Tag: Insurance, Financial Planning

The Ultimate How Bonds Work Guide

The Ultimate How Bonds Work Guide

Bonds confuse lots of people but actually they are very straight forward. When you buy a bond you loan your money to a company, city, state or country for a fixed term. When you first make the loan, the interest rate is fixed (in most cases) as is the maturity date (the date they have to repay you).

During the period of the loan, you usually receive interest every 6 months. In the vast majority of cases, the interest payment you receive never fluctuates; you always get the same payment regardless of what happens in the stock market and regardless of what happens to interest rates. When the term is up, you (hopefully) get your money back.

What happens if you need to cash in your bonds before they mature?
When you buy a bond, the company or government that borrows the money is only obligated to pay you interest every 6 months and to repay the face amount of the bond when it matures. If you need to cash the bond in before it matures, you must sell it to somebody else.

If you do that you may get more or less than you put in, depending on market interest rates, the general state of affairs in the economy and the specific situation the borrower is in. In other words, the value of your bond goes up and down all the time.

This doesn’t matter if you hold your bond to maturity because at that point, the borrower has to give you back the face amount (assuming they are able to do so).

Bond Terminology
Before we dive too deep into the world of bonds, let’s go through a little terminology. It’s not that complicated and it will really help you get a grasp of what’s going on.

Accrued Interest.

Bonds pay interest every 6 months. This period is fixed. As soon as the bond pays out interest, it starts accumulating interest for the owner the next day. This is known as the accrual period.

Let’s say you buy a bond that normally pays interest to the bond holders on January 1st and July 1st. If you buy that bond on June 1st for example, you’ll get all six month’s interest on July 1st even though you only owned it for 1 month. To make up for that, when you buy a bond in between payout dates, the buyer pays the seller for the number of days the seller held the bond after the last payout. That’s called accrued interest. If you buy a bond in between pay dates, you can confirm the accrued interest the seller is charging you by using any number of online calculators.

In this case, you’d owe the seller of the bond for 5 months of interest and you’d have to pay the seller that accrued interest in addition to the amount you pay for the bonds. That amount would be rolled into the price of the bonds when you buy them.

Call Date

Sometimes, the borrower (or issuer) has the right to repay their loan earlier than the maturity date. This is otherwise known as calling the bonds early. When you buy a bond, it’s always important to ask if the bonds are callable and if so, at what date and price. (Sometimes the call price is different than the face amount of the bond.)

Coupon Payment

This is the amount the bond holder will receive every 6 months. You calculate this by multiplying the interest by the face value of the bond.


The American Bankers Association developed a way to classify municipal, corporate and U.S. government bonds. What they came up with is known as a “CUSIP number” which is a unique nine digit alphanumeric identifier.

Discountbond funds

If you buy a bond at less than face value, the difference is a discount.


The length of years before the bond matures.

Face Amount

This is the par value of the bond. It is the amount that the borrower must pay the bond holder when the bond comes due.

High Yield Bonds

These are bonds that pay higher than market interest rates and they are otherwise known as junk bonds. Usually these bonds pay higher rates because the risk of default is higher. The added interest is meant to compensate the investor for this added risk.

Investment Grade Bond

There are rating agencies that evaluate how secure different bonds are. In other words, the higher the rating, the stronger this rating agency believes the bond issuer is and their ability to pay interest and principal. This in turn means that rating agency believes that the bond is appropriate for investors seeking preservation of capital.


This is the name of the party that borrows the money by issuing the bonds.


This is an estimation of how easy or difficult it will be to sell the bonds on the secondary market. If the bonds are in high demand, it will be easy to sell them if the need arises. If the bonds are not in high demand or there are very few bonds being traded, they are referred to as “non-liquid”. Investors who hold illiquid bonds may have to offer them at a steep discount if they want to sell them prior to maturity.

Maturity Date

This is the date when the issuer must repay all bond holders the face amount of the bonds plus the accumulated interest since the last interest payment date.

Nominal Interest

This is the fixed interest rate that the bond issuer pays to the bond holder.

Payment Date

This is the date that the issuer pays out to registered owners of the bond.


If the market price of a bond is higher than the face value, buyers pay a premium.


This is the face amount of the bond.


This is the return the investor earns based on the actual amount they invest.

Why Bonds Fluctuate In Value Prior To Maturity
The best way to understand this is to look at an example. Let’s assume you buy a $100,000 bond with a 5% interest rate at par value. In this case, you will receive $2500 twice a year for a total of $5000. No matter what happens in the market, as long as the people who issued the bond have the ability to pay, that’s how much you will get. No more. No less.

