Amounts and Kinds of Life Insurance


Death is inevitable, but death at a financially convenient time is not inevitable.  Life insurance exists so the inconvenience is minimized.  Die neat.  It deals with the inevitable, and the premium is the price to remove the inconvenience.

You may have heard people talk about being insurance poor.  They often see it only in terms of price.  There are two ways to be insurance poor.

  1. In the present, own inappropriate product, or pay premiums for risks you do not have.
  2. In the future, have too little coverage.

In case 1, the person is alive and can solve the problem.  They may require a new advisor who is more problem oriented.  In case 2, the survivors will be poor and will be unable to remedy the situation.

A successful life is about control.  Do not give it up easily.

How much coverage and the kind of insurance is a function of what it must do.

If it is to pay off debts and to provide cash for the education of children, home expenses, groceries and piano lessons, the need is likely temporary, (You will build your own wealth over time.)  Temporary being something around 20 years for young children.  Term insurance with a guaranteed premium for 20 years makes for an inexpensive, yet complete solution to that problem.

If it is to provide income for spouse beyond when the children have been raised, then the coverage must be able to last longer than 20 years.  Some forms of inexpensive non-par coverage may work better.  Participating could work but the value of the need must match the availability of current resources.  Participating costs more.  More about this later in the week.

Most forms of term insurance are convertible to something else.  Sometimes it is easiest to convert coverage no longer needed for children costs to permanent insurance for the spouse.  People whose children have moved on usually can afford the premium.

A flexible choice might be universal life.  It costs more than term to buy, but the premiums are flexible.  Pay in when you have money, do not when you do not.  The surplus cash earns investment income and that helps subsidize the insurance cost.  These plans are fine in the beginning but unless you deposit considerable excess, they become costly if it turns out you need the insurance for a long time.  They come in two billing formats.  Insurance cost based on your age, changing each year or level for some period of time.  Could be to 100, to 85, or even paid up in 20 years.  Other than annually increasing, the tax advantages will be significantly impaired unless the plan is in place before 2017.

Estate costs are not insignificant.  Taxes maybe, legal, probate, executor’s fees, a funeral and so on.  These always require permanent coverage.  The insurance must pay off whenever death occurs.

The essence of  the advisors role is to deal with the amount at risk now, the expected amount at risk as time passes, the forms of insurance available to match the risks defined, and the currently available resources to pay the premiums.

There is no perfect and enduring solution.  The portfolio should be reviewed at regular intervals.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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Life Insurance Has A Point. What Is It?


Many people own life insurance.  Not all the ones that need it, but still many.  How many know why?  Some, but not all.  How many know why they have the type they do?  A few.  How many would solve their problem differently if they knew more about the problem and the ways available to solve it.  Most, but again not all.

Understand the meaning.

Let’s begin with the common reasons for people to own life insurance.  This is for individuals.  The range of reasons for business is wider.

  1. I have a valuable asset that could be lost or damaged.  Life insurance is like fire insurance in a way, but in this case the valuable asset is the ability to work and earn money.  If a successful physician dies at 35, their loss is the present value of all their future earnings, after taxes, for the rest of their working life (assume retire at 60) .  Today the median income for a full time practitioner is about $150,000 after income taxes.  With interest at 1.5% after taxes and inflation at 1.25%, (optimistic investment parameters) the loss is about $4.4 million.  For less optimistic real yield, the number is larger.
  2. My estate would not be in the right form if something happened.  Sometimes valuable assets like homes, cottages, maybe a rental property or a farm are not saleable in part.  Estate costs like taxes, probate costs, legal fees, appraisers, funeral directors and spouses time off work to deal with the new reality are real and require cash to resolve.  Some costs will disappear if spouse inherits, but the point is still clear.  You cannot take the deed to a cottage to pay for the costs of an estate or to buy groceries.  Liquidity shortfall is a common problem.
  3. For some people some kinds of life insurance can help them accumulate investment assets.  By law, the income earned by assets inside a life insurance policy is not taxable to the policy owner as long as the money stays in the policy and the policy is designed properly.  Assets that earn 4% inside a policy grow materially more quickly than those exposed to tax on the outside.  Not for everyone but it is a nice option.
  4. It is a way to control legacies without making the estate more complex.  A beneficiary designation can be in the form of an annuity instead of a lump sum of cash.  For an heir who may be profligate, a useful tool.  Similarly one heir’s share could go into a trust without complexity in the will.
  5. Assets built up in the policies and payouts on death are generally creditor proof in respect to the insured/owner.  There are some structural needs for this to happen.  Not difficult.

