The Prosperity Blog

THE ISSUE IS INCOME

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The bottom-line objective of any individual financial program is to provide an ongoing stream of income to meet the necessities and pleasures of life.

Market values for different assets might add up to significant net worth, but net worth doesn’t buy groceries, pay the bills or take you out to dinner; your income does. People pray “give us our daily bread,” not “give us asset appreciation.”

This post emphasizes the primary position of generating income in your financial programs, because income is what makes all other financial decisions possible.

How Long Can Your Human Asset Keep Paying Dividends?

When it comes to asset values, we know the numbers are ugly. How ugly?

  • In the 2008 calendar year, the S & P 500 stock market index registered a 37% decrease, its worst calendar year performance since 1931. From January 1, 2009 to March 19, 2009 the index has declined an additional 15%.
  • Meanwhile, the Federal Housing Finance Agency reported on February 24, 2009 that home prices dropped 8.2% from a year earlier, the largest annual decline on record since 1991.
  • In total, the Federal Reserve reported that the wealth of American families plunged nearly 18% in 2008 – a loss of net worth estimated to be around $11 trillion.

But guess what? As securities and real estate markets have taken a pounding, another asset has returned to prominence. Featured on the cover of the March 23, 2009 paper version of Time magazine is the headline “10 Ideas Changing the World Right Now.” And according to Time, the No. 1 world-changing idea is…

…Jobs Are the New Assets.

That’s right; you – and your ability to deliver a steady income by working – are the “new” asset class that can make a difference during this down economy. Here’s an excerpt from the article, written by Barbara Kiviat:

“Houses and stocks – those were the things we paid attention to, the things that gave us the confidence to be good American consumers (Hello, home-equity lines of credit). At the same time, the percentage of income we saved dropped and dropped and dropped – until, thanks to the power of credit cards and other debt – it went negative in 2005. That was neatly explained away by the ‘wealth effect’: we spent money we didn’t have because we felt – and technically were – richer because of our assets.

All the while, we blissfully ignored a little concept economists like to call human capital. The cognition you’ve got up there in your head – your education and training – it’s worth something. We can extract value not just from our homes and our portfolios but from ourselves as well. The mechanism for extracting that value? A job. ‘The income you earn from working is like the stream of interest income you might get from owning a bond,’ says Johns Hopkins University economist Christopher Carroll. ‘Think of it as a dividend on your human wealth.'”

While it might make for nice headlines, identifying human capital as the core of financial prosperity isn’t a new idea. From ancient cultures that penned proverbs extolling the value of work (“Do you see a man skilled in his work? He will stand before kings…”) to 20th century champions of free enterprise and capitalism like Ayn Rand (“Wealth is the product of man’s capacity to think.”), human capital has always been recognized as the key ingredient in creating wealth. Real estate doesn’t gain value on its own – it has to be developed. An increase or decrease in stock prices ultimately reflects the decisions and productivity of the people in the company – both the employees and owners.

Given the media infatuation over the past decade with other assets, the article provides some much-needed financial perspective. Too often the most overlooked or undervalued financial asset is you and your abilities. Your ability to produce a regular income makes you a powerful dividend-paying asset, and it’s the type of asset that satisfies the basic objective of an individual financial program: to provide an ongoing stream of income to meet the necessities of life – and hopefully afford some of the luxuries as well.

When stock market and housing values were soaring, some people lost this focus on income production, because prevailing sentiment said you could always turn value into income at a later date by selling or borrowing against the assets. But when values decline and borrowing standards tighten, the assets don’t have the same convertibility.

Building Up Your Human Capital
This sounds obvious, but in a time when other asset classes are faltering and the economy is struggling, steady income from a job is critically important to your long-term financial well-being.
And like any other business that wants to remain profitable, your human capital must remain competitive in the market place. You may need to consider an investment in continuing education, or an upgrade in your technology skills. And “under-employment” – i.e., working in a position below your qualifications – may be better than not working, because of the future opportunities that may arise from connections with other productive people.

But even if you remain employed, there are other threats to your human-capital dividend production. Your human capital doesn’t last forever. At some point, you may get tired or break down. Eventually age takes some or all of your productive capacity. So unless you die young, it isn’t reasonable to expect you will remain fully productive for your entire life. This is the biggest financial challenge in using human capital to provide an ongoing income: At some point, there will need to be a transition from income/dividends from your human capital to income/dividends from other capital. But when?

The Longevity of Human Capital
The statistical realities of human capital in developed nations are eye-opening.

First, consider life expectancy. According to the Social Security Administration, a 40-year-old American male has an average life expectancy of another 37.28 years. (See Fig. 1 for life expectancies at other ages). And the older you are now, the greater your life expectancy – while an average 40-year-old male can expect to live until 77, an average 60-year-old male can expect to live to 80.

But there’s a distinction between being alive and being healthy enough to work. In most cases, people will not be able to work as long as they are alive. To account for this distinction, longevity statisticians have developed a Healthy Life Expectancy (HALE) calculation. HALEs (pronounced haleys), are defined as the average number of years that a newborn can expect to live in “full health,” and are used by statisticians to adjust life expectancies for the amount of time spent in poor health.

The World Health Organization (WHO) provides a HALE calculation for each country in the world. In the United States, the current HALE is 67.0 years for males and 71.0 years for females. When compared with current life expectancies for newborn Americans, the difference is 8 years for males and 9 years for females. From this data, it might be possible to consider average human capital to be “used up” 8 or 9 years before the end of one’s life.

But this data is for newborns – those born today. Other current information, while not providing an apples-to-apples comparison with the HALE data, is even more sobering

The following statistics come from reports issued by the Urban Institute in December 2008 and February 2009:

  • About one-third of all Americans develop a health-related limitation in their fifties and sixties.
  • Four in 10 workers in their fifties have jobs with some physical demands, which they might not be able to meet as they grow older.
  • Even for workers in jobs that aren’t strenuous, health problems can keep many from working. More than a quarter of adults age 65 to 69 have a health problem that limits the work they can do.
  • As a result, 37% of American workers do not retire on their own timetable, but rather are forced into retirement due to layoffs, illnesses or injuries.

In other words, human capital, while the key to all wealth production, is a fragile asset. It needs to be protected, and eventually, must be replaced by other assets.

Protecting Your Human Capital
Some of the best protection for your human capital is simple self-maintenance. Eating sensibly, exercising, and avoiding bad habits are not guarantees of a long HALE, but all evidence points to a clear correlation. Good health is essential to maximizing the value of your human capital. The longer you can produce an income, the greater the likelihood of financial security.

The rest of your human capital protection issues are best handled through insurance.

In the insurance business, there’s an old analogy that compares your human capital to a business machine that generates thousands of dollars in income per year. Considering its value, it makes sense to insure the machine (you) for direct damages, as well as coverage for lost income if the machine were broken or worse yet, if it were destroyed. Life, health and disability insurance exist to protect against the risks to your personal wealth-generating machine.

