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Minnesota Life’s Eclipse EIUL June 16, 2011

Posted by shaferfinancial in Finance.
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For the 1st quarter of 2011 the EIUL from Minnesota Life was #1 in sales.
Why? Perhaps people are starting to really understand how well it performs.
This historic analysis points it out:

The analysis looked at 30 years of historic data. That ran 20 year and 1 year rolling month analysis.
This means they looked at all the possible 20 year and 1 year returns starting every month for the last 30 years. This assumed the current 15% cap.

Percentage of 20 year period that exceeds 7.5% = 100% Percentage of 1 year periods that exceed 7.5%= 60%
Percentage of 20 year period that exceed 8% = 97%. Percentage of 1 year periods that exceeds 8%= 59%
Percentage of 20 year periods that exceed 8.5% = 81%. Percentage of 1 year periods that exceeds 8.5%= 57%
Percentage of 20 year periods that exceed 9% = 51%. Percentage of 1 year periods that exceeds 9%= 56%
Percentage of 20 year periods that exceed 9.5% = 29%. Percentage of 1 year periods that exceeds 9.5%= 54%
Percentage of 20 year periods that exceed 10% = 7%. Percentage of 1 year periods that exceeds 10%= 52%

We all know that statistics are just numbers that can be manipulated, but historically you had about a 50/50 chance of getting a 9% average credit for 20 years and a 97% chance of getting a 8% return!
Good odds if you ask me!

New Web Site is Live May 11, 2011

Posted by shaferfinancial in Finance.
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Please go check out my new web-site dedicated to understanding the basics of equity indexed universal life insurance policies. It is designed to start a conversation on EIULs as part of your financial planning!

Click here: EIULs

401K or EIUL? October 6, 2010

Posted by shaferfinancial in Finance.
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History has pointed out that those who sell mutual funds [and stocks in general] tend toward an idealized view of the future that can be rightly called Pollyannaism [having an overly positive view].   While those that sell Life Insurance tend to be exactly the opposite, perhaps alarmist in viewpoint.   I try to stay in the middle of those two extremes by cementing my strategy into real life experience and data.  This “middle-way” will provide the basis for this post.

When comparing two different retirement strategies it is best that we strip away as much of the hyperbole as possible, so I will not demonize those that push either side.  401Ks were originally designed as an avenue to get additional compensation to corporate upper level management.  As such it was thought as simply one of many points of compensation, but one that took special consideration about immediate taxation.  Long-term tax issues were best dealt with by strategies designed by tax accountants and attorneys.  Since those meager beginnings, 401Ks has become the only retirement plans for the majority of workers.  Note, that they were not designed to be the majority retirement plans that they have become.  So as a retirement tool, they will always be a little off.  Most people fund their 401Ks with mutual funds.  The mutual funds offered within corporate plans are both limited and have high expenses.  In fact, among corporate offered mutual funds the expenses are extremely high, 3% on average.

Universal Life Insurance was developed by a Wall Street legend, EF Hutton.  It was designed in the 1970s so that high net worth individuals could avoid taxation on their wealth and still receive a decent rate of return on their money.  In the early days the wealthy were able to move huge amounts of their wealth off the tax books into these policies without carrying much life insurance.  The IRS stepped in and over a 10 year period of time established rules and regulations over the use of UL.  The IRS did not stop the practice, but developed UL rules that allow us to create wealth without taxation.

So from the beginning 401Ks were not designed for long-term tax efficiency while ULs were.  Over time UL developed three strategies for dealing with the wealth put into the policies [fixed rate, variable, equity indexed].  These three strategies have a history that can point us to which strategy works best for retirement; Equity Indexed.

