Blog Archives

STYLE of Fixed Annuity

2/28/2017

Q. What are the benefits of fixed annuity products?

A. The main benefits of fixed annuity could summarized as STYLE, as explained below -

Stability: Premium is protected from market volatility.
Tax-deferred growth: Taxes on interest are not due until clients withdraw earnings
Yield: Purchase premiums are guaranteed to earn a set rate of interest for a specific time.
Liquidity: access to funds, free of early withdrawal charges, in certain situations outlined in the policy.
Estate planning: Generally, annuity death benefits are paid directly to beneficiaries avoiding the cost and delay of probate.

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What to do now if I emotionally pulled money out of stock market?

2/27/2017

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Q. I moved my money out of stock market during an emotional sell, now I regret my decision but I am scared back in. What should I do?

Q. If you are in the stock market for the long term, you can first develop a portfolio that fits your risk tolerance level and diversified enough, then stick to it instead of trying to time the market. So the answer is get back in now. If you really worry about putting all your money back all at once, you can do it in a dollar cost average fashion by putting a portion of it back in predetermined time frame, then rebalance occasionally according to your plan.

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Life Insurance Underwriting for People With Heart Disease and Heart Attack

2/26/2017

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February is American Heart Month!

One of the most common impairments life insurance applicants run into with underwriting is heart disease. It comes in many shapes and forms, as well as degrees of severity.

The broad category of heart disease can include mild issues such as an abnormal EKG, palpitations, mitral valve prolapse, or chest pain (angina). More commonly seen (moderate concerns) are issues like cardiomyopathy, arrhythmias, and atrial fibrillation. Additionally, there is a high frequency of the more severe cases of heart disease, such as congestive heart failure, those needing valve replacements and/or pacemakers, and those with histories of myocardial infarctions (heart attacks) with bypass, angioplasty, and/or stenting.

The underwriting of heart disease looks very closely at the cardiac testing results of the EKGs and echocardiograms, as well as stress and treadmill test results. Key factors they’ll be looking at, depending on the impairment or issue at hand, will be ejection fractions, wall thickness, condition and performance of the valves, and basic overall performance of the heart and circulatory system. Obviously, those who are diagnosed with heart disease at an earlier age are going to be more of a concern for possible progression than those that have onset later in life.

If a case presents with a heart attack history (myocardial infarction aka MI), obviously we know that’s a significant concern; heart attacks are the leading cause of death in America. Typically, after such an event, there’s going to be some kind of treatment to address the stenosis (narrowing of the blood vessels). Usually that will come in the form of coronary artery bypass graft (CABG), angioplasty (ANGP), and/or stenting (also known as percutaneous transluminal coronary angioplasty, or PTCA). After such an event, we’re typically going to be looking at a six-month postponement, and then a Table 4 (minimum) depending on the condition of the heart and coronary arteries after the event. Also considered is the age of the patient and if there are good cardiac follow-ups and cardiac testing results afterward.

The primary questions to be asked of a proposed insured that presents with this history are:

Age of onset or diagnosis? How long has it been/time since diagnosis?
What is the specific cardiac issue(s)?
How is it being treated? Are there good cardiac follow-ups?
If they’ve had an MI, did they have CABG or PTCA? If so, how many vessels?
Has recent cardiac testing been favorable? When was last Echo and/or EKG?
Any family history of CAD?
Any other significant health issues or impairments?

The underwriting of an applicant with heart disease is very dependent on the individual case, as well as what’s in the doctor's and cardiologist’s notes. Time passed since the event will also be a major factor.

Please contact us if you need help with your life insurance needs.

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Pros and Cons of Taking Retirement Plan Loans

2/25/2017

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Q. What are the pros and cons of taking loan from my 401(k)?

A. For someone who needs money, a loan from 401(k) or any retirement plan is a good option. Here are the pros:

No credit check is required which means no lengthy approval process;
Low interest rate on the loan, typically much lower than loans from other sources.

But there are cons as well:

3 Conditions to Meet
If you want to prevent the loan becomes a distribution from the retirement plan which carries tax and penalty, the following 3 conditions must be met:

The loan must be paid back in 5 years
The loan must be paid back with equal amount of amortization and on a quarterly basis
The loan balance may not exceed certain limits (usually $50,000)

It's important not to default on the loan, which means the loan will be viewed as a distribution and the tax and 10% penalty will be imposed. Also, once you leave the employer, you have to pay back the entire balance within a very short period of time.

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Lifetime Social Security Paid and Earned, Which is Higher?

