This is not what you usually hear from an insurance person. However, a new way of buying insurance and all financial services has arrived.
Based upon the model used by businesses, this approach builds on the trend of more of us who must manage our own pensions--401k, 403b and IRA accounts. Even though many of us say we don’t want to manage our own financial futures, we will be better off in the long run.
We are being forced to self-direct all our financial products. Our agents, bankers and brokers have all moved on. Typically, we practitioners of this new “self-insurance” model use our savings to build up our own reserves. This “Wealth Reserve” as I call it is a self-insurance fund I use to cover many risks so that I don’t have to buy a policy for every risk. I built a sizable reserve by buying products “wholesale.” I invest the savings.
Businesses have been doing this for a long time. For instance, most large businesses do not buy health care like we do. They buy it “wholesale.” They pay the claims from their own account. The insurer acts as the administrator—following the employer’s plan to decide it your claim should be paid. The business funds the claim account only to the extent necessary to pay claims. The insurer makes a fee for processing.
This costs the business less because the money to pay the claims is actually part of the working capital of the business. It is not sitting in an insurer’s investment account paying interest before it is needed to pay claims. For large claims, like brain surgery or death, the business buys catastrophic insurance. Some companies have their own (captive) insurer (reserves) to save even more.
How can you use this example? Let’s take homeowner’s insurance. Did you know that many agents purchase the standard HO-3 homeowner’s policy for their own coverage, but with a $2,500 deductible? That policy takes care of 99% of the claims and saves them 20-30% a year. They understand that they need to maintain the property to prevent it from deteriorating faster than it needs to. But by investing that 30% savings each year, they build a Wealth Reserve that earns them interest and will cover the deductible if they ever need it. So, over 10 years, they save $2,000 in premiums and earn interest on the funds.
Taken together for all your risks, you can build a large Wealth Reserve. For instance, we have helped people save over $3,000 a year on financial services, including banking, mortgage, education, mutual funds, securities, annuity, insurance—life, health, disability, long term care, vehicle, homeowner’s, lawsuit, vehicle purchase, legacy, wealth transfer, retirement spending . . . almost any service. Over time, those savings will compound to a $500,000. This fund can be used to pay for your insurance, retirement, and health care needs. Some clients plan to save $120,000 on long-term care insurance this way. Others have dropped their life and disability insurance—placing the premium in investment accounts that compound at the market rate over time.
When I was just 22 and working part-time during college, I was induced to buy permanent life insurance. I later cancelled it when I could not afford the $1200 annual premiums. I was in grad school and taking out loans to finish an MDiv. The agent representing Columbus Mutual probably earned all of that $1200 in the first year. I got little back when I couldn’t make the payments.
The agent did not explain that I would be better off buying a mutual fund instead of insurance. This was probably 1970. By the end of the 1960s there were around 270 funds with $48 billion in assets. No one advised me to invest in mutual funds at that time. My high school and colleges mentioned nothing about the miracle of compounding $1200 a year in a mutual fund at the average market rate of 12% per year. I think I would have paid attention if someone had told me it would be worth $1 million by the time I was 60.
1970 $ 0
1980 $ 23,233.91
1990 $ 99,914.79
2000 $ 352,991.38
2008 $ 933,673.59
There are few financial literacy programs in high school or college even today. Consequently, even in 2006, the Jumpstart Coalition for Personal Financial Literacy found that half of high school seniors failed to answer basic money questions. Schools don’t teach basics of saving, investing, compounding, and getting what you want, so parents are expected to. This leaves the blind leading the blind. Parents teach spending but few are role models in investing with compound interest. The subject we miss but need the most is about investing in the market. 86% of young people got it wrong. It is no wonder the U.S. savings rate is negative.
For Example, question 26. Kelly and Pete just had a baby. They received money as baby gifts and want to put it away for the baby's education. Which of the following tends to have the highest growth over periods of time as long as 18 years?
44.8% a) A U.S. Govt. savings bond
34.8% b) A savings account
6.3% c) A checking account
*14.2% d) Stocks
* correct answer is d. Ibbotson Associates data: Stocks average 11.4% per year, bonds 5%, CDs 3% over time.
