Posts Tagged 401(k)
The Case for Investing in Life Insurance
Posted by Harley in Be Your Own Bank on July 7, 2010
Now Could Be the Right Time to Invest in Your Own Health
By: Barry James Dyke
Key Points
- Insurance companies do not invest their money in the potentially unstable way that banks do.
- A mix of term and permanent life insurance is ideal for most investors, though only permanent life offers interest rewards.
- Life insurance policies should never be created for short-term investing.
Two years ago, presidential candidate John McCain secured initial campaign financing by using his $3 million life insurance policy as collateral.
In 1980, Doris Christopher used a life insurance loan to launch her struggling kitchen gadget company. In 2002, she sold that company—the Pampered Chef—to Warren Buffett for a reported $900 million.
Even in the midst of the Great Depression, J.C. Penney used a loan against his $3 million life insurance policy to resuscitate his retail stores after the 1929 crash.
By this point in our nation’s recession, it is clear that there is no such thing as a perfect investment strategy. As the Dow Jones Industrial Average sits at about 65 percent of its value from 18 months ago, now is an ideal time to learn about the proven benefits, strengths, and versatility of life insurance and annuity investing.
IF IT’S GOOD ENOUGH FOR BANKERS . . .
According to government disclosures, Federal Reserve Chairman Ben Bernanke has a majority of his liquid wealth—between $1 million and $2 million—invested in fixed and variable annuities, which are contracts issued exclusively by life insurance companies that promise guaranteed rates of interest.
What’s more, the 401(k) Thrift Plan for Employees of the Federal Reserve System, according to a 2009 first-quarter Fed report covering 22,000 Fed employees, has 75 percent of its assets—that’s $3.2 billion—invested in its fixed-income fund, which is invested exclusively in annuity contracts underwritten by major U.S. life insurance companies guaranteeing principal and an interest rate of 5.8 percent.
And this is not a new trend. A Deloitte audit affirms that in 2007 and 2006, Fed employees overwhelmingly chose fixed-income annuity funds over volatile mutual funds.
The nation’s large banks invest immense sums of their Tier 1 capital reserves—a bank’s most important asset and a key measure of its strength—into permanent life insurance underwritten by major life insurance companies. (See sidebar “Banking on life insurance” for more details.)
Why do banks look to insurance companies for sound investment? Unlike banks, life insurance companies do not use excessive leverage. If a bank has $1 million on deposit, it can lend out up to $10 million to the public. This leverage is called “fractional reserve lending,” and it can lead to instability. Indeed, excessive leverage is a major reason why banks are failing today and have throughout history.
However, if a life insurance company has $1 million on deposit, that company may loan no more than $920,000, and usually only a fraction of that. As such, life insurers are 100 percent reserve-based lenders, which makes them stable institutions in down economies.
WHY LIFE INSURANCE?
There are two basic types of life insurance: term life, which is essentially a rented policy for a specified period of time; and permanent or “cash-value” life, which is insurance for as long as you live. While a mix of both types of policy proves valuable for most investors, financial rewards are attainable only with permanent life policies. Following are some of the key benefits of investing in permanent life insurance and annuities:
Safety. Permanent life and annuities, when backed by the general account of a life insurance company, contain financial guarantees, are protected by state guarantee funds, and adhere to strict investment portfolio standards. Enormous losses in today’s stock market illuminate the dangers of investing without guarantees. During the Great Depression, when more than 10,000 banks failed, 99.9 percent of consumers’ savings in life insurance and annuities remained safe with legal reserve life insurance companies.
Earnings in addition to guaranteed rates. Although additional earnings above guarantees are not assured, most life companies paid additional earnings even during the Great Depression.
Permanent life insurance and annuities are savings systems. A major problem today in financial planning is that 401(k) and mutual fund marketers have successfully blurred the difference between “saving” and “investing.” When one saves, money is safe and liquid. When one invests, 100 percent of your money is at risk 100 percent of the time.
When you save through permanent life insurance and annuities backed by the insurance company’s general account, your funds are safe, liquid, and tax-favored.
