Alternative Investments (“alts”) and The Flight to Safety – Part II

Jim Lorenzen, CFP®, AIF®

In my last post, a talked about how the financial planning profession has changed dramatically since I opened my first office in  1991; but, the financial services industry – not to be confused with the profession that operates alongside it – seems to have changed little, though it’s changed a lot.

I talked about how the financial product manufacturing, marketing, and sales channels represent an industry that exists alongside – not necessarily a part of – the financial planning profession.  It doesn’t help, of course, that anyone can call themselves a financial planner – but I digress.

Alternative investments (alts) represent one example, which I discussed in the last post.  Another alternative investment is deferred annuities.

People love guarantees.  Marketers know this and the use of the word virtually always gets investors’ attention – particularly those who’ve amassed significant assets and are contemplating retirement.

The media – always on the alert for something they can hype or bash for ratings and typically lazy – find it easy to highlight high costs and shady salespeople.   And, there’s some truth to that.  Guaranteed income or withdrawal riders and  equity indexed annuities do tend to have high costs.  Often the guarantees that are less attractive than those presented.

The cost-benefit argument could, and probably will, go on forever.   I have other issues.  The first is, does an annuity make sense at all?  – Any annuity.   There’s no tax-deferral benefit if used inside an IRA and it limits your investment choices.  They also often have surrender charges that enter into future decision-making; but, even when there are no surrender charges, the withdrawals can harm performance or even undermine the guarantees that were the focus of the sale.

For me, here’s the big issue:  the annuity creates something most of my clients no longer want any more of – deferred income (who know what future tax rates will look like in 10-15 years as government deficits climb?  Deferred income comes out first and is taxed at ordinary income tax rates.

Deferred income in non-qualified annuities (outside IRAs, etc., funded with normally taxable money) is income in respect of a decedent (IRD) and does not get a step-up in cost basis at the death of the holder – someone will pay taxes on the earnings and they may be in a higher tax bracket or the IRD may put them there.

There may be other ways to invest using alternative strategies.  Options can work, but they also carry additional costs and risk.

Talk to your advisor –  a real one would be a good idea – to see what your plan should be.

Jim


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Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Alternative Investments (“alts”) and The Flight to Safety.

iStock Images

The more things change, the more they stay the same.

Jim Lorenzen, CFP®, AIF®

The financial planning profession has changed dramatically since I opened my first office in  1991; but, the financial services industry – not to be confused with the profession that operates alongside it – seems to have changed little, though it’s changed a lot.  What?  I’ll explain.

The industry, comprised largely of product manufacturers and their sales arms (these days it seems anyone can say their a ‘financial advisor’), has a long track-record of constantly packaging new products to take advantage of a demand among investors that the product manufacturers create through their marketing.   New ‘issues’ (created by marketing) give rise to new products to be sold to fill a marketing-driven demand.  Changes in product innovation to generate new sales is the constant that never changes.

This doesn’t mean it’s all bad; it’s just that it can be difficult for spectators to recognize the game without a program.

Alternative investments get a lot of press these days – especially if there’s a perceived risk of a down or bear market… a perception that’s  convenient to exploit at almost any point in time.  The media likes ratings, so profiling people that called a market  top or decline – and made money – is always good for attracting an audience.  And, since there’s  always someone on each side of a trade, finding someone on the right side  isn’t difficult.

I’ve always felt that many fund managers operate like baseball free agents.  Being on the right side of a call gets them on tv, which in turn attracts new assets, which in turn leads to bigger year-end bonuses.  I could be wrong, or not.

Many captive “advisors” are putting their clients into “alts” these days because their employer firms (the distribution arm for the product manufacturer) are emphasizing them.

My sales pitch for alternatives:   With alternatives, you can have higher costs, greater dependency on a fund manager’s clairvoyance, less transparency, low tax-efficiency, and limited access to your money!  What do you think?

Don’t get me wrong.  It’s not a black and white decision.  They can have a place in a well-designed portfolio; and, while many endowment funds and the ultra-wealthy do tend to own alts, most of us aren’t among the ultra-wealthy and risk mitigation is important.

What can you do?  What should you consider instead?  Well of course that depends on your situation – everyone’s different.   But, I’ll have a few thoughts you can chew on – and discuss with your advisor – in my next post.

Jim


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Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

College or Retirement: Does a 529 Plan Make Sense?