Showing posts with label financial. Show all posts
Showing posts with label financial. Show all posts
Friday, January 4, 2008
Wednesday, December 12, 2007
TIME creates wealth—the perfect present
This is the perfect birthday present for a young person. Because of the power of compound interest, you can start your loved one on the path to financial freedom that they will remember for a lifetime.
You can start small or large. You can establish an account for any person of any age. Even if they have not been born yet, you can lay the foundation for a better life.
The nice part is that you can do it easily and quickly.
You can start with as little as $100 by bank draft.
Fill out the application (download http://www.tiaa-cref.org/pdf/forms/mf-app.pdf) and send it to TIAA-CREF.org, one of the most secure pension providers.
Depending on the age of the recipient, you can be the owner with them and leave them the money as a transfer or they can be the owner from the start. If they have earned income, the ROTH IRA will add another 25% tax-FREE earnings to their retirement nest.
The point is to get them started with an equity index mutual fund early. Since this fund does not trade stocks, the tax bite is minimal. TIME creates wealth, not fast trading. As Warren Buffett, one of the world’s best investors, said,
“We continue to make more money when snoring than when active.”
berkshirehathaway.com
Look at what your gift can provide in the future because of compounding:
$100 is worth $10,000 later. $1,000 gets $100,000 and $10,000 gets $1,000,000.
If you start your gift early, providing $100 a month for 8 years before age 26, the child can have $36,000 at 30, $100,000 at 40, and $1 million at age 65. (http://www.saferchild.org/power.htm)
You can use this gift to help them go to college, start their life, buy a home, start a business, or just have as a basis for financial security later in life. You can structure it the way you want. When you or they take money out, the tax can be as low as 5% depending on the owner’s income level and type of account. See our FREE Guide: http://www.theinsidersguides.com/freeguide.html
They can use it later in life as a reserve to help them through a crisis or just to remember you as they spend it. Ether way, this reserve could provide wealth for life. What a perfect birthday present.
You can start small or large. You can establish an account for any person of any age. Even if they have not been born yet, you can lay the foundation for a better life.
The nice part is that you can do it easily and quickly.
You can start with as little as $100 by bank draft.
Fill out the application (download http://www.tiaa-cref.org/pdf/forms/mf-app.pdf) and send it to TIAA-CREF.org, one of the most secure pension providers.
Depending on the age of the recipient, you can be the owner with them and leave them the money as a transfer or they can be the owner from the start. If they have earned income, the ROTH IRA will add another 25% tax-FREE earnings to their retirement nest.
The point is to get them started with an equity index mutual fund early. Since this fund does not trade stocks, the tax bite is minimal. TIME creates wealth, not fast trading. As Warren Buffett, one of the world’s best investors, said,
“We continue to make more money when snoring than when active.”
berkshirehathaway.com
Look at what your gift can provide in the future because of compounding:
$100 is worth $10,000 later. $1,000 gets $100,000 and $10,000 gets $1,000,000.
If you start your gift early, providing $100 a month for 8 years before age 26, the child can have $36,000 at 30, $100,000 at 40, and $1 million at age 65. (http://www.saferchild.org/power.htm)
You can use this gift to help them go to college, start their life, buy a home, start a business, or just have as a basis for financial security later in life. You can structure it the way you want. When you or they take money out, the tax can be as low as 5% depending on the owner’s income level and type of account. See our FREE Guide: http://www.theinsidersguides.com/freeguide.html
They can use it later in life as a reserve to help them through a crisis or just to remember you as they spend it. Ether way, this reserve could provide wealth for life. What a perfect birthday present.
Wednesday, August 15, 2007
12 things your agent/broker/banker/money-manager won’t tell you.
1. “We have FEES and COSTS for everything. Most are not necessary.” For instance, your life insurance policy is probably one with a higher premium than necessary. Compare the cost of $200,000 benefit for a 50 year old in good health--$356 versus $481 per year. Also, it does not cost $50 to buy 200 shares of IBM. You can buy them for $0. And why should your broker charge you $160 when your account is inactive? Why are you paying 50 cents to deposit a check? Banks should pay you to deposit checks. Is your 401k money manager really worth 1.54% of your assets each year? And looses money too? Your employer should buy a retirement plan that costs you $0.30% or less with no kickbacks.
