Tag: Insurance, Financial Planning

Six Areas Where I Disagree with Dave Ramsey’s Retiring and Investing Advice

Six Areas Where I Disagree with Dave Ramsey’s Retiring and Investing Advice

“A good financial planner is going to do more than pick your funds.”
–Dave Ramsey

Recently, personal finance guru Dave Ramsey engaged in a very heated discussion on Twitter with several financial planners regarding the appropriateness of his investment and retirement withdrawal advice. The questions were (and are) very legitimate ones, namely:

Why does Dave Ramsey keep telling people to invest 100% in equities and that they can expect 12% returns?

and

Why does Dave Ramsey keep telling people that they can safely withdraw 8% of their net worth each year in retirement?

Dave Ramsey’s responses?

@BasonAsset @behaviorgap @CarolynMcC @DaveRamseyExemption from the CFP/ethical requirements due to journalist role?

The snobbery of some of the “Financial Pros” in not helping regular people is sickening.

@DaveRamsey You used to be an role model of mine until you lashed out at @CarolynMcC. Guess you have to change your hero at some point.

@davegrant82 //Why? She has attacked me continually. I just responded. Dont want to get bit by the big dog, stay off the porch.

Here’s what he has to say about people who question him.

Out of 387k followers I am amazed how many are postive they can win and how many are nit picking victims.

Instead of actually addressing the questions with a cogent, thoughtful, defensible response, he resorted to ad hominem attacks against financial planners who hold a fiduciary duty to their clients, Carolyn McClanahan and James Osborne.

I’m a fan of Mr. Ramsey’s debt advice. I regularly tell people to go to the local library and check out The Total Money Makeover if they’re deeply in debt because there’s no point in paying me to get the same advice that they can get for free by checking that book out of the library.

But, I have serious and deep concerns about the investment and retirement asset management advice that he gives to his listeners.

Six Areas Where I Disagree With Dave Ramsey’s Advice

There are six areas of disagreement I have with the investment and retirement advice that he provides to his listeners and to his readers.

Investment advice disagreement #1: You can expect a 12% average return

Even if the average returns of the market were 12%, which they’re not, he’s making a very simple, basic mathematical mistake. He is confusing average returns and compound returns. In average returns, the sequence of returns doesn’t matter. In compound returns, the sequence of returns does matter.

Let’s look at an example.

Say you invested $1,000 in Widgets, Inc. The first year, Widgets Inc. loses 10%. At the end of the year, you have $900 of Widgets, Inc. stock. The second year, Widgets Inc. gains 20%. At the end of year 2, you have $1,080 of Widgets, Inc. stock.

The average return during that two year period was 5%. But, applying an average 5% return over a two year period would mean that you should have $1,102.50 in Widgets, Inc. stock. You don’t. You only have $1,080 of Widgets, Inc. stock.

Your compound average growth rate (CAGR), or compounded annual return, was 3.92%.

If you report the average annual return, you get to say that you averaged 5% per year.

If you return the annual return that you see in your personal holdings, then you averaged 3.92% per year.

Compounded over time, that’s a big difference.

I don’t believe that Mr. Ramsey is trying to lead anyone down the garden path here. I think he really thinks that the average annual return is the correct number to report when it’s not.

He does argue two counterpoints to this issue. The first is that saving 15% per year during your working lifetime for retirement is more important than the returns that you’ll get. He’s right, but not by the wide margin that he tells his audience. Furthermore, his newsletters encourage working backwards from a 12% return rather than saving 15%. That advice is contradictory.

If an average family, earning $52,762 (the national average family income), saves 15% of their income every year for 40 years and receives the compounded average growth rate of the market, adjusted for inflation, which is 6.69%, that family will end up with $1,556,686.83. Using a 4% withdrawal rate (which contradicts his advice, a point we’ll address below), that provides the family with $62,267.47 per year. The family will be in good shape, but not in the shape that a 12% return assumption would lead them to believe – $6,799,510.70 versus $1,556,686,83 – a 77% difference.