If you are unable to work due to sickness or injury, health insurance is designed to cover “repair” costs, as well as provide an ongoing income during the period you are “out of service.” If your injury or illness is more long-term, disability insurance helps supplement your lost income. And if you are no longer able to provide for your dependents because of death, life insurance is designed to provide assistance for final expenses and ongoing income.

Because a major medical incident has the potential to cause the most immediate financial damage, health insurance seems to be a front-and-center issue for workers, employers and politicians. But the current obsession with solving the health-care crisis shouldn’t obscure the need to address individual disability and life insurance issues as well.

Don’t Undervalue Your Human Capital
A lot of space in the popular financial press is consumed with dissecting the fallout from the decline in asset values. Experts are trying to determine when the stock and real estate markets will rebound. Individuals are trying to decide if they should continue to buy-and-hold or cash out. These are important issues and legitimate financial concerns because assets, cash, stocks, bonds, and real estate have a place in your financial life.

But perhaps current events are also helping to reshape their importance of these types of assets in relation to the essential position human capital holds in every individual’s financial program. Developing and protecting your human capital sets the stage for long-term financial success – in all types of economic conditions. More than any prognostication or rearrangement of your other assets, your human capital is the one asset most likely to carry you through tough economic times.

This awareness should prompt some assessment of the condition of your human capital.

  • Should your human capital be upgraded through education or the acquisition of new skills?
  • Is your human capital healthy, or should you implement a better maintenance plan?
  • Have you adequately protected your human capital?
  • Is now a good time to use other assets to improve your human capital?

WHEN OTHER ASSETS START TO SLIDE, YOU WANT TO BE SURE YOUR BEST ASSET IS ON SOLID GROUND. DOES YOUR HUMAN CAPITAL NEED AN “ASSET CHECK?”

A Longevity Annuity as “Income Insurance”

Here’s an intriguing financial transaction:
A 60-year-old man places a small portion of his retirement savings in an annuity that will produce a guaranteed income once he reaches an advanced age, say 85. Based on current assumptions, here are some details: On a deposit of $50,000, the annuity is guaranteed to pay $5,211 a month, beginning at age 85 – for the rest of his life – no matter what happens to interest rates or mortality costs in the future.

If you do some future value calculations, the rate of return of the $50,000 placed in the annuity seems pretty high; at 6% annual interest, it would take more than $1 million in assets to provide an equivalent ongoing income. But even over 25 years, $50,000 would have to earn an average annual return of almost 13% to equal $1 million. So how does a longevity annuity achieve this result?

One key feature: If the policy holder dies before age 85, the annuity expires without value. Heirs receive nothing.

As John Olsen, a Chartered Life Underwriter from Kirkwood, MO writes in the January 2009 issue of the trade publication Life Insurance Selling,

“Why would anyone buy such a thing? Why buy a policy that won’t pay him a penny for 25 years and if he doesn’t make it that long, he loses his entire investment? Sounds like a very bad investment.”

But Olsen goes on explain this annuity, known as an advanced life delayed annuity, or longevity annuity, is not an investment. “It’s a risk transfer instrument – a pure insurance play. The risk that the purchaser transfers to the issuing insurer is the risk he’ll run out of money at an advanced age (when he cannot expect to earn income).”

The structure of longevity annuities are not limited to deposits at age 60 and payments at age 85. Deposits can be made as early as age 40, and payments can begin earlier as well. Earlier deposits will generate higher payments. Payment at younger ages will result in lower monthly amounts.

Longevity annuities are relatively new products in the marketplace, but have received some surprisingly positive reviews from the popular press, all because of the guaranteed income feature. In a January 21, 2008, Money article, senior editor Walter Updegrave writes:

To my mind the concept behind longevity annuities makes a lot of sense. In effect it’s like buying a homeowners or health insurance policy that has a very large deductible. You’re insuring yourself against a catastrophic risk you can’t handle on your own – in this case, running out of money late in life – while holding your premium to a minimum.

You guarantee yourself an income to cover your spending late in retirement while leaving more of your savings available to you today (or available to your heirs if you die young). And you can comfortably spend down a greater portion of your savings earlier in retirement, knowing that those longevity annuity payments will eventually kick in.

Martha Hamilton, writing in the Washington Post (“Live Long and Prosper,” August 12, 2007), emphasizes the cost-effective way that insurance can handle the need for income later in life.

You buy insurance because you get protection from a possible disaster at a reasonable cost. Same thing with a longevity annuity. It’s insurance that you won’t end up living on nothing but Social Security if it turns out that there’s more life at the end of your money than money at the end of your life.

The Spend-Down Concept Behind the Longevity Annuity
In examples used to illustrate the financial effectiveness of a longevity annuity,
the hypothetical policy buyer allocates between 5-15% of his/her current accumulation to a longevity annuity; a 60-year-old with a $1 million portfolio sets aside $50,000-$150,000.

Even though buying this “protection” decreases the overall account balance, having the longevity annuity allows one to “spend down” assets over a specific period of time instead of living only on interest or investment earnings and preserving principal. The insurance allows other assets to be spent more efficiently – in other words, more income is derived from the assets.

According to an online article from CNN/Money (money.cnn.com/retirement), putting 10% to 15% of retirement savings into a longevity annuity “provides roughly the same spending power as devoting 50% to 60% of savings to an immediate annuity, according to a paper by Jason S. Scott, retirement research director for Financial Engines of Palo Alto, Calif.”

Another Way to Accomplish the Spend-Down Concept
For those who own permanent life insurance, the spend-down concept may be executed even more efficiently. A life insurance policy that is in force in old age may have a significant value as a cash asset, as investors or financial institutions might be willing to make either payments or a lump sum to the insured based on a collateral assignment agreement – in exchange for rights to some or all of the life insurance proceeds at death, the insured receives money now. Having the life insurance available as a back-up (a whole life insurance death benefit may grow in value as you grow older), you are free to spend more of your accumulated assets.

Further, the insured does not have to live to a specified age to enter into a collateral assignment or life settlement agreement. If certain health situations precipitate the need for additional assets, an Accelerated Benefit Agreement will provide payments directly from the insurance company – no investor or other third party is needed. And of course, if the insured dies before needing to enter into a collateral assignment or similar agreement, the life insurance proceeds are distributed income tax-free to heirs.

If you understand the spend-down concept behind the longevity annuity structure and already have permanent life insurance, it might make economic sense to allocate 5-15% of your annual retirement income to permanent life insurance premiums. If you don’t have life insurance or find yourself uninsurable, a longevity annuity may be a suitable alternative.

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A Plan for the Information Age

“A dynamic economy is one in which human and
physical capital are chasing new opportunities,
not holding onto lost causes.”

– Arnold Kling

5 Minutes on the Couch + 10 Minutes in the Library =
A Plan for the Information Age

LISTEN: Audio mp3 (19.5 min)

Want to put your mind at ease about the current financial turmoil? Here are two perspectives that may help you get out of today’s funk and on to better things.

