Life Insurance with Long-Term Care for an 18 year-old?

Yes, a college freshman has just applied for a life insurance policy with a Long-Term Care rider, a second rider to ensure continued premium payments in the case of total disability (thereby ensuring cash growth) and another rider to provide additional insurance later, if desired.

More accurately, a parent is purchasing the policy for the freshman.  Why?

The conventional, or “normal” approach to financial well-being isn’t as robust as was the case in the past.

This is not just any policy… it is a Whole Life policy; a specially designed whole life policy, from a Mutual life insurance company.  It will provide savings (and growth) for retirement, a home down-payment, auto purchase, and much more as well as tax benefits.

It can and will work in conjunction with, or as an alternative to, the 401(k) that many others will use.  As a savings/growth vehicle, it is consistent, and competitive.  It will perform in a financial portfolio very efficiently.

And, yes, it will help to protect the freshman’s possible family in the future. 

The annual premium for an 18 year old is very low, as you might imagine. By the time the freshman reaches retirement age, that will be a very healthy and robust policy, and will prove quite useful along the way.

It’s now “normal” for people to purchase life insurance only to protect the family. 

It’s now “normal” to save for retirement through a 401(k) or IRA.

It’s now “normal” for people to start thinking about LTC when in their 50’s or 60’s. 

It’s now “normal” to ignore, or even disparage the use of Whole Life insurance due to myths and lack of insight. 

We’re not concerned about what is now “normal”.  In light of the economic environment since 2000, we believe in a “new normal”; one that has been used and proven successful for over 100 years!

Purchasing Whole Life from a “Mutual” insurance company gives the policy owner participation in the business model of the company; that is, an established, conservative, regulated, and relatively consistent business…with little-to-no stock market exposure.  Imagine participating in a solid company, growing your assets, at a good rate, without fear of the volatility of the stock market!

Accessing the cash in the policy is as easy as a phone call or letter, at any time in the owner’s life.  Imagine guaranteed cash growth, at a minimum, with tax benefits!

Should parents, grandparents, and even young adults consider this approach?  We think so. 

And, we do not use any form of Universal Life insurance.  None.  An explanation:

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“6 Must-Do Annual Financial Review Items for Your Well-Being”

Wish to make God laugh? Tell him your plans…

Our lives change quite unexpectedly, don’t they? That’s why life, auto, and other forms of insurance exist.

Our financial well-being often depends on occasional updates.

What we set up in the past, for the future, might need a tweak or an overhaul as the years go by.

Here is a minimal list of annual financial items to review for you and your family:

  1. Ensure that a complete list of assets, accounts, insurance policies, and important documents (with locations) is available and that a family member or “Trusted Party” is familiar with the location. Do not assume anything; be clear and concise. Think medical emergency or worse.
  2. Confirm that all family documents such as Will, Living Will, Health Care Proxy, and Power of Attorney (POA) are up to date. Have children or a special-needs dependent? Pay particular attention to any “guardianship” designation.
  3. Update beneficiary designations on all assets, accounts, and policies. Over 20% of life insurance benefits are paid to unintended beneficiaries! Think divorce, pre-deceased, change of heart, etc.
  4. Have an insurance “audit” performed on all of your policies; ensure that they fit your current situation. Special Note: If there is a change in home occupancy due to age-related or actually any issues, follow up with appropriate insurance coverage.
  5. Review and ensure the accuracy of your social security status.
  6. Check for “Unclaimed Property” with all states in which you (and family members) have resided. You’ll likely be shocked at the funds held for someone in your family. The states will not hunt for you.

As the saying goes, “Those who fail to plan, plan to fail”. Keep this in mind, especially as the new year approaches so you can be on top of all annual financial items that are imperative to your future well-being.

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What’s Wrong With Universal Life Insurance?

What’s Wrong With Universal Life Insurance?

Universal Life (UL), Variable UL (VUL), Indexed UL (IUL), Equity Indexed UL (EIUL)

First, key points:

  • UL, VUL, IUL, EIUL are all risk-inherent and not suitable as a retirement supplement or LTC vehicle if an assurance of financial well-being is important to you.
  • Universal Life Insurance (UL) was created in 1978.
  • UL was created to take advantage of the tax code, a growing stock market, high interest rates.  That environment has changed dramatically since 2000.
  • UL, VUL, IUL, EIUL all put the risk of “success” or failure, or cash growth, on the policy owner.
  • The “chassis” for all UL’s is based on one-year term policies, and carries an ever-increasing internal cost.
  • If the cash growth is not sufficient to cover (or mask) the increasing (underlying) cost, without additional cash infusion, the policy can lapse.
  • Projections of cash growth use “straight-line projections” resulting in off-base predictions. Marketing, using these straight-line projections, ignores impact of “arithmetic averages”, volatility, and sequence of returns.
  • If, in later years, there is no cash value (a common situation), a missed or forgotten premium will lapse a policy, guarantees notwithstanding.
  • UL, VUL, IUL, EIUL are all risk-inherent and not suitable as a retirement supplement or LTC vehicle if an assurance of financial well-being is important to you.  (Yes, I’m repeating…)


Over the years, I have met with several people who owned Universal Life (UL) policies; they had been notified by their insurance company that additional premiums were required in order to maintain the policy; the alternative would be a policy “lapse”.

