Tag: Annuities

Buying insurance and annuities

Two kinds of insurance products are often sold as investments, and should not be:

  • Life insurance
  • Annuities

There may be a place for both of them in your financial plan.  But they are often bought for the wrong reason because they are often misrepresented by the agent or misunderstood by the buyer.

Insurance products are complex and difficult for a layman to understand.  Let’s first review the basic purpose of these products.

Life insurance – its primary purpose is to replace the income that is lost to a family because of the premature death of the primary earner.  A young family with one or more children should have a life insurance policy on the earners in the family.  Ideally the insurance is will allow the survivors to continue to live in their accustomed style and pay for children’s education.

This usually means that younger families need more insurance.  However, there will be a trade-off between what a young family needs and what they can afford.  To obtain the largest death benefit, I suggest using a “term” policy.   “Whole Life” policies which have some cash value generally do not provide nearly as much death benefit and are less than ideal as investment vehicles.  Whole life policies are often sold using illustrations showing the accumulation of cash value over time.  What most people don’t realize is that illustrations are based on assumptions that the insurance company is not committed to.  This is the point at which an advisor who’s not in the business of selling insurance can prevent people from making mistakes.

Life insurance can also be used for other purposes.  One popular reason was to pay for estate taxes.  However, changes in the estate tax exclusion amount have made this much less attractive except to the very wealthy.

Annuities – useful for providing an income stream that you cannot outlive.  Like life insurance, it comes in a dizzying array of options that the average layman has trouble understanding. It is also one of the most commonly misrepresented insurance products.

Some of the most heavily promoted annuities are sold as investments that allow you to get stock-market rates of return without risk.  That’s one of those “too good to be true” offers that some people simply can’t resist.  The problem is that few people either read, or understand the “small print.”  Insurance companies are really not in the business of giving you all the upside of the stock market and none of the downside.  If they did, they would quickly go out of business.

These products are popular with salespeople because they pay high commissions.  Unfortunately they also come with very high early redemption fees that often last from 7 years to as much as 16 years.

If you have been thinking about buying a life insurance policy or an annuity you should first get some unbiased advice on what to look for.  Most insurance agents are honest, but like most sales people they would like you to buy their product.  It would be wise to get advice from someone who is an expert, but who is not getting paid to sell you a product.  There are a number of financial advisors who will provide guidance.  At Korving & Company we are Certified Financial Planners™ (CFP®) and licensed insurance agents, but we do not sell insurance products.   Since we don’t get paid to sell insurance we can evaluate your situation, advise you, and if life insurance or an annuity is what you need we can refer you to a reputable agent who can get you what you need.

Don’t make these common mistakes when planning your retirement.

Planning to retire? Have all your ducks in a row? Know where your retirement income’s going to come from? Great! But don’t make some basic mistakes or you may find yourself working longer or living on a reduced income.

Retirement income is like a three legged stool. Take one of the legs away and you fall over.

The first leg of the stool is Social Security. Depending on your income goals, do it right and you can cover part of your retirement income from this source. Do it wrong and you can leave lots of money on the table.

The second leg is a pension. Many people have guaranteed pensions provided by their employer.  But these are gradually disappearing, replaced by 401(k) and similar plans known as “defined contribution” plans. If you don’t have a pension but want a second guaranteed lifetime income you can look into annuities that pay you a fixed income for life.

The third leg of the stool is your investment portfolio. This is where most people make mistakes and it can have a big impact in your retirement.

Mistake number one is leaving “orphan” 401(k) plans behind as you change jobs. These plans often represent a large part of a typical retiree’s investment assets. Our advice for people who move from one company to another is to roll their 401 (k) assets into an IRA. This gives you much more flexibility and many more investment choices, often at a lower cost than the ones you have in the typical 401(k).

Mistake number two is trying to time the market. Many people are tempted to jump in and out of the market based on nothing but TV talking heads, rumors, or their guess about what the market is going to do in the near future. Timing the market is almost always counter-productive. Instead, create a well balanced portfolio that can weather market volatility and stick with it.