Life insurance is not a cure all for every financial problem but it works exceptionally well when the problem is defined and the solution is sensitive to that problem and the resources of the client.

Life insurance has three purposes.  To protect wealth that exists,  to create wealth where it does not,  and to create liquid assets. 

More on kinds of insurance tomorrow.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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Ten Thoughts About Do-It-Yourself Investing


Should you do your own investing?  Pretty easy question to ask, not so easy to answer.  Do you have the aptitude and the attitude?  These are prerequisites if you decide to be your own investment manager.  Maybe a list will help with the answer.

  1. You need access to the market.  That used to be a bigger problem than it is now.  On line brokerage services are good.
  2. You need to be error conscious and fussy.  Buying 1,000 shares of XYZ Corp online is only slightly harder than buying 100.  Know what will happen when you make a typing mistake.
  3. You will need a lot of time and some of it will be to keep record keeping from becoming a tax issue.
  4. You must have a method for deciding what to buy.  I don’t know how many stocks you could buy, but I would bet there are more than 50,000. Warren Buffett claims that you won’t need more than 6 or 7 for good diversification.  But which 6 or 7?
  5. You need some ideas about research.  Financial statements are not easy to understand and it is very hard to compare two companies in the same industry.  Even harder across industries.
  6. Cash and cash flow tend to be real and so does the liability list.  The rest of the numbers are opinion.  Microsoft does not get a slip at the end of the year that says  income for the year is $X.  They calculate it.  There are many decisions.  How much is inventory really worth?  Obsolete, slow-moving, damaged.  What is a fair depreciation rate?  Should depreciation be less if we spend more on maintenance? Should we write off research as we incur it or should we capitalize it and write it off over the time we use it?  How long is that?  How about advertising? It benefits future periods but we pay for it now.  What receivables will be uncollected?  After hundreds of estimates, opinions and guesses, income per share results and is calculated to three decimals.  Despite the precision, it is still a guess. You need several years worth of results and look for the dynamics of the income statement.  Pay attention to free cash flow.
  7. Read the letter to shareholders.  It will give clues to what is really happening.  I know one fund manager who reads it first and if he sees challenges or challenging in it, he throws the statement away.  You only need a few stocks.  Why deal with challenges?
  8. You must know when to sell.  A sale is the mirror image of a purchase.  With a purchase you have the money then the stock.  With a sale, you have the stock and then the money.  It is important to notice that when you buy, you give up your money. You have the ability to turn your stock back into money, but your money is gone.  That leads us to the hold condition.  A decision to continue owning a stock is exactly the same analysis as deciding to buy it.  You have a choice between the money it would sell for and the stock.  Same as the money it would cost to buy it and the stock.  Knowing what you know about a stock in your portfolio if  you would say I would not buy at this price, then you should sell.  Take into account, tax, brokerage costs and how close to maybe I would buy it.  The money or the stock.  Which do you prefer. 
  9. Be sure you like doing it.  It is not fun for everyone.  It requires passion to do anything well.  Hear Warren Buffett’s partner Charlie Munger,

    You’ll do better if you have passion for something in which you have aptitude. If Warren Buffett had gone into ballet, no one would have heard of him.

  10. Finally your emotions.  Most people need an emotional anchor.  Our emotions hurt us more than the absence of knowledge.  Someone to talk us in off the ledge when things go wrong.  Someone to prevent euphoria and a master of the universe complex when things are good.  A conscience that reminds us about goals  and resource allocation to other parts of our lives.

There is a cost in time and skill to be your own manager.  If you lack passion or aptitude or have trouble managing emotions, compare it to the cost to have someone to help.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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Develop and Retain Reasonable Expectations


If my great-great-grandfather bought a farm 175 years ago for 50 pounds, (which he did) and today it would be worth something around 3 million pounds, ($6,000,000) should I conclude that he was a brilliant real estate investor?  After all results matter.  60,000 times the original investment is pretty good.

Well, yes and no.  60,000 times is about 16 doubles.  16 doubles in 175 years is one every 11 years.  6.5% annually compounded.  How good is that?  Maybe not so exceptional.