The second counterpoint is that he uses 12% as an educational example and that he can point to mutual funds which have made 12% over a long period of time. We’ll deconstruct his picks further down, but using 12% as an “educational example” brushes over an important aspect of the differentiator between a “guru” (which he undoubtedly is and deserves the title) and an actual, fiduciarily bound advisor. He’s not bound by a fiduciary duty. It’s not investment advice. That’s why he won’t tell people which mutual funds to invest in. I can’t either, unless you’re a client, but I can certainly tell you which ones to avoid, such as mutual funds that have exorbitant loads. Again, more on this later.

If you think that you’re going to get a 12% average return, then you’ll simply plug 12% into your numbers each and every year, and that’s wrong. The market has ups and downs. To simply say 12% per year every year is naïve and can lead you to significantly overestimate the value that your nest egg will hold when it comes time to retire. It is possible to become anchored (to read how the anchoring bias affects your retirement decisions, read “The Difficulty of Predicting Your Retirement Number”) to the 12% return and not follow the 15% savings rule, and that will lead to serious repercussions when you reach retirement age if you save less because you think that you can get a higher return than you probably will.

Which leads me into the second area of disagreement.

Investment advice disagreement #2: Continuing to be invested completely in stocks in retirement

Once you retire, you’re basically trading sources of income from wages to money produced by the assets you’ve saved up and invested in. While some of you may plan on working part-time in retirement, it’s quite possible to expect that you may not be able to work once you’re in retirement. Furthermore, as you age, the probability that you can get back to work declines, both because of mental and physical frailties and because the absence from the workforce will make it increasingly difficult to get a job.

Thus, unless you’re the rare person who will work until age 103 and die at the desk, you’re going to have to rely on your nest egg and Social Security to support you. In most cases, Social Security will not be sufficient to allow you to maintain the lifestyle you had during your working years (and hopefully, many of you will be able to retire before Social Security starts), so you’re going to need an additional source of income.

That income will come from your assets.

Now, it’s possible that you may never need to purchase bonds in retirement, butyou will need some source of income. Relying solely on the dividends and capital gains provided by stocks is an extremely risky way of doing so unless your asset base and the dividends it produces far exceed your income needs.

It’s not wise to go completely in the other direction, either, and dump everything you have into CDs. If you choose that route, while you won’t lose money, you willlose purchasing power. Ultra-safe, income-generating investments like CDs and money markets do not beat inflation. This means that, over time, what you can buy for your money will decrease. Given that the biggest increase in expenses and the biggest inflationary cost in retirement is healthcare, this failure to match or beat inflation will mean that when you need more money to cover declining health or long term care, you won’t have the financial wherewithal to afford the care that you need.

That’s why I generally suggest that people aim to have 110 – age as a percentage of the portfolio to keep in equities and the remainder in income generating assets. If you are retired and have all of your investments in equities and the market tanks, then you’re going to be faced with a double whammy of a shrunken nest egg and having to withdraw from it when it’s been hit. Since bonds and equities usually are countercyclical, the impact of a down market year won’t be as bad.

While Dave Ramsey says that you can withdraw 8% per year from your portfolio in retirement based on a 12% rate of return and 4% inflation, the reasoning behind how he gets to that conclusion is where the advice causes me to disagree. First off, as I have pointed out, he uses incorrect calculations in determining 12%, but that’s not really the issue. The issue is that you won’t get 12% (or 15% or 3% or whatever rate of return you want to depend on) every single year. If that was the case, and your returns were steady every single year and at or above the rate of inflation, then you could withdraw the gains and not have to worry about depleting your nest egg.

The problem is that returns aren’t always going to be above the rate of inflation.The way that Dave Ramsey reaches the 8% withdrawal rate is outlined below. His newsletter outlines the example of a hypothetical couple who has saved $1.2 million for retirement.

