Blog Archives - PFwise.com

What Are Universal Life and Whole Life's Cost Differences?

10/31/2016

Q. I am trying to understand the cost differences between an Universal Life and a Whole Life policy. Can you help?

A. Sure. The most important difference between an universal life and a whole life's design is that pricing of an universal life policy is transparent - as a policy owner, you could see how much you are paying for cost of insurance, how much is your investment gain credit, how much is your admin cost, etc., while all these costs for the whole life product are bundled together you can't see the breakdowns.

Unfortunately such policy design has its advantages and disadvantages.

For advantages, it gives the universal life policyholders greater flexibility in terms of premium payments.

The disadvantage is, the universal life insurer has to guarantee each component, when the perfect storm hits, see our discussion in this blogpost, the insurer has little room to hide or manipulate the various components, which forced many universal life carriers to deliver the bad news of higher premiums to their existing policyholders. In contrast, the whole life carriers can manage the various pricing components behind the scene and be more flexible in today's low rate environment.

How To Rebalance My Portfolio?

10/30/2016

Q. I have a well diversified portfolio, how do I rebalance it?

A. There are two general methods when it comes to rebalancing a portfolio -

a. On A Calendar Basis
When you start your portfolio, you have an assigned percentage to each component in your portfolio. At one or more points of time in a calendar year, you look at your portfolio and readjust them to bring the percentages back to your original target. This is a lazy-portfolio approach and you don't create a lot of work for yourself.

b. On A Percentage Basis
Again, you have a predetermined percentage for each component in your portfolio, during any time of the year, if you see a component's percentage rises above or dips below a pre-determined percentage, for example, 5%, you adjust that component by bringing it back to your initial goal. This is a more dynamic process and needs more attention all the time.

How to Check Out An Insurer's Claim Record

10/29/2016

Q. How to check out an insurer's claim records?

A. It is critical to check out an insurer's claims record before you purchase a policy in advance so you could know whether an insurer has a tradition of hassling people about claims.

There is a central place you could find out such information - National Association of Insurance Commissioner's Consumer Information Source.

Where to Invest When Interest Rate Rises?

10/28/2016

Q. I am an income investor, what will be a good investment option when interest rate rises?

A. Income investors should look for interest payments that rises with interest rates. One option is Fidelity Floating Rate High Income (FFRHX), it invests in variable rate bank loans made to corporates and has yield is 4%.

Why Rebalance Instead of Letting Profits Run?

10/27/2016

Q. Why should I rebalance my portfolio instead of letting profits run?

A. While it is appealing to let winners run by not rebalancing, it is a short-sighted idea. Why?

Because there is always a time when the outperforming asset class to suffer a correction, and you will experience a larger loss due to the larger than originally specified portion of your portfolio.

Plus, there is no one could predict how long the winning asset class will continue the current trend. That's the reason you need a rule-based rebalancing and just follow it, instead of trying to time the market.

6 Defensive Funds For Market Turmoil Times

10/26/2016

In our last blog post, we discussed 3 characteristics we use to select defensive funds in order to survive any potential market downturns. We will share six funds that meet such requirements, in addition, these funds are no-load (no sales commissions) and still open to new investors.

We will group these six funds into large cap, mid-cap, foreign stock funds, and mixed funds these 4 categories.

U.S. Large Cap Funds

American Century Equity Income (TWEIX)
This fund invests one quarter of portfolio in convertible and preferred stocks, and the rest on beaten down dividend-paying stocks. Over the past decade, this fund has matched S&P 500 stock index' returns but with one third less volatility.

T. Rowe Price Dividend Growth (PRDGX)
Instead of focusing on bargains, this fund focuses on reasonably-priced and cash rich companies that are growing fast enough to boost their dividends or reinvest in business through acquisitions. This fund has consistently beating S&P 500 but with 10% less volatility.

U.S. Mid Cap Funds

Parnassus Mid Cap (PARMX)
This fund invests in socially conscious companies and has 15% less volatility than the S&P Midcap 400 index but remains at the top 2% of its category over the past decade.

Foreign Stock Funds

Tweedy, Browne Global Value (TBGVX)
This fund invests in about 100 foreign large cap blue chips stocks that are deemed at least 30% below their values. Various hedging methods are used by fund managers too, the result is this fund is in the top 1% of its category with 30% less volatile than its foreign stock index.