People do not intuitively understand exponential growth.  Our intuition is linear not compounding.  People must do the arithmetic to have a hope.

For example.  When was it worth half? $3,000,000  Half the time? About 1930?  Not likely.  If the growth was constant it was worth half 11 years ago.  2005.  Another double and here we are.

Looking at big numbers compared to small numbers and ignoring time is a way to get into trouble.

In investing, the time to double is a crucial variable.  It ties your scarce element (time) to the market offerings. (Yield)  Presumably your available capital is always the same.

You can readily make the calculations leading to responsible action if you know the rule of 72.  The time to double in years is approximately 72 divided by the yield.  Similarly, if you know how many doubles and the time it took to get them, you get yield by dividing 72 by the time for one double.

Knowing this is not about making you wealthy, it is about having you hold reasonable expectations about the market and the future values that are possible.

Suppose someone says they can make 18%. Roughly double every 4 years.  How much would $10,000 be in 40 years?  10 doubles.  1,024 times the capital.  A bit over $10,000,000.  Maybe, but I want the “cannot do it”  side of that bet.

I know a former day trader who claimed to be able to make 1% a day.  Turned out wrong,  but a cherished belief for a while.  1% per day the stock market is open, turns $10,000 into a one followed by 15 zeroes in ten years.  A handsome portfolio.  Sadly more than the value of all the stock on earth by a wide margin.  Maybe 1% a day is harder than it looks.

Unreasonable expectations eventually become unmanageable and then what? Unreasonable goals kill success.  It leads to under saving because I can catch up later, or it leads to disappointment after a short time.  Then the resultant change in strategy or even quitting altogether.

Reasonable goals add meaning you can understand.  Seeking and achieving reasonable goals builds strength, both financial and emotional.  You need those.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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Everything I Do Is Based On Prejudices


I am prejudiced and employ stereotype thinking.  Just like you.

I like steak and am not well-disposed to lamb.  I suppose the lamb industry will find that reprehensible behaviour.  I like single malt scotch and do not love bourbon.  Jack Daniels will likely be on the line by the end of today.  I am prejudiced against almost all seafood.  I see my prejudice to be a preference based upon objective evidence derived from matching my tastes to what is available in the world.

I feel no compulsion to like all things equally.

I see stereotypes as life simplifying assumptions.  I know they are generalities and may apply to no individual situation.  They make the initial response easier for me and since I like easy, they are good.

My stereotypes include

  1. People in banks who you meet at the counter are under informed for any but the simplest transactional matter.  I once had one tell me that an equity linked GIC returned interest based on the performance of “a bunch of blue collar stocks.”
  2. Life insurance companies, and probably other insurers too, rely on the words and write the words to suit their needs.  People don’t trust them.  Back in the 1890s when non-forfeiture options,  cash value is one, became law, congress required that if a policy did not have non-forfeiture options,  it must say so and be printed in red ink within the policy.  One major life insurer commenced printing all of their policies completely in red ink. Hard to trust.  
  3. All politicians, when speaking about political issues, lie.  Except Allan Lawrence.  He once told one of my children that the only unemployment a politician cared about was his own.
  4. The last place you should look for objective information is network news.
  5. Organized religion is contra to the idea of spirituality and is likely close to a conspiracy theory.
  6. 99% of lawyers give the other 1% a bad name.
  7. Most people who say they are liberal or socialist are in fact power hungry.  Bossy if that feels warmer.
  8. Car company warranties protect them more than they protect me.

I know that not all people in these categories are the way I portray the group, but I must start somewhere with a new person.  It is my default setting.  What does it all mean?

To me it means that every stereotype has a basis in fact.  To say that a stereotype is wrong because it is stereotypical is illogical.  There is a rather long article on that subject.  Truth in Stereotypes.

Life simplifying assumptions and preferences make the world livable on a day to day basis.  Evidence that says stereotypes are always wrong is unavailable.  Probably because there is none.  It is okay to have prejudices and to make early value judgements.  So long as you stop relying on them when contradictory evidence appears.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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Whither Gold


For a long time I have heard how the mint prints currency 24 hours a day, how government finances are in ruins, how inflation is inevitable, and how precious metals are the best form of protection from the coming chaos.  I recently noted that some say precious metals are a good hedge in times of hyper deflation as well as hyper inflation.  That hedge against deflation puzzled me, so I did some digging.  Guess what.  It is probably a good hedge, but it has little to do with either inflation or deflation as such.