Now, envision what retirement will look like for you by estimating the income your nest egg will bring. Using the example above, our couple’s $1.2 million will remain invested and growing at the long-term historical average. Estimating inflation at 4% means they can plan to live on an 8% income, or $96,000 a year ($1.2 million x 8% = $96,000).

This plan allows you to live off the growth of your savings rather than depleting it. With careful monitoring and some modest adjustments in years with low returns, you can be confident that your savings will last throughout your retirement.

This hypothetical couple lived off of $50,000 per year. Suddenly, they’re going tojump on the hedonic treadmill and start living on whatever above inflation their investments return.

Unfortunately, they still have minimum living expenses. They lived on $50,000 per year beforehand, and they were saving 15% per year, so their true living expenses were $42,500 per year. Therefore, in down years, they have to still eat and live, meaning that they need to eat into the nest egg to pay for food, shelter, clothing, and transportation.

Although I’m no fan of aftcasting, it is instructional to use historical stock market returns to give you an idea of how often this plan succeeds.

I set forth a couple of rules.

  • If the returns exceed the inflation adjusted annual expenses, then spend the returns. Do not deplete the nest egg.
  • If the returns do not exceed the inflation adjusted annual expenses, then spend the inflation adjusted annual expenses. Deplete the nest egg only to the extent necessary to meet minimum spending needs.

Using 3% as annual inflation (which would benefit the Ramsey approach, as that requires less money be spent in lean times), if I run the hypothetical retirees through 30 years of retirement for every year since 1926 using actual stock market returns, the retirees run out of money 49.1% of the time.

I don’t want to use a plan which has a slightly better than 50% chance of succeeding.

The reason that academics and practitioners promote 4% (or even less) as a safe withdrawal rate in retirement is that you need to reinvest excess gains in years with strong returns to give yourself enough buffer so that you don’t deplete your assets in years when returns are below the rate of inflation.

An improved solution in this situation is to set up a maximum cap of spending. If we set up an inflation-adjusted cap of $100,000 per year, then the plan has a 93% chance of succeeding.

There’s one problem with creating a solution that has such a broad range of spending. These retirees are going to experience some serious shocks and whiplash in their lifestyles. One year, they’re spending $106,090 and living fast and free, and the next year, they have to slam on the brakes and live on $46,440.90. The constant hedonic adaptation that one must undergo to constantly vacillate between salad and lean years is going to take an enormous psychic cost and will be a very difficult to live within.

The better approach is to work backwards from a retirement spending goal and a much smaller range and adjust it for annual inflation. Then apply a withdrawal rate such that the chances of running out of money before running out of heartbeats is minimal.

Investment advice disagreement #4: Recommending front-loaded mutual funds

On June 4, 2013, Mr. Ramsey invited a Motley Fool staff writer onto his showto discuss an article that was published at the Motley Fool website discrediting Ramsey’s assumed rate of returns. I’ll discuss more about that hour of the episode later, but for this disagreement, I want to pull out a particular piece of the discussion.

The crux of the hour-long dialogue was that Ramsey often quotes 12% as an average annual return, which is close to the S&P 500 average return (discussed in disagreement #1). Ramsey’s retort was that he has found funds which return more than the S&P 500 and have a history of doing so.

He cited two funds: Investment Company of America (AIVSX) and Growth Fund of America (AGTHX). He also encourages people to utilize loaded mutual funds on his website.

Both of the funds he cited have a 5.75% front load.

I’ve previously explained why loads on mutual funds destroy your nest egg. Let’s demonstrate how the 5.75% front load affects the returns for the hypothetical couple that we discussed above. As the example pointed out, this was a couple that made $50,000 per year and invested 15% of their earnings. How would they do with each of these mutual funds after paying a load?