Mixed Funds

FPA Crescent (FPACX)
The manager of this fund has been at the position for nearly two decades. In the past decade, this fund has nearly matched S&P 500 benchmark but with 30% less volatility!

James Balanced: Golden Rainbow (GLRBX)
Over the past decade, this fund has been trailing S&P 500 index only 1 percentage point, but at 50% less volatility!

3 Characteristics Of Defensive Plays to Your Portfolio

10/25/2016

Traditional Strategies Not Working This Time
If you want to play defense in anticipation of market turmoil, here are two traditional strategies investors used to use -

Dividend-paying Stocks
Invest in companies with long histories of reliable earnings and paying dividends is a proven strategy, unfortunately this time around this strategy might not work because most of these stocks have been chased up to very high valuation levels by income investors in today's low interest environment.

Interest Bearing Bonds
Bonds are usually a safe haven for investors, but not anymore this time around. The low interest rates and high chance of higher interest rates would cut into the value of the existing bonds significantly.

So, what to do this time if you want to play defense?

First, invest in funds rather than stocks.

Second, find funds that have proven track records to withstand market turmoils - those held up well when market was down and provided healthy gain when market was up.

How to Find Such Funds?

Use the following 3 characteristics in your search -

Experienced Manager
With long tenure and consistent strategies, you can see their performances in bear markets, not just during recent bull market.

Lower Volatility
Lower than its benchmark index, especially important is lower volatility during market down turn periods.

Histories of Good Returns
Good returns still required because you don't want to sacrifice safety to too much returns.

In our next blog post, we will share some examples of funds that fit the profile above.

Market Fear and This Time It Is Different?

10/24/2016

Q. Could the 7-year old bull market coming to its end soon? When it happens, what should I do?

A. Many investors are concerned that the 7-year old bull market is fragile right now, anything goes wrong the market could turn south, for example -

An ill-timed interest rate decision by the Fed
Wrong headed policies by a newly elected U.S. president
A spike in oil price
Turmoil in Europe as the Brexit moves along
Hard landing in Chinese economy
...
Or simply the stock prices just outpaced the corporate earnings

The truth is, no one knows if any of them will happen, but it's a fact that stock markets are cyclical, so don't blame yourself if you are thinking about defense.

While the best long term investment strategy is to stick to your original plan, use dollar cost average when the market is down and rebalance, if you want to use portion of your portfolio to play defense, it is completely acceptable and we will discuss some strategies in next blogpost.

Can I Convert One Insurer's Term Policy Through Another Company?

10/23/2016

Q. I have a term life policy from an insurer who doesn't have a good permanent life product. Can I convert this term policy through another company?

A. The benefit of term life to permanent life conversion is there is no medical underwriting required anymore. While it is possible to convert one insurance company's term life product to another one's permanent life product, the available options are likely to be very limited since most companies either don't accept such a conversion or accept with some limitations, such as the policy has to be within 5 years, a simplified underwriting is required, etc.

Please contact us if you have any questions.

How To Determine The Appropriate Life Insurance Term?

10/22/2016

Q. How do I determine the appropriate life insurance's term?

A. You may have a few options in front of you, and your selection depends on your goal:

1. Lifetime Term
The cheapest lifetime term option is a guaranteed universal life, you will have no to little cash value inside the policy, but you will achieve the goal of lifetime guarantee. Since it has no cash value, the premium is a lot more reasonable than other permanent life products. With lifetime term, you will never have to worry about life insurance again.

2. 30-year Term
If you are still young or have young kids, a 30-year term is something you will need and it will ensure you have appropriate coverage if anything happens to you, your family and business are covered.

3. 10 to 20-year Term
If your kids are older, and your mortgage has been paid a few years, then a 10 to 20-year term life insurance could save you money and meet your needs.

What Does The Life Insurance Medical Exam Look Like?

10/20/2016

Q. What does the life insurance medical exam look like?

A. The life insurance medical exam typically happens at your home before your breakfast time because fasting is usually required. The examiner will perform a blood test and urine test, as well as taking your pulse, blood pressure, height and weight. The results will be tested for drug use, nicotine, and evidence of health conditions.

The examiner will also ask you a list of health questions, even if you have answered many of them on your application form.

Exam requirements may vary with your age, face amount, and the product for which you are applying.