Now, let’s assume that a couple of years go by and interest rates go up to 10%. If you try to sell your $100,000 bond on the secondary market, you won’t get $100,000 for it. Here’s why.

If I have $100,000 to invest when rates are 10% and I buy bonds, I’ll receive $10,000 a year in interest. So if your bond is only paying $5000 a year, I know I only have to invest $50,000 to earn that $5,000 (because interest rates are now 10%).

That being the case, since your bond is paying a fixed $5000, the most I’ll pay you for your bond when interest rates rise to 10% is $50,000. Make sense? This is why as rates go up, the value of the bonds typically go down.

All investments are ultimately valued by the income they generate; either now or in the future. Remember that. It will help you understand how other investments operate as well.

Of course, the other side of this equation also works. Let’s say rates go down to 2 ½ % rather than go up. Are you going to sell me your bond that pays $5,000 a year for $100,000? No. That’s because, when rates are 2 ½%, someone would have to invest $200,000 in order to replicate the $5000 income your bond is paying you. So if somebody wants to buy your bond when rates drop to 2 ½%, they better be willing to cough up $200,000 or you won’t sell.

Other Factors That Move Bond Prices
Besides market interest rates, there are other economic pressures that impact bond prices. One major influence is the financial security of the issuer. If the company that issued the bonds is on the ropes and nobody expects them to be around when it’s time to pay back the bond holders, the value of those bonds will plummet.

In addition, if the economic conditions of the overall economy change for the better or worse, that could also impact the value of the bonds. That’s because if the open market expects interest rates to shift, bond values will shift along with them.

Another force that impacts bond values is the time to maturity. The longer the maturity, the greater the impact of the changes outlined above – all things being equal.

What happens when a bond matures?
When your bond matures, the borrower (or issuer) stops paying interest and you are supposed to get your money back. In order to understand how you get your principal back, you first have to understand how people actually hold their bond investments.

In the vast majority of cases, people hold their bonds in brokerage accounts. That means they don’t have a physical certificate but merely an electronic notation in their statements reflecting their ownership. This may not sound that secure but in reality, this is by far the safest way to hold bonds.

When a bond comes due in this case, the brokerage company simply removes the bond from the holdings and puts the cash redemption amount into the account. Very easy.

But some investors hold physical certificates instead. In the olden days, this was the only way you could hold bonds; to get a physical piece of paper and store it somewhere safe. And while most people don’t have to bother with this today, some still prefer to do so. For these people, the process of redeeming a bond is more complicated.

If you hold the physical bond certificate and it matures, you send the paper certificate to what’s called the transfer agent when the bond matures. This agent is a fiduciary intermediary that acts as an agent for both you and the bond issuer. When the bond comes due, the transfer agent will get your certificate from you and send it to the issuer. Then, the issuer will send the redemption value to the transfer agent who in turn puts the money in your account.

The idea of holding the certificates may sound appealing to you but there are downsides to this approach. First, if a bond matures and you hold the certificate, the agent or issuer may not reach out to you. It may be up to you to follow up with them. When your bonds are held by the brokerage firm, you don’t have that worry.

Another concern is that bonds held in certificate form can be lost or destroyed. If you happen to misplace your bond, you may have to pay 3% of the face value or more in order to get it replaced.

Bottom line? If you own bonds, chances are you will be far better off by depositing them with a broker.

All bonds are debt instruments because they represent a debt that someone has to the bond holder. There are many different types of debt instruments and each kind has its own benefits and risk profile.

The most prolific debentures are U.S. government notes, bills and bonds. These are all issued by the United States Department of the Treasury. These are all very liquid and are very easy to sell on the secondary market.

Treasury bills are debts that mature in one year or less. The interest is included in the price you pay for the bill. That means you pay less than the face amount of the bond when you purchase them. And when it matures, you will receive the full face amount. The difference is the interest and this is an example of buying bonds at a discount.

Treasury notes are issued for 2 to 10 years. These bonds pay interest semi-annually.
Treasury bonds are the longest maturity U.S. government debt you can buy. They are issued for 20 to 30 years.

The government also sells inflation protected bonds called “TIPS”. This is an acronym for “Treasury Inflation-Protected Securities”. You may recall that with typical bonds, the maturity value and interest payments are fixed while the value of the bond fluctuates prior to maturity.

With TIPS, the rate stays the same but the maturity value is adjusted by the Treasury department to compensate the bond holder for risk. If rates rise (CPI) the maturity value of the bonds rises as well. This way, if inflation gets out of control, TIPS investors have a built-in safety net.