Using historic data from the two different strategies is a good place to flesh out the different prospects.  Returns from mutual funds that actual investors get are well documented and over the last 20 years average 3.1%.  But remember the variance is extremely high with one-year index returns [January to December] as high as 36% or as low as -21%.  The historic rate of return for the Minnesota Life Index crediting for that same 20-year period, under current cap rates is 8.6%.  But that does not include expenses, which are substantial in the first 10 years.  When I create policies I am able to run the internal rate of return charts and the illustrations generally point to expenses between .5% and 1.5% depending on age and how the premiums are paid.  For the point of this exercise let us take 1% as an average expense, which gives an internal rate of return of 7.6%.  You can see that the expected average rate of return from the last 20 years is over twice as high for the EIUL than the mutual fund [7.6% v. 3.1%].  So even with a 100% match you are likely to do better over the long run with an EIUL and no match.

But with the EIUL you are also buying something else, death benefit.  Death benefit that will be there for your heirs even after you have taken out substantial retirement income.  And an EIUL is also self-completing for your spouse.  If you die earlier than you planned, before you have a chance to accumulate fully, your heirs will have a fully funded retirement with the tax-free death benefit.  What happens to your 401K if you die before you have had a chance to fully fund it?

Because of the strategy involved your 401K will show great variance in value from year to year while your EIUL will not.  Why is that important?  Because we know how people behave.  Every time there is a bear market of any consequence millions of people sell their mutual funds.  Whenever there is a great bull market millions of people sell their current mutual funds and buy the latest “hot” fund.  And whenever we have bad economic times [like now] people get laid off and access their 401Ks incurring penalties and taxes.  Every one of these actions dampens their overall returns significantly.  And even if you have a rock of a constitution that can ignore all this, what happens when you are close to retirement or just retired and a bear market turns your retirement plan value negative?  Your future income is lowered significantly because you don’t have the time to allow the value to come back up before you use the income.

Remember, back at the start of this when I pointed out the designs of the two options were different?  Well, when you take out retirement income is when this becomes huge.  Pulling money from your 401K will create an income tax liability.  A liability that can’t be put off any further than age 70 ½.  What will be the taxation rate then?  You also will create a tax liability for your social security by having other income.  And if you need your money before age 59 ½ then you must pay an additional penalty.

So after you have paid great expenses to Wall Street, suffered from painful market induced anxiety, had real losses in your retirement accounts right before or after you retire [the chances are close to 100% this will occur in a 5 year window before or after retirement], had mediocre returns over the long run, you then have to pay taxes that are several times more than if you paid them when you earned the income.  And that is the exact situation the majority of folks who chose to fund their 401Ks find themselves in for their main retirement plan.

So the question is should you buy a 401K or an EIUL?  Even with a 100% match, the question can be re-phrased like this:

Do you think you will live a long life, without significant disability or financial misfortune, which might cause you to need to use some of your retirement funds?  Do you think you can avoid doing anything in a gut-wrenching bear market that might go on for 20 years or if you make a move, make the right move?  Do you think taxes are staying stable or going down in the future?  Does it make sense to use a tool not designed for tax-efficient retirement income, but designed exactly the opposite?  Or does it make sense to have as one of your retirement strategies a tool designed to move wealth into a non-taxable situation, receive modest but consistent returns, with the flexibility to stop paying premium or curtail the majority of it for short periods of time, and that will be self-completing for your spouse?

Now I know most people will be unable to tell their employer, thanks but no thanks, for that 401K match and that is fine.  But just know that, even with the free money, the odds are you would do better with an EIUL.

I leave the decision up to you.  At least now you know the landscape and history of each option!

How do you know if your insurance salesperson has structured your EIUL correctly? April 19, 2009

Posted by shaferfinancial in Finance, Uncategorized.
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My posts on equity indexed universal life insurance policies are fairly popular.  I generally get several people a week contacting me with questions about this product.  One of the hardest thing I do is try to help people understand if their sales person is being up front with them and structuring the EIUL correctly.  Generally, I have found it is not usually set up in the clients interest, instead set up in the insurance agents interest!

There are several issues that need to be correct in order for these policies to accumulate maximum cash values and generally all these things decrease the amount of commission to the agent.  There are also some illustration issues that can cover up the wrong structure.

Here are the issues:

1.  The face value should be minimized down as far as possible without creating a modified endowment contract.  There is little the consumer can do to tell from looking at the policy to know if this is done.  I have done so many of these illustrations that I can pretty much tell just by getting a little information from folks.