AIVSX

Since the historical data from Yahoo Finance goes back to May 31, 1996, I’ll assume that this family invests 25% of their $7,500 per year, or $1,875 on May 31 of each year (or the first available trading date after May 31). They pay a front load varying from 5.75% down to 4.5% based on the breakpoints for loads in the fund (for which their salesman thanks them), and between $1,767.19 and $1,790.63 goes into the actual mutual fund. They will reinvest dividends and capital gains.

As of June 4, 2013, their investment would be worth $57,079.74. 17 years of contributions totaling $31,875 has gained them $25,204.74 in profit, for a 79.1% return. This is an average return of 4.65%, or an annualized return (CAGR) of 3.49%. They paid $1,818.75 in loads for this privilege.

AGTHX

Since the historical data from Yahoo Finance goes back to February 11, 1993, I’ll assume this family invests 25% of their $7,500 per year, or $1,875 on February 11 of each year (or the first available trading date after May 31). They pay a front load varying from 5.75% down to 4.5% based on the breakpoints for loads in the fund (causing glee in the salesman’s heart), and between $1,767.19 and $1,790.63 goes into the actual mutual fund. They will reinvest dividends and capital gains.

As of June 4, 2013, their portfolio would be worth $100,789.89. 20 years of contributions totaling $37,500 has gained them $63,298.89 in profit, for a 168.8% return. This is an average return of 8.44%, or an annualized return (CAGR) of 5.39%. They paid $2,001.56 in loads for this privilege.

Now, let’s compare how these two investments would perform versus their Vanguard Index counterparts.

VFINX vs AIVSX

The Investment Company of America’s fund invests in blue chip stocks, comparable to the S&P 500. Thus, an appropriate index fund comparison is the Vanguard 500 Index Fund (VFINX).

If the same family had purchased VFINX compared to AIVSX, they would have $57,696.02 as of June 4, 2013. That is $616.28, or 1.08% more.

To break even and erase the effects of the loads on performance, the family would have to contribute $1,999.94 per year, or $21.36 more to that fund.

NAESX vs AGTHX

The Growth Fund of America is a growth fund that invests in smaller capitalization stocks with the intent of gaining appreciation over time as these stocks grow. Thus, an appropriate index fund comparison is the Vanguard Small Cap Index Fund (NAESX).

If the same family had purchased NAESX compared to AGTHX, they would have $113,357.18 as of June 4, 2013. That is $12,558.29, or 12.5% more. To break even and erase the effect of loads and underperformance, the family would have to contribute $2,223.08 per year, or $244.50 more.

In the first case, the loads outweigh the outperformance of the fund. In the second case, even if you took away the load, the fund still underperforms its index counterpart.

Ramsey’s argument for loaded mutual funds is that purchasing a loaded mutual fund keeps you in the market when the market goes down and it prevents you from panic selling. This is an argument we’ve discussed before, but the simple counterargument is the best one.

If you’re taught to properly invest and understand the risks involved in jumping ship when the market declines, you’ll act correctly. It costs a whole lot less to get that training (and a full, comprehensive financial plan while you’re at it) than to rack up thousands of dollars in mutual fund loads.

Investment advice disagreement #5: Disregarding fees in investments

In his book Financial Peace Revisited, Dave Ramsey states the following:

The biggest mistake people make is putting too much emphasis on expenses as a criterion.

As I demonstrated in the above example, for disagreement #4, fees killed the returns in the VFINX versus AFINX horserace. Without fees, AFINX would have been a superior investment, but fees made the Vanguard counterpart a superior investment.

Investment advice disagreement #6: Promoting actively managed mutual funds

I have previously discussed how, in a time when information becomes more and more widespread, luck plays an increasing role in explaining extremes in performance. Since the highest skilled investors are, relatively speaking, only marginally better than the least skilled investors, the remaining differences in performance are generated by luck.