Currently, TIPS investors receive interest every 6 months and can buy bonds that mature over 5,10 or 30 years.

While these bonds may sound attractive for those worried about inflation, you might want to hold on to your check book for a while. I say this because nobody knows which way rates are going and how long it will take them to get there. If rates are low and stay down for years, it might take a long time before your TIPS prove themselves as worthwhile investments.

The government bonds discussed above all provide interest that is taxable at the Federal level, but State tax free.

Municipal Bonds
Besides U.S. government bonds, you can also loan your money out to cities, and states. These are referred to as municipal bonds and when you buy these bonds, the interest you receive is Federal tax-free. And in many cases, the interest you earn is also State tax free. The reason the interest is tax free is to make these investments more appealing to investors while making the borrowing costs lower for the cities and state.

The value of the bonds fluctuate and are subject to the same risks as discussed above.

Other Types Of Bonds
You can loan your money out to different countries or private companies as well. The same risks apply to these investments without the tax benefits described above. When you loan money to another country, the backing is only as secure as the country itself.

The history books are full of cases where sovereign nations defaulted on their bonds and left bond holders high and dry. Because of these risks, some foreign nations have to pay higher rates in order to attract investors. Of course, this depends on the financial stability of the borrower at the time they seek out funds.

You can also lend money to corporations here and overseas. Again, these bonds work the same way I’ve described above. And like foreign national bonds, the interest earned and the investment safety are very much a function of the particular party you are considering lending money to.

What happens if the borrower doesn’t repay you?
If the company, city, state or country that borrowed money from you does not have the wherewithal to pay you the interest or the principal they owe, you probably won’t be a very happy camper.

When this happens it’s known as default and it’s usually ugly. When the issuer is a company, they usually file for bankruptcy before they default. If they don’t, the bond holders usually force bankruptcy on the company.

If the company goes into a Chapter 7 bankruptcy, the court takes over the business and its assets are sold off. If your bonds are secured by assets, you’ll be among the first to see some money. If your bonds are unsecured, you won’t see a dime until the secured creditors are taken care of.

Chapter 11 bankruptcy puts the court in charge of the company but assets are not sold off. The hope here is that debt holders will get more if the company continues to operate rather than be sold off.

In either case, bond holders usually lose money when the issuer goes into bankruptcy and the value of their bonds will likely whither.

Municipalities can go bankrupt too but that doesn’t happen often. That’s because it’s very difficult for a municipal government to do so. In fact, there have been fewer than 500 municipal bankruptcies over the last 60 years compared to tens of thousands of business bankruptcies filed each year.

In the rare case where a city does file bankruptcy and defaults on its debt, the recovery rates were about 62% according to Moody’s Investor Services. To give you something to compare this too, corporate bond holders of defaulted securities usually recovered only 49% on average between that same period 1970 to 2012.

What about bond funds?
There are many ways you can invest in bonds. You can buy individual bonds of course as I described above. But you can also use mutual funds and/or ETFs to buy bonds. There are pros and cons to each. Let’s take a closer look at bond mutual funds, ETFs and index funds).

When you invest in a bond fund, the fund managers buy……ahhhhh……bonds. No surprise there.
But there are big differences between buying a bond outright and buying them through funds or ETFs. When you own a fund for example, you incur fund expenses. Some bond funds are expensive and others are very inexpensive. (We’ll look at fund expenses later on in the guide.)

On top of that, funds don’t have maturity dates – individual bonds do. The fund is a pool of potentially hundreds of different bonds and each one comes due at a different time. When one bond matures, the fund managers will in most cases immediately turn around and reinvest the proceeds into a different bond. Because there is no maturity date with a bond fund, you never have a fixed date when anyone is forced to repay your money.

Also, with an individual bond, you know what interest you are going to receive and when. With a bond fund, it’s not that simple. Remember, there are hundreds (sometimes thousands) of bonds that make up the fund. They all have different rates and different pay dates. While the income won’t change that much in any one month, it will change over time as old bonds mature and new bonds (at different rates) are purchased.

(Bond funds themselves come in a variety of different stripes. You can buy muni bond funds, international corporate or sovereign bond funds, and corporate bond funds. The holdings of each fund is determined by the fund prospectus. This is the document that details what the fund managers can and can’t do. Typically, the prospectus spells out what kind of bonds the fund will purchase, what quality the bonds will be and what the duration of the bonds would be as well.)

So these are two downsides to owning bond funds. But there are also some strong positives.