A sampling of real experiences:

In 1986, a young woman bought a UL policy with a $95,000 death benefit.  She paid her “target” premium, monthly, for 25 years.  In July, 2011, she received a letter from the insurance carrier requesting a check for $83,412, the sum necessary to prevent her policy from lapsing.

In 2014, a retiree (aged 82) received a letter from his insurance company requesting a check (mid-year) for $6,000, an amount above and beyond the $6,000 he paid annually since the policy’s issuance in 1992.  When the company was queried as to the amount that would be necessary to ensure the policy’s continuance to age 100, the response was $22,100 per year going forward.

Here’s a hypothetical: an 87 year old man has a universal life policy. There is no longer any cash in the policy, as it has not performed up to expectations. He is now alone in the world; no immediate living relatives. He forgets to pay the premium.  POOF! The policy evaporates/lapses!  (If there was cash, it might have covered the missed premium).

Now, no life insurance.  No one around him knows he had a policy.  Is this possible?  Yes.  Has it happened?  Bank on it.  Current industry marketing encourages attaching Long-Term Care riders to these universal policies. In this example, both would disappear.

Yes, insurance companies will provide a grace period to re-establish the policy…but someone has to go to bat for the client.  Remember, he “forgot”, and he’s alone.

Back in the first half of the 20th Century, life insurance (in a form similar to today’s Whole Life…not universal life) was used as a savings and investment vehicle, as well as a risk management tool. If you, the insured, died, your beneficiary would, of course, receive the proceeds of the death benefit.  If you lived, you could use the (cash) value of the policy to provide for your retirement expenses. 

That use of “living benefits” continues today and has been going on for well over 100 years. 

To be clear, UL and Whole Life Insurance are two very different structures of insurance.  Unlike Whole Life, Universal Life shifts the risk from the insurer to the insured.

So, what is UL, and where did UL come from?

It was in the late 1970’s when Jack Barger (at EF Hutton, a Wall Street firm) created universal life.  The concept? To take advantage of the tax laws regarding life insurance. The law said that any cash value (CV) increasing inside a policy, did so tax-deferred. Well, those were the days when the stock markets were strengthening after “May Day” (May 1, 1975); the SEC had mandated the deregulation of brokerage commissions.

Another factor in the rise of the stock market was The Revenue Act of 1978; this created the opportunity for 401(k)’s, which went into action in 1980.

Universal life policies were designed to take advantage of the tax code, a growing and strengthening stock market, and reasonably high interest rates. With UL, the insurance company was able to invest a part of premiums paid and provide a “crediting rate” (interest on the policy’s cash value) as an inducement to purchase policies.  This structure was the original and is still sold.

In (or about) 1986, variable universal policies (VUL) were getting started. Here, the part of premium that was to be applied to growth was positioned to invest in “sub-accounts” (similar to mutual funds) and thereby directly tied to the markets. Your success (or failure) was market related.

It was around 2000 when indexed universal life (IUL or EIUL) reared its ugly head. These were structured to benefit from (what seemed to be) the ever-climbing stock indexes.

The period 1980 – 2000, “The Roaring Twenty”, saw the stock markets grow like never before in our financial history.  The UL’s were designed for that environment.  That dynamic growth has all but disappeared.

The Magic of 1980 – 2000, “The Roaring Twenty”

Unfortunately, in 2000, the “Tech Bubble” burst.  The stock markets went down in 2000 and 2001.  Subsequent years have seen enormous volatility in the stock markets.  The performance of the policies largely suffered as a result.  Volatility continues to be a real concern.

Is there an additional key point here?  Yes…underlying cost.

Universal life is sold with the idea that the policy’s cash value will grow with the markets, and the  CV growth will be tax-deferred.  And flexible premiums!  Who wouldn’t like that?

Here’s the problem: Back in 1978, Jack created these with a “chassis” consisting of annually-renewable term insurance.


Consider that a premium payment covers two requirements:  1) cost of insurance (death benefit) and 2) cash infusion for growth.

In order to cover the company’s risk and cost of death claim, with UL, the company builds-in a string of one-year term policies; this is what the first portion of the premium covers.

We know that term insurance gets more expensive as we age.  The chassis for universal life has an ever-increasing-cost chassis.  And?  Well, as the insured ages, a growing portion of that premium is required to cover that growing cost of insurance, and less of that premium will go toward CV growth.