Valuable tax benefits. Savings and earnings within permanent life insurance and annuities grow tax-deferred, and loans from insurance are not taxed as ordinary income. What’s more, insurance proceeds are received income-tax-free and, in most cases, estate-tax-free.
Asset protection. Although asset-protection privileges for lawsuits and bankruptcy vary from state to state, life insurance and annuity assets are a favored asset in all states. States with particularly strong asset protection for life insurance and annuities for today’s physician include Arizona, Florida, Michigan, New York, New Mexico, Oklahoma, and Texas.
Income-tax-free death benefit. Life is a gamble. The greatest risk we face is the risk of premature death. Protecting those people or causes we love with life insurance is a wise allocation of resources.
When the Reverend Jerry Falwell died in 2007, he left $34 million in life insurance to pay off Liberty University’s debts, strengthen that school’s endowment, and provide funding for a Thomas Road Baptist Church. Newer annuities also offer additional life insurance benefits.
Professional money management. Savings within a life insurance company are professionally managed to secure the highest rate of return with the maximum amount of safety. You will enjoy diversification by industry as well as by geography.
Unlike some retirement plans, you have access to your money in a life insurance policy through loans and other options. Today, money within a qualified retirement plan (e.g., pension, 401(k), 403(b), IRA) is money in a straitjacket until retirement. Unfortunately, your money is still subject to market risk, inflation, and lost opportunity cost. Not so with permanent life insurance or annuities that are backed by the insurer’s general account.
Life insurance and annuities can perform additional economic jobs as well. By attaching riders onto base life insurance and annuities, they can provide additional benefits for disability protection, long-term care, critical illness, and retirement funding.
Life insurance and annuities are wills unto themselves. They are able to accommodate multiple and complex beneficiaries, and can be easily changed without legal costs. At your death, they also bypass probate—thus avoiding legal bills, appraisal costs, taxes, and other expenses common even to midsized estates. States with particularly onerous probate costs include California, Connecticut, and Georgia.
GUIDELINES FOR INVESTING
Life insurance and annuity purchases are some of the most important financial decisions you can make. Do not purchase either of them if you plan to do it for only a year; there are costs associated with any investment, and these are long-term planning tools.
Finally, this author prefers mutual life companies over publicly traded stock-based life insurers (although stock companies can be well-run and offer investors great value). Why mutual companies? A mutual company is not a publicly traded entity and does not succumb to the continuous demands and whims of Wall Street. Mutual companies, although not entirely unscathed, have for the most part dodged the stock market meltdown that has hammered their publicly traded counterparts.
Mutual companies, often criticized for being too prudish and conservative, are now pillars of strength. With a mutual company, a physician is technically an owner in the company and receives the profits of the company through dividends and interest—not stock.
If a mutual company does go public at a later date, its investors can enjoy potential rewards of cash, additional insurance, or shares of the new public company—while still maintaining their initial insurance and annuities.
It is wise to work with an adviser who has expertise not just in life insurance and annuities, but who has a working knowledge of taxes, risk management, investments, and economics. Insure your life as you would insure the economic replacement value of your automobile, home, or practice. Your human life is the greatest economic value of them all—the creator of all property values.
As a general rule, the economic replacement value for life insurance for a physician under 40 is 20 to 25 times his annual income. Physicians who are young will need large amounts of term life insurance—pure death benefit protection. As cash flow improves and debts such as student loans are paid down, purchasing permanent life insurance makes economic sense.
When buying life insurance and annuity products with savings components, purchase products that are backed by the general account of the company first. Why? The general account is the heart of any life insurance company and, by design, one of the safest depositories for savings in America today. By choosing general-account-backed products first, all financial risks are shifted onto the insurance company.
When allocating funds to life insurance and annuities as an asset class, a commitment of 10 to 30 percent of one’s portfolio is prudent, since these instruments have stable value and are easily convertible into cash. The nation’s large banks consistently invest between 10 to 30 percent of their reserves—hundreds of millions of dollars—into life insurance and annuity products. There’s every reason for you to do the same.