First and foremost, a bond fund spreads your risk. If you put all your money into one bond, you could lose it all if the bond defaults. With a bond fund, no one bond default can hurt you that much. Also, with a bond fund you have expert managers at the helm. All they do is read prospectuses and check out the financial strength of potential bond issuers all day long. These people have more expertise and time than you have and they are better equipped to keep your money away from shaky deals. This is not to say that they are always successful. But they do have better tools and resources than you do.

Also, you can put any amount you want into a bond fund. That’s not the case with individual bonds. Typically individual bonds are sold in increments of $100,000. That’s a lot of scratch for most people. If you buy individual bonds you need to invest several million dollars in order to have a diversified portfolio. With bond funds, you have access to wider diversification with only a $100 investment.

Last, with bond funds, you usually don’t have to worry about liquidity. If you own an individual bond and want to sell it before it matures you have to sell it on the open market and hope for the best. That involves commissions of course but it also involves risk. And if the bond you want to sell is a small issue and illiquid, it may take time to sell. To make matters worse, illiquid bonds are often sold at steep discounts as I mentioned before. If that’s the case, you could take a major haircut on your principal if you need to bail out of an individual bond prior to maturity.

This isn’t a problem for bond fund investors because the fund has more liquidity. Keep in mind that on any given day investors are buying and selling shares of the fund. Often, a fund manager can use the cash inflow to pay off those people who want to cash out. Often they can do this without even selling off any bonds.

Also, as the market shifts, bond holders can easily shift with it. For example, if you decide you want to sell your corporate bond fund and buy a municipal bond fund (or any other fund) instead, it’s very easy and inexpensive to do. The same can’t be said for investors who own individual bonds as this process is much more costly for them.

How to buy bonds and bond funds
Most people who buy individual bonds do so through their broker. The one tricky thing about this is that sometimes you don’t know how much commission they are charging. For some reason, it’s actually legal for a bond broker to “bury” the commission into the cost of the bond so the customers don’t know what they are paying.

For example, lets’ say you want to buy a bond. You call up your broker and tell her what you are looking for and she comes back to you with an offer of XYZ bond paying 4% maturing in 2030.

Let’s say you like the sound of that so you give your broker the green light and she buys the bond at par value – $100. This could be OK – but you don’t know for sure. It could very well be that the broker only paid $97 for the bond and is charging you over 3% to make the transaction. This is referred to as “mark up”. It’s a cost that is often difficult to ascertain because it’s buried into the price of the bond. This might be OK in someone’s world but it’s not OK in mine.

There are calls in the industry for brokers to fully disclose markups but so far this requirement has not been put in place. The best thing to do is ask your broker what the mark up is and hope they are being honest. Once you get that information, check with another broker to determine what price they would charge for the same bond – and tell your existing broker you are going to do so. Very few people do this but it’s the only way you can audit your broker under current rules and is very much worth the time.

If you want to buy Treasuries, you can sidestep this entire problem and buy them directly from the Federal government.
All you have to do is go to their website (Treasury Direct) and have at it. If you do, you won’t have to worry about commissions and mark ups as there are none. There are some costs to this but they are relatively minor and nothing to worry about.

On your first visit, you’ll have to open an account – but that only takes about 10 minutes. Once you do that, you can buy Treasury Bills, Notes, bonds or TIPS.

The easiest way to buy mutual funds or ETFs is to do so through a broker. Don’t buy funds at a mutual fund company however. If you go that route, you can only buy funds offered by that particular fund family. If you buy your funds through a brokerage firm like TD Ameritrade, Fidelity or E*TRADE, you can buy almost any fund you like. I’ll discuss this in further detail later on.

Bottom line on Bonds
Bonds are very popular – but that doesn’t mean they are the right investment for you. It depends on your investment objectives. Please refer back to the Ultimate Investment Guide for a deeper discussion on this point. Bonds may have a place in your portfolio. And if they do, this guide has explained most of what you need to know in order to make smart decisions about bonds. As always, speak to your investment professional before making investment decisions.

2 New Alternative ETFs Seek Absolute Returns In Any Market

2 New Alternative ETFs Seek Absolute Returns In Any Market

The premise of positive returns in any market is an alluring proposition for risk adverse investors.  These types of alternative strategies were once the realm of sophisticated hedge funds and institutional portfolios.  However, they are now starting to make their way into the accounts of mainstream investors via exchange-traded funds (ETFs).

Alternative strategies are generally given more flexibility than a traditional passive index tracking a basket of stocks or bonds.  They may have the capability to own futures contracts, short positions, currency pairs, or even volatility-linked products. Put simply, these “go anywhere, do anything” investment styles have the freedom to select virtually asset classes they feel are most appropriate for the current market environment.