So, if the cash growth is not sufficient (long-term) to cover or mask the increasing (underlying) cost, the insurance carrier can (and, in today’s volatile marketplace often does) call for additional premiums to maintain the policy, or the policy can “evaporate”! 

Jack’s structure was acceptable during the “The Roaring Twenty”, when the policies grew with the markets. Since 2000, not so much.

So, why does an “illustration” of these policies look so attractive?

Today, (variable and indexed) universal life policies are marketed as very attractive due to the potential for stock market participation, in the form of cash value (CV).  But, that is only the revenue (or cash-growth) side:

Again, if the cash value (CV) does not grow sufficiently to overwhelm the increasing cost of the policy, the policy can lapse or require increasing premium payments to insure continuity of the policy.

But the numbers look good!  Why?

The marketing of these policies is typically done using “straight-line projections”, without explanation of “Arithmetic Averages”, volatility, and sequence of returns.  The results?  Projections can be (and usually are) wildly off-base. 

A full explanation can be viewed following the link below, but, in summary, the actual “ups and downs” of the stock market will change results from projections; “straight-line projections” ignores those changes.

The phrase “real returns” is extremely important, but generally ignored.  Any time there is performance related to a securities market, “real returns” are essential to determining reality of projections and results.

Remember, VUL and IUL policies’  cash-growth performance is related to the stock markets; this carries and relies on inherent volatility.

One more point: the concept of “loans” from the policy before or in retirement can also jeopardize the longevity of these UL policies as the policies are likely already (and increasingly) cash-thin.

The marketing of these policies often neglects a full explanation of the underlying cost of insurance (remember the annually-renewable term chassis?).  It might also neglect the fact that due to the frequent lack of real cash accumulation, if you miss a premium, you could lose the policy, “guaranteed” death benefit notwithstanding.

Clearly this is a complicated topic.  That does not, however, excuse the consumer from doing his/her homework.  The potential negative results can be devastating to a family’s financial well-being.  UL owners are strongly urged to get an “in-force illustration” from their insurance company to determine the level of performance to date, and to see how long their policy is likely to last. Oh, and this should be done annually.

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Regarding your finances…If you had it to do over, what would you do differently?

What would you tell your children, your grandchildren to do? What do you wish someone had convinced you to do

by L N Himel

It’s been my experience that, generally, the young

a) feel immortal

b) need to experience for themselves (don’t listen to others)

c) feel they “have time”

Yes, that was me…

Even with those points, if you were able to travel back in time, and give yourself advice, what would that advice be?

Maybe these?

a) Start your saving and investing right away.

b) Live below your means.

c) Get Life Insurance when the kids arrive.

d) Be good to your knees. (Okay, that’s a little off-topic)


Not long ago, there was a period that I’ve dubbed “The Roaring Twenty”, 1980 – 2000.  During those twenty years, the stock markets went up more than at any other time in history, and it seemed that the climb would never end.  We came out of that period to face high volatility and for the last 15 years, most of us have been waiting for what became “normal”, to return.  Normal, in this sense, is almost 14% annual gains, year-over-year, that we experienced back in The Roaring Twenty.


That period of financial nirvana allowed us to accept (and internalize) truisms such as “buy term and invest the difference”.  We accepted the idea that risk (as evidenced in volatility) is inherent in the financial markets, and therefore unavoidable in our quest for, and maintenance of, retirement funds.  Here is a list of some financial truisms that we’ve all heard:


The stock market always goes up over time.

            Just put your money in your 401(k); you’ll be fine.

            But my average return is…

            If I go up 10%, and down 10%, I’m even.

            Mutual Funds provide diversification.

            When bonds go up, stocks go down (& vice-versa).

            For greater returns, you must take more risk.

            Pay off the mortgage, extra payment-by-extra payment. You’ll save…

            Pay cash; all debt is bad.

            You have kids?  529!

            Buy term and invest the difference.


It’s time to get past all of that. These truisms, and more, can be ripped apart for their misdirection or lack of validity.

The last 15 years should, by now, convince naysayers that stock market climbs of almost 14% (year-over-year) is not normal, nor was it before 1980. It’s time to get beyond the “infrastructure fees” that (during that period) were built into mutual funds, hedge funds, etc. and go to a more reasonable finance period…with more reasonable expectations.

Incorporating the information above, here is my advice to a young me:

1)  Question the conventional wisdom

Does the stock market always go up over time? And if so, how much? What if it’s not in a straight line? How is it possible that industry-stated returns (percentages) result in distinctly different dollars for me, and distinctly less success than I expected?

2)  Don’t look to peers for advice

Peers (your contemporaries) are just as new to the arena as you. Learn to trust in experience and wisdom, if you can find it.  At least investigate…

3) Ignore the “my broker is so good…” testimonials

For every “it went up…” story, there are many untold “the losses were…” stories.