2. “We offer products that are best for our firm, not for you. We don’t show you all the fees and commissions and financial kickbacks and perks we earn when we sell you our products. Our products are the “best” available because we sell them. We are the best in the industry because our marketing image says we are.” One pension plan provider charges 2.75% a year for their tax-deferred annuity. It has over 9 years of surrender charges so you can’t transfer your money if you change employers. It charges another $30 a year for ‘recordkeeping.’ Its mutual funds are among the poorest performers. One brokerage firm steered customers into their own funds because they have a higher broker payout. Your agent doesn’t sell SBLI, your broker doesn’t sell Vanguard, your banker does offer really free checking, and your money manager doesn’t price your funds at cost—0.1% or less.
3. “We will discuss your financial needs with half truths.” You are told you need $1,000,000 of life insurance but the policy type that your agent picks is the most expensive in the world. Even if you agree you need $1 million, you pay more for permanent, 30 year guarantee term or “return of premium” term than just term. You want a guaranteed income for the rest of your life but your broker doesn’t mention that the annuity payments loose half their value in 24 years. You want to save for college but your banker doesn’t mention that 529 plans are NOT taxed like the custodial account just opened for your child. You want to save for retirement but your broker put you in ‘hot’ funds.
4. “We don’t tell you about other alternatives. We don’t get paid to tell you there are less expensive alternative ways to solve your problems.” You can buy a FREE checking account from your credit union. The CDs pay more, the checking costs less and the loans are cheaper. You don’t need an ATM on every corner. You can defer taxation on your account earnings by buying and holding stocks or tax-managed funds. You can save on liability insurance by buying only what you need. Wealthy people buy “assets that grow by themselves” so they can self-insure and self-fund their needs. Consumer Reports reviewed 47 policies and concluded that “for most people, long-term-care insurance is too risky and too expensive.”
5. “We don’t explain how you can reach your goals in the least costly way.” Banks offer life insurance to cover your loan because you want to get the loan. They don’t explain that your existing term policy will cover the loan. Also, you can build a much larger retirement nest egg by investing in stock mutual funds costing .07% vs. 1.3%. Compounding magnifies the difference—20% more money over time. When new employees sign up for the retirement plan they are encouraged to pick the ‘safest’ option—treasury bonds. Stocks are more likely to grow in value over the long term.
6. “Our products must be ‘sold not bought. We use half-truths in order to contrive an ‘urgent financial need’ that you can solve only by buying our products.” One firm charged a 91-year-old “client” more than $35,000 for four trades over two years, at approximately $8,800 per trade. The largest annuity seller is accused of misleading policyholders regarding bonus payments promised on annuity products. Life insurance is not the foundation of every financial plan—you are more likely to run out of money than die in the 21st Century.
7. “We believe the hype of our industry: We give good financial advice that you can’t get anywhere else.” There are no classes in our high schools called Financial Health Class. You can’t easily find out the “tricks of the trade” used to sell you the products created to pay high fees to sellers. Young single people don’t need life insurance. They need to invest 10% of their income at an early age to become wealthy. Also if brokerage firms actually followed their own stock selection advice, they would have negative returns. The average return for the top 10 brokerage firms was minus 2.26% from 1997-2001! Most were negative (Investars). 88% of managed mutual funds earn less than the market.
8. “We are experts at figuring out what your “hot buttons” are and using them to get you to buy our products. We exploit the fact that everyone wants to buy the next Google stock or become a millionaire overnight buying and selling real estate or gold. We exploit the fact that seniors fear losing money and want to earn 10% on their money with a completely guaranteed investment.” Finding the next Google is like finding a dime in a football field on the first try. The average equity investor earned a paltry 2.57% annually; compared to inflation of 3.14% and the 12.22% the S & P 500 index earned annually, 1984-2002. You pay for guarantees by earning less and not keeping up with inflation. So even though you don’t lose money, inflation reduces money’s buying power. Putting your money into different investments reduces your chances of losing money and increases your chance of beating inflation.
9. “We don’t sell products from companies that don’t pay a commission—so you never obtain the least-cost product. We only sell products with commissions and fees and kickback incentives and “soft dollar” reimbursements.” When was the last time your broker offered the funds with the highest returns over a 20-year period? Vanguard Primecap--13.6% over 20 years--#1 in large company growth stock funds. Vanguard Health--17.4% over 20 years--#1 in Sector funds. Vanguard Energy--16.4% over 20 years--#2 in Sector funds. Did your agent call to tell you that life insurance rates are dropping so you should apply?