TD Ameritrade Shocks RIAs [By Changing Its Advisor Referral Program With] A Tight Deadline To Sign

TD Ameritrade Shocks RIAs [By Changing Its Advisor Referral Program With] A Tight Deadline To Sign

Last month on March 20th, TD Ameritrade “informed” the roughly-150 RIAs in its advisor referral program that they must acquiesce to new terms, which for many will involve substantially higher costs, with a contract and an April 5th deadline to sign or be dropped from the program. The primary changes were a shift in the revenue-sharing agreement for advisor referrals from 25% of the advisor’s fee, to 25 basis points (regardless of the advisor fee) which drops to 10bps above $2M and 5bps over $10M; for those who charge more than 1% in AUM fees for million dollar accounts, the change would actually be a discount, but for most advisors who charge 1% or less – sometimes much less on large accounts thanks to graduated fee schedules – the change amounts to a substantial increase in the cost of the referral arrangement.

In addition, the 25bps fee will apply on referred assets, not just closed assets, which means if TD Ameritrade refers a $2M account but the client only agrees to have $1M managed initially, the advisor still has to pay 25bps on the entire $2M that was referred. Also notable was a big change to the exit rules – in the past, advisors who left TD Ameritrade would have to pay a one-time 75bps fee if they left the platform and took TD-Ameritrade-referred assets, but now the cost will be a 75bps one-time fee plus a 25bps trail for five years.

The shift comes at a time when TD Ameritrade is finalizing its Scottrade acquisition, which is expected to boost its branch network from about 100 locations up to a whopping 450 branches, and as a result, could turbocharge what is already a referral flow of about $25B to $30B per year to RIAs… but now with much higher revenue-sharing and retention terms for TD Ameritrade. Of course, the reality is that most advisors would and do gladly share revenue in exchange for high-quality referrals provided to them on a silver platter, and the buzz is that most firms have simply accepted the new terms and moved on – especially since firms already charging right around 1% AUM fees and closing most new business referred to them won’t see much change, and if they plan to stick with TD Ameritrade anyway the new departure provisions are a moot point.

Nonetheless, there were substantial rumblings about the way TD Ameritrade handled the rollout, providing many firms less than 2 weeks to read the notice and make a decision (once the letters physically arrived in the mail), and using the DoL fiduciary rule and its April 10th applicability date as the justification for the push (even though the rule has since been delayed 60 days) on the basis that TD Ameritrade had a conflict of interest by getting paid 25% of an advisor’s revenues (which meant advisors who charged more would result in a conflict of interest by paying more in revenue-sharing to TD Ameritrade).

Although ironically, in practice the new pricing structure will squeeze investment-only firms (that tend to have lower AUM fees for investment-only services, and might not be able to pay 25bps if they only charge 40bps to 50bps in the first place), in favor of more comprehensive financial planning and wealth management firms that charge a higher price point (for which 25bps is expensive but not fatal).

How Much More is Life Insurance for Smokers in 2017?

How Much More is Life Insurance for Smokers in 2017?

It may not seem so on its face, but obtaining life insurance for smokers is super easy.

How’s that for going cold turkey?

If you smoke, it’s going to hurt your life insurance rates. Since this habit carries so many health risks, smokers generally need to pay more for their coverage and also could have a more complicated application process.

If you handle your application properly though, you can minimize the extra costs you’ll need to pay. Here is a complete guide to life insurance for smokers to help you get prepared.

Life insurance is one of the most important investments that you’ll ever make for your family. It’s the best safety net that you can buy. It’s one of the only ways that you can ensure that your loved ones will be taken care of, regardless of what happens to you. If you’re a smoker, you may think that you won’t be able to get an affordagble life insurance plan.

Can You Get Life Insurance as a Smoker?

You can absolutely get life insurance if you are a smoker of any kind.  In fact, you can even get instant approval through some life insurance companies.  This is not to say that you will not pay higher rates.  Since smoking has been proven to increase the risk of various ailments, smokers will pay higher rates than non-smokers who otherwise have the same risk factors.

So if you have two men, both are in good shape, both have similar family histories, and both pass their exam, but one is a smoker and the other is a non-smoker, then the smoker is going to have a higher premium.

How Much Higher are Smoker Life Insurance Rates?

Most smokers realize their life insurance rates will be more expensive, but many are shocked by just how high their rates actually are. A smoker in his 30s can expect to pay about two to three times as much for a policy than a nonsmoker. A smoker in his 40s can expect to pay three to four times as much.

Insurance companies charge this massive price increase because smokers have such a higher risk of death than nonsmokers. In addition, smokers often have other health problems like a poor diet or an inactive lifestyle. This is just one more example of how it pays to quit smoking.

