2 million dollar mistake meeting with MIL's financial guy
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2 million dollar mistake meeting with MIL's financial guy
My mother in law's 'planner' who is a CLU contacted my wife who agreed to let him sit down with us.
I had sent him all details of all of our assets, insurance policies, and our investment policy statement that was created by our current financial planner (me).
Besides the 300k whole life policy that he sold my wife 10 years ago (which finally has a cash value greater than premiums paid) we have plenty of term, and disability.We are age 43 and 42, and his retirement projections were for us to both retire at age 66.
He put together a projection of our current savings and glidepath, and I was really surprised at our projected accumulation. With his very conservative estimates, it is double what I was expecting, although I never gave it a thorough evaluation all the way out to retirement. But here is the best part - He has a plan so we can even do much better!
After looking through some fancy multicolor projections, a binder of graphs, yada yada yada, I think his wbcornerstones.com plan is for each of us to buy a million of whole life, and at age 66, our proposed retirement age, to take some money from our taxable account and buy a SPIA. His projections showed us having a couple of extra hundred thousand of dollars of income for each year of our retirement, and the same amount to pass on to our heirs.
In the smallest print of at the bottom of the projection page, it says these numbers are not guaranteed and they may be better or worse.
I did some quick calculations after he left. He used the uber inflated number for a potential cash value of the whole life policy, not the minimum guaranteed number. My million of life insurance would cost $16.6k annually. The cash value of that would be about 350k guaranteed at age 66 with a 1 million death benefit. If I just invested the 16.6k annually at 6.5% it would be worth 950k. If I stop making payments until age 78, the whole life would be worth 1 million. The 950k if it kept compounding that would be over 2 million. Assuming the same thing with my wife, if I follow his advice, I will have 2 million less in our estate.
My wife said to me that this advisor has a lot of money and is very wealthy. My response was he is wealthy because he sells expensive life insurance. If he was a great investor, he wouldn't be selling life insurance. Where are all of the customer's yachts? - I related that anecdote
In synopsis, this advisor was going to sell us a couple of million dollar whole life insurance policies and net himself a $30k commission. My projections show this will decrease our estate by 2 million. Garbage in equals garbage out. His numbers show that his plan will increase our estate by 2 million. You can have fancy software and small errors fed into it will make huge changes compounded over time. It is really important IMHO if you use an advisor that you use one that is fee based that gets no benefit from selling any product.
Be careful our there, and buy term life insurance!
I had sent him all details of all of our assets, insurance policies, and our investment policy statement that was created by our current financial planner (me).
Besides the 300k whole life policy that he sold my wife 10 years ago (which finally has a cash value greater than premiums paid) we have plenty of term, and disability.We are age 43 and 42, and his retirement projections were for us to both retire at age 66.
He put together a projection of our current savings and glidepath, and I was really surprised at our projected accumulation. With his very conservative estimates, it is double what I was expecting, although I never gave it a thorough evaluation all the way out to retirement. But here is the best part - He has a plan so we can even do much better!
After looking through some fancy multicolor projections, a binder of graphs, yada yada yada, I think his wbcornerstones.com plan is for each of us to buy a million of whole life, and at age 66, our proposed retirement age, to take some money from our taxable account and buy a SPIA. His projections showed us having a couple of extra hundred thousand of dollars of income for each year of our retirement, and the same amount to pass on to our heirs.
In the smallest print of at the bottom of the projection page, it says these numbers are not guaranteed and they may be better or worse.
I did some quick calculations after he left. He used the uber inflated number for a potential cash value of the whole life policy, not the minimum guaranteed number. My million of life insurance would cost $16.6k annually. The cash value of that would be about 350k guaranteed at age 66 with a 1 million death benefit. If I just invested the 16.6k annually at 6.5% it would be worth 950k. If I stop making payments until age 78, the whole life would be worth 1 million. The 950k if it kept compounding that would be over 2 million. Assuming the same thing with my wife, if I follow his advice, I will have 2 million less in our estate.
My wife said to me that this advisor has a lot of money and is very wealthy. My response was he is wealthy because he sells expensive life insurance. If he was a great investor, he wouldn't be selling life insurance. Where are all of the customer's yachts? - I related that anecdote
In synopsis, this advisor was going to sell us a couple of million dollar whole life insurance policies and net himself a $30k commission. My projections show this will decrease our estate by 2 million. Garbage in equals garbage out. His numbers show that his plan will increase our estate by 2 million. You can have fancy software and small errors fed into it will make huge changes compounded over time. It is really important IMHO if you use an advisor that you use one that is fee based that gets no benefit from selling any product.
Be careful our there, and buy term life insurance!
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Re: 2 million dollar mistake meeting with MIL's financial gu
Thank you for sharing your experience.
Whole life, or any life, is not an investment.
Whole life, or any life, is not an investment.
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Re: 2 million dollar mistake meeting with MIL's financial gu
Now you'll just have to ignore the next 500 follow up calls you get from him.