Send your feedback to meletters@advanstar.com
For more than two and a half decades, Barry James Dyke has advised individuals and corporations about financial planning, employee benefit plans, investments, and other economic issues. He is the author of the book The Pirates of Manhattan, which illuminates the reasons for today’s financial crisis and how to protect your assets in the days ahead. Learn more at http://www.thepiratesofmanhattan.com.
The U.S. Government Wants Your Retirement Plans
Posted by Harley in Be Your Own Bank on April 28, 2010
Right, left, or somewhere in between, over 75% of Americans now disapprove (April 2010) of the business going on within the walls of Congress and the White House. Burning the midnight oil, these folks don’t rest when it comes to digging into your wallet or taking away your freedoms.
The larger problem, of course, is that they are running out of ways to pay for it all as they spend us into oblivion. That’s why, along with cap-and-trade and a VAT tax, Congress is considering an attack on your 401(k) as of late, as a juicy new way to keep on spending.
In a nutshell, Congress is planning to force Americans to turn their IRA and 401(k) savings over to the government — in exchange for an annuity-based fixed income stream during their twilight years. They are calling this program Guaranteed Retirement Accounts.
In fact, the groundwork is already being laid. Bloomberg reports:
The Obama administration is weighing how the government can encourage workers to turn their savings into guaranteed income streams following a collapse in retiree accounts when the stock market plunged.
The U.S. Treasury and Labor Departments will ask for public comment as soon to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort.
There is “a tremendous amount of interest in the White House” in retirement-security initiatives, Borzi, who heads the Labor Department’s Employee Benefits Security Administration, said in an interview.
So you see, they just want to save you from yourself again with the promise of a “universal, secure, and adequate retirement system”. It’s all totally harmless! Yeah….Right!
And while this monumental change is not necessarily imminent, be aware that the plan is gaining inertia as Congress sizes up the $6.3 trillion in retirement assets of working Americans — followed by mandates that may one day ration your own money back to you.
So what’s in this deal for you, you’re wondering? As you might have guessed… it’s not much. Not only will you lose your coveted 401(k) tax break, but the government guarantee is only a mere 3% return on your investment. It would be comical if it weren’t so tragic. A monkey throwing darts at board could earn 3% with his eyes closed.
That’s why smart investors are beginning to leave this ship of fools behind by building retirement assets that the government can’t touch. In that regard, Private Banking offers the safest road to a happy retirement.
Savings Strategies ~ A Personal Bank
Posted by Harley in Be Your Own Bank on April 28, 2010
A Personal Bank
from WSJ.com
Colby Olds decided last year that he needed more control over his retirement savings and his finances in general.
Mr. Olds, a business-development executive for Vertical Prepaid, a provider of global prepaid and electronic-payment solutions, based in Sandy, Utah, decided that saving for retirement through a 401(k) was too constricting. So, based on advice from friends and online research, he moved his savings into a whole-life insurance policy that generates tax-free growth and still gives him access to his money.
Mr. Olds, 35, says he wasn’t comfortable locking his money away in a 401(k) until age 59 1/2. “So much is going to happen between now and then,” he says.
He and his wife, Tiffany, who live in American Fork, Utah, were concerned about funding possible emergency expenses and the needs of their family, which includes four children, ages 11, 8, 5 and 3. They also worried about stock-market declines ravaging their investments, he says.
The couple, married 14 years, has relied exclusively on Mr. Olds’s income since becoming parents. Mrs. Olds, who previously worked in fashion design and sociology, has been a stay-at-home mother and will likely do community-based work when their children are older, says Mr. Olds.
He closed out a 401(k) account totaling $50,000 in 2008. After taxes and early-withdrawal penalties, about $30,000 remained, which he used to buy a whole-life insurance policy through a local broker. Mr. Olds says the switch allows him to act as his own banker. He can borrow from the policy and make payments, with interest, back into his own account, instead of to a lender. For example, he borrowed $23,000 to buy a Dodge Caravan, which he’s paying off at 8 1/2% interest over a four-year term. “I feel like I’m driving my retirement plan,” he says. “My car payments are now my retirement savings.”