Sample Life Insurance Quotes for Smokers

Preferred Plus
Non- Smoker

Testing for Tobacco

If you are a smoker, you won’t be able to hide this fact. First of all, your life insurance application will ask you directly about whether you smoke. You need to be honest and say yes because if you don’t, it’s a form of insurance fraud.

Most policies also require that you see a nurse or doctor for a medical exam. As part of this exam, you’ll need to give your blood and urine for testing. The insurance company will check to see if tobacco shows up in either. If you test positive for tobacco but reported that you didn’t smoke, your odds of getting a fair insurance rate plummet.

Even if you can hide your smoking from the insurance company, you’re still taking on a big risk. The first two years of a life insurance policy are known as a contestability period. If you die during this time and the insurance company discovers that you were smoking, it can deny paying out your death benefit. Being honest is the best way to deal with smoking.


Cigars, Electronic Cigarettes, and Chewing Tobacco

If you smoke cigars or chew tobacco, you should make sure to note this distinction with your insurance agent. All these forms of tobacco would show up on your blood test and could get you rated as a smoker.

However, insurance companies are sometimes more lenient with these types of tobacco use. For example, some companies give a non-smoker rating to applicants that only use chewing tobacco. If you only smoke cigars a few times a year, you might also be able to qualify for a non-smoker rating by not smoking for several weeks before your application.

Each company looks at different forms of smoking with various medical underwriting. Some companies will still give you preferred rates if you smoke electronic cigarettes, but other companies are going to lump you with smoker’s rates, regardless of what kind of smoking that you do.

The best rule of thumb is to let your insurance agent know what’s going on ahead of time so you the underwriting department won’t just assume you smoke cigarettes.

Vaping and Electronic Cigarettes

Vaping has completely changed the way that life insurance companies must look at smoker’s rates. There are thousands and thousands of people that are starting to vape or are switching from traditional cigarettes to vaping. In fact, a lot of smokers are using vaping to kick their tobacco habit, which can work wonders on your health, but how is it going to impact your life insurance rates. When you’re applying for life insurance coverage, you may wonder how vaping is going to impact your rates, and the answer is, “it depends.”

Just like with other kinds of smoking or tobacco, every insurance company is different. Some companies are going to automatically give you smoker’s rates if you vape, but other companies will give you non-smokers rates or have a separate category. Finding the perfect companies for people who vape could save you hundreds of dollars on your insurance plan.

Because the idea of vaping is new, there is little research on how it will impact smokers in the long-run, which means that insurance companies don’t know how to rate it. As more studies come out on the impact on vaping, insurance companies can accurately calculate the risk associated with vaping, but until then, you can expect to get rates that vary drastically from company to company.

Quitting Smoking Helps

You can use your life insurance bill as one more motivation to quit smoking. If you smoke now and can only get a smoker rate, you could still qualify for a discount later on. You need to quit smoking for at least one year. At this point, you can request another health exam. If you come through clear as a nonsmoker, your insurance company will start charging you the lower nonsmoker rates.

Smoker Case Study

I had a 34 year-old male client that was seeking $250,000 of term life coverage.  He had been smoking for most of his adult life but was determined to quit.  He had two young children so getting some life insurance coverage was a major concern of his.  He had stopped smoking for just 4 months so it he would have still been subject to smoker rates. What I suggested was to take out a shorter term policy (10 years vs. 30 years) to make sure he had the coverage he needed while not having to pay a fortune to have it.

The only reason I suggested this was because I knew my client was serious about quitting. If you’ve been trying to kick the habit for years and have been unsuccessful, get the full term of life insurance you need. If you’ve been wanting to kick the cigarettes once and for all, the thousands of dollars that you would save is a great incentive. Not only will quitting smoking work wonders on your health, but it will also work wonders on your bank account as well.

Find the Right Company

Each life insurance company has a different process and different rates for smokers. In addition some treat all forms of tobacco the same while the best companies for smokers make a distinction for cigars, electronic cigarettes and/or chewing tobacco. Taking the time to find the right match for your situation could make a big impact on your insurance premiums.

To help you in your search, you can work with an independent insurance broker like our company. We regularly work with smokers so we are experts in this market. We can show you how to put together a smart application and match you up with the best companies for your needs. To learn more about our service, call or fill out our online application form for free life insurance quotes.

Unlike a traditional insurance agent, independent brokers represent dozens of insurance companies across the nation, which means they can bring all of the lowest rates directly to you. Don’t waste your time calling dozens of insurance companies and answer the same questions over and over again.