2/24/2017

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Do you know how much social security tax you would have paid lifetime and how much you could get back in your lifetime as well?

Below is a Wall Street Journal estimate of lifetime taxes paid and projected benefits for sample couples retiring in 2020....

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I am Young and Healthy, Why Do I Need Life Insurance?

2/23/2017

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Q. I’m young and healthy. Why do I need to think about life insurance?

A. When we purchase something, ideally we want to buy it on sale. Well, life insurance is only on sale when you are young.

it’s much cheaper to purchase a life insurance as early as possible, so you can lock-in low, flat premiums now, which last for the entire term of your policy. For example, a healthy 45-year-old’s price can be triple what a healthy 25-year-old would lock-in.

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Interest Rate and Investment - Part D: Interest Rates and Stock Market

2/22/2017

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In our last blog post, we discussed how interest rates might affect economy and inflation. Now we will discuss the impact of interest rate changes on stock market and what should be your investment strategy in a rate rising environment.

How do the interest rates impact stock market?
1) Interest rates and stocks
When interest rates rise, consumers and businesses' cost of borrowing increase, this will decrease the consumer demand for goods and services and negatively impact corporations' bottom lines, thus putting pressures on stock prices.

2) Interest rates and bonds
When interest rates rise, bond yields rise, some investors will be attracted by the higher yields in the fixed-income products thus shy away from stocks, especially high-yield stocks that are typically viewed as bond proxies.

Investment Strategies in a Rising Rate Environment
1) Avoid long duration bonds
When interest rates keep rising, the bonds' (especially long term bonds) prices (note, not yields) will keep dropping, which means if you bought at $1,000, you probably could only sell far less than $1,000. If you do want to invest in bonds, invest in bonds with shorter duration which means they are less sensitive to rate rises or invest in loans whose rates could adjust up with rates, such as float-rate bank loans.

2) Invest in stocks that could benefit from rising rates and inflation
When interest rates and inflation go up, banks, industrial, and producers of basic materials' shares tend to go up as they benefit from rising interest rates and inflation.

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Interest Rate and Investment - Part C: Rates and Economy and Inflation

2/21/2017

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In our last blog post, we explained the relationship between rates and yields. Now we will see the relationships between interest rates and economy and inflation.

Interest Rates and Economy
When interest rates fall, the cost of short term borrowing goes down which encourages consumers and businesses to spend, this will in turn stimulate the economy. The opposite will occur if the rates rise. The Fed regularly adjusts the rates with the goal to keep the economy growing at a healthy pace without too little or too much inflation. However, the Fed may not always be successful, for example, the rates were near zero in 2008 but the financial crisis still happened.

Interest Rates and Inflation
If there is any sign of inflation, interest rates (and bond yields) will tend to rise. If the Fed believes the economy is overheating, it will raise the interest rates therefore slow down the economic activities and consequently keep inflation in check. The Fed has a target inflation rate of 2% which is about where rate is today.

In next blog post, we will discuss how does interest rate affect stock market and what should be your investment strategy if the rates are about to rise.

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Interest Rate and Investment - Part B: Differences Between Interest Rate and Bond Yields

2/20/2017

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In our last blog post, we answered the question - what sets interest rates, and explained short-term, intermediate-term, and long-term interest rates each influence different financial products' rates.

Differences Between Interest Rates and Bond Yields?
Interest rates typically refer to annual interest owed on a loan. Bond yields refer to what an investor expects to earn, which often times are different from the interest rates because bonds once in the market, could be traded at prices different from their nominal values.

For example, a bond with face value of $1,000 and 10% interest rate. If it's traded at $1,000, then its yield is 10%. If the bond's price falls to $900, buying it would give the buyer a current yield of 11.1%. If an investor buys it at $1,100, the yield will dip to 9.1%.

From this example, we could see that a bond's price and yield move in opposite directions.

In our next blog post, we will discuss the relationships between interest rates and economy and inflation.

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Interest Rate and Investment - Part A: What Sets Interest Rates

2/19/2017

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In this mini blog series, we will discuss several key questions related to interest rates and investment.

What Set Interest Rates?
It depends on what interest rates we are talking about here.

Short-term and Intermediate-Term Rates
For short-term and intermediate-term interest rates, the Federal Reserve plays a key role because its Federal Open Market Committee meets several times a year and set a target for the Federal Funds Rate. Banks lend their excess reserves other other banks overnight based on this rate. Furthermore, an array of other rates, such as adjustment mortgages, credit card rates, and home equity lines of credit rates, are based on the federal reserve fund rates.

