The Truth About Financial Products.com Blog

High Yield Bonds

Your DisplayName here! — Fri, 29 Feb 2008 22:23:48 GMT

High Yield Bonds

As soon as someone mentions junk bonds (high yield bonds)…I have flash backs of Michael Milken. Yes, it’s a risky asset class if you compare it to treasury bonds…but high yield bonds have proven to be less risky than equities.

High yield bond funds average 8.7%, with a 20 year history averaging 6.6%. All bonds are rated based on their credit rating, and junk begins at BB to B. Companies who have a “junk” rating are deemed to be risky…simply because these companies borrow a great deal money. As example, a junk bond company may have assets only 1.5% greater than their outstanding debt.

Interest payments for high yield bonds funds are taxed at regular income tax rates, and there for would be great investments for IRA’s and 401ks.

Current default rates are about 1%. If you’re seeking a higher than normal yield for a portion of your portfolio…the high yield bond fund arena would be a great place to diversify a percentage of your investment portfolio in this bear market.

Please call your broker or financial planner to examine this sector in more details.

Sincerely,

John Bagwell

The Truth About Financial Products.com – Blog

www.thetruthaboutfinancialproducts.com

Impaired Risk Immediate Annuities

Your DisplayName here! — Fri, 29 Feb 2008 00:50:15 GMT

Impaired Risk Immediate Annuities

What is an impaired risk immediate annuity? This is an immediate annuity with above average payout for life annuitization…due to client having a shorter life span due to bad health. The higher than normal payout is given to a client after a physician & underwriter determine the life expectancy for the client is below average, based age & medical condition of the client. Since the life expectancy of the client is shorter (due to bad health)…the payout for life annuitization is higher than a client purchasing standard immediate annuity with life annuitization payout (with no medical conditions).

Basically, the older you are with bad health…the higher your payout. Example; A 65 year male with bad health , invests $100,000 in a impaired risk immediate annuity and gets a payout of $904 per month, while a standard immediate annuity for life annuitization might yields $800 per month for the same client.

Even though impaired risk immediate annuities have been around for 20 years, the insurance companies do not have enough data to generate accurate actuarial data, so the underwriters have to guess the probable life span of the client. And since each insurance company is guessing on the life span of the client…each insurance company will come up with different payout amounts for life annuitization (on impaired risk immediate annuities).

The use of impaired risk immediate annuities, in financial planning has taken two directions. The most common use is the purchase of impaired risk immediate annuities to fund a life insurance policy.

The use of purchasing an impaired risk immediate annuity to fund a life insurance policy is not in the best interest of the client. Let’s examine this point further. The client (age 79) has $1,000,000 in taxable CD’s (earning 5% taxable), the portfolio generates $32,500 net per year (which is used for monthly expenses), and there is an estimated estate tax of 50%...so his estate would only get $500,000. But, if the client bought an impaired risk annuity earning $80,000 a year, and gifts $50,000 to ILIT each year to fund a life insurance policy, the client will get $30,000 (net) a year in income, and at his death, his estate will get $1,000,000 tax free. What’s wrong with this solution? The balance of $1,000,000 investment in the impaired risk immediate annuity…is now owned by the insurance company (since the insurance company only has to pay-out until the death of the annuitant). If client had invested in a non-recovery planning solution, using two deferred annuities (earning 5%), and the client could have received $81,801 (gross) per year, and gifted $50,000 a year to ILIT to fund a $1,000,000 death benefit, netting $31,801 per year in income. And let’s say the client died when he was 97 years old. The estate would get $414,851 (the taxable balance) from the deferred annuities, plus receive $1,000,000 tax free from the life insurance policy. Which would you want?

Whether you are talking about standard immediate annuities, or risk impaired immediate annuities (life annuitization)…they are both bad for the client (unless they're in a recovery solution). You're only leaping from a 1.5% (for a standard immediate annuity) internal rate of return to a 3% (risk impaired immediate annuity) rate of return...only because the insurance company thinks your'e going to die soon, and they can leagally steal your money from your beneficiaries. Who in their right mind would want a 3% (risk impaired immediate annuity) rate of return when they can get 5% (for a deferred annuity - with no legal hitches)?