Maybe there’s a better way to accomplish both!

Jim Lorenzen, CFP®, AIF®

Can’t afford to save for retirement because you need to accumulate money for your kids’ college expenses?   Sound familiar?

Most parents are willing to put their kids’ education ahead of their own retirement needs, according to a T. Rowe Price survey.   In fact, their research says it’s true of 74% of parents – all willing to prioritize college saving over their own retirement needs.

But, is that the smart thing to do?

529 plans tend to be the primary college savings vehicle, but parents could be, and often are, jeopardizing their own financial security.  529 plan do offer tax breaks for their depositors; but those tend to be low dollar amounts and then often limited to only state income taxes.   A 401(k) or IRA can cut their federal taxes up to 40% for every dollar they deposit!  –  And, it’s even more if the parent’s employer is matching contributions!  This isn’t rocket science.

As for investment choices, 401(k) and IRA menus still tend to offer greater flexibility and access to thousands of mutual funds, ETFs, even individual stocks, bonds, and certificates of deposit.

 The Liquidity Issue

While 529 plan assets can be withdrawn at any time, if it turns out you have no qualified higher education expenses to match the withdrawal amount, the earnings can be taxable income – and there could be an additional 10% penalty on the income portion.

There are, however, ways to tap retirement accounts with minimal impact from taxes, costs, or penalties:   You might be able to borrow from your retirement plan at work – maybe with no application and at low interest rates – and Roth IRAs allow withdrawals of contributions at any time for any reason with no taxes or penalties.  Earnings can be withdrawn after age 59-1/2 without taxes or penalties, as well.   Note:  Those under age 59-1/2 will be taxed on the earnings portion of a Roth IRA, or any part of a traditional IRA, as regular income.  However, a pre-59-1/2 IRA or Roth IRA owner may avoid the 10% penalty if the money is used for qualified higher education expenses.

Caution:  It’s worth noting that any distribution from a parent’s retirement account may be counted as income when calculating subsequent years’ financial aid and may reduce any needs-based benefits.

Speaking of needs-based awards and benefits, while no more than 5.64% of 529 plan account value will be considered each year before any needs-based money is awarded, retirement account assets usually aren’t counted at all!

Retirement should be your number one priority.  Structured properly, retirement funds can be arranged to provide solutions for multiple objectives and minimize Uncle Sam’s dip into your wallet, as well.


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Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Are All Financial Advisors “True” Fiduciaries?

Jim Lorenzen, CFP®, AIF®

The short answer is ‘no’.   Mark Tibergien, CEO of Pershing Advisor Solutions, is quoted in this month’s issue of Wealth Management saying, “When we look at those who are breaking away [from traditional brokerages] and forming their own firms, we recognize that they are making a fundamental change from being an employee to being a business owner, from being a broker to being a fiduciary advisor and from being a product advocate to being a client advocate.”

According to the article, written by Mindy Diamond, president of Diamond Consultants, a nationally-recognized boutique search and consulting firm in Morristown, N.J. specializing in the financial services industry, here are just a few of the things she mentions to look for:

  1. Ability to serve the client first. Captive advisors, she says, essentially serve as product advocates for the firm and are limited to the products and platforms approved by their firms.  Independent advisors, on the other hand, serve as client advocates with access to the whole of the market – the ability to ‘shop the street’ for products and solutions that best serve the client.
  2. Higher level of transparency. At an independent firm, safe asset custody is separate from the advisor’s business and product manufacturing, creating a process of checks and balances.
  3. A clearer payment structure. Unlike the wirehouses, independent advisors aren’t paid according to a grid – a performance measurement based on selling ability and not meeting the client’s needs.  Higher production levels result in a higher percentage commission payout from the firm to the advisor.   Independent advisors are business owners with fully disclosed compensation that’s easy to understand.
  4. Ability to select the technology and services that best suit their clients – not what the ‘house’ provides.

It’s worth noting that independent registered investment advisors (RIAs) have legal fiduciary status automatically.   This may not be true in all instances when the advisor is considered an RIA representative only for the planning stage but reverts to registered representative (RR) status for product selection and implementation.

It pays to know who you’re dealing with.