Long-term Rates
For long-term loan loan rates, there are other important factors, such as expectations for inflation and economic growth. Traders with such expectations buy and sell Treasury bonds thus push their yields up and down. When yields go up, they pull up 30-year mortgages rates, corporate bonds and state and local government bonds rates, and other loans with rates tied to long-term bond yields. In other words, when the Fed raises rates, long term yields don't always rise.

In our next blog post, we will answer the question - what's the difference between interest rates and bond yields?

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Is My Money at a Brokerage Account Protected by Data Breaches?

2/18/2017

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Q. Is my brokerage account protected from identity theft and data breaches?

A. Most big brokerage firms such as Fidelity, Vanguard, and Schwab cover 100% of any losses in your brokerage accounts due to unauthorized activities.

However, if you share your user name, password or answers to security questions with a person or a service, such as a financial adviser or an aggregator site (e.g. Mint.com), you may have a tougher time to get the brokerage firm to pay your claim if money is stolen through a data breach at a third party.

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How Many Crowdfunding Portals Are Out There?

2/17/2017

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Q. How many crowdfunding portals are out there?

A. Based on the 2015 Crowdfunding Industry Report by Crowdsourcing LLC’s Massolution.com, the latest industrywide data available (the report is not free, though), shows $16.2 billion raised through the various types of crowdfunding in 2014, up 167% from the year before. At the end of 2014 there were more than 1,250 crowdfunding portals world-wide, versus 850 in 2012.

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Why Do Portfolio Rebalance If It May Cause Wash Sale Rule Violation?

2/16/2017

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Q. Could portfolio rebalance lead to wash sale rule violation? If yes, why should I do periodic rebalancing?

A. Yes, portfolio rebalance may cause a wash sale, but you should still do portfolio rebalancing, the reason is simple - your motivation isn't tax savings, but to realign your assets in a manner consistent with your asset allocation!

There's no harm to be tax-wise, but it should not overrule the more important objectives of your investment portfolio.

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Secure Life GUL 3 - One Stones That Knocks Out 3 Birds

2/15/2017

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Q. Is there one policy that can help with life insurance, chronic illness coverage, and retirement income at the same time?

A. Yes, Secure Lifetime GUL 3 from AIG is a new and innovative stand-alone product that can help consumers unlock available longevity and chronic illness riders for even greater guarantees.

Background
While term insurance is the most popular form of life insurance policy – mostly because it’s inexpensive up front – it only provides temporary coverage. For longer term (permanent) needs, there are a variety of choices – with one of the most secure and economical options being Guaranteed Universal Life (GUL). Often, GUL is a ‘no frills’ policy – offering few additional benefits. But, the Secure Lifetime GUL 3 provides innovative extras!

The Problem
Here is a hypothetical example. George is 50 years old and looking for $1,000,000 of coverage for his family. He wants to provide life insurance for his spouse well into retirement, but sees that need dropping as he approaches the latter retirement years. He is also concerned about the impact of a chronic illness on his retirement.

The Solution
He uses Secure Lifetime GUL 3 by paying $24K/yr for 10 years. Then, he pays nothing for 10 years.

Benefit 1. Retirement Income Benefit
At age 70, he takes $24K/yr out of the policy for 10 years (tax free!) using a unique feature of this policy – The Lifestyle Income Solution! This withdrawal of $24k / year for 10 years from the policy will reduce the amount of life insurance coverage from $1M to $420,000.

Benefit 2. Life Insurance Benefit
$1,000,000 to age 70; then it steps down to $420,000 by age 80 and continues to age 100. Guaranteed!

Benefit 3. Chronic Illness Benefit
While several options are available, George chooses to provide 2% of the life insurance coverage as a monthly chronic illness benefit – starting at $20,000/month during his earning years. The benefit then steps down to $8,400/month during retirement. Guaranteed!

If you are interested in knowing more about this innovative product from AIG, please contact us.

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Full Retirement Age Increases For the First Time Since 2005

2/14/2017

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Q. I heard that the full retirement age is going to increase in 2017, is it true?

A. Yes, it's true - since 2005, for every prospective retiree, age 62 is the time one becomes eligible for early retirement benefits, and age 66 is the full retirement benefits age. However, the 11-year hiatus of full retirement age adjustments has now come to an end, see table below. In short, in 2017, if one were born in 1955, the full retirement age is no longer age 66. Instead, it is becoming age 66 and 2 months, and it will keep increasing for the next 4 years!

