Collecting on Life Insurance early could lead to the next financial meltdown

Jennifer McClelland | RSS | Tue, Dec 15 2009 | 0 Comments

It looks like one of the things that has always been seen as a “sure thing” could be coming back to bite investors. Life insurance companies have been offering policies to people for years and premiums often go up as the insured begins to age.

An investment scheme that has popped up in the last few years is when someone who is insured can no longer afford the premiums or is looking to “cash out” a life insurance policy that he or she has been paying on, someone will come along and buy it for a fraction of the payout and sell it off to investors who will pay the premiums until the original insured person dies.

There have been over a dozen life-settlement scams to come under investigation since 2008. Life settlements get capital by promising high returns. The business also gains the attention of other senior citizens who have empathy for the policy holders that have looked to cash out. And so, there have been a lot of companies ready to take advantage of those people.

Like when the market for securities became bloated and backed by homes created the subprime mortgage mess, the market for life settlements has created a surge in fake insurance policies called STOLI’s or stranger-originated life insurance. These STOLIs are illegal and begin with a life insurance agent who is also a life-settlement broker. The agent talks a senior citizen into taking out a big life insurance policy and wines and dines them. Then the agent agrees to pay the premiums and the ownership of the policy is transferred to investors.

Again, the problem with these STOLIs is that they are illegal and could endanger the policyholder from being able to collect any insurance in the future. Some scary statistics are that more than 50% of life settlements right now were on policies that were less than 4 years old. The reason for the increase and the large amount of settlements on policies that are less than 4 years old is the STOLIs. These policies equal out to huge losses for the insurance companies also and could potentially hurt the insurance companies to the point where they are unable to pay out real insurance claims.

It appears as though the government is taking note. Last month Senator Herb Kohl led up a special committee on the problems associated with life settlements. The committee meeting ended with the IRS and SEC being contacted to talk about gaps that are left in legislation in life settlement procedures. The SEC has agreed to look into the issues facing the industry. Due to this activity, it seems as though the market has cooled down a bit.

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Tags: investors life insurance, scary statistics, life insurance companies

Is now the time to start investing?

Jennifer McClelland | RSS | Mon, Dec 07 2009 | 2 Comments

The stock market has seemed to start leveling off and is back to near-normal. Other investors have started to work their way back into the market after receiving heavy losses. So, is now the time for you, or any other timid investor to start putting their money back into the market?

I will say yes. However, I would say that the time to get into the market was months ago while the stocks were down. Many people lost a lot of money and then got scared and pulled their money out before they rode out the worst of the recession. For the most part, if they would have just held their stocks their losses would be minimized.

Right now, it is important to track the stocks and funds that you want to invest in. You have to look at the big picture rather than the previous 12 months. The problem is the recession has changed the game so much that you have to look at everything rather than just the short term.

For example, in commodities, most things have always fallen in price as the weather turns cold. However, if you look at the cost of something like copper, you can see that because the recession has improved in the 3rd quarter 2009, the prices have gone up a bit since the weather has changed. In normal times, the price falls because construction tapers off for the winter. Right now, though, more houses are being built than were at the beginning of the summer.

If you are still timid about trading, try paper trading for awhile and see how you do. Once, I had heard about Citi and the rules regarding mark-to-market trading changing and knew that the stock was going to go up. Chris and I paper traded the stock (actually we did an option trade) and would have made a killing had we actually put money into the stock. Doing something like that makes you a bit less paranoid about putting money in the market.

Things to consider before you put your money in the market are things like how much risk are you willing to accept. Obviously, the more risk you can take on, the bigger the payoff or the greater the loss. You also have to realize how much you can put into the market and how to diversify.

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Tags: recession, heavy losses, option trade

Minimize your Investing Costs

Jennifer McClelland | RSS | Tue, Nov 17 2009 | 0 Comments

You can minimize how much you spend when it comes to investing by doing just a few things. Cutting how much someone spends on investing is one of the five painless ways to cut expenses in a report from Time Magazine.

One thing that you can do to minimize your investing costs is, of course, to go from a full service brokerage to one that offers cheaper trades. Then again, a lot of people aren’t comfortable with making decisions when it comes to their investments. There are some brokerages that will charge very little per trade, but they are going to let you make your decisions. The stock information that you are missing out on by picking out one of these brokers could be made up by searching the internet for investment information. You have to be a bit more hands on with your trades but you could save yourself a lot of money in the long run.

Another thing that eats at your money when it comes to investing is that you are being charged fees that are hidden in your 401 (k) or your IRA. When you have your money in these kinds of funds they are often put in mutual funds and there are recurring fees associated with them. Because these fees are deducted from the balance already in the account rather than charging you out of your bank account, they often fly under the radar.

The best way to help out your 401(k) and the fees associated with it is to stick with low-cost index funds. You can reduce your annual expense to as little as 0.2% of the balance. There are actively managed funds that can cost you up to 1.20% of your balance.

From the article:

On an account worth $100,000, your annual cost in index funds is a mere $200 instead of $1,190 with actively managed funds. So you’d save $990 a year by switching. But that’s only the start.

The money you save each year stays in the fund and grows. Let’s say a low-cost index fund and an average-cost actively managed fund both grow 8% a year for 20 years. Over that period, you’d end up with $75,678 more with the index fund by virtue of the additional compound returns from lower expenses; the index fund would grow to $449,133 while the actively managed fund would grow to $373,455. That’s more than $3,700 a year.

Source

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Tags: index fund, time magazine, service brokerage