4)  If your advisor, upon you experiencing significant investment losses, says “don’t worry, you have time!”, get a new advisor

5)  If you’re pushed to use “age-based investing”, get a new advisor

The acceptance of risk with inevitable unexpected losses (in various years), with “time will save you…” is unacceptable. See #4.

6)  Question any use of the conventional (risk-oriented) investment portfolio during retirement

The financial industry has us accustomed to accepting volatility as price-to-pay for ultimate returns. Also, most advisors have us accepting the use of (at least some) risk in retirement when we cannot recover from losses through continued earnings/contribution. See #4.

7)  Don’t ignore or neglect tested, proven and traditional financial vehicles

Whole Life insurance, CD’s, savings bonds, etc. have their place.

8)  If you must invest, invest only in things/companies/ideas you believe in, and can investigate

Do not hang your future on “baskets” of securities.  There are fees, countervailing forces, etc. in mutual funds, and similar obstacles to success in many other instruments.  If you believe in IBM, buy IBM stock, and then pay attention.

9)  Buy Whole Life insurance (of a specific nature), and keep buying whenever you find the resources to do so

It’s unfortunate that it’s called Life Insurance; it has unbeatable living benefits…. This is a very traditional method for growing your assets for college funding, retirement, etc. It does not fall into the current conventional wisdom for asset growth; it does, however, precede and predate that current conventional wisdom by over 100 years.

10)  Do not wait to ensure that your later years (and those of your loved ones) are protected

Long-Term Care is, or should be, a growing concern. We are living longer but not getting healthier as we age.


Additionally, Here are The Rules Of Personal Finance

1) Start

“The best time to plant a tree was 20 years ago. The second best time is now”

                        – Chinese Proverb

2) Seek, But Question, Advice

3) Do Not Assume Newer Is Better

Assume marketing on newer products is better

4) Demand Continuity From Your Vehicle/System Of Choice

Volatility can prove to be a huge negative

5) Laugh At Averages

Arithmetic Averages will mislead  

6) Learn From Others’ Experience

Learn from your experience, smart. Learn from others’ experience, brilliant! And less painful.

7) Determine Who You Are

Based on the course you take, how well will you sleep at night?

8) Question “Risk”

Is it to your advantage to take risk? Or your advisor?

9) Review At Least Annually

Things change, life changes. Be flexible.

10) Share Details With Those Involved For Their (And Your) Protection

Forgotten assets can, and will, disappear.


And, as for that Mortgage pre-payment thing?

Your Home Mortgage Is A Form Of Disability Income Insurance! Why Pre-Pay?


Does any of this resonate with you? Maybe it’s not too late.

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Your Home Mortgage Is A Form Of Disability Income Insurance! Why Pre-Pay?

On pre-paying your mortgage, bit-by-bit. You might agree it’s not a good idea!

A banker is a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain. 

          -Attributed to Mark Twain

When you obtain a mortgage from any lender (notably banks), you will often receive “the letter”.

What is “the letter”?  It states:

“Congratulations on the financing of your home, and welcome aboard as a client of our bank.  We have a suggestion to make your purchase ultimately more affordable: whenever possible, send us an additional payment.  In so doing, you will decrease the length of time required to completely pay your mortgage, and you will save many dollars in interest expense.”

Now, who can argue with that?  We can.

First, you should be aware that everything we purchase, rent, or pay down is associated with “opportunity cost”.  Every penny we spend, etc. is the result of our decision to use that money for that moment’s purpose. So, are you “saving” on interest?  Perhaps you are, but what could the money be used for, or how could it grow, instead?  Would that offset, even overwhelm, the expense?

Second, remember when you applied for the mortgage?  The bank researched you as a borrower; that is, are you a good risk?  Yes, the bank took you on as a risk, and loaned you money.

It is entirely reasonable that you might feel better not owing money on your home, and so attempt to get out of debt as soon as possible.  Occasionally sending the bank an extra check will certainly shorten the pay-back time, but it will also decrease the bank’s risk, and increase yours.  Really!

Conventional wisdom suggests that if you add those payments, you will have more equity in your home, and if you need the cash, you’ll know where to find it.  You will simply get a Home Equity loan or re-finance, freeing up your equity.

Here’s the key question:  why might you need the cash?

Is there a possibility that, in the future, you could be unemployed?  Under-employed?  Ill?  Disabled?

Now, again, remember when you applied for the mortgage?  The bank was concerned about your income, right? 

If you, upon “need” as suggested above, approach the bank to apply for a loan to access that locked-in cash, the bank will ask for your current income data.  Unemployment or disability will likely impact income, and thus your trip to the bank! 