5 Minutes on the Couch: Letting Go of Present-Event Bias
Here is a brief excerpt from renowned investor Warren Buffett, in his Chairman’s Comments section of the Berkshire-Hathaway 2008 annual report, released February 27, 2009, assessing the economic events of the past year:

“By the fourth quarter, the credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country. A free fall in business activity ensued, accelerating at a pace that I have never before witnessed. The U.S. – and much of the world – became trapped in a vicious negative-feedback cycle. Fear led to business contraction, and that in turn led to even greater fear.”

A “vicious negative-feedback cycle.” Doesn’t that seem to describe all the economic news these days? Bad news causes fear, which leads to more bad news. As Paul Sullivan writes in a February 6, 2009 article in the New York Times, (“It’s Not Just the Money, It’s the Mind-Set”),

“Above all, people’s psyches are being wracked by what behavioral economists call present-event bias. This is the belief that what is happening now will always be. The same thing happens in bull markets — values always seem to be rising until they don’t — but it is clearly more painful when wealth is being destroyed.”

Logically, we all know present-event bias isn’t reality – we know that things, both good and bad, will not stay the same forever. But when you’re in the midst of a trend, it can be difficult to see beyond the prevailing sentiments of the moment. In both good times and bad, there is the danger of allowing the faulty premises of present-event biases to guide our attitudes and economic decisions. When we do, the long-term outcomes are not usually favorable.

In fact, many of the issues at the heart of the current economic crisis have been, to some extent, the result of present-event bias. Because of present-event bias…

  • Both mortgage lenders and homebuyers felt they could afford the risk of no-money-down, interest-only loans. After all, “real estate always goes up.”
  • Many stockmarket investors were lulled by the mantra “over time, the market always goes up.”
  • A union job for a major manufacturer was the gold standard in blue-collar employment, because “General Motors is always going to be there.”
  • When politicians began government-sponsored pay-as-you-go social security programs, they were sure that there would always be enough workers to bear the cost of providing benefits for the retirees. After all, said German Chancellor Konrad Adenauer in 1957, “People will always have children.” (Unfortunately for government planners, many developed nations now have fertility rates well below replacement levels!)

If you recognize that making decisions based on present-event bias isn’t productive, what’s a better alternative? Well, for starters, apply Stein’s Law.

Herbert Stein was an economics professor and government advisor to presidents Nixon and Ford (and also the father of entertainer/commentator Ben Stein). He put forward a simple statement about economic trends: “If something can’t go on forever, it will stop.” Put another way, present-event status will end when something can’t be continued. If banks can’t expand their lending because there aren’t reliable borrowers, they will stop lending. If people can’t afford over-priced housing, they will stop buying. When big corporations can’t be profitable in a competitive marketplace, they will cease to exist. And if there aren’t enough workers to pay the cost of Social Security, it will go broke.

In hindsight, it’s relatively easy to apply Stein’s Law to explain how and why past events changed from boom to bust. But can you use the same logic in a forward-thinking manner, to determine how and why the bust will end and prosperity will return? If you break free from the group psychology that creates present-event bias and take a broader view of history, some possibilities emerge.

10 Minutes in the Library: Going Post-Industrial in the Information Society
More than 30 years ago, some historians, economists and sociologists began questioning whether the current economic realities could continue, and if not, what would happen when they stopped.

In 1973, Daniel Bell analyzed the contrasts between the industrialized economies of the USSR and the United States in The Coming of Post-Industrial Society. Bell not only saw the centrally-controlled collectivist Soviet model as unsustainable, but also correctly predicted the attributes of a post-industrial U.S. economy: globally interconnected financial systems; international trade imbalances; and the decline of the manufacturing sector.

Peter Drucker, in his 1989 book, The New Realities, highlighted what he saw to be the major cultural shifts in the 20th century. In 1900, farming was still  the largest part of every nation’s economy, even though the Industrial Revolution had begun 100 years earlier. By the end of World War II, manufacturing had completely supplanted farming. This was the culmination of economic change in the twentieth century, and was the basis for America’s supreme position in world affairs. But Drucker also saw a “post-industrial” world coming, where manufacturing would be less prominent.

At that time, “post-industrial” was a vague term used by economists in that it told what was passing, but didn’t identify what was coming in its place. Since the mid-1990s, a consensus phrase arose for the coming new economic era: The Information Age.

James Davidson and Lord William Rees-Mogg authored several books on the seismic economic changes they felt were likely to occur in the coming decades. In their 1997 book, The Sovereign Individual, Davidson and Rees-Mogg stated that from its earliest beginnings until now, there had been only three basic stages of economic life in human history:

  1. hunting-and-gathering societies;
  2. agricultural societies; and
  3. industrial societies.

“Now, looming over the horizon, is something entirely new, the fourth stage of social organization: information societies.”

With the microprocessor and the Internet as the technological drivers of this new economic age, the forward-thinking commentators saw several trends arising from the emergence of these new technologies.

There would be a transition from goods production to the provision of services. This didn’t mean manufacturing would cease, only that fewer people would be employed in manufacturing. (This mirrors the changes that occurred in farming over the previous century. Today, less than 1% of Americans list farming as an occupation, yet the general wealth of the farming sector has not deteriorated. These few farmers produce much more food than their predecessors of the previous century, and both individual farmers as well as the broad population are better off today.)

With the move away from manufacturing as a core economic activity in developed countries, the importance of blue-collar, manual work (e.g., assembly-line manufacturing) would decline, with much of the lesser-skilled work outsourced. Professional and technical work (lawyers, computer programmers, etc.) would come to predominate. Although this service emphasis was predicted to impact a wide range of sectors, health, education, research, and government services are seen as the most decisive for an Information society.

This “Information Age” perspective isn’t new. Remember, a number of economic and sociological commentators saw this economic shift coming three decades ago. In various ways they said, “the industrial society cannot go on forever. Things will change.” And while it’s rare for economists to accurately predict the future, it’s not like other people haven’t seen the same things over the past 30 years. The decline in manufacturing jobs, outsourcing, and the increased globalization of companies are not new trends. The inevitable conclusion is the industrial society, and many of the economic features that embodied it are quickly fading into the past.

The economic ramifications for the individual are significant. Some of the mainstays of the industrial economy like lifetime job security, company pensions, and government benefit programs are no longer financial certainties. In varying degrees, change is shaping new financial realities.

The Plan For the Politicians & the Individual
When faced with change, there are two fundamental responses: resist it or embrace it. The chosen response often depends on how much one has invested in the existing program, and how much benefit is offered by the newer approach. For those whose livelihoods are connected to the American automobile industry, the change away from manufacturing is threatening. Workers who have paid into Social Security for 40 years don’t relish the thought of seeing the benefits diminish or disappear just as they reach retirement. On the other hand, for providers of Internet search engines and on-line content, change probably can’t come fast enough.