“Never ask anyone for their opinion, forecast, or recommendation. Just ask them what they have—or don’t have—in their portfolio.” -Taleb
Re: 2 million dollar mistake meeting with MIL's financial gu
There is a reason a lot of the tall building in any city have insurance company names stamped on them
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Re: 2 million dollar mistake meeting with MIL's financial gu
Just fired my financial adviser (after 1 month of hiring time) as well. 1% commission/management fee is way too high for my liking.
I save and invest my money, so money can make money for me, so I don't have to make money eventually.
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Re: 2 million dollar mistake meeting with MIL's financial gu
I think that is the wrong approach. You have to actively and aggressively feed him constructive criticism:Beat The Street wrote:Now you'll just have to ignore the next 500 follow up calls you get from him.
- that he is full of s,
- that he has no idea what he is taking about,
- that he has a huge conflict of interest,
- that he should never call you again.
Re: 2 million dollar mistake meeting with MIL's financial gu
I may not know much, but I know not to take investing advice from an insurance agent.
Last edited by stemikger on Fri Apr 24, 2015 5:06 am, edited 1 time in total.
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Re: 2 million dollar mistake meeting with MIL's financial gu
If you sit down with a Chartered Life Underwriter insurance agent, he's going to try selling you insurance.
What's so surprising about that?
Bigger question is: why does the OP need ANY life insurance?
I didn't see any offspring or dependents mentioned up front...
What's so surprising about that?
Bigger question is: why does the OP need ANY life insurance?
I didn't see any offspring or dependents mentioned up front...
Attempted new signature...
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Re: 2 million dollar mistake meeting with MIL's financial gu
Yes. I think this is an extremely important point. Too many of us have overlearned the lesson of compounding. It doesn't mean that any time you think you see a tiny estimated improvement in rate of return, that it is important and imperative that you change your investments to take advantage of it.rallycobra wrote:...You can have fancy software and small errors fed into it will make huge changes compounded over time...
1) If it is a precisely known difference that is guaranteed to persist, then you really will get the compounded benefit. However, in investing, you almost never know do know it. Illustrations using long-term compounding are a great way to turn a tiny amount of garbage in into a gigantic amount of garbage out.
2) Everything else compounds too, not just return. Uncertainty compounds. The chances that in the next thirty years you will encounter a major life surprise, that nobody could have possibly anticipated, that totally changes everything--are large.
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Re: 2 million dollar mistake meeting with MIL's financial gu
Not sure why you wasted your time sitting down with him in the first place.
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Re: 2 million dollar mistake meeting with MIL's financial gu
OP congrats for knowing this was a bad deal. So many people, not here, do not. I was reading a Yahoo article the other day on advisors. An advisor, in the comments, said he keeps his retirees out of the high fee products. He puts his retirees in bonds, mostly munis, not funds but individual bonds. He said the cost is only $20 per $1K of bond and they yield ~ 4%. He mentioned toll roads and private schools. I do not think MOST (not all) retirees should be in individual munis, which obviously are going out 20 to 30 years, and not based on the full faith and taxing ability of a major government entity. He was quite nice though until a couple informed people started to question him. I had flashbacks to the advisor I saw with my elderly mother. Nice guy until I questioned the Class C Balanced fund shares he wanted to sell her
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Re: 2 million dollar mistake meeting with MIL's financial gu
The letters "CLU" after an advisor's name are a red flag.
Run! Run as far and as fast as you can!
Run! Run as far and as fast as you can!
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Re: 2 million dollar mistake meeting with MIL's financial gu
I would answer one call. Then, I would block his number. Problem solved
Bogle: Smart Beta is stupid
Re: 2 million dollar mistake meeting with MIL's financial gu
Or Read "Where Are the Customers' Yachts" a 50+ year old book that's excellent.
Where are the customers' yachts? there are none, only their sales people/advisers can afford yachts!
Where are the customers' yachts? there are none, only their sales people/advisers can afford yachts!
Re: 2 million dollar mistake meeting with MIL's financial gu
Yep, it reminded me of the saying "When the only tool you have is a hammer, every problem looks like a nail."The Wizard wrote:If you sit down with a Chartered Life Underwriter insurance agent, he's going to try selling you insurance.
What's so surprising about that?
Income protection for family? Life insurance!
Retirement income? Life insurance!
Investing for the future? Life insurance!
Mitigate taxes? Life insurance!
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Re: 2 million dollar mistake meeting with MIL's financial gu
I get calls from MetLife on a regular basis, wanting to help me with "tax planning strategies for my 401K plan"stemikger wrote:I may not know much, but I know not to take investing advice from an insurance agent.
Or to go over my life insurance needs, don't waste your money on term they tell me! That is until I'm the one who is schooling them.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: 2 million dollar mistake meeting with MIL's financial gu
My parents have pointed out to me the effect of inflation. When they married in the early 1950's, $10,000 was an impressive amount of money. Not enough to be rich but a pretty nice stash. The projections that a life insurance agent would have made then would be laughed at today. He could have given a great presentation that after many years of owning a policy that they could accumulate an amazing $10,000!