In other words, unemployed, unhealthy, in-need…even short-term, you’re not likely to get the cash you need.  The bank will likely view you as a poor risk for the new loan request.

Could any of these negative “events” happen to you?  Well, life happens, doesn’t it?

The bank will overlook your many additional contributions, possibly even thank you for them, and continue to act like a bank (i.e. foreclosure?).  Key Point:  you will have decreased the bank’s risk and increased your own.            

Here’s an alternative:  when you have additional monies to send to the bank, don’t.  Instead, put the money in a vehicle that you have control over, such as a savings account, CD’s, Whole Life insurance, etc.  Look for a vehicle with little or no risk.  As you build this account over time, the earnings may actually offset the interest expense the bank teased you with (aka mortgage interest cost), but it will certainly help to manage your family’s risk.  When the money is available to pay off the mortgage in full, then (and only then) should you decide if that is right for you.

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It’s Time To Think Outside The Box – Part 2

Have you wondered why your 401(k) or investment account has not done what you had hoped, and why so many seem to be experiencing the same anxiety as you?  Much of this has to do with “volatility” within the markets, and more. 

 In our previous post, we addressed the difficulty and nature of the market environment over recent history.  We suggested that it was, and is, time to think outside the box. Here, we will address an alternative.

Life Insurance (that is, “Permanent Life Insurance”) is not all created equal. There are various flavors of Universal Life, and more than one type of Whole Life as well.

Now, before you walk away, consider that there is a section of the tax code, Section 7702, that addresses the design and use (benefits, for us) of life insurance. We can use life insurance for growth-oriented savings, as well as a death benefit. This should appeal to those not interested in the volatile and difficult nature of the (now conventional) stock market. 

Whole Life Insurance should, at least, be considered as an alternative non-correlated asset class in your investment portfolio.  This would serve to modify volatility and enhance growth.

In creating a (spectacular?) savings and retirement vehicle, we use Whole Life Insurance of a specific structure. (We do not use Universal Life of any sort; ask us why…).

The “enhanced” policies we use can provide the following benefits:

1) Guaranteed, consistent and continual growth of cash value, regardless of market swings

2) Access to cash without regard to age, employment status, or planned use

3) No negative effect, but rather potential positive effect, on qualifying for College Financial Aid

and these “Living” Tax Advantages: 

4) Tax-deferred / tax-free cash growth

5) Non-taxable Retirement savings withdrawals

6) Unlike IRA withdrawals, will not cause potential increase in taxes of Social Security benefits! 

and, of course,

7) Increasing financial (Tax-Free) Legacy for Beneficiaries

 Additionally, many of these policies can now be mated to Long-Term Care riders, resulting in policies with great optionality and flexibility.

 We start with a traditional savings vehicle, Whole Life insurance. These policies are devoid of stock or bond market sensitivity, but are growth-oriented.  These policies have become more sophisticated over the years, and represent an opportunity for those willing to use an alternative to what has become conventional. We believe stock market volatility is damaging; consistency is more reasonable for most. And why not with guarantees?

 The Ultimate Financial Security Blanket.  We have a lot to talk about…agreed?

For previous posts, go to:

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It’s Time To Think Outside The Box – Part 1

As an alternative to the stock markets, we suggest a specific type and structuring of Whole Life insurance.  Now, before you close down on that title, “life insurance”, please allow us to explain:

“Cash value life insurance” has been used to accumulate savings for retirement, college funding, and other needs, for well over 100 years.  Prior to the 1970’s, it was quite common for people to own these life policies. It was the late 1970’s when money started following and aggressively rolling into the stock market with “Buy Term & Invest the Difference”.

The 20 year period of 1980 – 2000 (“The Roaring Twenty”) was a time of great wealth expansion in the equity markets, with previously unequaled growth rates.  The cumulative rate of return (CROR) was just under 14%!  During that period it became conventional wisdom to invest in the market for retirement and for funding other financial needs.

You may remember the “Tech Bubble” collapse in 2000-2001, and the “Real Estate Bubble” collapse in 2007-2009.  The markets have been quite volatile since that 2000 collapse, yet many people believe (or hope) that the stock markets are as robust and upwardly-directed as they were before 2000.  The reality is that since 2000, the Standard & Poor’s index (S&P) has had a cumulative rate of return (CROR) of close to 3.25%, hardly robust in comparison to what many imagine.  Almost fifteen years of markets that fail to impress overall.  Yes, we’ve had a good last few years, but in a recovery from low levels.

During the period 1980 – 2000, “infrastructure” grew throughout society. Corporations, retail, housing, and almost everything else became bigger as the stock markets expanded, and wealth was created. That infrastructure is now a partial source of the market volatility as society tries to regain a solid footing. Empty storefronts and vacant homes are displays of some dislocations as that footing is sought. It looks like the volatility and societal adjustments will continue for some time.