How Are Fee-based Financial Advisors Paid?

10/19/2016

Q. How are fee-based financial advisors paid? By the amount of assets I have or else?

A. While many financial advisors are paid by the commissions - you buy the products they recommended, and the product provider pays the financial advisor the commission - a percentage of the value of the product you bought, many financial advisors charge a fee, with several variations:

a. A flat fee, for example, $5,000, to render the services they promised to deliver.
b. An hourly fee, for example, $100 per hour, to render the specified services.
c. An asset-based fee, for example, 1% of the asset they manage for you.

Regardless which pay structure, it's important for consumers to shop around, and ask the right question - how much will be my total cost (not just how much is your charge).

Are Student Credit Cards Different From Regular Credit Cards?

10/18/2016

Q. Are student credit cards different from regular credit cards?

A. The answer is not really, unless you think the following differences matter -

Interest rates
A student credit card's APR tends to be higher, all things equal. Also, it will be harder for a student credit card holder to get 0% introductory offer.

Credit limit
A student credit card's credit limit is modest, because a student account holder tends to have no to little income to justify a higher credit limit.

Approval criteria
A student credit card's approval criteria are more relaxed - as long as the student is over age 18, has no bad credit, has a social security number, a modest income (e.g. a part-time job) and a bank account, the approval should not be a problem.

How to Expand 401(k) Investment Options By Yourself?

10/17/2016

Q. How to get more investment options for my 401(k) legally?

A. Many firms' 401K investment options are very limited - with a dozen or so funds to choose from. But for the lucky ones, you could expand your 401(k) accounts' investment options easily and significantly. Here is what you could do -

Check your company's HR and ask if your firm's 401(k) account offers a "brokerage window", which is a self-directed account that you could access through a major brokerage firm such as Fidelity, Charles Schwab or TD Ameritrade. Through such an account, you could access to hundreds or even thousands of stocks and funds.

The Drawbacks

There is a typically $25 - $75 annual fee in order to access the brokerage window.
Some employers set limits on what percentage of a participant's investment can be invested through the brokerage (typically 75% - 85%).
You are on your own to invest, the funds available through the self-directed accounts are not vetted by your HR which has fiduciary duty to you.
Funds available through the self-directed accounts tend to be more expensive.
You will incur trading costs when buy and sell stocks/funds.
Unlike individual investment accounts, you cannot short stocks or use leverage in your self-directed accounts.

Why Not to Use a Family Member or a Friend As a Trustee

10/16/2016

Q. Should I choose a family member as a trustee?

A. Even you could find a family member you could trust (which is hard), it is best to choose a professional trustee. Here are the two reasons:

1. A professional trustee would avoid the mistakes made by amateur trustees.

2. If the beneficiaries had disagreements with the trustees, such dispute won't strain any family member relationships, and the beneficiaries could even sue the trustee without any concern of devastating the family relationship.

5 Ways to Save On Shoe Buying

10/15/2016

Q. How to save when buy shoes?

A. Here are 5 ways to save when buying shoes:

Subscribe to deal alert services from: DealNews.com, Shoes - Daily Deals & Coupon app
Buy from discount online sites such as: Groupon, OnlineShoes.com
Shop at offline discount retailers such as: Costco, Sam's Club
Buy from clearance, for example the clearance section at Overstock.com
Buy from brand names on sale at their eBay stores

What Are the Tipping Protocols in the U.S.?

10/14/2016

Q. What are the tipping standards I should follow when I travel in the U.S.?

A. See below for tipping protocols while traveling in the U.S.

Skycap: $2 per bag
Airport wheelchair attendant: $5 or more
Rental car shuttle bus driver: $1 - $2
Bellhop: $1 - $2 per bag
Hotel maid: $2 per night
Taxi driver: 15% - 20% of fare
Tour guide: $5 / half day - $25 / full day
Bus tour guide: $5 - $10

Are Heirs Responsible For Deceased Parents' Debts?

10/13/2016

Q. As a heir, am I responsible for paying off my deceased parents' debts?

A. After a person dies, the estate, rather than the heirs, usually must pay back the debts, although this means a heir will have less to inherit.

Retirement accounts and life insurance payments do not go through probate, so creditors usually cannot claim them.

For the other debts, such as credit card debt and car loans, the estate is responsible for them.