Sincerely,

John Bagwell

The Truth About Financial Products.com – Blog

www.thetruthaboutfinancialproducts.com

Closed-End Funds

Your DisplayName here! — Tue, 26 Feb 2008 23:24:56 GMT

Closed-End Funds

What is a closed-end fund? A closed-end fund is a mutual fund (or unit investment trust) that trades on a stock exchange (such as NYSE, NASDAQ, or AMEX) at a premium or discount to its NAV (net asset value).

Because a closed-end fund shares trade in the stock market based on investor demand, the fund may trade at a price higher than its NAV. In addition, due to less than favorable demand for its shares (for various reasons)…a fund may trade at a price lower than its NAV.

There are two types of closed-end funds; one is a closed-end stock fund, and two is a closed-end bond fund. You can view the listings for closed-end funds on Mondays in The Wall Street Journal. It will disclose market prices, discounts or premiums, and the stock exchange which it’s traded.

The average yield of a closed-end fund is 8.5%. And if you focus on closed-end funds that trade at discount (producing a high yield)…you can find yourself a very comfortable income investment.

Simply evaluate the underlying portfolio for risk, your income requirements, evaluate the discount and yield, analyze any borrowings (leverage), and of coarse the fund managers track record. Once you have found several funds that you have an interest in…call your stock broker up and determine your allocation strategy to invest in this sector.

Sincerely,

John Bagwell

The Truth About Financial Products.com - Blog

www.thetruthaboutfinancialproducts.com

Recovery Planning

Your DisplayName here! — Fri, 22 Feb 2008 23:12:57 GMT

Recovery Planning

What is recovery planning? Recovery planning is a financial solution using mathematics to compute future value of an investment product to solve for the recovery of the original investment principal. The solution uses multiple investments acting independent of each other in the same mathematical solution. You have three investment legs, an income leg, growth leg, and recovery leg. Traditionally fixed annuities are used in this type of mathematical solution. A recovery solution may or may not solve for income, but most solutions involve liquidation of the income & growth leg to solve for income…so the customer can liquidate to zero to seek maximum income, yet recover the original investment principal at a fixed date in the future. In addition, by using annuities the client guarantees the investment against loss (if held to term), and reduce the over-all aggregate tax liability of the client (through tax deferral). Recovery planning is highly recommended for conservative investors who seek a return, but want the guarantee of recovery of the original investment principal.

A more sophisticated type of recovery planning, involves the use of mutual funds to solve for income & growth, while using fixed annuities (or CD’s) to solve for recovery of the original investment principal. Two types of investment working side-by-side in the same mathematical solution…one investment guaranteed and one is not. This type of solution filters for prior positive consecutive returns within the mutual fund database. Filtering mutual funds for prior positive consecutive returns (relative to risk) produces the best possible fund picks for the next 12 months. Regardless, if client does well or not in the mutual fund arena, the investor will recover the original investment principal, plus interest (if the solution is held to term).

It will be up to the financial planner to determine which recovery solution (direction) is best for the client, based on the market cycle and risk tolerance of the client. If you’re interested in recovery planning call your insurance agent or financial planner.

Sincerely,

John Bagwell

The Truth About Financial Products.com

www.thetruthaboutfinancialproducts.com

Vice Stocks

Your DisplayName here! — Thu, 21 Feb 2008 22:46:09 GMT

Vice Stocks

What do people do regardless if the market is up or down? They drink alcohol, smoke tobacco, and gamble. They are legal and big business (worldwide). Your personal views are not going to change the world. I do not drink or smoke, and I rarely gamble…but that does not mean I will stay away from a good investment. This market cycle is going to keep to its downhill velocity…so if you’re in its way, you will feel the pain. One way to join the bandwagon is to buy stocks or mutual funds that focus on just alcohol, tobacco, and gambling.