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North American Underwriting Improvement Case Stuies

2/13/2017

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North American Life recently had some major underwriting improvements, for people due to health reasons who previously could only get Standard class, now could get Preferred class, depending on which product the person is buying, it could save consumers a lot of money.

See some case studies below. If you want to know about how you could benefit from these NA underwriting improvements, please contact us.

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Can I Use Equity Line of Credit As My Substitute for Cash Reserves?

2/12/2017

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Q. Can I open an equity line of credit in place of the cash reserve which if I put on a savings account would earn almost nothing?

A. It is usually a good idea to use your equity line of credit as your cash reserve, if you understand the potential risks.

First, the advantages - equity line of credit is a mortgage loan with your house as the collateral, because it has a collateral, its interest rates are typically a lot lower than credit card debts which credit companies have no collateral from you. Even better, with equity line of credit, if you don't use it, it carriers no interest charge (some banks might charge you an inactivation fee).

Now, the potential risk - a bank could cancel your equity line of credit at any time. Unfortunately this could happen at the time you need access to the money the most - when you lose a job. Worse, if your house value also drops while you lost your job (millions of Americans had this experience during the 2008 financial crisis), or the banks find out you are unemployed, they may cancel your equity line of credit account.

If you understand this worst case scenario and be prepared for it, then it's a good idea not to put lots of rainy day funds in a bank account earning nothing, an equity line of credit is a great alternative.

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When Is The Best Time to File Tax Returns?

2/11/2017

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Q. When is the best time to file tax returns?

A. The best time to file tax return is in early April, here is why.

Employers, banks, insurance companies, mutual funds and brokerage firms are required to mail Form W-2 by Jan. 31, and Forms 1099-Div and 1099-B by Feb. 15. However, as you’ve probably learned from past experience, some of those initial 1099 forms may contain incorrect information, prompting firms to issue amended 1099s later.

If you file before receiving the final 1099, you’ll have to redo your return and file an amended one, adjusting the amount you owe or any refund. This may result in added fees from your tax preparer for the extra work, as well as the extra time and hassle for you.

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Can I Cancel My Life Insurance Policy?

2/10/2017

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Q. Can I cancel my life insurance policy later?

A. Yes, if you are the owner of a life insurance policy, you can cancel the policy at anytime for any reason. The insurance company is obligated and cannot cancel the contract, even your health condition deteriorates later, unless they catch any misrepresentation by you during the first two years or in the event of fraud.

Before you cancel, you should explore alternatives with you agent. There may be alternatives available. In addition, there may be tax consequences if there is a policy gain.

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How to Estimate My Future Social Security Benefit Payment?

2/9/2017

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Q. How to know my future social security benefit amount?

A. First, you will receive in the mail your social security statement once every five years from age 25 to 60 (and every year after age 60). The statement is mailed to you three months before your birthday.

If you can't wait that long, you can visit Social Security Administration's website (www.ssa.gov/myaccount/) at anytime to estimate online.

The estimate is done based on your past earnings and assume your current earning will remain the same until age 62. Of course, if your future earnings will be higher, your actual social security benefit payment will be higher (or lower if your future earnings will drop or if you retire early than age 62).

You can do a more precise (and more complicated) estimation of the social security benefit by using the "Detailed Calculator" on the SSA website.

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A Real Competitor to Mint

2/8/2017

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If you are tied of the same credit card balance transfer offers from the same sponsors of Mint.com (which is a great personal finance site), you will be pleasantly surprised to find a real competitor to Mint:

Clarify Money

Clarity Money works a lot like Mint.com by connecting to all of your accounts at a central dashboard, but what's more, Clarity Money provides real-life recommendations that can improve your financial health, for example, it can suggest you ways to save money by lowering your recurring bills, cancelling online subscriptions, setting up savings account with its savings features.

Clarify Money is free, and only charges you a portion of your savings if it successfully helps you lower your bills.

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What Are the Downsides of Portfolio Rebalancing?

2/7/2017

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Q. What are the downsides of rebalancing my portfolio periodically?

A. We have discussed why it's important to rebalance portfolio periodically, however, there are downsides of portfolio rebalancing too, some are highlighted below -

Additional cost. Rebalancing will not only have transaction cost, but also lead to cost (for taxable accounts).
Hurt your performance. Rebalance builds on the premise that a investment's return has the tendency to return to mean, so a loser might produce better return and winner might be a loser next time. However, an investment's return to mean could take long time and different investments' regressions to mean could easily have a mismatch.
Risk and Return trade-off. If your risk tolerance level is high, buy and hold stocks could lead to greater performance for the long term, because history has proven that stocks tend to have better return in the long term. The benefit of rebalance is really in the short term so you could avoid some short term pain, like the one experienced in 2008 crisis. But if you are immune to such pain, there is no need to rebalance!