The Political Response
Since many politicians have decided the economic crisis requires government intervention, they also face this resist-or-embrace dilemma. Because many of their constituents remain heavily invested in the industrial society, many politicians promise to “save” jobs, Social Security, and the American way to capture their vote. As Arnold Kling, an ex-economist for both the Federal Reserve and Freddie Mac, said in his November 12, 2008 commentary on www.econlib.org, “…I can see where a bailout is a winning policy. The threatened industry is organized and visible. The alternative(s)…are diffuse and unseen.” But while such an approach makes for good politics, Kling says political intervention may not be the best response to the reality of a changing economic society.

“My guess, however, is that in a post-industrial economy, the necessary adjustments are too subtle and complex…In theory, wise technocrats could help guide workers in declining industries to appropriate re-training and career development. In practice, technocrats are not that wise. But it is much worse than that. Instead of giving the technocrats the mission of making the adjustment process more efficient, politicians will give them the mission of delaying the adjustment process and resisting the signals coming from the market. Thus, the expectation that government should help could have an ironic effect: the more that the public asks government to relieve the distress in labor markets, the longer it may take for labor markets to adjust.”

The Individual Response
While it may be possible for select sectors of the American economy to stave off changes that have been three decades in taking shape, it’s unlikely that the US economy will recover by reverting to an industrial/manufacturing base. And for those who want to step away from the gloom of a vicious negative-feedback cycle focused on present events, it makes sense to contemplate ways to embrace the financial changes that may coincide with the growing influence of the Information society.

In The Sovereign Individual, Davidson and Rees-Mogg suggested several ways in which the Information society will impact individual economics. First, most Information workers will operate as independent contractors; the term “job” will mean “a project” rather than “steady employment with a single employer.” Second, employment opportunities will be global, rather than local or regional – even as the worker never leaves home. Third, the new paradigms in employment “will leave individuals far more responsible for themselves than they have been accustomed to being during the industrial period.”

From these broad predictions, it is possible to make some fairly specific personal recommendations.

Cash reserves are critical. In the typical Industrial-era career, workers could count on steady paychecks and generous benefits. This economic certainty made it possible to operate on thin margins. Financial surprises could be covered by cash flow, insurance or even borrowing, as the repayments could be spread over time.

But when employment may be intermittent, and regularly changing, the need for a substantial cash cushion becomes much greater. The most stable Information Age workers will be those who have the financial wherewithal to comfortably bridge periods of unemployment (or perhaps time to work on entrepreneurial projects), instead of being forced to take whatever is available.

You must own or control your insurance and retirement benefits. Employer-sponsored group insurance and retirement benefits are fast becoming relics of the Industrial past, both for employees and retirees. 401(k)s instead of pensions and employee co-pays for insurance are part of the trend to decrease an employer’s long-term financial commitments. At the pace these employer-sponsored plans are being dismantled, the only people who will have pensions are government employees and Congresspersons.

So…If it’s likely that you will be regularly changing employers or working as an independent contractor, you can’t count on employer benefits – even stripped-down ones. This is especially true during the periods you are “between jobs.”

Given the dynamics listed above, it seems likely that future insurance and retirement developments will move to two extremes – government and individual programs. For those above the poverty line, government plans will offer minimum benefits, with the individual having the choice to add supplementary benefits at his/her discretion. As a result of this universal-individual model, the number of employers offering benefits will likely decline. Anything above the minimum will be the responsibility of the individual.

Since individual coverage (such as life and disability insurance) is often contingent on your health status, it makes sense to secure coverage as early as possible, with provisions to keep the benefits as long as they will be needed. Likewise, retirement accumulation programs should be portable, and allow for deposits from a variety of sources, not just wages.

(Using this universal-individual model, here’s a possible configuration of medical insurance. The rising cry for universal health care can be seen as a direct result of the erosion of Industrial-era employer-paid health insurance, and the increased technological costs of providing sophisticated Information-era medicine. While a government-sponsored plan may provide a base level of coverage for everyone, the likelihood is that individuals will also find it desirable to purchase additional coverages matched to their unique circumstances.)

Change your borrowing habits. The ability to borrow is determined by a lender’s assessment of your ability to repay. For a creditor in the Industrial era, a steady job meant regular repayments. In the Information age, lenders may look more at your assets and less at your employment to determine your suitability for a loan. If your unsecured borrowing exceeds your cash reserves, you may be overextended.

Since you may end up working “everywhere”, live where you want – and rent until you’re sure you’re ready to settle down. The real estate cliché about your home being your biggest asset has changed. For many, after the collapse of real estate values, your mortgage is now your biggest liability. In light of the comments above regarding the changing nature of debt, a large mortgage obligation could be an impediment to seizing financial opportunities.

These broad recommendations are not guaranteed to be the perfect prescriptions for your specific circumstances. But they reflect sound financial thinking in any era, and if nothing else, serve to encourage you to reconsider how many previous financial decisions have been shaped by present-event biases. A measured look at history seems to indicate change is coming, and it will favor those who are the best prepared. Those who make financial plans based on how it has “always been” during the Industrial era may find themselves behind the times.

Is Your Financial Program Structured to Embrace a New Era, Or Is It Still Operating on Present-Event Bias?

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Why Everybody Wants Whole Life Insurance (and its benefits!)

LISTEN: Audio mp3 (29 min)

On some financial topics, people have become so conditioned to seeing things from a single perspective it makes them incapable of recognizing other – perhaps even better – ways of addressing these issues. The on-going fallout from the “meltdown/crisis/recession/global-economic-funk” offers a striking example of an obvious solution that almost no one seems to see:

For one reason or another, everyone wants whole life insurance.

Don’t believe it? The disbelief just further proves the point. Whole life, or cash value insurance is so far outside the awareness of both average Americans and the mainstream financial press that collectively “advises” them, that they have become blind to what’s been there all along. Think about it. As various “better ideas” have fallen short of expectations or been unable to respond effectively to new economic realities, have you heard any experts, commentators, or consumers clamoring for whole life insurance as a viable answer?

And yet, the following news items and commentary make a compelling case for seeing whole life  for what is really is, and why everyone wants the benefits of whole life insurance – even if they won’t admit it.

Do Americans want a 401(k)… or do they really want Whole Life Insurance?

Here are some excerpts from a January 8, 2009 Wall Street Journal article by Eleanor Laise titled “Big Slide in 401(k)s Spurs Calls for Change.”

After watching her account drop 44% last year, Kristine Gardner, a 35-year-old information technology project manager in Longview, Washington, feels no sense of security. “There’s just no guarantee that when you’re ready to retire you’re going to have the money,” she says. “You either put it in a money market which pays 1%, which isn’t enough to retire, or you expose yourself to huge market risk and you can lose half your retirement in one year.”Many retirement experts have come to a similar conclusion: The 401(k) system, which has turned countless amateurs like Ms. Gardner into their own pension-fund managers, has serious shortcomings.