2.  Option A or Option B?  Should the face value be set up as increasing [option b] or level [option a]?  Generally, if you are max funding over 5 payments, option B should be the initial set up and it should be changed to option A after the premiums are paid.  For those funding with monthly payments option A should be used.

3.  Rate of return?  The software generally allows the agent to put in any number under a maximum the agent wants to.  This is the speculative rate of return that the purchaser can expect these policies to return.  Most agents use the maximum number.  I use 10% less than the 20 year look back to be conservative.  The product works as advertised using this more conservative number so why pump it up?  Agents do this because they are afraid of another agent using an even higher number or having a better product to offer the consumer.  It is the same reason these same salespeople tell people they will get 10 or 12% from their mutual funds.  They think people won’t buy unless they make their product seem like it will make the client wealthy!  Instead I rather give people a realistic view of what these products can do for them.  It makes for happier customers and a much happier salesperson [me!].

4.  There is a fear from most that if clients learn you are making a good commission from the product that people won’t buy it, so they refuse to disclose when asked.  I always disclose when ask.  And yes I make a good living selling these products!  But if the client doesn’t purchase one of these policies based on my commission, then that is a client that I don’t need to have because they are working under a different set of assumptions that I work under.  For me, I help put my clients in better financial positions by the use of my intellect and abilities and that works as a win-win because I can make a living helping people.  Those that want to work with people who can’t make a living doing this get what they are asking for; poor advice!

5.  Which company to buy the policy from?  I spend much time researching the best products out there for my clients.  Most agents offer up what their managers want them to, instead of what is the best out there.

Bottom line, keep up the phone calls and e-mails, and I will continue to structure these in your best interests, so we have a win-win situation!  I have licenses in many states and can get a license in most so it matters little where you live.

Have a great week and consider an EIUL as a part of your financial strategies.

The bias toward mutual funds in the mass media! October 28, 2008

Posted by shaferfinancial in Uncategorized.
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The New York Times ran a recent article on what they call a new financial product aimed at seniors now that we are in a bear market.  As usual the slant of the article is toward mutual funds (Wall Street), although they did let the cat out of the bag with some actual evidence.

First, let me say the financial product is really not new, but is thought to be so much a threat to Wall Street interests that the SEC is trying to take control of this insurance product so only those licensed for securities sales can offer it!  This product is called deferred indexed annuities.  Now I want to be clear that this is a different product than the indexed universal life insurance products I like for hedging against inflation and taxes.  Also I want to be clear, that generally I don’t like this product for anyone.  More on that later.

For those of you registered at the NY Times web site here is the article on indexed annuities.  Indexed annuities work similiarly to indexed universal life in that there is an underlying investment in options on a index.  There is a guarantee interest rate, usually around 2-4%, and a ceiling usually 6-8%.  Also annuities never go negative even if the index goes negative.  Other than that there is little the same.  Deferred annuities, which is what they are talking about, is a savings vehicle that has much fees involved.  On top of that there are usually surrender fees that go on for generally 5-10 years.  The interest rate credited goes up as the surrender fees go longer.  There is also a tax deferral function that works similiarly to IRAs.  You can annuitize these products down the line if you want to.

The NYT article made an astonishing admission for an article basically telling folks not to buy these products.  Here is the comparision of an indexed annuity to the S & P 500 (not a S & P 500 mutual fund with expenses). 

The result? The index annuity, which started with $100,000 in October 1998, would have had an account value of $176,478 as of Friday’s market close. The S.& P. 500 index fund, which also started with $100,000, would have actually lost money over 10 years, ending with a balance of $81,890.

The NYT article goes on to explain that this annuity is very complicated with alot of moving parts and then recommends a combination of Zero Coupon Treasury Bonds and a S & P 500 Index fund.  But it gets better, they run some analysis assuming a 10% annual return on the S & P 500 and found that their suggestion beats the annuity 82% of the time.  By now the astute reader will notice that all this is saying is that when we are in a bull market it is best to be in stocks.  DUH….  What about the bear market which they described above in giving actual results????  How does $176K including  all those fees compare to $81K without any fees in real life????? 

