Monday, March 22, 2010

A break-down of life insurance needs. Now with 30% less boring!

What would happen to my family?

In the last month I've been on airplanes 4 times. Each time there comes a moment as we taxi towards our takeoff that I find myself thinking "What if we crash?" I wonder how I would act - knowing I'd probably scream like an 8 year old girl. But after that I wonder "What would happen to my family?"

Would they have enough to get by? Would my boys be able to follow their dreams? Could my wife afford college again? Would she want to go back to work? Do I have enough life insurance coverage?

There are thousands of websites and tens of thousands of agents all dedicated to making sure you have adequate coverage. Some keep things pretty simple, and some go into great detail about "needs analysis" and "survivor's needs."

Let's see if we can simplify it a little.

You need as much life insurance on your spouse as it takes to let you live without them.

Let that sink in a little. Think about that. What would you be experiencing in life without your spouse there? How would it feel and what would you do? Try and visualize. It's not just a "back to life as usual" kind of situation, is it.

Now think about how much income you have right now. If your spouse passed away, would that change? If your husband brings in $50,000 per year, how long would $100,000 of life insurance last you? 2 years. If your wife brings in $20,000 how long would $200,000 last you? Probably about 10 years.

Yes we can calculate for inflation, taxes, final expenses, and all that. But what I've found is that most of the time a simple calculation based on income and aid to the family comes out within a few bucks of the detailed, hour long analysis. Add on a little extra for those final expenses and any emergencies associated with the passing of a loved one and you're pretty decently covered.

So do the math in your head. Have insurance through work? $200,000? If you're bringing home $40,000 per year, how long would that big chunk of change really last your family? At best, 4.5 years. None of us want to leave our family destitute. As bad as it was thinking about your life without your spouse, think about how your spouse would feel without you and without enough money to get by.

Life insurance is love insurance. I'm a firm believer. When you get on that airplane you're going to have a few moments of pre-flight angst, like everyone. But when you start to wonder "where would they be without me?" if you have sufficient life insurance you'll feel good.

Tuesday, March 17, 2009

We've been brainwashed: Financial truths or just good marketing?

There are certain 'truths' out there in the finance and insurance world that most of us take for granted. Can you think of some? Come on, class, let's do this together!

How about this one: "It is better to own than to rent." Heard that one before?
What about, "buy term and invest the difference?" Familiar?
"an index fund is better than any other type of fund." or "No load funds are always better than load funds." or "annuities are bad." or "fixed rate is better than variable rate loans."

The list goes on and on. Each industry has their own phrases that are heard and repeated over and over again. In real estate you see this in the ads "Start paying yourself!" In life insurance, "Buy term and invest the difference." and many many more.

Do we ever stop and ask ourselves why? Where do these phrases come from? More importantly, how can we know they're true?

The savvy investor knows he can not take any advice simply at face value - there's always a trade off between different products and services. Logically, then, the trade offs might be appropriate for certain people and totally inappropriate for others.

In other words - we don't all need to be home owners.

For one person, a home with a 30 year fixed rate mortgage, term life insurance, low deductible health insurance, and a 401k might be appropriate; however, for another person with his or her own unique personality and goals might feel that in the same situation he would want a rental, a ROTH IRA, permanent life insurance, a high deductible health plan and an HSA.

Both of these are great situations to be in! Neither is wrong! The second fellow is only breaking all the rules because the sales folk are telling him what they want the rules to be. Were it not for "they" there would be no "wrong" way.

Where do these phrases come from then? From marketing and sales professionals. Does that make them wrong? not necessarily, but neither does it make them right. It just makes them sales persons.

The next time you hear a pitch or have a financial decision to make, look for the reasons why behind the recommendations. Consider the alternatives. Your professional ought to be able to show and teach you what all your options are, then tell you why option B is most well suited to you and your specific needs. Obviously, then, if you are a professional, you owe it to your clients to present them with all their options, then your recommendation and reasons why. They will trust you more that way - and rightfully so.

Friday, March 13, 2009

My Investment Philosophy

Were I to sum up my entire investment philosophy in one sentence it would go thusly:

Investments are meaningless without the goals that drive them.

This is the one key principle I wish I could somehow stomp into the brains of the people I meet with - Sometimes with a boot. Yet, somehow, the meaning of this phrase escapes the brightest of us when we stare into the harsh reality of the quarterly statement. We get that piece of paper or that email which tells us what we’ve earned or lost and can’t help but feel that somehow we’re missing out on something better. We forget why we’ve been socking away the money in the first place and instead focus on the money itself.

This is typical human behavior. It is unnatural for us to think ahead. How many of us, after all, have a five year plan – much less a 20 or 30 year plan? It’s so much easier to worry about what’s going on today and forget that brief vision we once had – of a comfortable, safe retirement, or a child going to college or whatever it may be.

To use an analogy - it's hard to look forward to Disneyland when we're stuck in the traffic jam on I-10.

This is also why people like Bernie Madoff succeed. They play on these fears and say things like “Well, that’s pretty good, actually, but it’s certainly not the best. I have been consistently getting 400% returns with no negative years! I’d be willing to let you in, though I normally require at least 100,000 dollars to open an account…” The dollar signs seem to be dancing before our very eyes, and goals are pushed aside in the hunt for the quick, easy money.

