Can Software Really Tell You How to Make Life Insurance Decisions?

By
Rebecca DeSoto, CDFA®
May 23, 2018
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Technology provides ample flexibility when it comes to making purchasing decisions these days. You are no longer required to go somewhere, talk to anyone, or spend a great deal of time comparing options. The internet is a convenient place that is accessible wherever you are, doesn’t require you to talk through your purchase with a sales representative, and allows you to spend as much or as little time researching your decision as you’d like. This can make life more efficient and simpler, but when it comes to important decisions like purchasing life insurance, you run the risk of simplifying the decision too much, not fully understanding what you’re purchasing, and purchasing a policy that may not provide the most flexibility and options later in life when you need it most.

There is no shortage of information available about life insurance on the internet. A lot of it has negative connotations. From policies that historically haven’t provided what was promised, to salespeople coaxing consumers into products, and one size fits all advice. Most people come in with the base knowledge that they need term insurance if they have a spouse and children they want to protect financially if they pass away. Combine these two factors and people generally use the internet to find an inexpensive policy. However, when making a decision about life insurance there are a few important factors to consider besides simply the cost and the amount of insurance, namely living benefits or accelerated benefit riders, and whether the policy has a cash-value component.

While all policies are required to have a terminal illness rider, meaning the insured has the option of utilizing the death benefit prior to passing away if diagnosed with a terminal illness, not all policies come with a chronic or critical rider. A chronic illness rider can accelerate your death benefit if the insured is diagnosed with an illness and unable to perform two of the six daily activities of living (bathing, continence, dressing, eating, toileting, and transferring). Considering how expensive long-term care insurance can be these days, having a chronic illness rider on a life insurance policy can provide some level of affordable protection (depending on your age when you get the policy). The critical rider can apply to injuries or illness and can include things like heart attack, stroke, paralysis, severe brain trauma, and diagnosis of invasive cancer. Having these riders in addition to one that protects against terminal illness adds a much more encompassing level of protection to the insured that can provide flexibility and options in an unplanned emergency.

Life insurance can also have a cash-value component or investment vehicle in addition to providing protection. Cash-value in a permanent life insurance vehicle is one of the only ways to build non-taxable income in retirement besides a Roth IRA. Other than the tax benefits, it can also enhance your plan with diversification and stability. It generally has some level of protection, called a “floor” that assets invested in the stock market wouldn’t have, meaning there is protection against the downside while allowing the investor to take advantage of positive markets.

Whether or not you choose a policy that has all of these components, it is important to consider which benefits are meaningful to you and are worth paying for. It can be hard to determine the pros and cons without talking to a licensed professional that has your best interest in mind and it can be difficult to really understand what you’re purchasing just by browsing the internet for the least expensive policy. Just like any insurance, the ideal situation is not needing it. But if you do, you’ll be happy you did your research and understand the vehicle you chose.

This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. This article is intended to assist in educating you about insurance generally and not to provide personal service. Guarantees are based on the claims-paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges, and restrictions, and the policyholder should review their contract carefully before purchasing.

If you decide to downsize after retirement and have lived in your home for at least two years out of the last five from the date of sale, you can exclude up to $250,000 in capital gains from the proceeds and almost double that if you are married.

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By
Steve Hartel, MBA, AIF®
March 19, 2018

In 2001, the Securities and Exchange Commission (SEC) adopted a new rule to supposedly prohibit mutual fund names that may mislead investors about a fund’s investments and risks. The rule required a fund with a name suggesting that the fund focuses on a particular type of investment (e.g., “stocks” or “bonds”) to invest at least 80% of its assets accordingly. Previously, funds were subject to a 65% investment requirement.

This rule resulted in many funds changing their names, changing their investments, or both. In general, things are better now than they were before the 2001 rule. However, today’s mutual fund names and categories can still be confusing and/or misleading.

Blurred Boundaries

For example, let’s look at names that connote where the fund buys its investments. These names usually contain words like “Domestic,” “International,” “Global,” and “World.” Imagine a Domestic Large-Cap fund, whose name suggests it buys large, U.S. companies. But if the fund owns mostly companies in the S&P 500 Index, those companies might be generating up to 50% of their revenues outside of the U.S. The large multinational firm might be based in the U.S. but do business in countries all around the world. The opposite may be true of funds with “Global” or “World” in their name; those companies based in foreign countries may be deriving some or all of their revenue from dealings with the U.S.

Undefined Jargon

Another confusing category of funds is called “smart beta”. Investopedia defines Beta this way1:

“Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), which calculates the expected return of an asset based on its beta and expected market returns.”

Got that? Let’s assume you totally understand beta and CAPM. So, what is “smart” beta? If beta is a measure of volatility, then a reasonable person might assume that “smart beta” is a more intelligent measure of volatility, right? Let’s see if the definition of smart beta contains the word “volatility.”