Jim


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Economy Maybe Not So Strong After All

Fotila Images

Fotila Images

Jim Lorenzen, CFP®, AIF®

The new jobs report shows 178,000 jobs were created last month – and much of the media has reported that number; however, there’s a number missing:  All but 9,000 were part-time.

While unemployment has dropped from 5% to 4.6% over the past year, the participation rate has remained constant and those eligible workers not in the labor force has actually gone up, as you can see.

All of this, of course, seems to be forming a pattern occurring in an environment of increasing national debt.   If you want to give the politicians your own feedback on this, there are resources you can use.

If you’re one of those trying to navigate retirement planning in the midst of all the media `white noise’ and financial uncertainty, it might help to have a roadmap.  Maybe I can help.  You can begin here.

 

Jim

 


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Danger in Future Inflation, Interest Rate, and Tax-Law Changes.

6a017c332c5ecb970b01a5116fb332970c-320wiJim Lorenzen, CFP®, AIF®

Back during the 1990s, many Americans, particularly baby-boomers, were focusing on accumulation.  Many of us can remember the focus on mutual funds and a rising stock market.  Today, these same boomers are thinking more about protecting what they’ve saved.

The problem, as is often the case, is Uncle Sam.

For years I’ve believed that our 401(k) and other tax-deferred account statements are misleading.   Someone who’s successful and in his/her 50’s might open their retirement account statement and see a balance of $600,000, for example, and believe they actually have $600,000!

Not likely.  For someone in a 28% federal bracket, for example (we’ll ignore state taxes for  now, but you shouldn’t), the statement should read:

Your money:  $432,000
iStock_UncleSamLiftingWallet_MediumThe Federal Government’s money:  $168,000, unless your tax bracket changes and unless the federal government decides to change how much will be required to fund government operations.  If more is required, the government can increase it’s share of your retirement account without your consent.

And, there lies the problem.

According to this chart, federal finances may experience a bleak future.

201603i_Federal Finances

I aplogize for the poor image quality, but the upper-left depicts the annual deficits both past and projected, while the lower left chart shows the effect of these accumulated deficits

There’s more you should know about this and how this issue, combined with a few others, has important implications for baby boomers who need to navigate the retirement maze in the face of potential rising interest rates, inflation, and tax-increases – all during the years when they’ll be tapping into their nest-eggs.  I’ve included this and a few other charts – all much more legible – and additional information you might find interesting, as well.

Click Here!

Econ. 101-Supply and Demand – and Longevity Credits

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

More and more boomers are beginning to approach retirement. 

 

No news there; but something’s been happening – and continues to happen – that can negatively impact people who waited hoping to get a better deal regarding their retirement income.  It’s little wonder that so many retirement plans are in jeopardy.

You see, immediate income annuity sales totaled $9.7 billion last year – a 17% spike.  My guess is, as the boomer retirement bubble really begins to hit, that number will be much higher.

6a017c332c5ecb970b0192ac851ba2970d-320wiIt’s Economics 101: Supply and Demand.  As more and more boomers purchase annuities to cover their basic expenses in retirement, this demand coupled with increasing life expectancies, will likely have a dramatic effect on payout rates for future purchasers.

According to an excellent article by Tom Henga, writing in the June issue of Retirement Advisor, a Society of Actuaries (SOA) committee released the final report of RP-2014 mortality tables in October and those tables reveal a consistent trend, which if it continues for the next 14 years, means in 2028 life expectancy might rise to 88.6 years for males aged 65, and 91.2 years for females the same age.

So what?

According to Mr. Henga, these updated mortality tables will require insurance companies to lower their payout rates in order to properly reflect longer life spans.   His logic is easy to understand and the math isn’t hard to do.

The trend increasing life expectancies – along with the consumer demand for guaranteed income solutions – could very well result in annuity payout rates going from 14 percent to 10 percent, from 9 percent to 7 percent, and from 7 percent to 5 percent.    It’s about longevity credits.  As demand increases, something has to give.

People who’ve been avoiding annuities now because of today’s low interest rates may find themselves wishing later that they had understood the situation.  As Mr. Henga points out, income annuities are not an interest-rate play; they’re a longevity credit play.

Most people have no idea how annuities work or why the insurance companies can provide such high cash flows in a low interest rate environment.  The key is longevity credits, i.e., mortality credits.  It’s what separates annuities from investments.