In short, rebalance your portfolio or not is a personal level decision, for some investors, not doing it might be more beneficial.

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Eligibility for Full Spousal Social Security Benefit

2/6/2017

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Q. When my father recently passed, is my mother who is 68 entitled to her husband’s full benefit?

A. Yes, since your mom is beyond her full retirement age, she is entitled to 100% of what her husband was receiving.

Your mom could visit a local Social Security office and find out more details. The staff there can tell your mom exactly how much your mom is entitled to.

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3 Phases of Retirement Spending and the Implications - Part B

2/5/2017

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In our last blog post, we described three phases of retirement spending - Go-go, Slow-go, and No-go. Now we will show you how the actual retirement spending might look like.

Retirement Spending Smile
David Blanchett of Morningstar used the Rand Health and Retirement Study, which provides some longitudinal data on retiree spending behaviors over time and found that real retirement spending declined a little at the beginning of retirement, accelerated its decline in the middle retirement years and then slowed its decline again in the final decade, in a pattern that was dubbed the retirement spending smile.

Implication of 3 Phases of Retirement Spending

a. Composition Changes
While the total actual spending declines slightly each year, the composition of retirement spending changes quite significantly over time. For example, as retirees age, some spending categories steadily decline, e.g., insurance premiums, as life insurance, disability insurance and, eventually, automobile insurance become less necessary; transportation, as the household consolidates to one or even no cars; housing, as spending on new furniture and other household goods slows down; and clothing. Other categories, meanwhile, rise — most notably, health care.

b. Health Care Cost Rises, But Not That Much
We now know two things - 1) total retirement spending declines year after year; 2) health care costs rise year after year. This means that even though health care costs increase in later stage of life, the increase is not significant enough to push up the total retirement spending.

c. More Realistic Retirement Spending Budget
If you want to plan your retirement spending, it probably makes more sense to break the expenses into several major categories - basic spending (expenses you can't escape from), discretionary spending, health care, and taxes, then you can make different annual percentage change assumptions for these different categories of expenses.

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What Are the Major Assets and Their Representative Indexes?

2/4/2017

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Q. I want to build a diversified portfolio. What are the major asset classes and their representative indexes?

A. Based on modern portfolio theory, the best way to build an optimal portfolio is to include asset classes that don’t all behave in exactly the same way. The first step is to identify the major asset classes.

The table below shows the 12 major asset classes and their representative indexes -

During the 2008 financial crisis, almost all of the assets' correlations jumped which is bad for investors. However, that high correlation has since dropped which is a good news for diversified investors.

Also noticable is that cash is part of a portfolio, why?

For readers who are interested in seeing more findings from a recent study, this financial planning magazine article is a good read.

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<<Previous

STYLE of Fixed Annuity

What to do now if I emotionally pulled money out of stock market?

Life Insurance Underwriting for People With Heart Disease and Heart Attack

Pros and Cons of Taking Retirement Plan Loans

Lifetime Social Security Paid and Earned, Which is Higher?

I am Young and Healthy, Why Do I Need Life Insurance?

Interest Rate and Investment - Part D: Interest Rates and Stock Market

Interest Rate and Investment - Part C: Rates and Economy and Inflation

Interest Rate and Investment - Part B: Differences Between Interest Rate and Bond Yields

Interest Rate and Investment - Part A: What Sets Interest Rates

Is My Money at a Brokerage Account Protected by Data Breaches?

How Many Crowdfunding Portals Are Out There?

Why Do Portfolio Rebalance If It May Cause Wash Sale Rule Violation?

Secure Life GUL 3 - One Stones That Knocks Out 3 Birds

Full Retirement Age Increases For the First Time Since 2005

North American Underwriting Improvement Case Stuies

Can I Use Equity Line of Credit As My Substitute for Cash Reserves?

When Is The Best Time to File Tax Returns?

Can I Cancel My Life Insurance Policy?

How to Estimate My Future Social Security Benefit Payment?

A Real Competitor to Mint

What Are the Downsides of Portfolio Rebalancing?

Eligibility for Full Spousal Social Security Benefit

3 Phases of Retirement Spending and the Implications - Part B

What Are the Major Assets and Their Representative Indexes?

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