Investopedia defines smart beta this way2:

The goal of smart beta is to obtain alpha, lower risk or increase diversification at a cost lower than traditional active management and marginally higher than straight index investing. It seeks the best construction of an optimally diversified portfolio. In effect, smart beta is a combination of efficient-market hypothesis and value investing. Smart beta defines a set of investment strategies that emphasize the use of alternative index construction rules to traditional market capitalization-based indices. Smart beta emphasizes capturing investment factors or market inefficiencies in a rules-based and transparent way. The increased popularity of smart beta is linked to a desire for portfolio risk management and diversification along factor dimensions, as well as seeking to enhance risk-adjusted returns above cap-weighted indices.

Hmm. Not a single mention of volatility. Are you confused yet?

Growth, Aggressive Growth, Capital Appreciation, Equity Income

Growth sounds good, but how is it different from capital appreciation? Don’t they mean the same thing? Does aggressive mean faster, riskier, meaner, or something else? Equity income funds are supposed to be stocks that pay dividends, right? So, what category do you think the Dividend Growth Small & Mid-Cap Fund3 is? It has both “dividend” and “growth” in its name, but are they separate or together? Does the fund invest in companies whose dividends are growing, or does it invest in growth companies that also pay dividends? An investor would need to read the fund’s prospectus to find out for sure. I’m sure all good investors thoroughly read those prospectuses from cover to cover.

Reporting Problem

The SEC requires mutual funds to report complete lists of their holdings on a quarterly basis. So, the manager of the hypothetical Blah-Blah Domestic Large Cap Fund could buy a bunch of foreign small-cap stocks on January 1 and hold them until March 28. Then, the manager could sell them and replace them with domestic large-cap stocks, and report on March 31 that the fund was properly holding domestic large cap stocks as required. On April 1, the manager could buy back the foreign small cap stocks and repeat that process every quarter.

Conclusion

Mutual fund names and categories are more informative than they used to be, but they can still be quite confusing or misleading. Investors (and advisors) need to do their due diligence, fully read those prospectuses, and closely follow the actions of the fund managers. Is your advisor recommending mutual funds? Are they confident of what’s really in those funds? Are you? If you have any questions about the mutual funds in your portfolio, email me at steve.hartel@trilogyfs.com and I if I can’t answer your question, I will find someone who can.

  1. https://www.investopedia.com/terms/b/beta.asp
  2. https://www.investopedia.com/terms/s/smart-beta.asp
By
Jeff Motske, CFP®
August 31, 2018

There are some great advertisements that show you retirees traveling, gardening and enjoying their hard-earned reprieve from the workforce. It gives a great glimpse of how good retirement can be, giving folks something to strive for. However, it’s not the only reflection of retirement. Sometimes there are valleys to go along with those peaks, and one of the most distinct valleys that are experienced in retirement is mounting health care costs.

The financial weight of health care can start off with small steps, or small pills to be precise. Nine out of ten people 65 and older have commented that they have taken at least one prescription drug within the last 30 days.1 As health issues progress, so can treatments, with some people having multiple medications and continuous appointments, not all being covered by private health insurance. According to an annual estimate conducted by Fidelity, the average retiring couple “will need $280,000 to cover health care and medical costs”.2 While many expect to rely on Medicare for their health care costs, the program is not comprehensive. Fidelity’s figure includes deductibles, cost-sharing requirements for certain medications, as well as services and devices that Medicare doesn’t cover, like hearing aids. For the unprepared, these figures can be staggering.

Those who are unprepared can, unfortunately, find themselves sliding into practices where they are not taking care of themselves in retirement. According to the 2018 Economic Well-Being Report, a quarter of adults went without needed medical care because they were unable to afford the cost.3 Those who do go in for medical care can be overwhelmed by mounting medical costs. According to a study done by the Consumer Financial Protection Bureau, “43 million Americans owe a medical debt.”4 Stress-induced by medical issues combined with stress over mounting medical costs is not what people expect to experience in their retirement.

The key to good retirement planning isn’t to plan to maintain your current lifestyle. It is to plan for possibilities and scenarios that may not seem likely today, but that statistics show could impact your tomorrow. While these statistics can be very overwhelming, if you start saving early and work with a trusted financial professional, you can be fully prepared to enjoy your retirement. In the end, you need your finances to be in good health for those moments when your body can’t be.

https://www.iris.xyz/advisor/9-facts-about-retirement

http://time.com/money/5246882/heres-how-much-the-average-couple-will-spend-on-health-care-costs-in-retirement/

https://www.federalreserve.gov/publications/files/2017-report-economic-well-being-us-households-201805.pdf

https://finance.yahoo.com/news/4-tips-keep-medical-debt-overwhelming-174638865.html

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