10. “We charge you fees whether we give good service, good rates, good returns, or good benefits.” One money manager charges 1.5% for the same exact fund that charges .07%. With $250,000 invested, you will give up about $700,000 (2,723,138 vs. 2,022,979 over 20 years of compounding at market rates). Only 12% of managers can beat their benchmarks over long periods of time. You don’t get a refund if your manager can’t beat the index. You can’t get a refund if your CD or annuity renews at a lower rate. You can’t get a refund if we mess up your trustee to trustee transfer. We don’t give you a “better” death benefit check for $200,000 when your loved one dies. Many banks hit customers for fees they didn’t know about.
11. “When things go wrong, we treat you like you’re the enemy.” All brokerage firms disallow you to sue for bad service—you must use their arbiter and settle for the decision. One firm has the worst call response service in the industry. Another company pressured outside engineers to prepare reports concluding that damage was caused by water rather than by wind. They just denied all of them in the same geographic area. Another insurer dropped coverage and stopped signing new policies in coastal areas of 9 states. Some long term care insurers aren’t paying claims.
12. “We don’t care if you have been a loyal customer. We buy and sell customer accounts anytime we can make more money from it.” In the last few years, hundreds of customers have had their accounts dumped on others. For instance, John Hancock’s president sold the company to Manulife [Canada], Fireman’s Fund was sold to Allianz [Germany], Household Finance went to HSBC [Hong Kong], and Sage Life went to Old Mutual [S. Africa]. Brown & Co and HarrisDirect went to E*Trade. Golden West Financial went to Wachovia. MBNA and Fleet Bank went to Bank of America. A complete list is available at http://www.theinsidersguides.com/whoowyoacno.html. More consolidation is expected: HSBC, Rydex, Gateway Investment, GAMCO Investors, Julius Baer Investment, UBS AG. Your accounts could be next. You can do it yourself and save.
"Investors should purchase stocks [financial services] like they purchase groceries—not like they purchase perfume…” Benjamin Graham
2. “We offer products that are best for our firm, not for you. We don’t show you all the fees and commissions and financial kickbacks and perks we earn when we sell you our products. Our products are the “best” available because we sell them. We are the best in the industry because our marketing image says we are.” One pension plan provider charges 2.75% a year for their tax-deferred annuity. It has over 9 years of surrender charges so you can’t transfer your money if you change employers. It charges another $30 a year for ‘recordkeeping.’ Its mutual funds are among the poorest performers. One brokerage firm steered customers into their own funds because they have a higher broker payout. Your agent doesn’t sell SBLI, your broker doesn’t sell Vanguard, your banker does offer really free checking, and your money manager doesn’t price your funds at cost—0.1% or less.
3. “We will discuss your financial needs with half truths.” You are told you need $1,000,000 of life insurance but the policy type that your agent picks is the most expensive in the world. Even if you agree you need $1 million, you pay more for permanent, 30 year guarantee term or “return of premium” term than just term. You want a guaranteed income for the rest of your life but your broker doesn’t mention that the annuity payments loose half their value in 24 years. You want to save for college but your banker doesn’t mention that 529 plans are NOT taxed like the custodial account just opened for your child. You want to save for retirement but your broker put you in ‘hot’ funds.
4. “We don’t tell you about other alternatives. We don’t get paid to tell you there are less expensive alternative ways to solve your problems.” You can buy a FREE checking account from your credit union. The CDs pay more, the checking costs less and the loans are cheaper. You don’t need an ATM on every corner. You can defer taxation on your account earnings by buying and holding stocks or tax-managed funds. You can save on liability insurance by buying only what you need. Wealthy people buy “assets that grow by themselves” so they can self-insure and self-fund their needs. Consumer Reports reviewed 47 policies and concluded that “for most people, long-term-care insurance is too risky and too expensive.”
5. “We don’t explain how you can reach your goals in the least costly way.” Banks offer life insurance to cover your loan because you want to get the loan. They don’t explain that your existing term policy will cover the loan. Also, you can build a much larger retirement nest egg by investing in stock mutual funds costing .07% vs. 1.3%. Compounding magnifies the difference—20% more money over time. When new employees sign up for the retirement plan they are encouraged to pick the ‘safest’ option—treasury bonds. Stocks are more likely to grow in value over the long term.