The presentations are impressive but one forgets the high cost of the whole life premiums and the corrosive powers of inflation upon seemingly impressive numbers. Add to that the very low level of interest rates today. If bonds yield two maybe three percent, what is going to be left to accumulate after all the insurance policy fees and expenses? The answer is not much.
Jim Stowers Jr. realized that many people could not afford to invest because the whole life policies were too expensive. It was a double whammy with high premiums and the inability to buy enough life insurance for a young family. He started up a term life insurance company and told people to buy term and invest the difference. He later went on to found American Century Investments.
The loaded mutual funds he sold for investment were not perfect but did accumulate value faster than whole life insurance. Today, term insurance rates are low and investors have access to very low cost investment vehicles like no-load index funds with miniscule management fees and trading costs. Today, investors have much more opportunity than during the 1950's.
The presentations are impressive but one forgets the high cost of the whole life premiums and the corrosive powers of inflation upon seemingly impressive numbers. Add to that the very low level of interest rates today. If bonds yield two maybe three percent, what is going to be left to accumulate after all the insurance policy fees and expenses? The answer is not much.
Jim Stowers Jr. realized that many people could not afford to invest because the whole life policies were too expensive. It was a double whammy with high premiums and the inability to buy enough life insurance for a young family. He started up a term life insurance company and told people to buy term and invest the difference. He later went on to found American Century Investments.
The loaded mutual funds he sold for investment were not perfect but did accumulate value faster than whole life insurance. Today, term insurance rates are low and investors have access to very low cost investment vehicles like no-load index funds with miniscule management fees and trading costs. Today, investors have much more opportunity than during the 1950's.
A fool and his money are good for business.
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Re: 2 million dollar mistake meeting with MIL's financial gu
Yes, no sitting down with the "financial guy," even if he buys you a lobster dinner. The same goes for sitting down with a timeshare property salesperson, etc. None of this, "Oh, I'll just listen to what he has to say, no harm in that, right?" Ha! The lobster tail will not make up for the damage to your soul.
Re: 2 million dollar mistake meeting with MIL's financial gu
Great post, Rallycobra, thank you for sharing.
What the heck do his initials stand for anyway?
It would be very interesting if you schooled this guy with BH theory, pointing out the flaws in his calculations. Might make a good blog post or personal finance piece you can sell. For me, I love the In-Law angle, too. Hoo-wee, I've got some In-Laws that are so pompous and smug about their investing strategies, and wanting us to work with their (UBS/Ed Jones) "Advisors".
Stay the course.
What the heck do his initials stand for anyway?
It would be very interesting if you schooled this guy with BH theory, pointing out the flaws in his calculations. Might make a good blog post or personal finance piece you can sell. For me, I love the In-Law angle, too. Hoo-wee, I've got some In-Laws that are so pompous and smug about their investing strategies, and wanting us to work with their (UBS/Ed Jones) "Advisors".
Stay the course.
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Re: 2 million dollar mistake meeting with MIL's financial gu
Thank you everyone for the replies. Quick follow up to some points -
I have been refusing to meet with the guy for years. He contacted my wife and she agreed to it.
We have 2 little kids and about 7 million in 10/20/30 year term policies to meet our life insurance needs.
He came to our house and we gave him a glass of wine. He should have given us a gift card for Red Lobster
He was proposing replacing our taxable bond allocation with whole life since the rate of return is guaranteed and would do better than bonds yielding 3.5% - That is an interesting idea to the causal observer, but it defeats the purpose of a fixed stock/bond split since you can't rebalance your portfolio.
I'm going to have my wife read this, and maybe if the agent gives me too much hassle, I'll give him a link to this post
I have been refusing to meet with the guy for years. He contacted my wife and she agreed to it.
We have 2 little kids and about 7 million in 10/20/30 year term policies to meet our life insurance needs.
He came to our house and we gave him a glass of wine. He should have given us a gift card for Red Lobster
He was proposing replacing our taxable bond allocation with whole life since the rate of return is guaranteed and would do better than bonds yielding 3.5% - That is an interesting idea to the causal observer, but it defeats the purpose of a fixed stock/bond split since you can't rebalance your portfolio.
I'm going to have my wife read this, and maybe if the agent gives me too much hassle, I'll give him a link to this post
Last edited by rallycobra on Fri Apr 24, 2015 4:00 pm, edited 1 time in total.
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Re: 2 million dollar mistake meeting with MIL's financial gu
I'm actually interested in how you determined that you need $7M in life insurance and how it's structured. Would you mind sharing? It's just making me do a gut check on how much life insurance we have and whether it's enough.rallycobra wrote:Thank you everyone for the replies. Quick follow up to some points -
I have been refusing to meet with the guy for years. He contacted my wife and she agreed to it.