There were a number of unique factors that contributed to The Roaring Twenty.  We had Baby Boomers, tax code restructuring (1981-1982), desktop computerization, a change in perception of “below investment-grade risk” (Michael Milken at Drexel Lambert), the introduction of 401(k)’s, and more. One might suggest that The Roaring Twenty will not return in any close form without a similar confluence of factors, which looks unlikely.

Volatility may be an exciting part of the investment experience, but that is the last thing you’ll want in retirement, as you withdraw cash from your account to pay bills.

Whole Life Insurance of a specific structure is utilized and provides a range of exceptional benefits.   Our next message will further explore the topic.

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Annual Review Items for your Financial Well-Being

Wish to make God laugh?  Tell him your plans…

Our lives change quite unexpectedly, don’t they?  That’s why life, auto, and other forms of insurance exist.  

Our financial well-being often depends on occasional updates.

What we set up in the past, for the future, might need a tweak or an overhaul as the years go by.

Here is a minimal list of annual review items for you and your family:

1 – Ensure that a complete list of assets, accounts, insurance policies, and important documents (with locations) is available and that a family member or “Trusted Party” is familiar with the location.  Do not assume anything; be clear and concise.  Think medical emergency or worse.

2 – Confirm that all family documents such as Will, Living Will, Health Care Proxy, and Power of Attorney (POA) are up to date.  Have children or a special-needs dependent? Pay particular attention to any “guardianship” designation.

3 – Update beneficiary designations on all assets, accounts, and policies.  Over 20% of life insurance benefits are paid to unintended beneficiaries!  Think divorce, pre-deceased, change of heart, etc.

4 – Have an insurance “audit” performed on all of your policies; ensure that they fit your current situation.  Special Note: If there is a change in home occupancy due to age-related or actually any issues, follow up on appropriate insurance coverage.

5 – Review and ensure the accuracy of your social security status.

6 – Check for “Unclaimed Property” with all states in which you (and family members) have resided.  You’ll likely be shocked at the funds held for someone in your family.  The states will not hunt for you.

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8% isn’t always 8%…in fact, rarely! Arithmetic Averages are Deceiving

Arithmetic Averageand Straight-Line Projections” — frequently applied to investment gains, losses and marketing by Wall Street investment advisors.  These “results” are not indicative of actualor realreturns.

Perhaps you’ve wondered why the returns on your investments (and mutual funds in particular) don’t seem to match the claims made by fund managers.  You might be puzzled at why your investments don’t provide the same “rate of return”, on average, as the market or a specific index (i.e. S&P, Dow, etc.).

These investments might be in a 401(k), an IRA, an investment account at a Wall Street firm, etc.  Let’s take a look at how some of these claims of achievement come to be.

First, let’s imagine that we want to invest some money, and that we are told an average return of 8% is possible.  Now, our first thoughts might be that 8%, over years, would be… Well, what would it be?

$100 invested, and the gains/losses are as follows:

100    x     8% gain  = 108

108    x     8% gain  = 116.64

116.64 x   8% gain  = 125.97

125.97 x   8% gain  = 136.05

136.05 x  8% gain   = 146.93

So, to get the average, sum the changes:







+40, now divide by the five years…

40/5 = 8% avg.  This example result?  146.93 with the straight-line 8% average. 

(Is this how the stock market behaves?)

The advisor’s statement: “The investment returned an average of 8% over five years!”

Average is average, right? 

Let’s try it again, but with what looks like market volatility:

Same $100 invested, but with gains/losses as follows:

100    x    16% gain   = 116

116    x     0% (no loss, no gain) = 116

116    x     8% gain     = 125.28

125.28 x -24% loss   = 95.21

95.21   x 40% gain   = 133

Again, to get the average, sum the changes:







+40, now divide by the five years…

40/5 = 8% avg.      This result?  133 with an irregular 8% average, but the same advisor statement!

Different results, 146.93 and 133.     Hey, what’s up with that?

Both 8% averageaccording to the advisor.why the difference in investment results?        Both are simple arithmetic averages, but one is irregular (possibly real), the other straight-line              

Now, let’s look at the Standard & Poor’s index, and the market “moves”:

Real Returns vs. Straight-Line Projections

Standard & Poors index levels*, year-end 2000 – year-end 2014 (the most recent 14 years) – The Real Deal

Year          Index level        % Change       $100 investment is now:

12/31/00     1320.28                                                $100.00

12/31/01      1148.08                       -13%                  $87.00

12/31/02       879.82                       -23%                  $66.99

12/31/03       1111.92                  +26.4%                  $84.67

12/31/04      1211.92                        +9%                  $92.29

12/30/05     1248.29                     +2.9%                $ 94.97

12/29/06     1418.30                   +13.6%               $107.88

12/31/07      1468.36                     +3.5%                $111.66

12/31/08       903.25                    -38.5%                 $68.67

12/31/09       1115.10                   +23.5%                $84.80

12/31/10       1257.64                    +12.7%                $95.57

12/30/11      1257.60                       -0-                      $95.57

12/31/12      1426.19                     +13.5%              $108.47

12/31/13     1848.36                    +29.6%              $140.58

12/31/14     2058.90                    +11.4%             $156.60  (this is the “real                                                                                                                                return”)

                                        Total % = 71.2

*S&P History Resource:

Arithmetic Averageof percentage gain = 71.2% / 14 yrs = 5.08% per year.   Its just adding the (percentage) gains and losses, and dividing by the number of years. 