This sector has seen a 21.7% five year trailing returns. Drinking and smoking will kill you, and gambling will make you a poor man. But investing in this sector may make you rich (long term). Take gambling for instance. Las Vegas pulled in $7 billion last year…and there is no sign that it will slow down (in this century). Beer consumption is up (globally), and there is no sign that any country (domestic or foreign) is going to stop drinking beer anytime soon. And the tobacco industry makes a pack of cigarettes for just 25 cents, and China is buying cigarettes like its going out of style. People smoke cigarettes in the shower…that’s how addictive cigarettes are. So you will not see a slow down in tobacco sector (globally anytime in the next century). These sectors may go down for the short term…but they will not stay down for any length of time. As with any security…buy low and sell high. Pretty simple. So stick to simplicity.

Call your stock broker or financial planner and investigate stocks or a mutual fund that focuses on these three vices…and you’re bear market will seem like a bull market!

Sincerely,

John Bagwell

The Truth About Financial Products.com

www.thetruthaboutfinancialproducts.com

Long Term Care Insurance

Your DisplayName here! — Thu, 21 Feb 2008 01:51:57 GMT

Long Term Care Insurance

I remember the last time I recommended long term care insurance…and my advice was not taken. My clients had $250,000 in investments, and their home & car were paid off. I gave them sound advice to purchase long term care. I went over the probability that one or both of them needing long term care in their lifetimes. They both decided it was too costly, and decided to go on a two week vacation in Brazil . I guess I just overwhelmed them with sound advice. They stayed at the plush resort, and they went swimming in the hotels pool. The husband got an ear infection, and two weeks later he was comatose in the hospital. The wife just could not believe this could happen to them. Her $250,000 retirement account was eaten up in just 3 years with medical bills. She eventually had to sell the house to pay the bills, and went to live her son. The bottom line, long term care insurance is not just an insurance policy that cost money…it’s a hedge against future liabilities (that will likely happen)!

Let’s look at another way. The chance of you being in a serious car accident is 1 in 4,200. The chance of you needing long term care in your life time is only 3 in 5!

What does it cost to self insure at age 65? Let’s look at the following problem mathematically:

Age 65
Current cost of long term care per year = $75,000
Average stay in a custodial care facility = 4 years
Total cost = $75,000 x 4 = $300,00

If you are contemplating self insuring for long term care (to avoid paying LTC premiums) you should reconsider! $300,000 is a lot of money to set aside for an emergency…which can be avoided by paying a small annual long term care premium.

For those who like to live on the edge, who contemplate needing long term care when they become 90 years old (as an example). Let’s look at the variables:

Age 65
$180 a Day in Custodial Care Costs
Inflation Rate = 3%
Tax Rate = 15%
Length of LTC Stay = 4 years
Age to Begin LTC stay = Age 90
Investment = Deferred Annuity Earning 5% Static Return
You Need To Invest = $144,044.33 Today
Future LTC Cost = $487,785.24

Do you have $144,044.33 to invest right now…that you don’t need? If you cannot afford to invest and not touch $144,044.33, then I would reconsider and invest in a long term care policy. It’s only pennies on the dollar. A very wise investment to hedge a long term care liability, when you have a 3 in 5 chance of going to a custodial care facility. So, we looked at $300,000 short term investment liability and a $144,044 long term investment liability to pay for custodial care. Let’s say you choose a company that has not raised rates, and let’s say you don’t go to custodial care facility for 29 years. Would you rather spend $58,000 (29 yrs x $2,000 per year for LTC premiums)…or would you rather spend $144,044 (or $300,000) to self insure?

Call a long term care agent with experience or call a financial planner and buy a long term care policy for yourself and your spouse. Don’t take the risk!