When 401(k)s were first established in 1978, one of the selling points was the opportunity for individuals to participate in the uncertain (but historically profitable) market fluctuations. However, as Ms. Laise notes, “a market meltdown near the end of their working careers can …blow their savings to smithereens.” Quoting Alice Munnell, director of Boston College’s Center for Retirement Research: “That seems like such a fundamental flaw. It’s so crazy to have a system where people can lose half their assets right before retirement.”

In response, Congress has begun looking at ways to overhaul the 401(k) system. How? Among the proposals: government-supervised universal retirement accounts offering a “guaranteed, but relatively low, rate of return.” Another idea is an index fund of stocks and bonds whose mix becomes more conservative as workers near retirement age.

But there’s more to the 401(k) issue than just guaranteeing a retirement balance. Ms. Laise shares the experiences of another individual:

Peg Kelley, a 58-year-old small-business consultant in Watertown, Mass. didn’t contribute anything to her 401(k) last year. Instead, she’s been focusing on paying down credit-card debt and building up an emergency reserve in case the bad economic times turn worse. She’s also still paying off an $8,000 loan she took from her 401(k) plan four years ago to buy a new car.After reliving the dot-com market meltdown, which knocked $100,000 off her retirement savings, she moved her entire 401(k) from diversified stock and bond holdings into cash-like investments early last year.”I’m not going to get rich on my 401(k),” she says, “but also don’t want to get poor because of it.” She had hoped to retire early, but now figures she won’t quit work before age 65.

In both Ms. Gardner’s and Ms. Kelley’s comments, 401(k)s seem to present a number of “either/or” financial decisions. Ms. Gardner sees her investment options as either a low-yielding money market account or “huge market risk.” In a roundabout way, Ms. Kelley agrees, seeing her choices as either not getting rich, but at least avoiding poverty by choosing lower-risk, lower-return financial instruments. When it comes to extra funds, Ms. Kelley has to choose either pay down debt and build emergency funds, or contribute to the 401(k). And because of other financial needs, Ms. Kelley has already borrowed from her 401(k); like many Americans, she doesn’t have enough money to fund all the buckets (one for retirement, another for emergencies, big-ticket purchases, college funding, etc.) so filling one means stopping another.

If you were to summarize the comments from these two individuals, they could easily be considered representative of the accumulation issues of most Americans:

  • They want some guarantees, yet want to achieve annual returns better than 1%.
  • They have a need for accumulating liquid emergency funds.
  • They want opportunities to access funds prior to retirement, either as loans or withdrawals.

Guess what? With some variation in the sentence structure, those very features will be mentioned in almost any insurance company’s brochure about whole life insurance! And these features aren’t either/or. When you make deposits to a whole life insurance policy, you can address all of those issues simultaneously. Cash values can be accumulated for emergencies or retirement. The long-term rates of return on cash values are greater than the 1% low-risk options Ms. Gardner is aware of – and they include some guarantees.

In addition, many whole life policies will offer a Waiver of Premium rider; if the insured is disabled, the insurance company will pay premiums to ensure the future growth of the cash value. And in tragic situations of an early, unexpected death, the insurance benefit delivers significant tax-free dollars in a time of great need.

As a depository for tax-advantaged retirement savings, 401(k)s may fill the bill. But as more and more Americans are discovering, they want a financial multi-tool that can serve several different functions – before and after retirement. For many Americans, a custom-fit whole life insurance policy could be their ideal solution.

Do Americans want a “Medical Expense Fund”… or do they really want Whole Life Insurance?

What is the cost of health care in retirement? Robert Powell, in March 14, 2006 MarketWatch column said:

“A 65-year-old couple retiring today will need on average a tidy $200,000 set aside to pay for medical costs in retirement, according to an annual Fidelity Investment study released this week.”

That was almost three years ago. Does anyone think medical costs have gone down since then? No? That means the need for a “tidy $200,000” is larger today.

Powell’s column elaborated on the Fidelity report, noting that Medicare B and D premiums accounted for $64,000 of the estimated costs, while cost-sharing co-pays ($72,000), and out-of-pocket costs ($64,000), comprised the rest. The $200,000 amount also didn’t include expenses from over-the-counter medicines, dental care and long-term care, and was based on an assumed life expectancy of 85. The estimate assumed the couple enjoyed reasonably good health. Add nursing home or other long-term care expenses to the list, and the total health-care cost in retirement could be staggering. To make matters worse, expenses have been increasing at a rate of 5.8% annually since Fidelity started conducting the surveys in 2002.

Now, even if you have a couple million accumulated for retirement, setting aside $200,000 in a safe, low-return financial instrument could result in a significant decrease in retirement income. It’s another one of the either/or, lose-lose decisions. Either you lose income because some assets can’t be invested in potentially high-profit, long-term opportunities, or you lose the security of having the liquidity to meet possible medical expenses.

Guess what? Whole life insurance might offer some unique solutions to medical expenses in retirement. The cash values can not only serve as a great reserve fund, but many life insurance companies offer riders that delineate terms under which a portion of the life insurance benefit can be distributed to pay costs resulting from a long-term care situation or a catastrophic terminal illness. Further, because of provisions in the 2006 Pension Protection Act, these benefits could be received on a tax-favored basis in many circumstances. In terminal situations, the amount paid could equal up to 80% of the life insurance face amount. In chronic situations, the amount paid usually varies with the age of the claimant – the older the policyholder, the higher the percentage.

These riders (sometimes referred to as Accelerated Death Benefit riders) are not intended to serve as a replacement for the stand-alone long-term care insurance (usually the whole life rider’s definitions of what constitutes an “LTC event”for which a claim can be made are not as generous or comprehensive as those in a long-term care contract). But these provisions give the insurance benefit – not just the cash values – a clearly defined financial value before death. And, Robert Lehmert explained in the June 2006 issue of the Life and Health Advisor: “Accelerated benefit riders do not require the negotiations associated with life settlements; the formula is predetermined and the entitlements can be taken at will.” Even better, if the Accelerated Benefit option is not used, beneficiaries will receive the full insurance benefit tax-free. That’s a win-win, either/or decision.

Lehmert goes on to note: “in an era of dramatically increased longevity, permanent (whole) life insurance has the potential to play a critical role in helping individuals live out their days with enhanced financial security.”

Do Americans want “Yeah, buts…” or do they really want Whole Life Insurance?

If whole life insurance is such a good product, why don’t more popular “financial experts recommend it? And why don’t more people own it? It goes back to the opening comment: When someone is so invested in seeing things from one perspective, it can be difficult to see it differently, even if the alternative is supported by facts and logic. For these people, the answer to retirement is a 401(k), the answer to emergency funds is a savings account, the answer to college funding is a 529, and the answer to life insurance is term. Anything outside their framework doesn’t fit, and generates a dismissive “yeah, but…” response. For example:

“Yeah, but…” Hindsight Sees a Better Idea

By design, whole life insurance is conservative and predictable. It’s boring. Here’s what happens: Someone looks at historical results and says “You could have done better if you had…invested in the tech stock…, speculated in beach-front condos…flipped houses… bought term insurance, etc.” Looking backward, it’s always possible for someone, somewhere, to construct a better outcome than the one you have. This is true for every financial decision, not just life insurance. In hindsight, you could have bought a nicer home on better terms, earned more with a different mutual fund, paid less for a car.