But, let’s say that you poo-poo the notion that you have to be lucky to get outsized returns in the market. Let’s assume that the mathematics are wrong and it doesn’t take up to 64 years to determine if you’re skillful. You can look at the past 20 years of returns, as Ramsey suggests, to determine whether or not you have a winner on your hands.

There are still risks involved in choosing an actively managed fund:

  • The manager’s retirement risk. Few people like to continue to work at picking stocks like Warren Buffett does. Even Benjamin Graham retired after a few years. What happens when a fund manager decides to hang up his boots and ride off into the sunset? You now get to start all over with a new fund manager and have to wait another 20 years before determining ifthat manager knows what he or she is doing.
  • Tax risk. Actively managed mutual funds, as is implied by the name, trade more often than index funds. Because of the increased trading, the investor must pay short-term and long-term capital gains taxes. If the funds are in a tax-deferred or tax-free retirement account, this is a moot point, but for investments in normal brokerage accounts outside of a tax shelter, this is important and reduces the after-tax returns of these investments.
  • Concentration risk. I don’t mean that the manager is going to daydream, but, rather, that you’ll be more concentrated in an actively managed fund when you will be in an index fund. The active manager should, by definition, be picking fewer stocks for the fund than the index counterpart, since he’s supposedly picking the best of the litter. This is great when his bets are right and disastrous when his bets are wrong.

The statistics simply are not on the side of actively managed mutual funds. First off, for the past five years, of all of the different mutual fund categories, active management underperforms the index counterparts in all but one: large-cap value funds, where 50.22% of actively managed funds outperformed their index counterparts. For the other 16 categories, index funds outperformed actively managed funds.

Secondly, even if you pick a high performing fund, there is little assurance that said high-performing fund will continue to do well. If you picked an actively managed mutual fund that was in the top 20% of performance over the previous five years, there was only a 0.18% chance that it would remain in the top 20% of performance over the next five years. If you were a little more lax in the standards and only picked a fund that was in the top half of performance (which would not guarantee that it outperformed its index counterpart) in the previous five years, there was a 4.46% chance that the fund would remain in the top half in the next five years.

The statistics simply are not in your favor if you choose actively managed funds and are investing for the long term; it is more likely than not that you will choose funds which underperform their index counterparts.

In the previously discussed June 4, 2013 show, Dave Ramsey categorized people who questioned his advice as one of two types of people:

  • Bitter people who say that they can’t win and they can’t be millionaires. I daresay that any casual reading of my body of work will disprove both of those notions.
  • Financial nerds who analyze and analyze (his emphasis, not mine) everything to the nth degree and don’t learn about what Dave Ramsey teaches. I’ve gone through the Financial Peace University course, read The Total Money Makeover, and listened to hundreds of his podcasts. I understand his advice, quoted his website (which he, in the show, admitted he doesn’t read everything which gets published there), and have applied analytical rigor to what he teaches. He also says that those financial nerds don’t have a business and are bored. I have a business, serve my readers, and am far from bored (oh, and I already built and sold another business). I just want people to get proper guidance, regardless of the source.

Dave Ramsey’s biggest argument during the discussion was “If they [his listeners and readers] follow all of my advice, they are not being harmed.” That is true. They should not be harmed, although his advice for withdrawing funds during retirement could be harmful for retirees; however, just because someone isn’t harmed doesn’t mean that the person can’t do better.

The lesson of all of this is to apply a critical eye to everything you hear or read. Just because information comes from a “guru” or from a website you like doesn’t mean it’s always going to be right. Don’t take things at face value. Think. Question. Ask yourself how something could go wrong. Determine what would happen to you if the assumptions you make about future outcomes don’t work the way you planned. Have a backup plan and a backup plan after that. Don’t just take it on blind faith that because someone told you that something would work a certain way that it well when it comes to planning for your retirement. Make sure that you understand what information and assumptions are being used to make your plan and how those affect the outcome.

Then, you might have financial peace.