When new mortality tables reflect increased aging, chances are better than good that insurance company payout rates will be reduced because of the adjustment in mortality credits.  And, chances are, due to the factors cited above, we may be seeing the highest longevity credits we may ever see the rest of our lives…. And many of these adjustments may very well occur in the next 12 months!

its-about-timeLongevity credits aren’t unlimited.  It’s the life insurance on the books that provides the built-in hedge to lifetime annuity sales.  As people live longer and the demand for credits increases, the pool of available credits decreases.  Econ. 101:  This will affect pricing of annuity products in the future.

Boomers, of course, are becoming more preoccupied with covering 100% of their non-discretionary, basic retirement needs, and using other investments to address inflation and discretionary spending.  Those who secure their annuities earlier in their planning can lock-in these longevity credits early.

Tom Henga likens it to fishing in a fully-stocked pond, as opposed to a pond with a limited supply of fish.

Income annuities come in all shapes and sizes, of course, and the long list of insurance carriers selling them each offer a variety of designs, each with their own bells and whistles.  They can be complex products; but, they can also have simple, easy to understand designs.  It’s important, however, to avoid the tendency of grabbing the best-looking shiny thing that may have other problems embedded.

Annuities, as mentioned earlier, are gaining in importance however; and they may be worth a look now, more than ever, because of the Econ. 101 issues cited above.

Retirement planning can be a little tricky.  In fact, I believe – and many experts agree with me – that most retirement plans will probably fail.  I’ve even created a special report that explains why.  I think you may find it interesting.  You can access it here.

Hope it helps!

Jim

 

BAD ADVICE REPEATED BECOMES ACCEPTED KNOWLEDGE

6a017c332c5ecb970b01b8d06b519e970c-320wiWe’ve seen it all our lives; and the older one gets, the more transparent it becomes. Some people simply don’t know what they’re talking about. Here are a few examples:

  • “Pay cash and you avoid paying interest.”  You’ve heard that one.    Whether good or bad, it sounds simple enough.  It’s apparent plausibility even leads us to believe it without even bothering to examine it, let alone test it.

The truth:  Everyone pays interest, including those who pay cash.  How?

The money you use to pay cash is unavailable to lend to others which would allow you to earn interest.  $40,000 cash paid for a car is $1,200 every year in lost interest (hypothetical 3% rate) that money could have earned.  That’s $6,000 over five years.  True cost of the car:  $46,000.

Some people may not think “opportunity cost” is worth worrying about; but, I doubt they’re among the wealthy.  Warren Buffet may disagree with them.

Whether it would have earned more than it would have saved on the car purchase is another discussion, of course; but, the blind statement that it’s always better to pay cash is an example of financial pornography.  It sounds good, so it must be true in all cases when, in fact, it may or may not be true in any given case.

  • “Investments should be compared on the basis of their average annual return.”Really?

6a017c332c5ecb970b017c384ba1fa970b-320wiAverage annual (arithmetic) return is different from average annual compounded (geometric) returns.  Geometric returns measure how well an investor would have done.  You might find Understanding Investment Returns helpful.

  • “Buy term insurance and invest the difference.” Really?

It sounds true because we want it to be true.  The tv gurus tell us it’s cheaper.  This one is usually advanced by some financial types who are usually selling something else:  Other financial products – or gurus[2] selling CDs, DVDs, workbooks, seminars, etc.

Professional speakers know this basic axiom:  If you tell people something they think they already know and perceive to be true, they will think you’re smart and follow your advice.  Tell them something that flies in the face of their belief system, and it’s like getting someone to change religions.  People tend to favor the advice that’s consistent with what they’ve always believed.

                                                                        –        Anonymous

Ask yourself:  Why is term insurance so cheap?  

First of all, you’re paying for “pure” protection; but, as you’ll see, the cost for pure protection is the same in a wide variety of policies.  More significant, I think, are the statistics from a study conducted by LIMRA[3] indicates that death benefits are paid out for only 1% of retail term insurance policies.  The other 99% are dropped without value.

There’s very little risk in a 3-year term if your life expectancy is higher.  And, when you renew, the rates will be higher, too.  It’s like an apartment lease.[4]  When the lease is up you renew at higher rates – but most of us like owning our houses.  We like the predictability of no increases and we know it can be paid off by us or a buyer.

This is a  no-brainer for the insurance companies; and, unfortunately, too many who find chase “shiny things” – things that sound cheap and therefore good.