6. “Our products must be ‘sold not bought. We use half-truths in order to contrive an ‘urgent financial need’ that you can solve only by buying our products.” One firm charged a 91-year-old “client” more than $35,000 for four trades over two years, at approximately $8,800 per trade. The largest annuity seller is accused of misleading policyholders regarding bonus payments promised on annuity products. Life insurance is not the foundation of every financial plan—you are more likely to run out of money than die in the 21st Century.
7. “We believe the hype of our industry: We give good financial advice that you can’t get anywhere else.” There are no classes in our high schools called Financial Health Class. You can’t easily find out the “tricks of the trade” used to sell you the products created to pay high fees to sellers. Young single people don’t need life insurance. They need to invest 10% of their income at an early age to become wealthy. Also if brokerage firms actually followed their own stock selection advice, they would have negative returns. The average return for the top 10 brokerage firms was minus 2.26% from 1997-2001! Most were negative (Investars). 88% of managed mutual funds earn less than the market.
8. “We are experts at figuring out what your “hot buttons” are and using them to get you to buy our products. We exploit the fact that everyone wants to buy the next Google stock or become a millionaire overnight buying and selling real estate or gold. We exploit the fact that seniors fear losing money and want to earn 10% on their money with a completely guaranteed investment.” Finding the next Google is like finding a dime in a football field on the first try. The average equity investor earned a paltry 2.57% annually; compared to inflation of 3.14% and the 12.22% the S & P 500 index earned annually, 1984-2002. You pay for guarantees by earning less and not keeping up with inflation. So even though you don’t lose money, inflation reduces money’s buying power. Putting your money into different investments reduces your chances of losing money and increases your chance of beating inflation.
9. “We don’t sell products from companies that don’t pay a commission—so you never obtain the least-cost product. We only sell products with commissions and fees and kickback incentives and “soft dollar” reimbursements.” When was the last time your broker offered the funds with the highest returns over a 20-year period? Vanguard Primecap--13.6% over 20 years--#1 in large company growth stock funds. Vanguard Health--17.4% over 20 years--#1 in Sector funds. Vanguard Energy--16.4% over 20 years--#2 in Sector funds. Did your agent call to tell you that life insurance rates are dropping so you should apply?
10. “We charge you fees whether we give good service, good rates, good returns, or good benefits.” One money manager charges 1.5% for the same exact fund that charges .07%. With $250,000 invested, you will give up about $700,000 (2,723,138 vs. 2,022,979 over 20 years of compounding at market rates). Only 12% of managers can beat their benchmarks over long periods of time. You don’t get a refund if your manager can’t beat the index. You can’t get a refund if your CD or annuity renews at a lower rate. You can’t get a refund if we mess up your trustee to trustee transfer. We don’t give you a “better” death benefit check for $200,000 when your loved one dies. Many banks hit customers for fees they didn’t know about.
11. “When things go wrong, we treat you like you’re the enemy.” All brokerage firms disallow you to sue for bad service—you must use their arbiter and settle for the decision. One firm has the worst call response service in the industry. Another company pressured outside engineers to prepare reports concluding that damage was caused by water rather than by wind. They just denied all of them in the same geographic area. Another insurer dropped coverage and stopped signing new policies in coastal areas of 9 states. Some long term care insurers aren’t paying claims.
12. “We don’t care if you have been a loyal customer. We buy and sell customer accounts anytime we can make more money from it.” In the last few years, hundreds of customers have had their accounts dumped on others. For instance, John Hancock’s president sold the company to Manulife [Canada], Fireman’s Fund was sold to Allianz [Germany], Household Finance went to HSBC [Hong Kong], and Sage Life went to Old Mutual [S. Africa]. Brown & Co and HarrisDirect went to E*Trade. Golden West Financial went to Wachovia. MBNA and Fleet Bank went to Bank of America. A complete list is available at http://www.theinsidersguides.com/whoowyoacno.html. More consolidation is expected: HSBC, Rydex, Gateway Investment, GAMCO Investors, Julius Baer Investment, UBS AG. Your accounts could be next. You can do it yourself and save.
"Investors should purchase stocks [financial services] like they purchase groceries—not like they purchase perfume…” Benjamin Graham
Subscribe to:
Posts (Atom)
