Friday, August 29, 2014

The Myth of the Unchanging Value of Gold - Joseph T. Salerno - Mises Daily

The Myth of the Unchanging Value of Gold - Joseph T. Salerno  breaks down the importance of having a commodity based monetary standard.

An Excerpt from the article:

"When money is conceived as a measure of value, the policy implication is that one of the primary objectives of the central bank should be to maintain a stable price level. This supposedly will remove inflationary noise from the economy and ensure that any changes in money prices that do occur tend to reflect a change in the relative values of goods and services to consumers. Thus, for mainstream economists, stabilizing a price index based on a basket of arbitrarily selected and weighted consumer goods, e.g., the CPI, the core CPI, the Personal Consumption Expenditure (CPE), etc., is a prerequisite for rendering money a more or less fixed yardstick for measuring value."

Life Insurance Myths Debunked: Whole Life

The common refrain from most mainstream financial experts is that Whole Life is too expensive, too costly, its a bad "investment", etc etc. Most of these reasons are false, as it demonstrates the lack of knowledge and understanding on how Life Insurance Contracts are engineered, constructed, and priced by Insurance Companies. This understanding does not fit into a pithy TV or Radio Soundbite, so it is understandable why there is so much confusion surrounding this topic.

I was reviewing an article titled, "5 Common Whole Life Myths, Debunked", and I also provided some replies to the posters of this article. NOTE: It is assumed that most of these posters are agents/or financial advisory types.

Here is some of the posts and my responses to those posts(The original posts are italicized):

ahardester- you have pay the salesman, the administrative costs to issue the policy and general overhead prefund reinsurance costs..

Robert Williams Jr
Ahardester's post is false. You must meet the IRS guidelines for the definition of the life insurance contract during the first several years of its existence. Placing 100% of the funds in a Whole Life Policy and pulling 100% of the funds out in less than 5 years acts as an Endowment. Most financial services reps know Endowments are illegal as per the IRS and TAMRA,DEFRA etc. The first several years covers that expense to ensure the insurance contract is just insurance contract not an Endowment.

Prior to the 1980s, Endowments were used heavily, the various tax acts in the 1980s removed this product out of the marketplace. This notion holds true for all permanent life products, as the surrender charges are high upfront.

Think about it: How would the insurance company leverage its assets if these long term contracts were that highly liquid in the first 0-5 years of its existence? Each policy holder would simply place money in a contract, and then remove the cash. The Insurance Company would be unable to loan out money for commercial developments, purchase bonds, etc etc. They would be unable to expand their portfolio to pay future claims. It makes no sense. This is why the surrender charges exists, the insurance company must look at all the funds and all the insureds. Its not some zero sum game.

Keep the policy contract for longer than 10 years, report back. The results are staggering. I have of no client who complains after 10 years regarding their permanent life insurance contract. Focusing on the first several years is horrible analysis of a permanent life insurance contract.

However, if you need the cash right away(e.g less than 5 years), it makes no sense to purchase any permanent life insurance contract, annuity, 401(k) plan and the like. It is a long term proposition. If this is a concern, utilize a different financial vehicle, like your savings at a credit union or a brokerage account.

In short, that post is a fallacious critique of a permanent life insurance policy, as it is tantamount to saying that a Porsche 911 is a poor vehicle because it can not carry hay in the back seat. Buy a pick up truck.

One of the biggest myths is that the cash value is "your money". It's not. It was never intended to be. It's there to support the death benefit and all the guarantees of the contract while also providing a profit to the company. Can you use it? Yes, but you should never borrow cash value that you can't pay back in a short time. The interest rates on loaned out cash value are hardly a bargain. And, if you don't pay the interest, it is added to the principal of the loan. Agents that don't fully understand and explain how a whole life policy works are doing the policyowner a great disservice and it results in questions like those that Hollywood poses. The author of the article owes Hollywood a proper response.

Robert Williams Jr
"The interest rates on loaned out cash value are hardly a bargain. And, if you don't pay the interest, it is added to the principal of the loan."

This too is slightly false. Most loans are done on a net or "wash" basis. With whole life policies, they are direct and indirect loans also. The loan interest rate is done with simple interest, as it does not reduce your compounding of the cash value. At death, the loan is taken off the death benefit.

"One of the biggest myths is that the cash value is "your money". It's not. It was never intended to be"

Ipso facto, this is correct. It is the beneficiaries' money. However, as the owner of the policy, one controls the cash value. Similar to someone who is a member/owner of a LLC. The Cash value is the over-payment of premiums in the earlier years, yet in the later years the corridor of insurance(The Net between the Cash Value and the Death Benefit) shrinks, making the actual amount for the insurance company to "pay out" at death smaller.

Since the cash value grows tax free and compounds, the IRS assists in this process of paying the insurance cost. In this case, one is actually "buying term and investing the difference", but the Insurance company and the IRS are sharing in the risk.

Discussing whole life when writing an article on life insurance for the general public is one thing that has caused people to be so confused that life ownership is now at an all time low!.

The fact is that for 95% of people TERM life insurance is the least expensive and best answer. Term life is used to: insure dependents to replace income, provide financial security for dependents, pay-off a mortgage, fund college, or for final expenses.

The typical profile of a term life insurance owner is someone who is a family breadwinner and has minimal savings. It is critical protection and easy to understand and buy.