Working with an independent insurance agent is going to save you both time and money on your life insurance policy. Because you never know what’s going to happen tomorrow, you shouldn’t wait any longer to get the insurance protection that you and your family need.

Getting the Right Amount of Coverage

Aside from picking the right kind of policy, it’s vital that you get enough insurance coverage to protect your family. If you were to pass away, your loved ones would be responsible for all of your debts and final expenses, which can make an already difficult situation a lot more stressful. It’s extremely important that you have enough life insurance protection to give your family the money that they need if anything tragic were to happen to you.

When you’re calculating your life insurance needs, there are several different factors that you’ll need to account for to ensure that you have enough coverage. The first thing that you should calculate is your debts and final expenses. Your family would be left with your mortgage payments, car loans, and much more. All of those can put your family under a mountain of debt.

The next thing that you should account for is your paycheck. The secondary goal of your life insurance is to replace your income. Your family would struggle financially if they no longer had your salary, but that’s where your policy comes in.

These are only two of the things that you should consider when adding up your life insurance needs. I can help you make sure that you’re getting the coverage that you need, and at an affordable price. Just because you’re a smoker doesn’t mean that your life insurance plan has to break your bank every month.

The Financial Report of the United States Government 2016

The Financial Report of the United States Government 2016


In these to graphs they display the financial reports of the U.S. in 2016.   The first message is to beware some of the estimates that you hear, should you hear them at all.  No one wants to talk about this, but what few that do will look at a few headline numbers and leave it there.  Really you have to look at it for years, and look at the footnotes and other explanatory sections in the back when things seemingly change for no good reason.  Also, you have to add all the bits up.  No one will do that for you.  Even with that, you are relying on the assumptions that the government uses, and they are not biased toward making the estimates sound larger.  They tend to make them smaller.

Thus you will see two things that adjust the headline figures.  In 2004, when Medicare part D was created, the Financial Report of the US Government began mentioning the Infinite Horizon Increment.  Now, that liability always existed, but the actuaries began calculating how solvent is the system as a whole if it were permanent, as opposed to lasting 75 years.

The second is the Alternative Medicare Scenario.  When the PPACA (Obamacare) was created in 2010, there was considerable chicanery in the cost estimates.  The biggest part was that they assumed Medicare Part A (HI) would cost a lot less because they would reduce the amount that they would reimburse.  They legislated away costs by assuming them away, and then each year Congress would restore the funding so that there wouldn’t be a firestorm when doctors stopped taking Medicare.  But they left it in for budget and forecast purposes, and showed what the projections would be like if these cuts never took place in what they called the Alternative Medicare Scenario.

So, did the cuts to Medicare part A take place? No.

Graph Credit: The Boards of Trustees of the Federal Hospital Insurance Trust Fund

As you can see they have gone up almost every year since 2010. The liability should not have gone down. If you think the Alternative Medicare Scenario is conservative enough, the liability has remained relatively constant since 2010, not diminished dramatically.

How is the load relative to GDP?  It keeps growing, but since 2010 at a less frantic clip.  The adjusted ratio below includes the Alternative Medicare Scenario.

Final Notes

Remember that we have had a recovery since 2009.  The statistics never assume that we will have another recession, much less a full fledged crisis like 2008-9.  Without adjustment, the Medicare part A trust fund will run out in 2028.  There is no provision for what the reimbursements will be made if the trust fund runs dry.  Social Security’s trust fund will run out a few years after that, and instead of getting 12 checks a year, people will only get 9 of that same amount.  If there is a significant recession, those statistics will move forward by an unknown number of years.  Without congressional action, because there will be a recession, I would expect that both will run out somewhere in the middle of the 2020s, and then the real political fun will begin.

The tendency has been over time to turn these from entitlements to old age welfare schemes.  FDR always wanted them to be self funded entitlements with everybody getting roughly the same treatment by formula, because he wanted the program to have widespread legitimacy across all classes, and no sense of stigma for being a poor old person on the dole.

Given the strategies that exist around qualifying for Medicaid, those days are gone, so I would expect that benefits will be limited for those better off, inflation adjustments eliminated, taxes raised to some degree, eligibility ages quickly raised a few more years, with elimination of strategies that allow people to get more out of the system by being clever.  (As an example, expect the favorable late retirement factors to get reduced, and the early retirement factors to go down even more.)

Does this sound fun?  Of course not, but remember that cultures are larger than economies, which are larger than governments.  The cultural need for supporting poor elderly people will lead funding to continue, unless it makes the government, and the culture as a whole fail in the process, and that would never happen, right?


