Life insurance in the fast lane
By Steve Savant
Ash Brokerage Corporation
When financial magazines need filler articles, they always appear to choose one subject — life insurance. And it’s never pretty. It seems like every single columnist is a bombastic blowhard pontificating on the rip off of life insurance.
Day in and day out, these “experts” make uninformed, yet confident assertions about life insurance. And they don’t have clue. Yet the myth mongers just keep churning out their fables and never check their facts.
What’s worse? If you actually followed their advice over the last five years, then half your portfolio would be gone. How can you hold yourself out as a third-party financial authority with a record like that?
So when you have nothing to trumpet, you blast out a column with just enough truth to invalidate an entire industry.
And if it isn’t the headlines in trade publications, then it’s the lead story on cable TV. The talking heads can fabricate a single piece of yarn into a full blown sweater that comforts their listeners like a straitjacket.
The arguments are wound so tight that any loose thread can unravel their talking points. Sometimes I scream at my TV: “Hey girlfriend, my FICO score is fine — it’s my tax bill that’s killing me.”
If I paid less in taxes, I’d have more money to spend. Then, I wouldn’t need to call your show and get your approval to spend money on an item I want.
Plus, there are several nationally syndicated radio shows on the air today. They’re the pundits of the “pure religion” — the religion of managed mutual funds.
I have no problem with holding mutual funds as part of an overall portfolio. But they sound off like carnival barkers with the same old tripe: “Life insurance is a horrible investment. Just look at all those fees and expense loads.”
And here’s my megaphone message response: “What about your fees, especially the undisclosed fees, taxes and the beta risk?”
Speaking of mutual funds losing money, how do you explain to a client why they’re paying capital gain taxes on a loser fund? Every January, clients receive an annual statement displaying a loss and a week later they receive a 1099 on the same fund for capital gains for internal fund trades that netted a profit that year. So why don’t the critics talk about paying taxes on a loser fund?
Every investment has a price tag. And every mutual fund has a price tag, starting with the expense ratio.
The expense ratio is a mutual fund's operating expenses expressed as a percentage of average net assets. The expense ratio includes management, administrative, marketing and distribution fees. It is calculated annually and directly reduces the fund's returns to shareholders. The industry average seems to settle around 115 basis points. I heard about a new study stating that the median asset-based fee, charged by firms, is 90 basis points of the average assets under management. (Seems low, but I’ll use it.) So now I’m at 205 basis points — why don’t they talk about that?
Some unfamiliar variable costs can comprise and trading expenses. Whenever a trade is made, a commission is paid. These expenses are inserted in the statement of additional information.
This statement is not automatically provided to investors. The prospectus is, but not the SAI. It is provided upon request, but how many clients know that? How many clients order it? No one seems to talk about that either.
As a result, most fund owners are not aware of these costs and additional fees. In some funds these costs and fees can exceed the annual expense ratio. The average annual SAI charge is around 140 basis points. When you add the SAI cost of 140 basis points to 205 basis points, you’re at 345 basis points. But why aren’t they talking about this?
When I design a non-modified endowment life insurance contract, it generally expenses out an average 80 to 115 basis points during distribution. In a long-term retirement strategy, those expenses are below the average mutual fund and advisory fees.
Additionally, they’re tax free as long as the contract is held for the life of the insured and TAMRA compliant withdrawals to basis and policy loans of gain are distributed in a level income stream, calculated from an in force ledger. (Whew, that was long, but it’s my disclaimer.)
The real debate centers on the accumulation period, where the internal expense loads of a life policy are high. You can lower the cost of insurance to the minimum, non-modified endowment death benefit amount to mitigate main expense load, which is the cost of insurance. But those costs are generally mitigated by the compounding effect of tax deferral.
Bottom line: if the client is in a blended federal tax bracket of 22 percent or higher, life insurance is a viable option for long-term retirement scenarios. So it’s a hold position. Life insurance, designed correctly, can be a significant retirement option.
It’s not an either/or proposition of mutual funds versus life insurance. It’s measuring the net effect in real spendable income, all in and accounted for. Life insurance is a legitimate retirement option and should be treated as such.