Sincerely,

John Bagwell

The Truth About Financial Products.com

www.thetruthaboutfinancialproducts.com

Oil

Your DisplayName here! — Wed, 20 Feb 2008 00:11:38 GMT

Oil

I have been talking about oil for years. Years ago, I came across an article on the worlds oil supply versus demand, the conclusion is the world will reach the “halfway-to empty mark” around 2015 to 2020…driving prices higher and higher for oil. The United States , China , India , Russia , and Brazil are the known gas “guzzlers” of the world. Russia is already trying to plant flags at the bottom of the ocean (under the North Pole)…to try to claim whatever oil it possibly can for its citizens in the future. The United States should start getting on the ball and do whatever we can to plant flags all over the oceans floor, before all the real estate is gone! The world courts are going to favor the strong…just to avoid a world war. The next world war is going to either be about energy, or about energy & religion.

Ask yourself; “Do you think the price of oil is going up or down? If you just look at the demand versus supply…oil is not going down. If it does go down…it will only be for a very short time. In addition, oil companies are making a great deal of money by artificially manipulating the price of oil at the world’s commodities exchanges…they do not want the price to go down (for the long-term). You have to start thinking like an oil company…invest in energy and you will make money (even in a bear market).

The “natural resource mutual funds” sector has returned over 30% annually for the past 5 years. The overall category has a low P/E ratio versus other stock fund categories. You want a fund with a high percentage of oil (40% to 60%), and the rest of the portfolio in coal and gas (with some service related companies doing business in oil). Make sure the fund does not borrow from the bank and re-invest (often called leverage). You want to analyze funds which have exceptional returns each year for the past three years. It does not matter if the energy related stocks within the portfolio are well known or not…you just want prior positive consecutive returns. If you want to beat this bear market…this is a sector you should be in. Call your stock broker or financial planner and analyze the natural resource funds together.

Sincerely,

John Bagwell

The Truth About Financial Products.com

www.thetruthaboutfinancialproducts.com

Life Settlements

Your DisplayName here! — Sat, 16 Feb 2008 20:35:37 GMT

Life Settlements

What is a life settlement anyway? This is when you sell your life insurance policy to a third party for a small percentage of the face value (or death benefit) of the policy. You must release your medical records, and take a 45 minute phone telephone interview. If approved, a life settlement company buys your policy on behalf of the investor (usually a hedge fund, mutual fund, or pension fund), who then become the owners & beneficiaries of your policy. The investors prefund an escrow account in advance and pay your policy premiums until your death. The investors collect anywhere from a 9% to 15% return (in some cases as high as 25%- depending on how soon you die).

How much cash can I get up front, if I sell my policy? Usually you will get around 28% to 18% of the face value of the policy. Example, you have a $250,000 policy x 28% = $70,000. Many companies are not taking policies less than $1,000,000 in death benefits. But there are still some companies taking $100,000 and $250,000 policies. The life settlement company will determine the payout based on your age, the type of policy, the rating on the insurance company, and the premiums they need to pay until your death.

There are two types of the life settlement’s, one is the traditional life settlement that seniors need, who currently own life insurance policies, and two is the “premium financing investment” for the rich. Let’s talk about the traditional life settlement market first.

The traditional life settlement market is comprised of two different types of people who try to sell their policies. One is the person who cannot afford to pay their premiums on their current policy and those who can afford to pay their premiums on their policy. In this market the age of the policy owner must be 65, but in reality from an agents point of view representing investors…you must be a minimum of 70 years old.

Who should consider selling their policy in the life settlement market? If you meet the following conditions, you should seriously consider a life settlement (if most or all the conditions below are met):

Your age is 70 years or older.
You cannot afford to pay the policy premium any longer.
Your financial needs must be met now, and cannot wait.
You’re in poor health.
You earn less than $38,000 a year. Basically, you are always following a strict budget, and you’re debating which bills to pay.
You have no beneficiaries truly to speak of.
You have large debts.

Who should not sell their policy in the life settlement market? If you meet the following conditions, you should not consider a life settlement (if most of the conditions below are met):

Your age is 70 or older.
You can afford to pay the policy premium.
You’re in the upper middle-class or wealthy.
You have an estate.
You have beneficiaries.
You have a charitable foundation.