For mortgages, it's more complicated, please see our previous blog post for a more detailed discussion.

Tips For Seniors Who Are Planning Moves

10/12/2016

Q. Any practical tips for seniors who are planning downsizing?

A. Here are some senior moving related tips:

1. Plan the decoration of the new place
Use free online tools to do interior decoration planning:

2. Downsize the possessions
In addition to holding garage sales or estate sales, you can sell the old possessions through online estate auction sites or donate to local charities:

MaxSold.com
Everything But the House
Donate to Habitat for Humanity's ReStore
Local thrift shops

Is Actively Managed Funds Can't Beat Their Benchmarks a Myth?

10/11/2016

Q. Are actively managed funds beating their benchmark indexes or not?

A. The answer depends on who you ask this question for. Actively managed mutual funds tend to have higher fees which drag down their performances, or so most investors thought, Morningstar research has supported this view as well.

However, if you read this research paper from Financial Planning Association's website, you will see another angle of the discussion - there is lack of relationship between fund expense and performance.

Who side do you take?

Active vs Passive Investing: Who Wins?

10/10/2016

Q. What percentage of actively managed funds beat their passive counterparts in terms of performance?

A. A Morningstar research has answered this question, see the chart below.

The One Thing Against Robo-Advisor?

10/9/2016

Q. I am starting investing and evaluating some of the online robo-advisors, are there anything against robo-advisors?

A. There are dozens of online robo-advisors offer low cost investment options. It works like this - you answer questions about your attitude toward risk, then you will be given a portfolio that fits your risk tolerance level.

While this is very sound, there is one thing that is against such risk-based investment approach - it ignores your investment goals.

For example, if you have a conflict between your investment goal and risk tolerance, the robo-advisor will advise a portfolio that is suitable to your risk tolerance level, however, that might never have a chance to reach your investment goal! It's important to keep this conflict in mind when using robo-advisor. For someone who is new to the investment world, it will pay off to gain some basic knowledge about investment instead of relying entirely on a robo-advisor.

Do AG and AGLA Use the Same Underwriting Standards?

10/8/2016

Q. I am trying to decide between AG's Select-a-Term and AGLA's QoL Flex Term products. Do they use the same underwriting standards?

A. AG's Select-a-term product is its traditional term life offer, which means low cost and standard features.

The AGLA QoL Flext Term offer is a term life industry revolutionary offer and relatively new, it has 3 free living benefits riders included - terminal illness rider, chronic illness rider, and critical illness rider. See the more detailed product description here.

As of now, both products' underwriting standards are the same.

3 Ways to Buy Stocks in the U.S.

10/7/2016

Q. I am new to U.S. How to buy stocks in the U.S.?

A. There are three ways you can buy stocks in the U.S. -

1. Through a Brokerage Firm
Pros: If you have no idea which stocks to buy, there are brokers at those major national brokerage firms help you decide which stocks to buy at what prices.
Cons: The brokers will charge you commission each time you buy and sell stocks, and commissions could be as high as 1.5%.

2. Through a Discount Broker
Pros: You save money by using a discount broker to buy and sell stocks, some discount brokers even offer their services free!
Cons: You need to know which stocks to buy and sell, by yourself!

3. From the Company Directly
You can buy stocks from a company that offers it directly, it's called a Dividend Reinvestment Plan (DRIP).
Pros: Very low cost, since you don't have to do it through a licensed broker. The company will reinvest your dividends into more shares, usually for a small fee.
Cons: Not every company offers this, only about 1,000 companies, typically large ones such as IBM and Wal-Mart.

While DRIP is a great long term investment plan, in our next blog post, we will discuss some of the major disadvantages of DRIP.

How to Give My Home to My Children Tax-Free?

10/6/2016

Q. How to give my home to my children tax-free?

A. The answer is quite simple - do nothing!

Just keep living in your home and die there, assume your estate is below the Unified Federal Estate Gift and Estate Tax exemption amount ($5.46 million for 2016), your home's tax basis will be stepped up to fair market value as of the date of death.

In this way, neither you nor your children will pay any capital gain tax on all of the appreciation on the house. Also, because the value is below $5.46 million, there will be no federal estate tax either.

When your children sell the house later, their tax basis to calculate the gain or loss on the sale will be the home's fair market value at the time of your death.