What do you think? Am I wrong in disagreeing with the points that I do? Do you agree with him on those points? If so, why? What other advice, if any, do you disagree with? Let’s talk about it in the comments!

The 3 Big CPA Problems Financial Advisors Can Help With

The 3 Big CPA Problems Financial Advisors Can Help With

These scenarios to developing a relationship with the CPA work best if you already have a mutual client with the CPA. It’s the easiest way to connect with them to solve their problems, and start the relationship with a CPA.

PROBLEM #1: HAVING TO EXPLAIN NEGATIVE TAX CONSEQUENCES OF DECISIONS THEIR CLIENTS MADE LAST YEAR.

From an advisor’s point of view, I’ll sum this up as lack of coordination between tax and investment.

It’s very common for clients to make big financial decisions during the year, and then be surprised come tax time when they find out that they owe more tax than they thought. A lot of times the CPA gets the shaft, because they are the ones that break the bad news to the client.

This is not a great feeling for the CPA, because the client ties the negative results directly to the CPA!  And what is the CPA thinking is “How am I supposed to magically know what you did last year? Why didn’t you or your advisor tell me about this ahead of time? This all could have been avoided.”

If we want to stand out from all the other advisors, we want to create an ongoing relationship with our client’s CPA. When you’re planning for your client throughout the year and there’s a possible event that could affect their taxes (ie, large capital gain/loss, Roth IRA conversion, etc.), we want to make sure we keep the CPA updated.

After getting approval from your client, a simple phone call to the CPA is the best method for starting the conversation. Both the client and the CPA will appreciate this effort to keep all parts of their financial life coordinated. (As you continue to read this post, you’re going to learn exactly what to say to start the conversation with your clients and their CPAs about this issue.)

PROBLEM #2: TIME WASTED GOING BACK AND FORTH WITH CLIENTS REGARDING MISSING TAX FORMS.

A normal conversation at a CPA firm with a client during tax season goes like this:

CPA: I see that you had dividends from fund company last year but nothing this year for your taxes, did you get a 1099?

Client: No, I don’t remember getting one.

This will either result in incorrect info on the tax return and a letter from the IRS three months later, or it will hold up the CPA on completing the tax return for a few weeks. Both are an inconvenience for the CPA.

Since you know your client’s financial picture better than the CPA, you can clearly communicate to the CPA the correct answer. It’s very simple, but this one thing gives the CPA the ability to complete a tax return and move onto the next one, which is a big deal to them.

The best way to solve this problem for the CPA is to create a simple list of your client’s accounts. All that’s needed is the name of the custodian, the type of account, the last 3 digits of the account number, and whether the account has a 1099 for the year or not. (Of course, it’s very important that you first get client and compliance approval before communicating and sharing with their the CPA in this way.)

This simple exercise is going to save the CPA a lot of time. As the CPA goes through the client’s tax documents, they can use the list you provided to confirm that they have every 1099 from their client. If something is missing, they can ask you to get them a copy.

I’d recommend trying this out on only 10-20 of your clients. It’s a good way to test the process and make sure your client and CPA are getting benefit from the extra work you’re doing.

PROBLEM #3: MISSING COST BASIS OF OLDER INVESTMENTS

This is the most common problem that CPAs face. It usually happens during tax season while the CPA is working on the client’s tax return, and they see a $0 cost basis. They call the client to ask them about it, and the client will have no idea. And then begins a time-consuming process to try and figure out what the basis is. This is also the one thing where clients usually end up paying way more to the government than they have to.

All CPAs want is a number to put on the tax return and be done with it. If you can help them with this in the height of tax season, they’ll love you. They will at least say yes to meeting you for lunch after tax season.

If you were involved in the account throughout and actually have – or can get – the transaction history, calculate the total cost basis of the investment, or at least give the historical purchase details to the CPA, so he/she can get it done quickly.

Alternatively, if there’s no record of basis and you can’t calculate it yourself, try running a Morningstar Hypothetical that works backwards to estimate what the cost basis might have originally been.