We have 2 little kids and about 7 million in 10/20/30 year term policies to meet our life insurance needs.
He came to our house and we gave him a glass of wine. I should have given us a gift card for Red Lobster
He was proposing replacing our taxable bond allocation with whole life since the rate of return is guaranteed and would do better than bonds yielding 3.5% - That is an interesting idea to the causal observer, but it defeats the purpose of a fixed stock/bond split since you can't rebalance your portfolio.
I'm going to have my wife read this, and maybe if the agent gives me too much hassle, I'll give him a link to this post
Re: 2 million dollar mistake meeting with MIL's financial gu
Not only that but it isnt guaranteed to beat or even be close to bonds. If you look at the guaranteed returns they are below inflation. The illustrated return might be bond like but given how what they do is invest in bonds, take out huge fees, and give you the rest, it isnt guaranteed to be for either the cash value or the death benefit. If it wasnt for the fact that almost all of these polices lapse/surrender, the illustrated returns would look even worse. Finally the guarantee is only as good as their ability to pay. May wish to review the Japan experience of insurance companies with prolonged period of low interest rates.rallycobra wrote:Thank you everyone for the replies. Quick follow up to some points -
I have been refusing to meet with the guy for years. He contacted my wife and she agreed to it.
We have 2 little kids and about 7 million in 10/20/30 year term policies to meet our life insurance needs.
He came to our house and we gave him a glass of wine. I should have given us a gift card for Red Lobster
He was proposing replacing our taxable bond allocation with whole life since the rate of return is guaranteed and would do better than bonds yielding 3.5% - That is an interesting idea to the causal observer, but it defeats the purpose of a fixed stock/bond split since you can't rebalance your portfolio.
I'm going to have my wife read this, and maybe if the agent gives me too much hassle, I'll give him a link to this post
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Re: 2 million dollar mistake meeting with MIL's financial gu
The SEC and Finra have teamed up to protect seniors from financial predators. The policy is outlined in a program called, "NATIONAL SENIOR INVESTOR INITIATIVE", and is a coordinated series of examinations by the SEC’s Office of Compliance Inspections and Examinations and FINRA to stop this type of activity.
One of the primary missions of the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) is the protection of investors, of which senior investors are an important and growing subset. As part of a collaborative effort, staff of the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) and FINRA (collectively, the “staff”) conducted 44 examinations of broker-dealers in 2013 that focused on how firms conduct business with senior investors as they prepare for and enter into retirement. These examinations focused on investors aged 65 years old or older; this report refers to these investors as “senior investors.
Here are some highlights:
The SEC and Finra were concerned that, after a lifetime of accumulated savings, senior investors may meet the financial and risk threshold requirements to invest in more complex financial securities and that broker-dealers may be recommending unsuitable transactions to these senior investors or may not be providing proper and understandable disclosures regarding the terms and related risks of those recommended securities, particularly non-traditional investments.
Almost 64% of the examined firms allowed their representatives to use senior designations in their sales efforts. Certain designations carry specific qualification requirements, while others have none. Only 64% of the designations that firms allowed representatives to use required continuing education for the financial professional to maintain the title. More disconcerting, 44% of the allowed designations were not recognized by any independent accrediting organization. As a result, some of these designations may be misleading to the investing public.
Members firms must ensure that statements are clear and not misleading within the context in which they are made, and that they provide balanced treatment of risks and potential benefits. Communications must be consistent with the risks of fluctuating prices and the uncertainty of dividends, rates of return, and yield inherent to investments.
Communications may not predict or project performance, imply that past performance will recur or make any exaggerated or unwarranted claim, opinion, or forecast.
And much more....
Rick Ferri
One of the primary missions of the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) is the protection of investors, of which senior investors are an important and growing subset. As part of a collaborative effort, staff of the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) and FINRA (collectively, the “staff”) conducted 44 examinations of broker-dealers in 2013 that focused on how firms conduct business with senior investors as they prepare for and enter into retirement. These examinations focused on investors aged 65 years old or older; this report refers to these investors as “senior investors.
Here are some highlights:
The SEC and Finra were concerned that, after a lifetime of accumulated savings, senior investors may meet the financial and risk threshold requirements to invest in more complex financial securities and that broker-dealers may be recommending unsuitable transactions to these senior investors or may not be providing proper and understandable disclosures regarding the terms and related risks of those recommended securities, particularly non-traditional investments.
Almost 64% of the examined firms allowed their representatives to use senior designations in their sales efforts. Certain designations carry specific qualification requirements, while others have none. Only 64% of the designations that firms allowed representatives to use required continuing education for the financial professional to maintain the title. More disconcerting, 44% of the allowed designations were not recognized by any independent accrediting organization. As a result, some of these designations may be misleading to the investing public.
Members firms must ensure that statements are clear and not misleading within the context in which they are made, and that they provide balanced treatment of risks and potential benefits. Communications must be consistent with the risks of fluctuating prices and the uncertainty of dividends, rates of return, and yield inherent to investments.