I have often said correlation is not proof of causation, but I need to use correlation here to give you insight into the question.

First a little tech.  Correlation is measured by an indicator called R-Squared. R² 1 means the two series are perfectly correlated.  One goes up exactly as the other or behaves exactly opposite.  Sometimes there is mutual causation but not always.  You have to be careful.  R² zero means the relationship is random..  Most times the numbers are in between.  Anything much over .50 is strongly correlated.

Credit Suisse did some work and found that the R² for the gold price to inflation is .0111.  Random.  So we can likely dismiss inflation as a meaningful factor in gold pricing.  By extension likely deflation is out too.  They did find one strong correlation though.

R² for gold price to TIPS (Treasury Inflation Protected Securities) is .749  Not perfect but strongly indicative.

TIPS provide yield from a safe security after inflation.  The real yield.

It makes some sense that people are looking for real yield.  Gold is not often player in that game because it costs to own it.  Storage and insurance being most common.  No income.  Negative cash yield on annual basis.

All investment decisions are comparative.  Rental income at 5% of cost is the same as a purchase at 20 times earnings.  There are many other factors of course, but the idea is there.  If bonds pay 1% and inflation is 2%, the the real yield is -1%.  If I could hold gold for half of one percent then gold is comparatively attractive.  I am better off holding gold with no income and some cost than owning a bond, assuming gold prices don’t fall for some other reason. 

Which brings us to negative interest rates.  If the rate offered is -1% and inflation is 2% a real yield of -3%, then comparatively gold is a great investment.  And it will get better if interest rates rise again because of monetary inflation and continuing negative yield. 

I think we can expect to see governments print money to avoid deflation and if they do and inflation is say 4% and the bond yield is 5%, real yield +1, gold may still be attractive.  The stock market, the real estate market and many commodities will have fallen in price.  Gold will look good because it will be comparatively better than the alternatives.

So.  Owning at least some precious metal component in a portfolio seems indicated.  Base the share on the TIPS pricing and its change. The gold advantage will not last forever, because real yield cannot stay negative forever.  People would stop investing if it did.

Eventually gold will become just another commodity and the hucksters who are selling it in TV commercials will disappear.  But for now, maybe own some.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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What Happens To Unclaimed Money?


If a bank has lost touch with a customer and the account has been dormant for more than 10 years the money is paid over to the Bank of Canada.  It is an easy search to see if you have any money to your credit.  Bank of Canada.  There is more than $600 million waiting to be claimed.

Bankruptcy trustees too must transfer amounts for those who cannot be found to the Superintendent of Bankruptcies.  There is another $20 million or so there.  The largest is near $180,000

All good and it reduces the complexity of operating accounts for banks and bankruptcy trustees.  But there are more that go nowhere.

What happens to unused gift cards or credit notes?  How about uncashed checks or travellers checks.  Uncashed money orders and bank drafts end up with the Bank of Canada.  I think gift cards could be a sizable number, but who really knows.

The other potentially large amount is unclaimed benefits from a life insurance company.

Some estimates put the number of unclaimed policies as high as one on four, but in my experience that number is unlikely.  It is not zero, though.

Most of us would expect it to be impossible to miss a claim, but reality says it is not.  Suppose your parents bought a 20-pay whole life policy on you when you were born.  They forgot about it and you never knew about it.  You pass away at 80.  What are the chances your heirs will know enough to claim?  Zero.  Since the policy will not lapse, the insurer will eventually, maybe around your age 115, need to decide what to do with it.

In the US, some of the companies have agreed to turn money over to the states.  That will not likely do much to get it into the hands of the beneficiaries, but the states will win and the insurers will give up the money.  Maybe that is a little good.

What can you do if you think there may be a policy outstanding and the person is deceased?  If you know the company, it is not very hard.  Except for the ones that have disappeared by merger.  Again, there are ways to find who has it now and most of the companies are helpful.

If the policy has been paid up for a while, it will be difficult.  Nothing will trigger your quest.

Your best defense for the living policy owner is to be proactive.  Don’t lose touch with your agent.  If the agent has left the business, ask the company to assign a new one.  That has more potential benefits to having an agent than avoiding unclaimed death amounts, so make sure the new one is one you can work with.

Eventually the world may be so interconnected that insurers can tell when they have a claim and who to pay it to.  We aren’t there yet, so keep connected.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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