Similarly, a robust industry springs up around whichever commodity is doing well. Have you heard this phrase: “Send us your gold for cash?” how about this one “There’s never been a better time to invest in…” If we lose track of the reasons why we invest we then start to give in to fear. Doubt creeps in and we wonder “What if that other investment really is better than what I’ve got?” Some financial professionals love this feeling and will try to exploit it - simply asking you to change funds or brokerages. This is the investment equivalent of changing lanes to try to get ahead. What they don't mention is that each time you change lanes it costs you something.

There’s no point in taking on the additional risk of an investment that shoots for a 12% return when a more stable 6% or 8% will be enough to achieve your goals.

The natural question is, “But why not shoot for 12?” Again, ask your retired friends how they feel about their 401k balances lately. Those who were looking for that little extra boost to their income instead experienced a drastic reduction in their money. Those that took the conservative route felt little if any loss at all. I know one doctor who experienced a 6.5% gain in his retirement funds in 2008 because he was invested in that "terrible" investment vehicle - life insurance. Suddenly the "terrible" investment of last year is looking really really smart, (and I give kudos to his planner who had the guts to tell a very wealthy client to go against the flow when the time was right to get conservative).

Does that mean everybody should be jumping on the life insurance bandwagon? Absolutely not.

There is no “best” investment for everyone. The real “best” way is to have customized methods to reach your individual goals on your own time line. It doesn’t matter what you’ve “heard” about this or that investment, or how other people are doing it. What matters is getting to the destination.

We don’t spend hours and hours planning the drive, we spend only as long as it takes to make sure we’ll be able to get there in the way and time we want. To worry about speed limits, guard rails, ice conditions and how fast other drivers will be going is ludicrous until we’re actually on the way. Adjust as needed, but never lose sight of those goals. This attitude will prevent you falling prey to unscrupulous people in the industry and will also reduce some of that ulcer inducing stress than can occur on those bad years.

Thursday, March 5, 2009

How Mass Mutual is Choosing to Turn the Recession Into a Marketing Opportunity.

In the Life Insurance world there is a small handful of companies which really stand out. The most secure of these would include a short list of: New York Life, Northwestern Mutual, and Mass Mutual.

Of these companies, Mass Mutual has recently been bragging about having the highest dividend rate in the industry currently. (Dividends in Life insurance work like dividends in stocks - the company pays owners back a certain dollar amount each year expressed as a percentage of the cash 'invested' in the individual life insurance policy.) While this is true- they do illustrate a higher percent to their policy holders than any other insurer I know of - it may have been a mistake to do so.

In the face of the economic turmoil of the last year, most life insurance companies have made the choice to reduce their dividend rate. Conservative Northwestern Mutual chose to drop it's dividend rate from 7.5% on unborrowed funds to 6.5% for 2009. The reasoning behind it is simple: they don't know how long this recession will go on, so they want to keep more in reserve, just in case. This reserve of cash on hand is what makes life insurance companies so financially stable.

Mass Mutual made the gutsy move of not lowering their dividend rate at all. This gives them a couple of competitive advantages at the risk of tremendous damage to the company's strength ratings. They're able to say now, with confidence, that no other life insurance company has a dividend rate as high as Mass Mutual. They, assuming they survive the next few years, will be able to show a history graph of dividends which show a steady increase in dividends paid even through the recession of '08 and '09 - which they can then call 'financial strength,' rather than risky behavior.

What do they risk? Well, they just released their balance sheet for 2008 two days ago. On that sheet was a net loss of 1.1 billion dollars. Compare that to Northwestern Mutual which also released it's statements recently - a net gain of 400 million, even after billions of dollars of investment loss. New York Life has yet to post it's 2008 financial statements.

Mass Mutual may be playing the smart game after all, however. With a cash surplus of about 8 billion dollars, they could conceivably ride out another half decade or more of recession and still offer their high dividend rate. If they do, though, they'll certainly be downgraded in their previously high ratings from Moody's, S&P, Fitch, and AM Best, leaving the "highly rated" arena to the likes of the stodgy and conservative New York Life, Northwestern Mutual, and TIAA-CREF. The question then becomes: do consumers want a risky investment when they look at their life insurance, or do they want boring but safe?


Tuesday, March 3, 2009

Bad Hands: The Naughty Insurance Companies.

There are some really, really bad insurance companies out there. We've all heard the horror stories in movies and books like Grisham's The Rainmaker. You may have even heard some of the news stories in recent years. But how do we know who to trust and who to avoid?

The American Association for Justice has compiled a list based on the dismal track records of the ten worst of the worst. These are companies you've heard of. These are companies who spend millions on advertising to make themselves look good. These are companies who seem to be willing to do anything to avoid paying out.

The entire article can be found here, , and I suggest you read it all. It contains real stories compiled from these nightmare corporations, like the Unum sales agent who found herself in need of her disability insurance and was denied by the company she had served for so many years.

So who are the culprits? Here they are listed in order of awfulness, beginning with the company who works the hardest to avoid doing good:

1. Allstate
2. Unum
3. AIG
4. State Farm
5. Conseco
6. WellPoint
7. Farmers
8. UnitedHealth
9. Torchmark
10. Liberty Mutual

It may be time to reconsider who you have your car insurance with.

What amazes me is how each of these companies advertise how they are "there for you" and "do the right thing," etc. It's time to stop looking at ads to help us make decisions and do some actual research.

We'll discuss what makes an insurer tend to be "good" versus what makes an insurer go bad in a future post. We'll also talk about some simple research that you can do to figure out where to shop. Look for it here!

- Oreo