But while hindsight can always develop a better scenario for the past, hindsight insights cannot guarantee future outcomes. Two decades of historically superior returns were irrelevant when the S & P 500 dropped over 30% in 2008. So instead of looking backward to guess what might be most profitable in the future (and occasionally guessing wrong), take a look at this: the accumulation focus of whole life insurance policies is consistent, guaranteed, long-term cash value growth.

“Yeah, but….” The Costs Exceed the Benefits

No one really argues the benefits of whole life insurance; the issue is the perceived cost of obtaining them. When compared to term insurance, whole life insurance seems inordinately expensive. (Typical comment: “If I can get $500,000 of term insurance for $35/mo., why do I have to pay $750/mo. for $500,000 of whole life?”)

But other than the life insurance benefit, whole life and term insurance are radically dissimilar products. In a different context, whole life isn’t over-priced. Consider a household with take-home earnings of $100,000/yr. that is attempting to save 12% of their income (a percentage which, by the way, most “experts” say must be increased to ensure a comfortable retirement). Maybe some of that $12,000 goes to a retirement account, some to emergency savings, some to buy term insurance, and some to an after-tax college savings fund. Or instead, maybe a sizable chunk of it is applied to a whole life policy, because the whole life policy can provide cash values, which can be used for  retirement supplement income, emergency reserves, money for college – and life insurance.

“Yeah but…” There’s Up-Front Commitment, and Delayed Gratification!

Whole life insurance is a long-term financial instrument with a long-term funding commitment. Although a whole life insurance program can be constructed in such a way that premiums can be paid for a limited period as opposed to one’s entire lifetime, the shortest paid-up period is usually seven years. A whole life insurance purchase is big-ticket purchase, paid for over time – like a car, a home, a college education. While there is some payment flexibility in most whole life policies after the first few years, whole life works best with regular funding.

Because whole life is designed with the intention of being in-force at death (unlike term insurance), the costs of providing the insurance benefit – whether death occurs tomorrow or 50 years from now – must be secured by the insurance company. Thus, in the first years of a whole life insurance policy, most of the scheduled premiums do not accumulate as cash value. For some short-term thinkers, these “start-up costs” are an insurmountable psychological barrier.

The diagram below doesn’t represent a specific numerical comparison. Rather, it illustrates the conceptual difference between whole life insurance and other non-guaranteed accumulation strategies. Plan A is a slow-starting, well-planned financial path; if you stay on the path, the desired long-term results will be attained. In contrast, Plan B, while having the potential to deliver better results than Plan A, offers no guarantees; ups may be followed by downs.

Which Approach Would You Choose?

Which Approach Would You Choose?

As many Baby Boomers are finding out, what happens at the end of the plan is arguably more important that what happens in the beginning or the middle. But even though the long-term benefits of a whole life insurance program will accrue at an ever-increasing rate over time (Plan A), and even though various Plan Bs offers little assurance of finishing strong, some people simply can’t handle the longer start-up curve that comes with whole life insurance.

“Yeah but…” Is Anything Really Secure in This Economy?

In light of recent events, there’s general skepticism about any financial promises. Considering the wide-spread turmoil at once-solid financial institutions, who can say that a similar meltdown might not also occur with life insurance companies? It’s a fair question.

If we experience a complete economic and social collapse that plunges the world into a new “Dark Ages”, life insurance companies will probably go down the tubes, along with everything else. But if your sense of pessimism is that high, you better start watching your “Mad Max” and “Waterworld” DVDs for survival tips in a post-apocalyptic world, because there is no safe place for your money or your financial future.

Otherwise, there are good reasons to think life insurance companies will remain viable financial institutions, even in tough times.

In a January 11, 2009 Palm Beach Daily News article by R. Marshall Jones, JD, CLU, ChFC titled “Life Insurance: An Additional Asset Class in Difficult Times,” the author makes the following observations about whole life (or permanent) insurance companies in the wake of the past year’s economic turmoil:

Fortunately, the life insurance industry has almost none of the problems of Wall Street… Until recently, permanent life insurance was arguably the financial industry’s most complex instrument. Fortunately, due to its complexity, life insurance is highly regulated to assure there are always sufficient, safe assets to honor its guarantees. This is referred to as statutory accounting. For more than 100 years, every life insurance death benefit has been paid.

All life insurance companies use statutory accounting. In addition, publicly traded insurance companies use GAAP accounting. It allows them to report the expected profitability of products that require reserves to back their contractual liabilities.

Jones doesn’t say life insurance companies can’t fail. But life insurance companies have a proven track record of stability. And while whole life insurance may be considered a complex financial instrument, it isn’t an untested new idea (like credit-default-swaps or other next-generation financial derivatives that were “virtually unsupervised,” according to Jones). Whole life insurance has been around, been regulated, been through good times and bad – and succeeded.

“Yeah but…” It’s Too Complex and Too Boring for Media Sound Bites

Like Mr. Jones said in the previous paragraph, whole life insurance is a complex financial instrument. It takes time to explain it (even a slim “overview” article like this one takes over four pages!). And it takes even more time and personal attention to tailor a whole life program that fits an individual’s unique financial circumstances. There is no one-size-fits-all plan for whole life, and this is not a do-it-yourself project.

These characteristics are not ones that fit easily in column-length newspaper or magazine article, or a thirty-second analysis from a financial talking-head on a television program. And since whole life insurance is a long-term financial instrument, there’s not much demand for headline-grabbing topics like “Experts Pick Top 5 Life insurance Policies for 2009” or “Best Whole Life Plans to Implement Right Now!”

Instead, establishing a successful whole life insurance program requires several face-to-face consultations with a knowledgeable professional, and regular reviews. Yeah, it sounds more like going to the dentist than dinner and a movie. Whole life insurance may be serious, complex, boring – but it works.

Bottom Line: Everyone wants Whole Life Insurance

Consider these common “yeah buts…” concerning whole life insurance. Should any of them really stop someone from taking a closer look at how whole life insurance might fit in their financial situation?
No.
Does everyone need whole life insurance?
No.
Does everyone want whole life insurance?

The opinion here is yes. Whole life insurance delivers a unique and flexible assortment of financial benefits. Properly situated in your financial program, having whole life insurance is better than not having it. And with the assistance of a skilled insurance professional, there are many ways to make whole life fit your plans.

Whole life insurance is a “financial classic.” Newer products and approaches may grab popular attention, but as a solid financial foundation for every stage of life, whole life continues to be in style.

It’s time to admit it…Everyone Wants Whole Life… (or, at least, everyone wants to enjoy the benefits of Whole Life Insurance!)

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A Financial Powershift Toward Insurance Companies?

