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Record amount pulled from stock funds last week! August 28, 2015

Posted by shaferfinancial in Finance.
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I want to apologize to my readers for not having posted for a while, but I have been moving. I am now settled in.

I just wanted to drop folks a note that last week there was a record amount of $$$$ pulled out of stock funds at $29.5B in the week ending Wednesday. This is typical of what happens to folks who are invested in mutual funds as they sell into the panic. Classic sell low, buy high phenomenon that Dalbar, Inc. studies document and the main cause of the 3.8% return the average investor has gotten out of their stock funds over the last 30 years.

I’m sure the mutual fund sales people/Wall Street will simply blame their clients for the failure as they always have, ignoring the real life demonstration of behavior based on how all our brains function.

My clients in EIULs had no such damaging behavior because their was no losses to deal with.

Comments of the 1st Quarter of 2015 May 27, 2015

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I will do this in outline form for brevity:

The stock market continues to rise although at a lower rate than 2014.  At some time in the near future we will see a correction. This is a much needed event as we have not seen a correction in quite a few years.  For those who are invested long term we use these events as an opportunity to pick up bargains.

EIULs continue to perform as structured.  As a group sales of EIULs broke a record and have attracted the attention as a threat to whole life companies as well as mutual fund/stock companies.  New rules will come down that will severely limit the ability to illustrate these policies at anything close to real world experience.  This won’t stop the attraction of EIULs to folks looking to secure their financial future.

The price of oil made a move up this quarter, but has since stalled.  World oil production continues to be a record levels while demand has seen some growth.  China demand for oil up 9% with 6% the result of transportation [SUV sales up 50%].  India up strongly too.  US demand up with strong increase in miles driven and sales of SUVs up.  Even some positive movement in Europe.  Russia and Latin America lag in demand for oil.  Saudi Arabia sees increase in internal use.

North American tight oil [which I don’t invest in], has seen falling production since the first of the year.  This should really take affect in the second half of 2015 reversing the current world wide overproduction of oil.

My energy stocks moved up, but are significantly in the red.  Despite this, I remain confident in their ability to get back in the black over the next 24 months.

Berkshire Hathaway off its highs but continues to do well in this environment.  It produces a huge amount of cash flow each day.

Real Estate rents remain strong in the US.  Prices continue to increase as bankruptcies and foreclosures decrease. Real Estate remains a great place to invest.

The overall dividend environment for blue chip companies is positive as dividends continue to move upward.

If you had followed the strategy [ies] that I advise you would be in great shape for whatever happens next.

1. EIUL [protected against market downdrafts and taxes]

2. Investment Real Estate [rents continue to increase]

3. Dividend producing Blue Chip Stocks [dividends continue to increase]

4. Annuities [for guaranteed life long retirement income]

Why People Don’t Buy Equity Indexed Universal Life Policies? May 22, 2014

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I have been an owner of an EIUL going on 8 years and been selling them for almost 7. I tend to be surprised when people come back with the same type of rejection statement that I have heard all along. Now, when I first started selling them there was ample reason to be cautious because it was a fairly new product that had not been battle tested through poor markets. The product has now gone through the worst recession since the great depression and come out with flying colors. Worked well in multiple types of markets. Produced superior performance throughout the years.

Here are the common refrains that I hear:
The insurance companies can change the participation rates, cap rates, expenses etc.
Yes they can and I am happy they can adjust according to the market so they don’t get in trouble like the banks and Wall Street. It is for the protection of the insurers and for your protection that the insurers will be there for you. Now the facts are that no EIUL has been materially changed. The only movement has been the cap rates which, as all my clients understand, will move within a tight range as a result of interest rate movement. And remember they went through 2008-2009 and came out the same as they went in. But do choose to do business with a strong insurer.

You can lose money:
Well, if you surrender this policy in the 1st 10 years you probably would lose some money because of surrender fees and front loaded expenses. This product is not constructed for the short term. It is designed for the long term. So, as long as you hold this policy for the long term you will not lose money. The facts are that the internal rate of return for a properly designed EIUL has delivered higher returns than the index they base their payable interest rates. This is not theory but what has happened over the last 16 years that EIULs have been around.

I don’t trust insurance companies:
Do you trust banks? Wall Street? Who do you trust more? Who has done better over the long run? Bottom line is you either bury your gold in the back yard or you have to put your faith in some type of institutions.

I can do better in my companies 401K:
Facts are stubborn things and the facts are that people don’t do better in their 401ks. Not even close to the returns inside an EIUL. The reasons have been outlined in my blog so I won’t repeat them here, but if you think you will you are on a fool’s mission.

Finally, remember that when the market is in its bull run up, everyone thinks they are an investing genius, but when it goes down it does so fast and sharply creating panic in the streets. You can avoid those sleepless nights by having your money in an EIUL.