Mistake number three is “set it and forget it.” The biggest factor influencing portfolio returns is asset allocation. And the one thing you can be sure of is that over time your asset allocation will change. You need to rebalance your portfolio to insure that your portfolio does not becoming more aggressive than you realize. If it does, you could find yourself facing a major loss just as you’re ready to retire. Rebalancing lets you “buy low and sell high,” something that everyone wants to do.

Mistake number four is to assume that the planning process ends with your retirement. The typical retiree will live another 25 year after reaching retirement age. To maintain you purchasing power your money continues to have to work hard for you. Otherwise inflation and medical expenses are going to deplete your portfolio and reduce your standard of living. Retirement plans should assume that you will live to at least 90, perhaps to 100.

Retirement planning is complicated and is best done with the help of an expert. Check out our website and feel free to give us a call. We wrote the book on retirement and estate planning.

Death and Taxes

The old saying about death and taxes being the only things that are certain is only partly true. Taxes change. Death is certain. The end of our lives is something that we face only reluctantly, if at all. When someone close to us dies, the effect is al­ways sadness. When a spouse or parent dies, the effect is traumatic.

Because death is an unpleasant subject, most people prefer to spend their time thinking of more pleasant subjects.  They believe that they have done their planning if they meet with an attorney to have a will or trust document prepared.  Once this is done the feeling is that the planning process is complete.  Unfortunately that’s rarely true.  This traditional view of estate planning gives your heirs the view from thirty thousand feet but often fails to provide the guidance that surviving spouses or children really need.  Here is an example from real life.

Sue Smith (not her real name) became a widow after her husband, Sam’s, brief illness. Sam had a small account with me but the bulk of his portfolio was distributed among a number of different investment firms and mutual fund custodians.  Only Sam had a complete picture of the family’s finances and he rebuffed suggestions to consolidate his assets and do planning beyond reviewing his will on a regular basis.  Sam retired after a career as an executive at a large corporation.  He had been a take-charge guy all his life, both at work and at home. He had been the sole income earner, made the investment decisions and paid the bills, while Sue was in charge of the home and children. They were a very typical couple.  Both were healthy, until Sam had a sudden stroke that left him incapacitated and led to his death a few weeks later.  Sue was suddenly alone.

In a matter of hours Sue had to make a number of decisions. Some required immediate action, such as the selection of a funeral home and the arrangement of the funeral service.  Shortly after the funeral Sue realized she needed help and asked me to be her “financial advisor” and I agreed.  We met at her home to gather basic information.  I began by asking her basic questions.  What was her income now that she was single? What level of income would she need to maintain her lifestyle?  Did she have any debts?  What were her regular bills and how were they paid?  What were her financial assets and where were they?  Did her husband have a life insurance policy or annuity?

The answer to all of these questions was “I don’t know.”

The psychological result of being left alone and unsure of herself was severe.  Sue was overwhelmed. This was a crushing burden to fall on someone who had never been required to take care of financial issues. It was as if a child had been dropped in the middle of dark woods with wild animals prowling around. The result was not only deep sadness but also fear and paranoia. Since her husband had always taken care of the fam­ily finances, she felt unprepared to handle major decisions and was terrified of being victimized. And because Sam had not left an in­struction manual for her, Sue went through a long period of grief combined with anger and confusion.

Since Sue did not have a the information that we needed, we had to go through Sam’s files, make phone calls and watch the mail and as bills and statements came in to get an true picture of her assets, income and expenses.  It took several months before we had a good handle on her finances.

Fortunately, Sam left Sue with a sizeable estate and I was able to provide all the income she needed as well as leaving a sizeable inheritance for her heirs.  However, Sue never over­came the issues that surfaced after her husband’s death, and it made her life as a “suddenly single” person very unhappy.  Sam never provided her with the guidance she needed once he was gone and it affected her in a very profound way.

As a result of my experience with Sue and a number of other widows who came to me for help, I prepared a manual that became a book, Before I Go, which I provide to all of my clients.   It provides the answers to the questions that are not addressed by the usual estate planning documents but are the questions that those who are left behind need to know.  The view from thirty thousand feet is not enough when it comes to managing the family finances and too often the details are ignored unless couples are made aware of the need for detailed planning that goes beyond preparing the will or trust.

 
 

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