The assessment of Dr. Nikolaus von Bomhard, CEO of Munich Re, the world’s biggest reinsurance company, in an October 15, 2008 Reuters article by Christian Kraemer states: “The credit market crisis will shift the balance of power within the finance industry towards insurers and away from banks because insurance companies have a better business model.”

Located in Germany, Munich Re has subsidiaries throughout Europe and North America. After observing the challenges affecting banks and mortgage institutions both at home and abroad, von Bomhard is confident Munich Re “is stable and well-capitalized – despite the market turmoil.” In fact, von Bomhard believes that most insurance companies “will emerge stronger from the crisis.”

According to von Bomhard, there are two reasons insurance companies should continue to survive – and thrive – in tough economic times.

First, insurance companies have a superior track record when it comes to evaluating investment risk. In the Reuters article, von Bomhard stated that many banks’ business models were based on unrealistic profit expectations, and in an attempt to meet those expectations, some institutions took more risks. But because banks did not have appropriate risk management systems in place to accurately assess their investments, they “blindly relied on the judgment of outside credit agencies.”

A second factor that favors insurance companies is what von Bomhard calls “sustainability.” The emphasis for insurance companies is long-term returns within the context of being able to pay claims. “Insurance is a promise for the future,” says von Bomhard. “Its business model is built on fulfilling obligations from insurance contracts on a durable – in other words, sustainable – basis.” In contrast, von Bomhard sees banks as too often oriented toward short-term results.

In an October 8, 2008 press release following the fallout from the financial crisis, von Bomhard said “major losses or crises like the present one are also a test for our business model. And we are passing this test.” While von Bomhard has an obvious interest in trumpeting the strength of insurance companies, his comments have some academic support as well. In his 2006 book Money, Bank Credit, & Economic Cycles, Spanish economist Jesús Huerta de Soto provides the following assessment of life insurance companies relative to banks:

The institution of life insurance has gradually and spontaneously taken shape in the market over the last two hundred years. It is based on a series of technical, actuarial, financial and juridical principles of business behavior which have enabled it to perform its mission perfectly and survive economic crises and recessions which other institutions, especially banking, have been unable to overcome.

By the way: As an example of the way things might be different if this financial shift occurs, von Bomhard said, “In my view, life insurance is going to experience a renaissance because it is secure.” De Soto concurs, calling life insurance “a form of perfected savings.

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Life Insurance

Life insurance isn’t the sexiest financial topic, but as an aspect of risk management, it remains a foundational component in every financial plan. And, in its own way, the life insurance industry has some interesting developments. What follows are three life insurance items worth noting.

Note #1: If you are serious about life insurance, get expert assistance.

The purchase of life insurance is rarely a “once-in-a lifetime” thing. Surveys about customer preferences and behaviors may vary in their specifics (what type of policy was purchased, the amount, etc.) but one aspect of their findings seems constant: People who buy life insurance will buy several policies during their lifetime.

In the industry, a typical comment is that people buy seven life insurance policies during their lifetime. Some of the details of this statement are fuzzy (if you buy a policy on your child, does it count as one of their seven policies, or one of yours?), but even if the number is three or four instead of seven, it still means that life insurance is not a “set-it-and-forget-it” financial decision. However, even with seven policies during your lifetime, it’s not like buying life insurance is something you do on a regular basis. Consequently, many people are less than informed when it comes to the status of their life insurance program. What’s worse, there are indications that some “financial professionals” aren’t much better informed than the typical policyholder.

Errold F. Moody, Jr., operates and maintains what he claims is “the largest and most comprehensive planning site on the Internet” (www.efmoody.com). For more than two decades, Moody’s major interest has been “individual fee financial planning.”  It is Moody’s contention that the best way to retain the services of a financial professional is by paying for their advice as opposed to buying their products. Except when it comes to life insurance. Moody observes that many fee-based planners don’t seem to know much about insurance. Besides personal experience, he quotes a 1999 Journal of Financial Planning article which stated:  “…many planners were not looking at, or least not emphasizing enough, the entire area of risk management – not just life insurance, but also disability, health, long-term care and liability coverage.”

Moody follows with some commentary of his own. (As you read this, keep in mind that for the past 22 years, Moody has been a professor at the University of California at Berkley and Irvine, taught classes for Professional Designation in Financial Planning, and from 1995-2004, he was an Insurance instructor for various licenses and continuing education programs.) “Insurance is, in my mind, one of the most difficult of all planning areas. While it is easy to get information about mutual funds and other investments from the likes of Morningstar or Value Line, it is almost nigh on to impossible to obtain objective and intensive analysis of a life insurance product. Therefore, since the analysis is hard, and since very few planners have the capability to do such analysis, they simply have decided to effectively eliminate planning for that area in total. Therefore, while somebody may have limited the conflict of interest in regards to commission, they simply have paid an hourly or flat fee for an incompetent, unknowledgeable adviser who has effectively breached its fiduciary obligation to a client.”

Thus, Moody concludes the only effective way to buy life insurance is from a knowledgeable agent. Moody acknowledges that “while it is unquestionably true that commissions can taint the planning process, it is not a universal fact.” The real issue is the financial professional’s knowledge of insurance, their ability to accurately transmit that information to the consumer, and then deliver the appropriate products. Because of the variety and complexity of insurance contracts, you need to work with someone who is immersed in the business.  And the most likely “expert” is an insurance agent, commissioned or not.

“The problem is that no matter what you think of insurance, past problems, future difficulties, etc., risk management still is a mandatory element of financial planning.” – Errold Moody

Note #2: Guess who’s buying life insurance?

People over 70. Here’s something that actuaries might not have anticipated: Increasing numbers of people over 70 are buying more life insurance.  According to its PR material, Towers Perrin is “a global professional services firm that helps organizations improve performance through effective people, risk and financial management.” One of the reports that Towers Perrin produced in 2005 was the Tillinghast Older Age Mortality Study (TOAMS), which uncovered interesting trends in the use of life insurance among older individuals. In February 2008, Tower Perrin released TOAMS 2, and the updated data was, in a word,
“overwhelming.”

Quoted in a February 12, 2008 Business Wire release, Mike Taht, a principal at Towers Perrin noted “an overwhelming increase in sales activity at the very high issue ages. ” Specifically, Taht reported that “…for some companies, sales at issue ages over 70 represent 30% of all universal life premiums sold – a statistic unheard of five years ago.” Other research from TOAMS 2 found that 2007 life insurance sales were up 4.3% over 2006 for ages 60 and older, while sales among the 45 to 59 age group declined. The TOAMS 2 suggested that this significant increase in older individuals owning life insurance could compel insurers to adjust their prices, underwriting practices and mortality assumptions.

Why are older people buying more life insurance?

Some possible answers:
Greater longevity = lower prices. Many life insurers have repriced their products (or developed new ones) based on longer life expectancies. This has resulted in more affordable premiums at higher ages. Reality turns out to be different than theory. Remember the conventional financial wisdom that says most people don’t need life insurance in their old age? It turns out people either want or need life insurance in their “golden years,” for a variety of reasons. Their retirement resources (pensions, investments, etc.) may not be as great as anticipated. Rising health care costs, especially those from a final illness, may put surviving family members at financial risk. There may be a desire for certainty and guarantees in inheritance bequests or the settling of other financial issues – and life insurance is particularly well-suited to meet these objectives.