One thing you can do is visit an online life insurance site to learn more about life insurance, and the better ones offer free quotes, allowing you to get rate comparisons for most insurance products.

Robert Williams Jr
"The fact is that for 95% of people TERM life insurance is the least expensive and best answer. "

This is a false statement on so many levels. First of all, term life is cheaper, under this one condition: If the insured dies within the policy "term" period. Since Insurance is based on statistics, econometric models and probability, these factors along with risk are some of the factors in pricing insurance. If the policy is "cheaper", then the probability or risk is lower for the insured's death. For example, if a 30 year old purchases a 20 year term policy, of course it will be "cheaper" than a Whole life policy. The probability is lower for the 30 year old to die in the 20 year term, vs a policy contract that runs to age 120.

Secondly, this quote totally ignores the notion of suitability. How does one possibly know what is best for 95% of the people 100% of the time? Is this agent/adviser omniscient? Do they have God like tendencies to know each person's resources, goals, wants, desires, etc? The BEST life insurance contract is the one that functions as promised in the contract and what assists the client to achieve their individual goals and objectives.

A video explaining why Whole Life Insurance is an economic Work Horse:

Thursday, August 28, 2014

Obamacare Rates on the Rise?

PWC(PriceWaterhouseCoopers) performed a study showing an increase of health care premiums for policies sold via the exchange due to Obamacare. An excerpt:

  "In nearly one-third of the 29 states that PwC investigated, premiums will rise by double digits. In Indiana, the average increase will be 15.4 percent. In Kansas, it’s 13.6 percent. Florida’s insurance commissioner says premiums are set to climb 13.2 percent."

Read the article titled, "Obamacare Year Two: PWC Survey Shows Double-Digit Rise In Many States"

Do Big Infrastructure Projects Boost GDP?

Do Big Infrastructure Projects Boost GDP? This question is addressed in a study done by the IMF. Here is a key excerpt:

"The econometric evidence reveals small positive and instantaneous associations between public investment booms and economic growth, but little long run impact. Several aspects of the evidence cast doubt on the idea that past booms triggered or accelerated GDP growth. Most of the positive association occurs immediately; a spending boom tends to be immediately associated with a rise in GDP this year, but not subsequent years."

The Doubling of the National Debt

"The Doubling of the National Debt" digs into the notion of the Federal deficit is declining, but US Government Debt load is increasing. A Key Excerpt:

"The falling deficits sound like good news, but there are two important things to understand about it. First, falling deficits mean that the national debt is still increasing — just more slowly than they previously were. In this case, assuming things play out as projected, that means that instead of trillion dollar deficits adding a trillion dollars a year to the nation’s debt, we now have a half-trillion dollar deficit adding a half-trillion dollars a year to the nation’s debt."

Wednesday, August 20, 2014

Militarization of the Police State: Increased due to 2009 Stimulus Package

Two good links discussing the the militarization of the local law enforcement. The first article titled, Obama Stimulus Program Includes Billions for Cops", covers how the 2009 Stimulus package had items to help increase funding for local law enforcement officials:

"The grants are popular with Democrats, and restoring them was central to Obama's campaign plan to combat rising violence. By tacking the money onto the stimulus plan, Obama avoids having to defend the spending during the normal budget process."

Yet, crime rates, according to Cato Research Fellow Trevor Burrus, have been declining since the 1990s. He makes this point and other points regarding the funding of local law enforcement in this Cato Podcast:

Tuesday, August 19, 2014

Walmart Shakes Up Primary Care—and the Whole System

Walmart Shakes Up Primary Care—and the Whole System

Key Excerpt:

"Insurance is irrelevant to these clinics, which post and accept cash payments directly. Walmart and other businesses outside the government-medical complex increasingly understand that there are opportunities outside those bureaucracies, and healthcare enterprises that operate free of the dead hand of Obamacare can take care of their customers without getting bogged down in the old system."

Militarization of the Police

Here are some excellent reads that provide some different view points from the mainstream school of thought regarding the Police State.

This first article, Police States and Inner City Economics, addresses this issue and some of the issues that have caused the decline of the economics in the inner city areas. A key excerpt:

"The expansion of police prerorgatives has accelerated in recent decades, first with the “War on Drugs,” and then with the “War on Terrorism,” both of which have resulted in what we see today in the form of heavily militarized police forces, asset forfeiture, and an endless list of federal laws that bring long jail sentences, even when no criminal intent is proven."

The Second article, Police Militarization in Ferguson-and your Town, explores the issues surrounding on how the local police are funded to acquire military surplus equipment and the like. A key excerpt:

"Federal grants drive police militarization. In 2012, as I was able to establish in moments through an online search, St. Louis County (of which Ferguson is a part) got a Bearcat armored vehicle and other goodies this way. The practice can serve to dispose of military surplus (though I’m told the Bearcat is not military surplus, but typically purchased new) and it sometimes wins the gratitude of local governments, even if they are too strapped for cash to afford more ordinary civic supplies (and even if they are soon destined to be surprised by the high cost of maintaining gear intended for armed combat)."

Lastly, a peer reviewed paper titled, "Warrior Cops" addresses this issue. This paper was written in 1999, as it details how much military equipment was given to local law enforcement agencies during that time period.