The ‘term is cheaper’ argument has been disproven in numerous analytical models, but ignored by mostly tv gurus trying to sell their CDs and DVDs.  The reason is simple:  Their argument generally ignores cash-value buildup which can be accessed tax-free and usually based on policy designs created decades ago.

Many will argue that if you invest the difference, you won’t need the insurance later and won’t have to renew.  How many people actually did this – or do?   And, what happened to those who bought that idea in 1988 only to see their retirement accounts blow-up the day they retired in 2009?

Ask 10 35-year olds who believe the ‘buy-term-invest-the-difference argument if they’re doing it; then ask ten 60-year-olds who did it if they’re glad they did.  I’ve never met a 70-year-old who wished s/he’d followed that advice – ever.  Not one.6a017c332c5ecb970b01a73dd6e411970d-320wi

This is a mantra that simply hasn’t worked since they began preaching it in the early 1970s – at least that’s when I first heard it.

What the schools don’t teach[5] and the public doesn’t know:  There are only two ways to pay for life insurance:  

  • You can purchase off-the-shelf, retail, yearly renewable term life insurance and pay for it with after-tax income – a purchase of pure protection for a limited time; or
  • you may rearrange assets to place investment funds with the insurance company, funds in excess of what is required for the yearly renewable term insurance.

So, what happens with the excess money that most people place with the company… money beyond what’s required for pure protection?  The insurance company invests those extra funds on your behalf and earns a return that will not be subject to income tax.  Sounds a little like a tax-deferred vehicle, doesn’t it?

The insurance company will then use a portion, or all, of this return to pay the annual mortality and expense charges required by your life insurance contract.  You can choose to pay for life insurance with the pretax earnings on your investments inside the policy.[6]  Oops!  Now we’re not limited to a specific term.  The policy can even  become self-supporting!

Under the first method, retail term insurance, you would be paying for these same benefits with dollars that had been subject to taxation.  Under the second, the inside buildup of excess dollars, above the cost of pure insurance, can be added-to with pre-tax buildup, grows tax-deferred, and, depending on the design, possibly be accessed later tax-free.   Any purpose.  No pre-59-1/2 penalties.  No credit checks, no loan origination fees, no application process,and on-demand.

In essence, all insurance is term insurance.  You pay for life insurance each year, whether you make the payment directly or have premium payments taken from earnings in the insurance company’s investment account (which you’re funding over and above the cost of pure insurance).

The question is how excess capital is treated and utilized once the cost of pure protection is covered.  The uninitiated see it as a cost.  Those who know understand it has uses as a financial vehicle for efficiently managing assets in excess of the insurance cost.  Excess capital is managed in the insurance company’s general account in conservative investments (usually long-term bonds and mortgages) and the client receives tax-deferred treatment on those cash values.

good meetingOne product, indexed universal life (IUL), in one form, marries the concepts of term insurance with an equity-indexed annuity.  This allows the policy owner’s cash value to benefit from upside moves in the market while being protected against loss.  How is that possible?  The company uses a small portion of their investment account to buy options on an index, which they can exercise to take gains when available.  This product is particularly popular with successful business owners.

  • Receive market-like returns with no market risk.
  • Never take a market loss
  • Draw income in retirement tax-free
  • Access to money at any age
  • Provides a large income-tax-free lump sum payment to your family if you die prematurely
  • Protected against judgments and lawsuits (in many states)
  • Can give you an option to continue to make your savings contributions if you become disabled
  • No 59-1/2 required minimum distributions
  • Cost of insurance similar to pure term

Not bad.  Your 401(k)s, IRAs nor the investments they hold – stocks, bonds, mutual funds, CDs, etc. – can do all that.  If you can find something better, let me know.   Many advisors, RIAs included, are now beginning to view IUL policies designed as financial tools not so much as substitutes for stocks in client portfolios, but for placement as part of a portfolios bond allocation.  There are a number of reasons for this; but, the primary ones are:

  • Safety – insurance company guarantees against loss – bonds won’t do that.
  • Bond like returns –  Despite the caps and floors, returns can be expected to look more like bond, rather than stock, returns – and likely even a little better – and with better tax treatment than is available even in tax-deferred vehicles.
  • Advantages outlined in the previous list, including excess capital accumulation beyond what maturing bonds would likely provide.
  • Business owners particularly like the fact that there are no funding limits other than those imposed by the insurance company and that prior year’s under-funding can be carried over, unlike traditional retirement plans.