Readers will also recognize I did this actual results test for an EIUL versus S & P 500 recently.  The EIUL outperformed by a large margin after fees and insurance costs!  Look here is the bottom line, annuities and EIULs perform well in a mixed bull and bear market.  Indexed equity funds perform well in a bull market.  But no one can actually predict these things in the long run.  What we do know is that, on average, we have a bear market every 6 years, and three times in the last hundred years we have had an extended bear market of around 15 years.

Now to my issues with the deferred annuities.  All the expenses and fees loaded in these products provides a cost.  Unlike EIULs, there is no reason to assume this cost if you don’t have a great reason, like tax free access at any time.  You are tying up your money, with hefty penalties for access either through surrender fees or tax obligations.  This is of course why people sue over this product.  They think they have found a better deal or just really need to get to their money and realize the cost of getting out early is high, so they sue the insurance companies to get their money (most deferred annuties allow borrowing only up to 10% of the principal each year).  I think either you buy an EIUL and get the tax advantages and a better return or you keep the money liquid by buying treasuries or even the zero coupon bonds suggested in the NYT article.  Very little risk and a small return that should hedge you against inflation and the variation in the stock market.

Finally, I really like immediate annuities.  When you annuitize it means you give an insurance company a chunk of immediate money in exchange for a lifetime of fixed installments.  Basically, you are betting that you will live longer than average.  If you live a shorter life then you end up losing on the deal; but who cares you are dead!  This guarantee of life time income is a great bet for the middle class reducing their risk to zero.  Of course inflation will degrade their income over time, but their expenses generally will go down once they hit their 80’s.  Of course we are all here at UFW trying to avoid having meager funds to retire on, so if we are successfull an imediate annuity might not be necessary or might be one of several income producing strategies employed! 

Why EIUL’s might outperform mutual funds! October 11, 2008

Posted by shaferfinancial in Uncategorized.
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Several months ago I posted on equity indexed universal life insurance products (EIUL) versus mutual funds on this and at Bawld Guy’s real estate investment blog. There are always critics of this product that want to compare fees between the products.  No doubt, EIULs have fees, many times more fees than low expense mutual funds like Vanguard.  But, these folks miss the point.  It is all about the strategies employed.  Now, is a good time to talk how the basic strategy makes a difference.  EIULs have guaranteed rate of return, usually 2%.  They also have ceilings, like my favorite EIUL has a 30%/ two year ceiling.  But more importantly, they never go negative.  In other words any year the underlying index is negative, your EIULs cash value remains the same.  Let’s look how this factor can benefit you in down years like this year.

If you had $300,000 in a mutual fund at the peak of the market in April, and it got the S & P 500 market return (remember this is impossible since even Vanguard mutual funds have expenses and fees) it would be worth somewhere around $168,000 today.  If you had cash value of of $285,000 (lets pretend the extra fees and the cost of insurance cost you $15,000) in a EIUL, it would be worth $285,000 today.  You would need a 79% rate of return to get back to your $300,000 in your mutual fund.  You need to get a 70% rate of return to catch up with the EIUL!  That’s right, a EIUL never gives a negative return.  Looking at the historic rates of return, I doubt you will ever catch up with a EIUL, fees and all!  Remember, we have a bear market, on average every 6 1/3 years that averages a 31% decline.  We average 2-4 down years every decade! My EIUL has a two year 30% ceiling, so you would need to outperform that by more than 70% and still overcome other future down years!

Wall Street has been very astute at reacting to every challenge to its mutual fund industry.  It has adeptly allowed people to focus attention on fees instead of the actual results of mutual funds.  Now, as people panic and pull their money out, it has a built in blame factor to further hide the failure of the mutual fund strategy from folks.  Already, they have cranked up the propaganda machine blaming individuals for the poor performance of their retirement vehicles!

Those of us who have EIULs are not afraid to look at our statements as they come in the mail, can you say the same!