If you can work the hypothetical to show a sale price that’s close to the total proceeds on the 1099, based on at least an estimate from the client of when the original purchase may have occurred, you’ll have a pretty good idea of what the cost basis was, and the total amount of dividends reinvested over that time period.

I usually tell the CPA that I’m sending them a hypothetical example and it shouldn’t be shared with the client, but it will provide you with some idea of what the cost basis would be for this example. It may not be perfect, but the CPA can use it to make a reasonable estimate of the cost basis, that is better than just assuming a cost basis of $0… and you save your clients a lot of money by communicating with their CPA on the problem! (Again, make sure to check with your compliance department to ensure this is permissible for you.)

By solving one or more of these 3 problems for a CPA, you’ve instantly been brought to the head of the crowd. You’ve relieved their pain and stress when it’s highest, and they’ll be grateful for your help. And you can turn that positive feeling the CPA has about you into a prospective referral relationship.

TrumpCare: A CFP-M.D. On What Advisers Need To Know

TrumpCare: A CFP-M.D. On What Advisers Need To Know

With the news this week that an amended version of the American Health Care Act (AHCA) has passed in the House of Representatives, substantial changes to the existing framework of the Affordable Care Act could impact advisors and their clients in the coming year, and while it remains uncertain whether the current version of AHCA will become law (it is still has to pass a deeply divided Senate), McClanahan notes that now is the time to start planning for contingencies. Key issues to be aware of include: 1) AHCA would eliminate the current list of “Essential Health Benefits” under the ACA, giving states (and the insurers in those states) the option of enacting a shorter list of required essential benefits, which means it’s possible that coverage for everything from pregnancy and contraception, to mental health and preventative medicine, might no longer be required in health insurance policies in at least some states (and the new rules would apply for both individual policies purchased from insurance exchanges, and for employer health care coverage, which means advisors must be especially vigilant in reviewing clients’ employer health care coverage in the coming years); 2) AHCA would eliminate the prior ACA requirement that coverage be priced based on a “community rating” (cost of care in a particular area of coverage), and instead will revert back to personal underwriting for individuals and experience ratings for large groups, which means unhealthy individuals may see a substantial increase in premiums, and while pre-existing conditions will be covered, clients will still have to pay more (with one estimate that a 40-year-old with diabetes would increase premiums from $4,020/year to $9,620/year, and someone with metastatic cancer would face premiums of $146,650/year)… which means, at the least, that proactively helping clients navigate health insurance decisions will become more crucial than ever; 3) premiums for older individuals will be permitted to go as high as 5 times the amount for younger individuals (while the ACA limited the cost difference to “just” 3X the premiums), which means costs may get a little cheaper for young people, but could become prohibitively expensive for those looking to retire early (before age 65 when Medicare kicks in), or even those in their 50s and early 60s who are still working but want to become consultants or start a small business (as individuals and small business plans will have less leverage to negotiate pricing compared to large employers). On the flip side, the AHCA would result in tax relief for the clients of many advisors, as the 3.8% surcharge on net investment income (above $200,000 for individuals and $250,000 for couples) would vanish, as would the 0.9% Medicare surcharge on earned income (on the same earned income thresholds).

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.

CUSIP

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.

Duration

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.

Issuer

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

Liquidity

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.

Premium

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

Principal

This is the face amount of the bond.

Yield

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.

TYPES OF BONDS
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

30 YEAR OLD MALE
20 YEAR $500K POLICY
40 YEAR OLD MALE
20 YEAR $500K POLICY
50 YEAR OLD MALE
20 YEAR $500K POLICY
Preferred Plus
Non- Smoker
SBLI
$20.88/mo
SBLI
$30.45/mo
SBLI
$81.35/mo
Preferred
Smoker
SBLI
$77.00/mo
Banner
$134.31/mo
Transamerica
$337.75/mo

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.

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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.