Communications may not predict or project performance, imply that past performance will recur or make any exaggerated or unwarranted claim, opinion, or forecast.
And much more....
Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
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Re: 2 million dollar mistake meeting with MIL's financial gu
Kudos to you for having the wherewithal to see through it, and taking the time to examine everything. Sadly many people would not, and would pay a steep price for it.
Don't do something. Just stand there!
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Re: 2 million dollar mistake meeting with MIL's financial guy
Sorry to bump this, but I had to add a follow up. The agent asked if I had any more questions, and I politely declined purchasing whole life with him. I have him my quick calculations that that would put me 2 million behind at age 78, since his policy has negative returns for over the first 10 years.
His secretary sent me a reply with a bunch of scanned whole life propaganda, and images. It wasn't even professional looking. I'm going to summarize the final bullet points. Since it's an image, I can't cut and paste:
Based on my current strategy and the 4% rule, your family will retire on about $382k annualy with 0% guaranteed plus Social Security.
If you purchase permanent life insurance, your family will retire on $642k annually which $450k will be guaranteed because you can purchase a covered asset.
The income loss to your family over a 25 year retirement (life expectancy) will be $6,375,000 because you have no permanent insurance.
Wow! With a straight face the guy can look me in the eyes and tell me that he can do 6.4 million better than my 65/35 stock/bond total market Vanguard approach over 25 years with the purchase of dual million dollar whole life policies.
I am researching a fee for service advisor with a CFA or similar to give my in law's a second opinion. If anyone has a suggestion for one near Cherry Hill NJ (Philadelphia Metro Area) please PM me.
His secretary sent me a reply with a bunch of scanned whole life propaganda, and images. It wasn't even professional looking. I'm going to summarize the final bullet points. Since it's an image, I can't cut and paste:
Based on my current strategy and the 4% rule, your family will retire on about $382k annualy with 0% guaranteed plus Social Security.
If you purchase permanent life insurance, your family will retire on $642k annually which $450k will be guaranteed because you can purchase a covered asset.
The income loss to your family over a 25 year retirement (life expectancy) will be $6,375,000 because you have no permanent insurance.
Wow! With a straight face the guy can look me in the eyes and tell me that he can do 6.4 million better than my 65/35 stock/bond total market Vanguard approach over 25 years with the purchase of dual million dollar whole life policies.
I am researching a fee for service advisor with a CFA or similar to give my in law's a second opinion. If anyone has a suggestion for one near Cherry Hill NJ (Philadelphia Metro Area) please PM me.
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Re: 2 million dollar mistake meeting with MIL's financial guy
Wonder what he is doing regarding/to OP's MIL?
OAG=Old Army Guy. Retired CW4 USA (US Army) in 1979 21 years of service @ 38.
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Re: 2 million dollar mistake meeting with MIL's financial guy
When I was a resident doing Cardiothoracic Surgery, the Chief Resident presented a complication in a large auditorium to fellow surgeons. The Chief Resident was a military guy with an interesting sense of humor. He presented a complication of a redo open heart surgery on a lawyer. The complication was that, during the sternotomy (cutting the chest open) in the beginning of the operation, the saw cut through the aorta and the patient hemorrhaged profusely. The patient (lawyer) lived and went on to do well. The comment from the Chief Resident in the auditorium was "at that moment (cutting into the aorta and bleeding)..it was like your MIL going over a cliff in your new Cadillac."OAG wrote:Wonder what he is doing regarding/to OP's MIL?
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Re: 2 million dollar mistake meeting with MIL's financial guy
Minor correction: "fee-based" can still be expensive and riddled with conflicts of interest. I think the accepted mantra is fee-only.rallycobra wrote:You can have fancy software and small errors fed into it will make huge changes compounded over time. It is really important IMHO if you use an advisor that you use one that is fee based that gets no benefit from selling any product.
Re: 2 million dollar mistake meeting with MIL's financial guy
Interesting. Hopefully, the Cadillac was fully insured. Also, I hope the young doctors in the audience you mentioned believed that it is good that the patient lived.goodenyou wrote:When I was a resident doing Cardiothoracic Surgery, the Chief Resident presented a complication in a large auditorium to fellow surgeons. The Chief Resident was a military guy with an interesting sense of humor. He presented a complication of a redo open heart surgery on a lawyer. The complication was that, during the sternotomy (cutting the chest open) in the beginning of the operation, the saw cut through the aorta and the patient hemorrhaged profusely. The patient (lawyer) lived and went on to do well. The comment from the Chief Resident in the auditorium was "at that moment (cutting into the aorta and bleeding)..it was like your MIL going over a cliff in your new Cadillac."OAG wrote:Wonder what he is doing regarding/to OP's MIL?
Re: 2 million dollar mistake meeting with MIL's financial guy
When all you have is a hammer, every problem looks like a nail. To an insurance salesman, the answer to every conceivable financial problem is more Whole Life Insurance. I would look elsewhere for financial advice.