Mr. Olds wasn’t concerned about giving up matching company contributions to a 401(k), because his investment in the insurance policy, which pays dividends, protects him from the volatility that has recently devastated the stock market. He says he receives a “healthy” single-digit rate of return. Additionally, his family would receive a $2.1 million death benefit if he died, he says; with a 401(k), they would receive only the funds he had saved.
Mr. Olds hopes to accrue enough in the policy to fund the purchase of an income-producing asset, such as a condominium. He’d pay the debt back to himself while collecting the cash flow from the investment property.
At retirement, he can decide to withdraw a set amount per year, which, he says, he won’t have to repay. However, the death benefit would be reduced by the amount he withdrew.
Mr. Olds says his family’s finances have remained stable amid the current market chaos. “I’m not looking at 2009 trying to figure how I’m going to dig myself out of the market,” he says. He tries to sock away 10% of his income, but some months are better than others, he says.
Mr. Olds is using the global economic crisis as an educational opportunity for his children. He says the kids have been worried because some school friends have moved unexpectedly after their parents lost their jobs.
“It’s surprising how much discussion we’ve had about the economy with such a young family,” he says. The family agreed on certain cutbacks in order to ease the children’s anxiety. They decided to eat out less and to cut back on expanded cable-television services. “That made them feel better,” says Mr. Olds.
—Suzanne Barlyn
THE GOVERNMENT WANTS YOUR RETIREMENT
Posted by Harley in Banking, The Economy on February 26, 2010
I will soon have another free report for you that will protect you from this power grab but right now it is imperative that you read the following. Do not be fooled by the government speak that they are looking for ways to help you. It’s all about deceiving you into believing they have your best interests in mind.
NOTHING COULD BE FURTHER FROM THE TRUTH!
“When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that justifies it.” ~ Frederic Bastiat
THE GOVERNMENT WANTS YOUR RETIREMENT
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Neal Boortz@ February 3, 2010 8:51 AM Permalink | Comments (105) | TrackBacks (0)
I’ve been telling you about this for a while now. This, to me, is one of the most dangerous schemes currently slithering through the crevices and dark spots of the Imperial Federal Government in Washington. What am I talking about? What I believe to be plans by the Obama administration to, in effect, seize your retirement funds and use them to finance their deficit spending. Remember … there are more than $3 trillion dollars sitting out there in individual retirement, IRA and 401K plans. Politicians just cant stand the idea of this much money sitting out there in private investments … out of the grasp of politicians. So …. Something needs to be done. And sure enough, something is going to be done. The Treasury Department and the Department of Labor were going to start taking comments on ways to promote the idea converting 401(k) savings and IRAs into annuities or other steady payment streams. Well you can finally take a look at this document for yourself:
Request for Information Regarding Lifetime Income Options for Participants and
Beneficiaries in Retirement Plans
Here, I’ll post a little to get you started:
The Department of Labor and the Department of the Treasury (the “Agencies”) are currently reviewing the rules under the Employee Retirement Income Security Act (ERISA) and the plan qualification rules under the Internal Revenue Code (Code) to determine whether, and, if so, how, the Agencies could or should enhance, by regulation or otherwise, the retirement security of participants in employer-sponsored retirement plans and in individual retirement arrangements (IRAs) by facilitating access to, and use of, lifetime income or other arrangements designed to provide a lifetime stream of income after retirement. The purpose of this request for information is to solicit views, suggestions and comments from plan participants, employers and other plan sponsors, plan service providers, and members of the financial community, as well as the general public, on this important issue.
That’s a lot of government-speak. Can you read between the lines? What is the real plan here? Behind this nonsense about “lifetime stream of income after retirement” language is a lovely little plan to force you to finance the Democrat’s deficit spending. The plan is to play into the current economic fears. “Never let a good crisis go to waste.” Remember the words of Rahm? The Democrats want you to question whether or not Wall Street is the right place to invest your money. Wouldn’t you be safer if the government kept it for you? The government wants you to believe that it can do a better job of investing and managing your retirement than you can. And for a lot of people who believe that government is the answer, they may fine with this. It’s not fine with me, and, I suspect, it’s not all that fine with you.