Betterment Raises Fees And Pivots To Platform Offering Human Advisors

Betterment Raises Fees And Pivots To Platform Offering Human Advisors

Since they first emerged nearly five years ago, the widespread belief has been that robo-advisors will ultimately cause fee compression amongst human financial advisors, as the process of implementing a diversified asset-allocated portfolio becomes increasingly commoditized. However, it turns out that in the pricing game of chicken between robos and human advisors, it’s actually the robo-advisors that are turning first.

 This week I will discuss this week’s blockbuster announcement from Betterment that they  will no longer be “just” a robo-business, are instead are pivoting to offer human financial advisors, and are raising their fees in the process!

Specifically, while Betterment will still maintain a 25bps advisory fee for its core digital business, the company announced that for accounts over $100,000, fees are being increased from 15bps to 25bps (a whopping 66% price increase for large accounts paying the “old” rates!), and large accounts will also have the opportunity to use Betterment Plus (offering an annual meeting with a CFP professional) for 40bps, or Betterment Premium (offering year-round access to a team of CFP professionals) for 50bps, or can be referred to the new Betterment Advisor Network (at whatever rate the outside advisor charges, plus the 25bps Betterment for Advisors platform fee).

The announcement that Betterment is pivoting to increase their fees and add new human advisory services is the most direct acknowledgement yet of the sheer unsustainability of the original robo-advisor model. Instead, Betterment has shifted to mimic its more successful competitors, including Personal Capital, Vanguard Personal Advisor Services, and the recently announced Schwab Intelligent Advisory – none of which are actually robos at all, but rather tech-augmented human advisor platforms.

Ultimately, though, Betterment’s shift to offer a layer of human advice still isn’t necessarily about staking a competitive position against (other) human advisors. Instead, it’s a shift to become a platform business that compete with the likes of Schwab, Fidelity, and TD Ameritrade. After all, if the scaled human advice is merely offered “at cost”, then Betterment effectively earns 25bps of fees regardless of where clients go – whether it’s Betterment Digital, Plus, Premium, or the Advisor Network. It’s no longer about getting the clients, per se, but simply being the platform where the clients go for whatever solution they choose.

Yet, there is still a question of whether Betterment will actually be able to compete in this space at all. After all, the irony is that now the “robo-advisor” is actually the higher priced offering, as the new Betterment Premium service is almost double the cost of the competing Schwab and Vanguard alternatives, with 5X to 10X the minimums! Which means Betterment faces a challenging uphill marketing challenge, for which the quintessential robo-advisor differentiator – low cost – is no longer in their favor!

The bottom line, though, is simply to recognize what a profound shift Betterment has made, and one that I think marks the ultimate demise of the pure B2C robo-advisor. For better or worse, Betterment is now trying to reinvent a modern version of the old-school investment platform – akin to Schwab, Fidelity, and TD Ameritrade – serving both consumers and advisors, but doing so with what it hopes will be recognized as superior technology. Which means the “robo” technology is still here to stay… though ironically for Betterment, the challenge remains what it has always been – whether they can market themselves and attract assets fast enough to hit critical mass, or succumb to the challenge of the financial services industry’s brutally high client acquisition costs!




Cash Cows Of The Dow

Cash Cows Of The Dow

Long time readers know that I have been a shareholder yield advocate on the blog for almost a decade.  (We used to call it net payout yield back then, and we define it as the combination of dividends and net buyacks.)

People are slow to change of course, but my hopes are that eventually you all come around to a little common sense.  Sometimes books and white papers are too much, and all that is needed is a simple chart or table that will change people’s minds.

Remember the old Dogs of the Dow strategy where you just invest in the 10 highest yielding Dow stocks each year?  This strategy was popularized by O’Higgins, and historically beat the market.  But as you all know, a shareholder yield approach does even better historically.

Below we list all 30 Dow stocks, their dividend yield, their net buyback yield, and their total shareholder yield.



We then group the Dow stocks into the Dogs strategy and the shareholder yield strategy (what we call the Cash Cows.)  Not surprisingly, the Dogs have the highest yield.  However, they also have the lowest buyback yield.  Overall the Dogs have a very similar shareholder yield to the entire Dow, but actually is slightly lower.

The Cash Cows, despite having the lowest dividend yield, have by far the largest buyback yield resulting in a total shareholder yield that is nearly double that of the Dogs and about a third higher than the Dow.

Click to enlarge


Here’s where it gets even more interesting.  The Cash Cows strategy also has the cheapest valuations (median) across all variables except P/E ratio (and then it only nearly misses.

So a much higher total yield, and lower valuations.  What’s not to like?