products that may offer low expenses, may offer minimum guarantees, may offer income protection and may work in conjunction with your other savings to meet your goals. Of course, products will vary from company to company and although one company may offer a flexible and consumer-friendly financial product, another company may offer the same type of product but with greater fees, less liquidity and more restrictions.
There are products you should be wary of, for instance Variable Annuities, Whole Life, Variable Life and other life insurance products being offered as savings vehicles, managed accounts whereas the same investments could be held without excess fees outside of the account, junk bonds and of course my new favorite, mortgaged-back securities. There are downsides to every type of investment and savings vehicle, the real question is not the downsides but rather if the product fits your needs, objectives and risk/reward requirements. The objective with everyone’s money should be simple, not to measure results by short-term performance, but rather to maintain consistent upward growth, something that most investors have yet to experience.
Guest Post
HCM Financial
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