6a017c332c5ecb970b017c37fc6922970b-320wiMaybe the guru’s don’t get it; but the people in Congress sure do.  

It’s an issue congress has re-visited on more than one occasion since 1985 with some wanting to tax the inside buildup received by those who hold permanent, participating policies designed as a financial tool rather than pure term protection. 

Their argument is that even if a policy owner did surrender the policy during his or her lifetime and incurred ordinary income tax on the amount received in excess of the investment made, that policy owner has still received still reaped a substantial income tax benefit.  This is because the tax basis in the policy includes a portion of the premium that had been used to pay the cost of life insurance for past periods.  In other words, the cost of life insurance has become equivalent to a tax-deductible expense in these policies.

They’re arguing that comparable investment products are not tax-free or tax deferred.[7]  Further, they argue that life insurance is not subject to significant limitations on the timing and amount of contributions (although greater limitations were imposed in 1988 under Modified Endowment rules) and that there are no required minimum distributions.[8]

Interesting; don’t you think?  Politicians in Washington, D.C. are able to present the benefits of life insurance so forcefully, whereas the insurance industry itself seems unable to communicate these benefits to the public without confusion, usually coming from self-anointed gurus.

Will Congress change the rules?  Probably.  But, if history is any guide, people who bought policies with provisions Congress decided to change, required the changes going forward only.  Policies already in force have generally been “grandfathered” so those policy owners would not be affected.  The reason for this is simple:  An insurance policy is a private contract between two parties and the law has been loath to interfere with lawful agreements between private parties.  The lesson seems to be if you like it, you’d better do it before the politicians see it as a revenue source.

Should you start using life insurance as an investment vehicle?  No.  Even though advisors, as I stated earlier, are beginning to view some policies as part of an asset allocation, life insurance is still about life insurance – there must be a need for the death benefit –  but, it does have some attractive tax and savings components that can help secure your life while you’re still alive, as indicated earlier.  Policy design is something you should discuss with your financial/insurance advisor. 

Unfortunately for the investing public, information isn’t education.  And, financial entertainment seldom provides even good information.  The investor is left on his own if not seeking qualified help.

Jim

——————

[1]See my report, Understanding Investment Returns.

[2] Not all gurus are financial pornographers.  A few are actually qualified:  They’ve taken the rigorous coursework, passed the exams, have respected credentials, are regulated, practicing professionals.  One example is Ed Slott, the IRA guru you often see on public television.  A few others I won’t mention, with nationwide radio programs, have never taken any academic courses, achieved any credentials, or worked with a single client.  They’re also unregulated.  But, they do have free speech.

[3] Life Insurance Marketing Research Association

[4] Term insurance has it’s uses, particularly for temporary protection needs, i.e., a need that isn’t permanent.

[5] If the schools did teach it, it would interesting to see who they’d pick to teach the class and what their qualifications would be.

[6]The New Investment Life Insurance Advisor, Ben G. Baldwin, McGraw-Hill, 2002.

[7]  IRAs, 401(k)s, 403(b)s are account types, not investments.  Investments placed in these accounts grow tax-deferred until withdrawn, then taxed at the then-current income tax rates.  So, someone in the 28% bracket, for example, can figure that 28% of the account balance really belongs to Uncle Sam.  This is not necessarily the case inside a life insurance contract.

[8] It’s worth noting that the government is not a party to the contract.  The policy is a private contract between the owner and the insurance company, giving the owner greater control.

Become an IFG client!  Don’t play phone-tag; schedule your 15-minute introductory phone call using this convenient scheduler!

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  Images used in this post are public domain stock images and do not represent any IFG affiliate or client.

March 2015 IFG Viewpoint & Outlook

IFG 2015 March_001

Here’s IFG’s March 2015 Viewpoint and Outlook.

It should serve as a “heads up” for those of you over age 50, for whom retirement planning is becoming an issue.

 

 

Just click on IFG 2015 March.

Enjoy!

Jim

 

 

 

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You can find some useful Life Guides and Worksheets here.

Become an IFG client!  Don’t play phone-tag; schedule your 15-minute introductory phone call using this convenient scheduler!

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.