A fool and his money are good for business.
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Re: 2 million dollar mistake meeting with MIL's financial guy
Nice thread Rallycobra.
I think the concept is relatively simple. All insurance products are negative expected value for the consumer-else there would be no incentive for the company to offer the product. Even term insurance is negative expected value, and we only purchase it because we are risk adverse and afraid of the financial effects of early unexpected death on our spouses and children. In the commercial auto insurance business, a pay ratio (the ratio of claims payments to premiums) of 0.5 is considered bad for the insurer. In other words, the purchase of commercial auto insurance has less than -50% expected return.
Whole life has an insurance component and a cash component. It makes no sense to make a negative expected value investment on cash. The presence of a commissions and costs to the company necessarily make it an unfavorable product. The only advantage of whole life is the tax benefit where the beneficiary does not have to pay tax on the face value of the product.
"at that moment (cutting into the aorta and bleeding)..it was like your MIL going over a cliff in your new Cadillac."
-Haha
"Also, I hope the young doctors in the audience you mentioned believed that it is good that the patient lived."
-Dark humor is common in medicine. Let them have their fun. They work hard.
-L
I think the concept is relatively simple. All insurance products are negative expected value for the consumer-else there would be no incentive for the company to offer the product. Even term insurance is negative expected value, and we only purchase it because we are risk adverse and afraid of the financial effects of early unexpected death on our spouses and children. In the commercial auto insurance business, a pay ratio (the ratio of claims payments to premiums) of 0.5 is considered bad for the insurer. In other words, the purchase of commercial auto insurance has less than -50% expected return.
Whole life has an insurance component and a cash component. It makes no sense to make a negative expected value investment on cash. The presence of a commissions and costs to the company necessarily make it an unfavorable product. The only advantage of whole life is the tax benefit where the beneficiary does not have to pay tax on the face value of the product.
"at that moment (cutting into the aorta and bleeding)..it was like your MIL going over a cliff in your new Cadillac."
-Haha
"Also, I hope the young doctors in the audience you mentioned believed that it is good that the patient lived."
-Dark humor is common in medicine. Let them have their fun. They work hard.
-L
Re: 2 million dollar mistake meeting with MIL's financial guy
I agree with most of what's been written. One small nit to pick:
How sure are you of your own projection? GIGO.rallycobra wrote: My million of life insurance would cost $16.6k annually. The cash value of that would be about 350k guaranteed at age 66 with a 1 million death benefit. If I just invested the 16.6k annually at 6.5% it would be worth 950k.
Re: 2 million dollar mistake meeting with MIL's financial guy
There is no magic in this world. If you don't have confidence in the future then you shouldn't have confidence in some company's claim of guarantee.RNJ wrote:I agree with most of what's been written. One small nit to pick:
How sure are you of your own projection? GIGO.rallycobra wrote: My million of life insurance would cost $16.6k annually. The cash value of that would be about 350k guaranteed at age 66 with a 1 million death benefit. If I just invested the 16.6k annually at 6.5% it would be worth 950k.
Re: 2 million dollar mistake meeting with MIL's financial guy
Right. But you're measuring their claim, in part, against your projection. I guess the nit I'm picking is your use / assumption of a generous (IMO) rate of return (6.5%). If that's the # you're using for your portfolio and retirement planning, know that according to many, that is an optimistic projection. No slam dunk.dhodson wrote:There is no magic in this world. If you don't have confidence in the future then you shouldn't have confidence in some company's claim of guarantee.RNJ wrote:I agree with most of what's been written. One small nit to pick:
How sure are you of your own projection? GIGO.rallycobra wrote: My million of life insurance would cost $16.6k annually. The cash value of that would be about 350k guaranteed at age 66 with a 1 million death benefit. If I just invested the 16.6k annually at 6.5% it would be worth 950k.
And the CLU is a snake oil salesman.
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Re: 2 million dollar mistake meeting with MIL's financial guy
[/quote]
There is no magic in this world. If you don't have confidence in the future then you shouldn't have confidence in some company's claim of guarantee.[/quote]
Right. If returns are going to be so poor that I can't make a few percent with a 65/35 allocation in the market, the insurance company may go out of business. It has happened in Japan. http://www.economist.com/node/1468804
There is no magic in this world. If you don't have confidence in the future then you shouldn't have confidence in some company's claim of guarantee.[/quote]
Right. If returns are going to be so poor that I can't make a few percent with a 65/35 allocation in the market, the insurance company may go out of business. It has happened in Japan. http://www.economist.com/node/1468804
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Re: 2 million dollar mistake meeting with MIL's financial guy
Is that 6.5% real or nominal when considered very optimistic?RNJ wrote:Right. But you're measuring their claim, in part, against your projection. I guess the nit I'm picking is your use / assumption of a generous (IMO) rate of return (6.5%). If that's the # you're using for your portfolio and retirement planning, know that according to many, that is an optimistic projection. No slam dunk.dhodson wrote:There is no magic in this world. If you don't have confidence in the future then you shouldn't have confidence in some company's claim of guarantee.RNJ wrote:I agree with most of what's been written. One small nit to pick:
How sure are you of your own projection? GIGO.rallycobra wrote: My million of life insurance would cost $16.6k annually. The cash value of that would be about 350k guaranteed at age 66 with a 1 million death benefit. If I just invested the 16.6k annually at 6.5% it would be worth 950k.