Let’s talk about why you shouldn’t sell your policy. Let’s assume you fall into number #8 through number #13 above. Let’s examine total return for a moment. Why sell your policy for a 52% to 95% loss? When you sell a policy the investor will offer you a percentage of the face value (or death benefit) based on your age and how long they think you’re going to live. Let’s take a case example, your age is 70, you have a $1,000,000 policy. Investors offer you $200,000 cash right now. That’s an 80% loss to your beneficiaries. Your beneficiaries would be in the money, if they paid the premiums on the insured…and just waited. In addition, a life settlement has a tax liability above your basis (the amount premiums you paid in)…so you lose even more money. Your beneficiaries would have received $1,000,000 tax free if you held on to policy. Why sell when you do not need the money?

The life insurance company could sue the estate (of the deceased) over the issue of “insurable interest”…and probably win. This means the agent & the deceased failed to mention that investors were purchasing the policy (who have no insurable interests in the deceased-insured). An insurable interest is; the person purchasing the policy must have an insurable interest in the life of the person being insured (either by love & affection, such as a wife or a blood relative, or have economic interests in the continued life of the insured). This all means the policy held by the investor becomes worthless, and then the investors sue the estate of the deceased for fraud. And since the deceased is dead (and can’t defend himself)…the investors will probably win (and take damages equal to their investment, plus the interest they would have made). No matter what, the investor wins in court, or acquires the death benefit (if the insurance company does not contest).

Unfortunately, there is another problem…called “suitability.” This relates to the insurance agent recommending a life settlement, when the agent should not have made the recommendation to sell the policy. Why should you sell a bond worth $1,000,000 for $200,000? The same principle applies to a life insurance policy. The agent must prove beyond a reasonable doubt to the insurance commission & the securities commission (if questioned)…the insured or deceased had serious money problems and needed as much money they could get their hands on…immediately! If the agent can’t prove that, he or she will be in serious hot water.

The problem in the life settlement market, is the people who truly need to sell their policies (people who fall into numbers #1 through number #7 above) cannot sell their policies…because their policies are two small. A normal policy for the average middle class is around $100,000 to $250,000 in face value (or death benefit). Investors do not want to stick their neck out for anything less than $1,000,000 in face value (or death benefit)…due to the possibility of suing the estate of the deceased. Who wants to invest, and then sue over small change (like an investment of $28,000 on a policy death benefit of $100,000)? In addition, as medicine & genetic science progresses over the next decade, you will see the life settlement market disappear altogether…since the investor will not be able to calculate the estimated return (since science will alter the life expectancy table beyond which can be calculated honestly on even given year).

With the life settlement market, the older you are…the more money you get upfront, since your life expectancy is shorter. The closer you are to age 70, the worse the deal gets. If you have no beneficiaries to help you, and you’re debating which bills to pay…then call an insurance agent up and sell your policy. If you are going to sell your policy, check who the buyer is. Are they reputable? Call the department of insurance and check out if they have a good track record or not. Get four quotes from four different settlement companies, since different companies determine life expectancy differently (and they all pay different commissions to agents)…you may get quotes from $200,000 to $400,000 on a death benefit of $1,000,000.

If you sell your policy, do not get hustled into purchasing another policy with the proceeds of a life settlement. This is called “churning” and is against the law. To get rid of one policy with a lower premium, and buy a policy at a higher premium (just to make a commission)…is very bad!

If you are in the middle class, and cannot afford to pay the premiums…ask your beneficiaries to pay the policy premiums…before hiring an agent to sell your policy. Hopefully, you have other assets to liquidate.

What exactly is a “premium financing investment?” Remember, a life settlement is when the insured already has a policy and has financial difficulty. While in the world of premium financing, a wealthy person evaluates insuring himself for $10,000,000 to $20,000,000 (on average), the investors pay the premium, and after 2 years the policy is sold to the investors…and they become the owner & beneficiary. Why would you do this John? Let’s look at a case example:

Client = Age 88

Life Expectancy = 4 years

Policy Death Benefit = $20,000,000

Policy Premiums for 2 Years = $3,400,000

Client Sells the Policy for $5,000,000 Cash is Two years

$3.4 million - $5 million = $1,600,000 Gain

Taxes = $1,600,000 x 35% tax bracket = $560,000

Net = $1,600,000 - $560,000 = $1,040,000

Now if I was this person, I would be thinking; “I just sat around watching TV and made my estate $1,040,000 larger.” These people are rich, they don’t need life insurance…their beneficiaries are well taken care of. Would I consider this illegal? No. Should it be considered to be illegal? No. But, I do think that this scenario should be taxed similar to a taxable bond. Congress has to think of interesting tax angles to pay-off this administrations debt, and the possibility of having a national insurance plan…so tax law changes are likely in the coming years for this type of investment.