The emergence of life settlements as an alternative final transaction.

Through life settlements, policy owners have a secondary market for their life insurance policies – they don’t have to be held until death for there to be a payoff from the insurance benefit. Although some forms of life settlement have come under ethical and legal scrutiny, there are plenty of legitimate and creative ways for policy owners to leverage the financial value of a life insurance policy before one’s death.

Note #3: A Presidential Campaign rescued by a life insurance policy?

In the fall of 2007, Senator John McCain’s presidential campaign was in serious financial
trouble.
Just months away from the start of presidential primaries, McCain was broke. Laying off staffers and abandoning his quest for the Republican Party nomination seemed inevitable. So the McCain campaign, like many other struggling enterprises, went looking for a loan. In November, the Fidelity & Trust Bank of Maryland lent McCain $3 million.  According to a February 14, 2008 Wall Street Journal editorial, “there’s no doubt the November cash infusion helped Mr. McCain survive long enough to compete and win in New Hampshire (one of the early state primaries), and ultimately to become the GOP’s presumptive nominee.”

It is not unusual for candidates for elected office to borrow to finance their campaigns. But what got the attention of the Wall Street Journal was the collateral McCain offered in exchange for the $3 million.  According to the Journal, it was McCain’s demonstrated ability as a fund-raiser that convinced the bank he was worth the money – regardless of whether he would eventually win the nomination. But in addition, The Journal noted that “Mr. McCain also put up a life insurance policy and other campaign assets.” Although the article provided no further details, the essence of the transaction could be evaluated thusly: Fidelity & Trust was banking on McCain’s unique personal ability to raise money – and on the policy that insured his life.

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One of Those Details That Needs Regular Attention

Perhaps you noticed an item from the week of December 3, 2007 that appeared in the major wire services…

A wealthy London widow who had outlived both her husband and lone son, repaid the kindness shown to her by a family that owned a Chinese restaurant by leaving them a $21million inheritance. The woman, Golda Bechal, had stated in a 1994 will that she wanted Kim Sing Man and his wife, Bee Lian to be the beneficiaries of her estate upon her death.

Sad and alone following the deaths of her husband and son, Ms. Bechal became close friends with the couple that operated a Chinese restaurant in her neighborhood. The three of them not only met regularly at the restaurant and Ms. Bechal’s apartment, but also traveled together on vacations to other countries. When Ms. Bechal died at age 88 in January 2004, her five nephews and nieces contested the will, asking the British courts to declare it invalid, claiming Ms. Bechal suffered from dementia. However, after more than three years of deliberations the court awarded the inheritance to Kim Sing Man and his wife, saying, “it was not irrational to leave the bulk of her estate to Mrs. Man, the daughter she would dearly wished to have had, and her husband.”

You may never have $21 million to pass on, but the above story illustrates the challenges of settling an estate, especially when significant assets are involved. While it is possible to contest almost every will, there are several things you can do to make it less contestable.

Have it drafted by a professional. A hand-written will, although it may be valid, is not recommended. A handwritten will is called a “holographic will.” It is valid in about 25 states so long as all material provisions and clauses are entirely handwritten. However, because most handwritten wills are not as in-depth as a professionally drafted will and because they are oftentimes not properly written, they are not recommended. Courts can be unusually strict in determining whether a holographic will is authentic.

Have all changes and updates prepared by a professional. A will may often contain a provision or schedule, listing specific assets and their intended beneficiaries. Some people may try to amend this section by hand at a later date. In general, any handwritten annotation is much easier to challenge, even if witness signatures are present. Revisions (generally called codicils or amendments) should be made with the same care and attention to procedure as was given the original document.

Make a will review a regular part of your financial check-up. If it’s on the list, you’ll get used to doing it. If you do it regularly, it won’t take much time.

Checklist:

  • Have your will drafted by a professional.
  • Have all changes and updates prepared by a professional.
  • Make a will review a regular part of your financial check-up.
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Financial Pep Talk ('cause you might need one right now)

Remember Eeyore? You know, the pessimistic, depressed, grey donkey from the “Winnie the Pooh” stories? (If you do, you’re probably trying to impersonate Eeyore’s voice from the Disney cartoons, aren’t you?) From Eeyore’s perspective, things were always heading for disaster. Even when things were looking up, Eeyore was sure that it was only setting the stage for something worse.

As you read the financial headlines, there are moments where you might wonder if everyone writing or speaking about financial topics had suddenly become Eeyores. All the bad news means only more bad news: rising oil prices, dropping stock market values, defaulting mortgages, declining earnings, downsizing companies and outsourcing jobs. As Eeyore might say, “Oh my, it’s all bad news. ”When the bad news starts to cascade, it seems the conditioned response is to adopt a bunker mentality – pull back, pull out and hole up. Cut your losses, cut your expenses, cut up your credit cards. But maybe now is not the time to cut and run.

Read this excerpt from “Killing Sacred Cows” by Garrett Gunderson:

I’m constantly amazed at how much financial advice I hear boils down to cutting expenses. Now, am I saying that cutting expenses is inherently bad, or that it is not useful in the proper context? No. But to enjoy better results, instead of asking, “How can I cut my expenses” we should ask “How can I be the most productive in this moment?”

How can I be most productive in this moment? Isn’t that a good question on which to base your financial decisions?

Much of the macro-level economic fallout is the result of poor decisions by institutions and large groups of individuals. But if you’ve been making good financial decisions, it’s possible you are well-positioned to take on some outstanding opportunities – at very favorable prices.

If that’s the case, now is the time to act, not pull back. Even if some of your financial
history isn’t that great, are your problems going to be solved simply by tightening your
belt? Put it this way – what’s going to pay off that home-equity loan faster – an extra
$100 each month, or a $1,000 increase in monthly income? As Gunderson says, “we
should produce more than we consume, and the best way to do that is usually to focus
more on increasing our production as opposed to focusing on decreasing our consumption.”

How can I be most productive in this moment?
When you first process that question, you may think of it primarily in terms of generating more income through your work, business, or investment opportunities that you already know about. But answering the question doesn’t have to be a solo project. Now might be the ideal time to ask the financial professionals that serve you for their insights as well.

An old Hebrew proverb says there is wisdom in a multitude of counselors. So it seems logical that having two or three other people helping you become more productive can only work to your benefit.

The economic bad news you hear and read shouldn’t be dismissed; some things are not going well, some companies are in trouble, and some people are struggling. But while economic bad news may give you information to adjust the specifics of your financial circumstances, it shouldn’t change your outlook.

Whatever the situation, the best response is:
How can I be most productive in this moment?

“PRODUCTIVITY TRUMPS ACCOUNTING”

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