Why purchase an Equity Indexed Universal Life Insurance Policy? January 21, 2014

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Its been several years since I have written a post outlining the basics of Equity Index Life Insurance Policies [EIUL]. EIULs are life insurance policies that credit the cash value with interest tied to a stock index or group of stock indexes with a floor of 0% and a moving cap [currently between 13-16%]. Here is a key point; when we structure it for future tax free cash flow, we minimize the amount of life insurance to its lowest level allowed under IRS rules. By lowering the face value of the insurance we drop the expenses within the life insurance policy significantly [including the commissions] increasing the internal rates of return received on the premiums paid into the insurance policy. When one needs money from the policy you access it via policy loans. These are loans against the face value of the policy. Most EIULs have loans that are at “no cost” or “minimal cost [.1%].”

One important factor is that most of the expenses are taken out in the first 10 years. There are also surrender fees that go on for 10-15 years. This combination makes this product unsuitable for those looking for short term or even medium term products that can be liquidated over 15 years. No one should enter into an EIUL unless the plan is long term in nature. Obviously in emergency situations the cash value can be accessed any time after year 1 so it does serve as an emergency reserve fund, but this should not be the plan for this product.

Here is how it works:
Premium must be paid in over no less than 4 years. It can be paid in for as long as someone needs to.
Each year expenses are subtracted from the premium each month. The balance is put into an index leg chosen by the policy holder. At the end of 1 calendar year each leg is given an interest credit that matches an index or group of indexes. That interest credit is locked in at this point. The following year the locked in amount plus the additional premium added is given the interest credit. Each year the worst thing that can happen is if the index has gone down you get no gain [and no loss]. So a big fat 0%. So if the stock market does one of its usual swoons [averages 3 times a decade] you lose nothing. If the stock index goes up you get the gain up to the cap. This strategy testing backdated data for almost any period of time gives you higher rates of returns than the actual index.

The math in this strategy is that losses hurt more than gains help. An easy way to look at this is a simple example: You put $1,000 into an stock index fund. The first year it goes down 33%. You now have $667 of value. The second year it goes back up that 33%. It is now worth $889. What happened to the other $111? It is lost in the “average” returns. Your average return was 0% [-33% + 33%/2] but you actually loss 11% of value! Now you know why Wall Street loves to talk about average returns! In your EIUL what happens. The first year your value stays at $1,000 even though the market dropped 33%. The second year you get the cap of 16% so have $1,160 in your account [compare that to the $889]. Now you know why in most markets the EIUL strategy will give you higher rates of returns.

Expenses are very different in the EIUL as opposed to your basic mutual fund. In your mutual fund there is usually an expense ratio applied to your premium dollar. This is subtracted annually no matter whether there were gains or losses in the account. And more importantly the bigger the account gets the higher the actual expenses are. In an EIUL the expenses are fixed up front and with the exception of the premium load and insurance costs are subtracted from the premium over the first 10 years [in the ML EIUL]. Once you stop paying premium and get beyond the first 10 years the expenses basically stop. So in the years that you have the most cash value your expenses are extremely low. This difference is hard for folks to get their head around, but when we look at total expenses over a lifetime we find that the cost of the life insurance policy is generally between .5% and 1.7% depending on what age you start the policy. Bottom line is that you can get lower expenses if you have absolute control over your money [not in an 401K for example], but the expense are generally in-line between what most people have in their 401Ks and these policies.

The one risk Wall Street hates to talk about is sequence of return risk. This is the risk that even though the “average” rate of return is sufficient, the actual sequence of returns could leave your retirement nest egg insufficient. Take someone that retires within 5 years before or after a major market downturn. They simply don’t have the time before they need the money to make up for a -30% year or heaven forbid another -40% year. And if you are unlucky to retire close to a series of market downturns [remember the 2000s] your anticipated retirement income could go down over 50% annually just because of bad luck. Do you really want to leave your retirement to pure luck??? Might as well walk into Vegas and put it all down on black!

Now under current IRS rules [revisited three times by the IRS], you can take loans against your face value and there are no tax consequences as long as you keep your life insurance policy intact. So tax free distributions from your EIUL.

Finally, these are insurance policies so they work to complete one’s financial planning. Most people never imagine an early death but it does happen to 24% of individuals who die before retirement age. 16% of men [12% of women] die between the ages of 45 and 67, which happens to correspond to the years most people are able to put the most money aside for their retirement. It also corresponds to the years most people are not insured because they have dropped their term life insurance. This is often a disregarded function of these life insurance policies, but for 16% of folks having a substantial death benefit can help complete their family financial planning.

To summarize:
1. These are for people with a long term savings strategy
2. History suggests a higher rate of return over the long term using the step up and lock in strategy inside EIULs
3. Sequence of return risk is eliminated
4. Expenses in line with most mutual funds inside 401Ks
5. Tax Free Distributions
6. Death protection against an early demise
7. You own these yourself so the company you work for can’t lock you away from your money
8. No penalties if you need to take money out in an emergency. You would get a 10% penalty in an 401K/IRA
9. Your money doesn’t go down in bad market years
10. You sleep better at night not having to worry about “the market,” something totally out of your control

At last a reasonable way to save money and get a decent rate of return is available to those who can think outside the box Wall Street has created with its propaganda. Now, I always suggest combining an EIUL with other investments that will diversify yourself and provide potentially higher rates of return [like real estate investing and dividend producing stock]. The beauty of starting an EIUL is that it only takes a monthly commitment and not large sums of capital to start like real estate. So, no matter what the age we can structure an EIUL that will create a bountiful retirement. Don’t you owe it to yourself to look into this savings vehicle? Contact me and we will create an illustration that fits your particular situation so you can make a comparison to what you are currently doing.