Why is it called premium financing? Usually large banks pay the premiums to the insurance company. The bank usually owns or has interests in the hedge fund, or mutual fund which the investment is being placed (and may even own a large stake in the insurance company). This is BIG business and this is not going away. This asset class is un-correlated with the general equities market, which makes it a great investment (if it remains legal), and it’s a great hedge against inflation (with returns from 9% to 25%). If you are interested in this type of investment, make sure you have a qualified insurance agent, your lawyer, and CPA all agreeing to go forward on this.

Sincerely,

John Bagwell

The Truth About Financial Products.com

www.thetruthaboutfinancialproducts.com

401k

Your DisplayName here! — Thu, 14 Feb 2008 23:24:29 GMT

401K

Watch out, the pension fund managers are recommending balanced funds or target funds as the default for 401k investing. What is a balanced fund anyway? A balanced fund is a mutual fund which uses an asset allocation model of 60% equities and 40% bonds & cash for its portfolio makeup. What is a target fund? A mutual fund with 80% (or 90%) equities and 20% (to 10%) bonds that mature the year that you retire. These target funds are supposed to become more conservative as you near your retirement date (but who can see into the future).

Ask yourself do you think the price of oil is going up or down? If the price of oil is going up, the cost of doing business will also go up…thus the net price per share will go down. Thus, this negative effect will affect all equities markets in general. Do you think the world will become more peaceful or more volatile as the year’s progress? I do not see the world getting any better over the horizon. So, if the advisor proclaims a balanced fund or target fund as being conservative in this market cycle…then the advisor should go see a neurosurgeon have his brain looked at. The old days when we were in a solid bull market (in the 90’s), you could consider a balanced fund or target fund as being conservative, but in this market cycle I would consider a balanced fund or target fund to be aggressive. Would you invest 60% of your retirement assets in a market that is so volatile it makes the era of the Vietnam War look…peaceful?

Why would you invest 60% in equities when there is a good chance those U.S. & non-U.S. equities will fall even further? What’s the point? Yes, you can get back-data to advocate the last 48 years investing in a balanced fund would support a conservative return. But, past performance is no guarantee of future performance. And the market cycle we are in is unlike any market cycle in history…so be extremely super-conservative when you choose an investment in your 401k retirement portfolio. You want your 401k portfolio to be there when you retire.

Sincerely,

John Bagwell

The Truth About Financial Products.com

www.thetruthaboutfinancialproducts.com

REIT

Your DisplayName here! — Thu, 14 Feb 2008 00:32:47 GMT

REIT

What is a REIT anyway? A REIT is an investment trust that purchases owns or manages real estate or real estate loans (or a combination of the two). A REIT has liquidity and the ability for investors to evaluate portfolio assets (much like a mutual fund) to determine whether the REIT is a good or bad investment.

As of 2007, the REIT index was down 14% due to the current mortgage crisis, while home values plummeted 11%. But in the specialty market, timberland (trees, wood, timber, and the land that grows trees) have taken an entirely different direction than traditional real estate and the home mortgage market. Historically, timber investments do not correlate to other asset classes, but moves positively in the direction of inflation (which is going up)…a true inflation hedge. Timber investments have beaten the S&P 500 index over the past 20 years with less volatility, but were only available to the rich, until the timber REIT surfaced several years ago.

The timber REIT has consistent cash flow, and the dividend is a capital gain (rather than ordinary income). The specialty REIT sector (which is primarily timber REITs) was up 15% as of the end of 2007.