This average, 5.08%, might also be applied to the results of the investment, $156.60, with a statement of Its 5.08%!  Yes, inaccurate…we’re applying an erroneous average percentage gain to a (lower) real dollar result.

This is done partly because the actual calculation of the real return is not performed, however a marketing statement applicable to the investment vehicles percentage changes (again, using arithmetic average) is assumed to apply to the dollar results.

What if we were able to look at the history of the index, i.e. as above, and say “the average returns over fourteen years was 5.08%, so lets use that in projecting the next many years…”       Using the same money, we should get the same results, right?  $156.60?

If we take $100 here (to start) and assume those 5.08% gains annually, we’d get: 

after yr 1: 100 x 5.08% gain = 105.08

              2: 105.08 x 5.08%    = 110.42

              3: 110.42 x 5.08%     = 116.03

              4: 116.03 x 5.08%     = 121.92

              5: 121.92 x 5.08%     = 128.11

              6: 128.11 x 5.08%     = 134.62

              7: 134.62 x 5.08%     = 141.46

              8: 141.46 x 5.08%     = 148.64

              9: 148.64 x 5.08%    = 156.19

            10: 156.19 x 5.08%     = 164.12

            11: 164.12 x 5.08%      = 172.46

            12: 172.46 x 5.08%     = 181.22

            13: 181.22 x 5.08%     = 190.43

            14: 190.43 x 5.08%    = $200.10

Yikes!  So now, we have to reconcile the fact that we saw a real return result (in the S&P moves above, in years 2000 – 2014) of $156.60, and using the resultant arithmetic averageof percentage change, over another 14 years, an expected result of $200.10.

A point of fact:

This is a straight-lineprojection based on an arithmetic average of percentage gains/losses from some historical index year-end levels.  As we see from the real returns, the use of an arithmetic average of percentage gains/losses can be wildly misleading. 

This projection is actually displaying a Cumulative Rate of Return(CROR) in its consistent 5.08% rate, building upon itself, year after year.

Oh, and the (real) Cumulative Rate of Return (CROR) on the $156.60?  3.25%   

Wait!  What?  S&P, over 14 years, up 3 percent?  And taxable?  Im hearing at least 5% from my broker, my advisor!  Well, maybe if we use the arithmetic average

What is the danger in straight-line projections?  Straight-Line projections are typically used to express what become expectations.  Unfortunately, the securities markets are not consistent, but are volatile.   Straight-line is wishful thinking.

Straight-line projections are used regularly in the financial world for convenience and necessity; after all, how would volatility be projected?  But its still wishful thinking.

Real returns of any investment that has inherent volatility will not perform in line with straight-line projections over time; the longer, the greater the potential variation.

One more thought on the use of averages and, in particular, percentages:  Gravity wins!

What do we mean by that? 

Let’s imagine you have $100, and you invest that money.

In the first year, you gain “10%”.  Your Financial Advisor tells you you’re up 10%.  That should give you $110.

In the second year, your advisor tells you you’re down 10%.

So, up 10%, then down 10%.  “Even”, right?  Back to square one? 

$100, up 10% = $110. 

$110, down 10% = $99.  Yes, 10% off of that bigger number, 110.

How about the other way?

$100, down 10% = $90.

$90, up 10% = $99. The 10% gain on a smaller number.

Gravity wins.  Not “even”.

Let’s try one more.

In the first year of investing, you’re up 60%.  In the second, down 50%.  So, what’s your return, or average return?

Up 60, then down 50…so, 60 – 50 = 10, divided by 2 (years) = 5% per year, true?  Certainly that’s how people tend to look at it.

Now let’s try that with money:

$100 invested, and up 60% in year one = $160. Second year, $160 goes down 50% = $80.  $80!

The point?  Advisors, investors, most people tend to discuss or exclaim results as percentages, and averages.  Just a little misleading, right? 

In the real world, the use of “Arithmetic Averages” can’t be totally, or even largely avoided.  The expectations created are off, to say the least.  Throw in fees (rarely, if ever, incorporated into expressions of results) and taxes, market sales and purchases (timing…) and you will probably not get what you hope for.