Is Minnesota Life Eclipse still the best EIUL? January 21, 2014

Posted by shaferfinancial in Finance, mutual funds.
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Each year I look at the full market for Equity Indexed Universal Life Policies to determine which ones I will sell in the coming year. For the last few years the results have been fairly stable, despite many changes to existing policies and several new EIULs entering the market place.

This year is no different. Minnesota Life in my opinion is still #1. The Eclipse has several changes made to it that improved the overall performance.

1. A bonus was added for years 11 and up.
2. Index options where changed. Most notably a blended option was added.
3. Underwriting was improved for those folks who had 1 blemish on their health report.

My thoughts on why the ML Eclipse is still the best EIUL going forward:

1. They added a bonus to not only future policy owners but ALL policy owners so some folks will get there first bonus this year.
2. They still are the most policy holder friendly life insurer out there
3. They continue to have a history of the best performance of all EIULs on the market
4. The new blended index option has the highest 20 year look-back of all options available.
5. They have very fair underwriting
6. The company still is highly rated [93 Comdex]
7. When they make changes it is to make the product better for the policy holders

I sleep well putting folks into the Eclipse, knowing that their premium is safe and compounding at the highest rate possible in an EIUL.

Over the more than 10 years that the Eclipse has been around it has worked exactly how it is advertised to work giving folks more than 8% average returns over that time period. All the detractors of using EIULs for retirement savings now have only some vague fear to sell folks as we now have enough data to know this product works well for tax free retirement income.

Equity Indexed UL vs. Whole Life November 23, 2010

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Tip of the hat to a reader who suggested this exploration!

There is a parallel group of insurance thinkers that suggests using participating [whole] life policies for what they call the “infinite banking” concept. The concepts are basically the same, build up cash value in your policy and then use the cash value as your own bank, borrowing and paying it back as you need to. The concept is sound, but the product has limitations in my mind.

First of all whole life has much less flexibility built into it. Once the premium is set, then you must make that premium payment or put your policy at risk. Instead of getting interest tied to a stock index, you get dividends, which are basically the excess interest earned by the life insurance company over their expenses. These participating policies has a long and successful history. If you choose a solid company [Northwestern Mutual, Guardian, Penn Mutual, etc.] you should be assured of getting a consistent dividend.

There are three areas of performance that we should be looking closely too. The first is the cash value build up. The second is the actual historic internal rate of return over a long enough period to even out the good and bad years. The final is the amount of income that can extracted from the policy. In all three areas the performance of Whole Life is wanting. The cash value build up is around 15-25% less for the best whole life policies compared to the top EIULs. Now, I will say that whole life has a much longer history than EIULs and so we are comparing actual performance [going back 30 years] of WL with theoretical performance since EIULs only go back 15 years. But if we look at the actual life [10-15 years] of EIULs compared to Whole Life we see the same real performance differences as our longer analysis, so I believe the analysis is sound.

The comparison goes downhill for WL from there. The actual historic rate of return is between 2-3% [except Northwestern at 4.65%]. Northwestern is a great company, but the expenses are much higher inside the policy so the final results are similar to other companies despite the higher rate of return. Remember, our 30 year look back for Minnesota Life is 8.86%. Finally the amount of income that can be extracted from whole life is about 50% of that from the top EIULs because the the poorer performance and the lack of a variable loan option.

One note, you can’t lower the insurance amount down, like you do in EIULs, so you have to do what is called “paid-up additions.” The end result is about the same, but EIULs allow you to be more precise.

Bottom line is that the strategy of “infinite banking” is solid. The idea’s of using life insurance for a tax efficient savings vehicle is the same. But the lack of flexibility and the poorer performance should be a deal killer compared to the EIUL.

Oh, and one more observation. Whole life policy illustrations include a projected return for 20 years down the road. The projections always seem to be much higher than the actual returns. With the long history of WL, you would think they would project it a little closer to actual returns. For example the Guardian projected return in late 1989 was 5.25%, but the actual 20 year return was 2.97%.

I hope this discussion is helpful for folks looking into using life insurance as a savings vehicle.
As always let me know what you think and give me a call if you want to further discuss EIUL!

Minnesota Life EIUL just got BETTER! April 29, 2009

Posted by shaferfinancial in Finance.
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As regular readers know, I made a change to selling the Minnesota Life EIUL several months ago because I found it to be the best policy out there.  Well they just added new index options!

1. 100% participation with a 16% maximum per year on the Dow Jones World ex. USA index [W2DOW].  Allows you invest in a diversified set of non-US companies.

2. 140% participation of index with a 14% maximum per year.  For those who believe the stock market will underperform going forward this option allows you to maximize returns.

These new index options along with the S & P 500 with a 16% maximum improves on the best product out there.

Remember it still has a 3% guarantee return for lapse, surrender or death benefit, which is the highest out there!