What does this mean to you the investor? This means you should evaluate the pros & cons of investing in timber REIT’s carefully before investing with your broker. There is several different timber REIT’s…so analyze the prospectus & market sector carefully. If you invest, diversify your positions, and evaluate your liquidity to fight volatility with future market cycles.

Sincerely,

John Bagwell

The Truth About Financial Products.com

www.thetruthaboutfinancialproducts.com

Life Insurance Company Ratings

Your DisplayName here! — Wed, 13 Feb 2008 01:18:01 GMT

Life Insurance Company Ratings

It’s amazing the dishonesty in the life insurance industry concerning life insurance company ratings. I remember, seventeen years ago when two financial planning agents were telling me that they were selling an insurance company (we’ll call company A) which was rated by A.M. Best (a rating company for the insurance industry) an A-. The grade of A- sounds pretty great to me, and sounded pretty great to all of their clients. Since, I am analytical, I asked a new company (called Weiss Ratings) to give me an un-biased rating of the insurance company. Weiss faxed backed to me a rating of D- (which seamed pretty horrible to me). I told the two planners the analysis from Wiess, and I advised the two planners they should stop selling this annuity product immediately (and send out a letter of concern to their clients).

The two planners became outraged that I would be giving them advice, since they have been financial planners for 25+ years, and told me that Weiss new nothing about financial planning or the industry as a whole. Well, a couple of days went by, and the insurance company went under…and so did these two planners.

The moral to the story is, always double check the ratings of an insurance company by an un-biased source…before you purchase an investment product from an insurance agent.

Each insurance company which transacts business in your State must follow certain guidelines concerning their ratings in relation to the amount of assets they must set aside in capital & surplus incase there is a run on the companies assets in case of failure. The better the rating of the insurance company, the more capital the insurance company must set aside in capital & surplus in case of failure. The better the rating of the company, the lower the yield on its products…since the insurance company must set aside higher quality grade bonds & other assets in its books to support those ratings.

What do insurance agents do? They sell products from insurance companies with lower ratings, which have higher yielding products. By selling products from insurance companies with lower ratings, the insurance agent is able to compete against higher yielding (taxable) products. But the caveat to this problem is…if the insurance company goes under, the investor will suffer (either by reduced payouts or a deferral of principal owed).

There have been over 29 insurance company bankruptcies since the year 2000. The companies that have failed, those insurance companies had between 35 million to 3.5 billion in assets. Out of these failures, most of these insurance companies had a “D or E” ratings (although there was a couple of failures in the C- rating). This tells you to stay away from any companies that are rated less than B- and/or have less than 3.5 billion in assets.

In addition, check for the following:

Large Holdings of BBB Rated Bonds, Mortgages, and Significant Holdings of Junk Bonds to Capital. Or, A Negative Return on Equity or Negative Cash Flow.

If an insurance company fails, most State guaranty associations do not set aside funds in advance. But, contributions from other insurance companies are contributed after insolvency occurs. If an insurance company fails, all deferred annuity products are acquired by the new company taking over the failed company, and a 3 or 4 year hold on liquidations are put into place. So the deferred annuity owner will not lose money, since the annuity company will not allow the owner to liquidate the account until the insurance company recoups the original investment principal. On the other hand, the immediate annuity owner who is receiving money on a monthly basis will normally lose 25% of their payout amount…since the new company is buying the insolvent insurance company assets at a 25% discount.

The bottom line, be careful of all companies rated below a B- rating (by Weiss), or have less than 3.5 billion in assets. You’re investing to make certain you do not lose money…so take the added caution of analyzing the insurance company “true” un-biased ratings before investing, by going to: www.weissratings.com.

Sincerely,

John Bagwell

The Truth About Financial Products.com

www.thetruthaboutfinancialproducts.com

Stock Market Crash

Your DisplayName here! — Mon, 11 Feb 2008 16:59:33 GMT

Stock Market Crash

Are you ready for the next big stock market crash? For the conservative investor, resist speculation…since asset allocation programs don’t factor speculative prices (or price to value comparisons). Think hard about that for a moment. What is a crash anyway? It’s a price correction on an over-valued stock market.