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The Magic of 1980 – 2000, “The Roaring Twenty”

Here is a link to a chart displaying the Dow Jones Industrial Average for the period October 1928 to January 2016.

You will notice a climb for the period 1980 – 2000.  Let’s focus on that.  On January 2, 1980, the DJIA stood at 824.57.  On December 31, 1999, the DJIA was 11,497.12  The cumulative rate of return (CROR) was about 14%.  Not bad!  There were several factors that we can pinpoint.  I will give my impression as to the effect and leave it to the reader to determine the extent to which there is agreement.

The Revenue Act of 1978 included a provision which became known as the Internal Revenue Code sec. 401(k).  The law became effective on January 1, 1980.  You can imagine as the law was applied and brought into various corporations nationally, investment money was channeled (at increasing volume) to the stock market; the result would be an updraft in volume and price over time.

The IBM 5150 was introduced in August of 1981 and, even though there were previously-sold small computers, the IBM proved more popular.  As Wall Street saw the utility of the machine, “quants” and mathematicians were hired and told to find a way to make money.  This was a factor in the eventual derivatives market (mid 1980’s through mid 1990’s).

Ronald Reagan changed the tax structure in the period 1981-1982. The deductions an individual could take advantage of were decreased to mainly two: mortgage and margin interest on investment.  The highest marginal tax rate was decreased from 70%!  You could make an argument that there was increasing amounts of cash directed to the markets.

In the early 1980’s, Michael Milken and his employer Drexel Lambert had a significant effect on the perception of investment value and cashflow into securities.  Mike took a look at the investment community’s perception of risk as resulting in default and bankruptcy of the companies in the High Yield market. He pointed out that the statistical probability of default for a “junk” company was about the same for quality companies.  He then pointed to the amount of yield or gain the investor left on the table by ignoring the High Yield companies.  How does that matter for the stock market’s climb?

Let’s assume that you’re a securities analyst assigned to a sector within the “junk” market.  In 1980 you review XYZ company that has a cost of capital (amount of interest that the lender, as in bond buyer, demands to buy your bonds) of 13%.  That is, for the company in question, that company wishes to sell 10 year bonds, and to do so, they must agree to a 13% rate of interest on that bond loan to be paid to the bond investor.  You see that XYZ company is making money, even at that cost of capital.  You (as an analyst) make a recommendation to your investor audience to buy the bonds.  In the early 1980’s, Mike Milken convinced investors that the XYZ company and others of the sort were a good risk, much better than anyone had noticed.  As buyers flocked in, the bonds, becoming more popular, pushed prices up. As the prices went up, yield went down; investors were less concerned about the risk and demanded less interest/income for their money.

In 1986, six years later, you’re reviewing XYZ company and see that now, their cost of capital has decreased to, let’s say, 9%.  You recommended the company some time ago when their cost of capital was 13%, and now it’s 9%!  Likely you’ll recommend more strongly now, knowing that XYZ is much more likely to turn a profit (their interest costs are lower), and actually become less risky as their cost of capital goes down.  But that’s not all!  Now consider the options of XYZ company: they have a growing number of comfortable analysts and investors.  The company has an interest in issuing stock (not continuing interest expense as a cost of capital) instead of bonds.  The company therefore adds operating capital, decreases their operating expense, and stock comes to the market.  The issuance of stock, of course, must be met with willing buyers, but the company is increasingly viewed positively and the 401(k) phenomenon is moving nicely.  Now multiply this many times.  Mike had a big effect.

We mentioned derivatives earlier.  Rather than get into minutiae, consider that the various types (CDO’s, CMO’s, etc.) essentially came to be and evolved from the mid 1980’s to recently.  Initially the hedging aspect of the derivatives allowed for growth in securities purchasing, leading to more issuance and, well, the players grew in numbers and size of holdings.  After the mid-1990’s, the growth in the issuance was considerably higher as trading occurred more for trading’s sake, but the change in complexion of the securities markets was seemingly effecting issuance of stock.

We had the tech interest and beginning of the bubble in the 1990’s, we had low interest rates, creative mortgages…

The first 100,000,000 share day on the New York Stock exchange was in 1982.  The first 1,000,000,000 share day was on October 28th, 1997.

What does all of this mean?  My belief is that the period 1980-2000 was a remarkable period in our history.  The belief that stocks go up, on average, ~10% per year (with fair consistency) seemed to be real then, and was.  But it wasn’t true before that period, and it hasn’t been since.  There is enormous volatility in the world’s markets.  Regardless of the reasons behind that volatility, if we were able to remove it, what would your expectation of the market be?  Would you expect a return on investment of 10% or 4%?  I view the 1980 – 2000 as an aberration.  While the factors that created that period won’t be repeated, I don’t have a crystal ball to suggest never seeing similarly strong factors again.  But again?  A year or two or five, maybe.



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