Don’t believe me? Here is how these agencies present their reasoning:
Accordingly, with the continuing trend away from traditional defined benefit plans to 401(k) defined contribution plans and hybrid plans … employees are not only increasingly responsible for the adequacy of their savings at the time of retirement, but also for ensuring that their savings last throughout their retirement years … In recognition of the foregoing, the Agencies are considering whether it would be appropriate for them to take future steps to facilitate access to, and use of, lifetime income or other arrangements designed to provide a stream of income after retirement.
Here is one of the questions asked in this document from the Treasury Department and the Department of Labor:
13. Should some form of lifetime income distribution option be required for defined contribution plans (in addition to money purchase pension plans)? If so, should that option be the default distribution option, and should it apply to the entire account balance? To what extent would such a requirement encourage or discourage plan sponsorship?
Okay, what is this question really asking? First, it wants to know if the government should FORCE you to contribute money to an income distribution option. Then the second part of the question wants to know if this should be the standard retirement option, unless you choose to also put your money elsewhere.
OK .. I’m a little disjointed here. Let me try to wrap up all of this up in one neat package.
Obama’s budget is setting records in deficit spending. Obama is proposing borrowing every close to the amount of money that the Republicans borrowed in a single year .. but Obama is proposing borrowing that sum EVERY SINGLE MONTH throughout his term of office and beyond.
Earlier this week I told you of a story from the investment press which stated that investors now look at blue chip stocks like Coca Cola as better and safer investments than U.S. Government treasury certificates. China has signaled that it is not in the mood to buy many more U.S. government securities. This is how we finance our debt! If investors and other nations won’t voluntary finance our debt, what does our government do? Well, our government does what governments always do. Fall back on its unique ability to use force to accomplish its goals. There’s a problem here. We aren’t going to force China to buy more Treasuries … so where is the force to be applied? YOU, that’s where.
The government is talking about some form of “lifetime income distribution” and “lifetime stream of income.” (Isn’t this what Social Security was supposed to do?) But just HOW does the government provide this “lifetime” income? Simple … by FORCING you to take all or a portion of your retirement funds and invest them where China won’t go; invest them where private international investors no longer want to go; invest them in Treasury Certificates. Oh yeah … they’ll probably come up with some fancy new name for some fancy new type of T-bill … but the goal and the effect will be the same. You’ll see your money seized by government and used to finance the insane spending plans of politicians .. Democrat and Republican.
Stay alert folks. The government has wonderful ways to couch this in language that seams harmless and innocuous. It’s a money-grab. Nothing less.
The Foolishness of Most 401(k) Plans
Posted by Harley in Managing Your Money on November 2, 2009
The Foolishness of Most 401(k) Plans – Unfortunately, most 401(k) plans only allow investments in mutual funds whose high administrative fees eat into the returns of the participants. This fact increases the likelihood of loss as most investors chased performance versus being strategic investors. Case in point, Peter Lynch the famed money manager of one of the best performing mutual funds (The Magellan Fund) from 1970-1990 documented that most investors in the Magellan Fund lost money because they never stuck with it and were constantly chasing performance. Therefore, until employers can structure their 401(k) Plans for employees with much more flexibility and not just more mutual funds, the likelihood is that most employees are going to suffer further losses in their 401(k) plans if they remain in the broad overall market that is presently being manipulated by the Wall Street elites with all the government stimulus money. The market has only recaptured about half of what it lost in 2008 and just like the 30s is going to take a dive perhaps worse than it did in 2008. Consequently, to take advantage of this prolonged recession with many more financial surprises on the horizon, the general population better learn how to be strategic investors.
US MARKET NEWS:- UPDATE - Tyco International profit beats forecasts (at Reuters)
- Wall St futures point to higher open as data eyed (Reuters)
- Stocks struggle to hold gains after Fed caution (at Financial Times)
- Stocks set for early gains as investors await more earnings (at CNNMoney.com)
- Wall St futures point to higher open; data eyed (at Reuters)