How would you invest, if the market was going to crash tomorrow? Would you be 100% cash? Would you be in bonds? Or would you wait for the crash and buy stocks at a low price?

For most investors, it’s easier to just buy and hold for the long-term. For stock brokers it’s easier to just give advice based on the old strategy of buy & hold, since a stock broker has to spend 80% of his or her time soliciting for new clients. But, let’s put those issues aside for a moment to consider if you were to buy and hold, and simply held your position through all the market cycles (both up & down). Your return would be around 9.6%. But if you consider, getting out of the market at the worst times and then ride the bull market up, your return would be around 20% (a buy and hold…then sell strategy). What would you want? Hopefully, the later of the two choices

Do not take the course of investing in single securities…when the sky is falling. Leave this type of investment approach to professional investors. If there are reams of data to support an opposite market direction, take your money and run! It’s not the return on your money that counts…it’s the return of your money that counts.

Investing is made up of an uncertain future, made by decisions with incomplete financial data to support investment decisions. For the conservative investor, it’s better to be out of the market when the market is simply un-decisive towards a bullish run.

So, if you believe the market has crashed, or will get worse…stay out of harms way! You’ll be thankful that you did.

Sincerely,

John Bagwell

The Truth About Financial Products.com

www.thetruthaboutfinancialproducts.com

Choosing an Investment Advisor

Your DisplayName here! — Sat, 09 Feb 2008 23:42:38 GMT

Choosing an Investment Advisor

When Galileo trained his eyes on the heavens and found out that the earth revolved around the sun, this fact was considered heresy (according to the church), and punishable by being burned at the stake. I’m sure Galileo shook his head in disbelief that the truth was being suppressed…intentionally. This is how I felt when I emailed agents, planners, and investment advisors that I created a blog to talk about the truth concerning financial products & services. I had many financial planners email me back to say this was a great website, but I had a few email me back to condemn my actions, and made it clear that this blog would be a “deal killer” for their business activities. It is truly unbelievable that an agent could say this, when this website is designed to evaluate the truth behind financial products to help the public make the right decision concerning investment purchases (and thus help planners in the back end). It's interesting how agents interpret the truth...especially if commissions are involved.

I asked these agents; “Don’t you want to do what’s right for the client and get more referrals by doing what’s truly in the best interests of the client?” All I got in the reply was hate mail. Those emails made it clear to me I was on the right path, concerning this blogs direction to help the public not get burned by “wishy-washy” agents selling just for the sake of the all mighty commission check and not looking out for their clients best interests.

There are agents and securities representatives who advertise to the public they are a financial planner or an investment advisor…but in reality they are nothing but “commission planners.” Commission planners will “hustle” any financial product as long as it pays a high commission. They are not evaluating the true pros & cons of the product or solution…but only looking out for their interests (I mean commission payout).

Financial planners or investment advisors evaluate financial products or solutions based on this simple question; “Is this product or solution truly in the best interests for my client (based on the specific planning variables for the case)?” Many “commission planners” will throw out the fact find for the case and specifically focus on the “liquid” assets that are transferable into a specific product (for the highest commission payout).

Ask yourself, did the financial planner or investment advisor create a solution for my wants & needs, which evaluated the highest possible yield relative to liquidity, safety, recovery of principal, and tax reduction? Did the financial planner or investment advisor focus on a single product, or did the financial planner or investment advisor solve for a diversified product solution to reduce risk? Did the financial planner or investment advisor solve the problem of liquidity incase you need to liquidate in an emergency? Did the financial planner or investment advisor create a solution to solve for income, yet solve for the recovery of the initial investment principal? If you found more no’s than yes’s to above questions, then you should move on to evaluate other financial planners or investment advisors that can solve these problems for you.

I know several high qualified planners, they do exist, and their honesty to seek out the truth (concerning financial products) shall be revealed in their advice...to truly benefit your interests (first and formost).

Sincerely,

John Bagwell

The Truth About Financial Products.com