And the CLU is a snake oil salesman.
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Re: 2 million dollar mistake meeting with MIL's financial gu
Well said!nisiprius wrote:Yes. I think this is an extremely important point. Too many of us have overlearned the lesson of compounding. It doesn't mean that any time you think you see a tiny estimated improvement in rate of return, that it is important and imperative that you change your investments to take advantage of it.rallycobra wrote:...You can have fancy software and small errors fed into it will make huge changes compounded over time...
1) If it is a precisely known difference that is guaranteed to persist, then you really will get the compounded benefit. However, in investing, you almost never know do know it. Illustrations using long-term compounding are a great way to turn a tiny amount of garbage in into a gigantic amount of garbage out.
2) Everything else compounds too, not just return. Uncertainty compounds. The chances that in the next thirty years you will encounter a major life surprise, that nobody could have possibly anticipated, that totally changes everything--are large.
The finest, albeit the most difficult, of all human achievements is being reasonable.
Re: 2 million dollar mistake meeting with MIL's financial guy
Real.smkrn wrote:Is that 6.5% real or nominal when considered very optimistic?RNJ wrote:Right. But you're measuring their claim, in part, against your projection. I guess the nit I'm picking is your use / assumption of a generous (IMO) rate of return (6.5%). If that's the # you're using for your portfolio and retirement planning, know that according to many, that is an optimistic projection. No slam dunk.dhodson wrote:RNJ wrote:I agree with most of what's been written. One small nit to pick:
How sure are you of your own projection? GIGO.rallycobra wrote: My million of life insurance would cost $16.6k annually. The cash value of that would be about 350k guaranteed at age 66 with a 1 million death benefit. If I just invested the 16.6k annually at 6.5% it would be worth 950k.
There is no magic in this world. If you don't have confidence in the future then you shouldn't have confidence in some company's claim of guarantee.
And the CLU is a snake oil salesman.
http://www.rickferri.com/blog/investmen ... -for-2015/
http://awealthofcommonsense.com/rooting ... ar-market/
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Re: 2 million dollar mistake meeting with MIL's financial guy
I wanted to give an update just to satisfy the curiosity of anyone who had interest in this thread. I sat down with my MIL and reviewed her finances in preparation for an analysis by a CFA. She is frustrated because she doesn't understand what she has or how any of it works. This is despite taking copious notes at meetings with her agent.OAG wrote:Wonder what he is doing regarding/to OP's MIL?
She has 8k in cash, and 258k mixed between four annuities, one is varaible. I believe 2 of the annuities are IRAs with RMD's.
Fortunately, she receives $3400 a month from a teacher pension in addition to $1450 from Social Security.
Get this, she was put into some kind of $400k life insurance policy at age 60 about 11 years ago that costs $4100 a year. She has no need for life insurance, since her pension was reduced to still pay her husband if she expires before him.
She brought a giant 3 ring binder full of notes but only one recent statement from one of the annuities. I asked her to gather 2014 annual statements for the annuities and the life insurance policy information. Her binder was full of handwritten notes and old annuities and old products. Every few years, this agent would find a 'better deal' and move her from Templeton or some other company into another company. Better deal for him I guess. She said there were numerous times people would come and do physicals and draw blood. She is a diet/fitness fanatic, so I'm sure she is a dream customer.
Her husband has 40k in 2 annuities, one is variable annuity. He is age 65, and I want him to hold off on SS until age 70. 6 years ago this agent put him into some kind of 300k life insurance policy. Again, for what purpose I have no idea. He has a pension approximately ~$1200 a month and has an IRA that is about 500k. The agent transferred it into Penn Mutual last month.
They own a townhouse in NJ and a small home in FL with 30k outstanding on a mortgage, so they have enough assets and cash flow to maintain their standard of living, but the whole thing is really amazing to me. Anytime they need money for a significant purchase, they have to call the agent and approve it with him and he trickles some money out into their checking account. They had to do this for the FL home purchase, and I think for the kitchen remodel they did recently.
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Re: 2 million dollar mistake meeting with MIL's financial guy
There are two sad things here:
- the behavior of the so called "financial advisor" is simply criminal. I think we need laws to protect people,
- the second sad issue is, what I say, some sayings are just true: a fool and his money are soon parted.
- the behavior of the so called "financial advisor" is simply criminal. I think we need laws to protect people,
- the second sad issue is, what I say, some sayings are just true: a fool and his money are soon parted.
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Re: 2 million dollar mistake meeting with MIL's financial guy
Rallycobra says the MIL has physicals and blood drawn.
I do also once a year, but I don't see what this has to do with investing and money management.
They say that we run a risk of "losing it" mentally as we get older, in terms of coping with routine financial matters and even elder scams.
But if one doesn't have it together in the first place, then what?
Is the MIL trending into incompetence at this point?
Can she express what she WANTS to happen with her finances presently?
I'm not interested in rereading this whole thread to see if she's asking for help or what...
I do also once a year, but I don't see what this has to do with investing and money management.
They say that we run a risk of "losing it" mentally as we get older, in terms of coping with routine financial matters and even elder scams.
But if one doesn't have it together in the first place, then what?
Is the MIL trending into incompetence at this point?
Can she express what she WANTS to happen with her finances presently?
I'm not interested in rereading this whole thread to see if she's asking for help or what...
Attempted new signature...
Re: 2 million dollar mistake meeting with MIL's financial guy
I am eager to hear what the CFA has to say. Hopefully it will include a way to get your MIL out of the hands of her CLU and on to sensible, financial independence.
Last edited by pingo on Sat Jul 04, 2015 12:17 pm, edited 1 time in total.
Re: 2 million dollar mistake meeting with MIL's financial guy
I believe that the MIL had third parties come by to draw blood, not that she was having regular physicals. This is typically done before a new insurance policy goes into effect.The Wizard wrote:Rallycobra says the MIL has physicals and blood drawn.
I do also once a year, but I don't see what this has to do with investing and money management.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
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Re: 2 million dollar mistake meeting with MIL's financial guy
Yes, physicals and blood work were for every time the agent sold a new insurance product.
The reason I got involved with the MIL's finances is because her CLU was trying to get my business. He asked my wife who our financial adviser was and when she told him I was doing it he set up a meeting so he could show us how much better we could do if he managed our money.
I know my MIL wants to go over her will and estate with an attorney since it hasn't been updated in a while.
Now that I'm thinking about it, I wonder if the agent has financial power of attorney over those accounts. He must if they have to call him up for money. That's pretty frightening.
The reason I got involved with the MIL's finances is because her CLU was trying to get my business. He asked my wife who our financial adviser was and when she told him I was doing it he set up a meeting so he could show us how much better we could do if he managed our money.
I know my MIL wants to go over her will and estate with an attorney since it hasn't been updated in a while.
Now that I'm thinking about it, I wonder if the agent has financial power of attorney over those accounts. He must if they have to call him up for money. That's pretty frightening.
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Re: 2 million dollar mistake meeting with MIL's financial guy
Not necessarily. Could be necessary for loans from life insurance for instance.
The CLU designation is meaningless in my view when it comes to ethics. They do have more insurance training but I find that means they just are better at selling.
The CLU designation is meaningless in my view when it comes to ethics. They do have more insurance training but I find that means they just are better at selling.
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Re: 2 million dollar mistake meeting with MIL's financial guy
My only quibble with the OP is the statement above. Calling the information fed into the fancy software a small error is a misnomer. Those were not errors, but inputs carefully chosen to sell a product.You can have fancy software and small errors fed into it will make huge changes compounded over time.
“Speak only if it improves upon the silence." Mahatma Gandhi
Re: 2 million dollar mistake meeting with MIL's financial gu
Throw in 'or bankers' and then chisel that statement in stone!stemikger wrote:I may not know much, but I know not to take investing advice from an insurance agent.
"Optimum est pati quod emendare non possis." |
-Seneca
Re: 2 million dollar mistake meeting with MIL's financial gu
James E. Showers (Founder and Chairman of 20th Century Mutual Funds) wrote the book "Yes You Can Achieve Financial Independence". I highly recommend the book.nedsaid wrote:My parents have pointed out to me the effect of inflation. When they married in the early 1950's, $10,000 was an impressive amount of money. Not enough to be rich but a pretty nice stash. The projections that a life insurance agent would have made then would be laughed at today. He could have given a great presentation that after many years of owning a policy that they could accumulate an amazing $10,000!
The presentations are impressive but one forgets the high cost of the whole life premiums and the corrosive powers of inflation upon seemingly impressive numbers. Add to that the very low level of interest rates today. If bonds yield two maybe three percent, what is going to be left to accumulate after all the insurance policy fees and expenses? The answer is not much.
Jim Stowers Jr. realized that many people could not afford to invest because the whole life policies were too expensive. It was a double whammy with high premiums and the inability to buy enough life insurance for a young family. He started up a term life insurance company and told people to buy term and invest the difference. He later went on to found American Century Investments.
The loaded mutual funds he sold for investment were not perfect but did accumulate value faster than whole life insurance. Today, term insurance rates are low and investors have access to very low cost investment vehicles like no-load index funds with miniscule management fees and trading costs. Today, investors have much more opportunity than during the 1950's.