RISCARIO INSIDER: financial literacy

Showing posts with label financial literacy. Show all posts

December 17, 2017

Leaving Your Employer? Get Your Insurance In Place First.

When you're leaving your employer — voluntarily or not — you have much to consider about your future. You could easily forget or undervalue the employee benefits you've been receiving.

Unless you put similar protection in place, you are transferring risks to yourself. You have other options.

Health and Dental Benefits

If you act fast, you likely qualify for Manulife FollowMe health and dental without underwriting. You need to apply and pay within 60 days of losing your current coverage (sooner is safer). You can apply for FollowMe through Costco to save money if you don't need guidance.

If you'd like better coverage with fewer limitations, consider Association plans, which are only available through advisors.

Tip: If you're out of time, get FollowMe first and then compare with the Association plans.

Disability Insurance

Your group Long Term Disability (LTD) will likely end. Personal disability insurance is worth considering if you or your dependants would be heavily impacted if you became unable to work due to a sickness or injury. The cost may seem high but the benefits are valuable.

The best time to apply is while you're still working since a discount usually applies. Upon leaving your employer, a well-constructed plan allows a special one-time top-up to replace the group LTD you're losing.

Tip: Group LTD has limitations. Consider personal disability insurance as a top-up even if you're working.

Life Insurance

You likely have a right to a short period to convert your group life insurance to personal coverage (e.g., 30 days) after your employment ends. Your employer may not emphasize this option because the insurer charges them a penalty on the assumption that some of those who convert are in below-average health. Personal life insurance is likely cheaper but takes time to put into place.

Tip: If you're out of time, convert your group life and then compare with personal life insurance.

Be Ready

When you're starting out on your own and uncertain about the future, insurance brings stability and peace of mind. Waiting until you're established brings risk.

Reminder: simplified for clarity. For specific answers to your personal questions, arrange a private chat.

February 28, 2015

WHY DO I NEED INSURANCE? | QanA #1

This blog is switching to a video-first format with a new YouTube series called Question an Actuary (QanA). You can read the transcript (this blog post) or watch the video (embedded at the bottom). You lose nothing and get more choice.

Question: Why do I need insurance?

Answer: Because bad things happen. Even if you’re good. Even if you prepare. Insurance transfers risk.

You — yes you — always have insurance. Even if you don’t want any. How good is your protection?
As a minimum, you are your own insurance company. This is called self-insurance. You transfer the risk to yourself. You might set money aside in a bank account for the projected claims. For instance, you could build a fund to repair broken appliances or to cover expenses during a disability. Self-insurance is riskier if you live alone by choice or because a til-death-do-us-part relationship collapses.
Beyond this, you have OPM: Other People’s Money. That’s terminology from The Millionaire Next Door by Thomas Stanley. Here you transfer the risks to others, often family. Parents, grandparents, siblings. Your rich aunt or uncle. They may willing and able to help. Don’t count on them being happy, though. You may pay them back in other ways: they now have power over you … and may like reminding you and anyone else who listens about their generosity. Charity begins at home. Arguments too.

You may be able to transfer some risks to your employer. Perhaps basic medical, dental, disability and life insurance. Employers often dislike self-insurance and transfer some risk to an insurance company. Employers often pay some or all of the costs. Whoever pays decides what you get. Insurance from your employer is called group insurance.

There’s another source: an affinity group where you're not connected by work. You could qualify through an alumni association, professional association or other group. Do you think affinity groups self-insure? At work, you have no say in what you get. Same here. At work, your employer helps with the costs. With an affinity plan you pay every penny — rarely guaranteed. Part of your premium goes from the insurance company to the affinity group. Employers don’t usually add a markup since they're already profiting from you.

The next stage is personal insurance. This you buy from an insurance company. Now you’re in charge and pay the premiums, which may be guaranteed. The protection stays with you if you change jobs voluntarily or involuntarily. Here you pay the stipulated predictable premiums. In exchange, you get a contract which states the benefits you get.

Insurance companies don't like self-insuring. They transfer risk to re-insurers who may transfer risk to retrocessionaires.

The insurer of last resort is the government. You may think they self-insure but we taxpayers pay. You may think you’re entitled to benefits because you pay taxes. Other taxpayers may not agree. Also, you don’t have control over what’s available. Rules change.

Do you need insurance?

Yes. The question is who insures you. Since we’re not good at assessing risk, we tend to be optimistic. That’s why people buy lottery tickets and get remarried.

We don’t need car insurance because we’re safe drivers. We don’t need disability insurance because we’ll remain healthy (or think we have enough coverage from work). Who needs long term care insurance? If we need money, we can borrow against the growing equity in our house (if the banks are still lending) or get help from our kids (which means a smaller inheritance for them). There’s the government too. We paid taxes for ages. They owe us!

What if you’re wrong? That’s when you’ll truly know if you need insurance. That’s also when you can’t get any. Sorry. Insurance companies also bet. To minimize their claims, they want low risks. If you’re eager to buy, they’re suspicious. Do you know something they don’t?

Even if you have insurance, you might find you don’t have enough if you have a claim. And feel you have too much if you never have a claim. Maybe something is better than nothing?

If you never have a claim, would you like your money back? This option is sometimes available for an additional cost. The refund takes place at cancellation or death. It’s as if you earned a zero percent return. You’re protected whether you have a claim or not.

You always have insurance. Have you explored your options and optimized your decision? The best time is now.

Do you need insurance? What do you think? Share your thoughts and ask your questions below. For private personal attention in Toronto, reserve time to Learn About Life.

Reminder: These answers aren’t a substitute for personalized financial advice. The general information isn’t tailored to your unique situation.

December 21, 2014

GET/GIVE TONY ROBBINS NEW BOOK “MONEY: MASTER THE GAME”

There are lots of reasons to read a book about money and there are lots of books about money. Tony Robbins has a new one, Money: Master The Game.

Unfortunately, not many people read books. Even fewer read nonfiction. Only a small sliver read books about money. Be an exception and join them.

Not Perfect

There are various criticisms of the book, such as

an outsider: but being outside the traditional financial community gives Tony a different perspective
contradicting advice: but that’s common in life. He interviews 50 money experts with varying views.
over-simplified: but isn’t that better than over-complicating and confusing? Complexity can be added once the A-B-Cs (or 1-2-3s) are known.
conflicts of interest: Tony recommends companies in which he might have financial interests (see dealing with biased financial advice). That doesn’t mean the choices are bad but they but warrant more investigation.
too long: yes … I got the audiobook which runs over 21 hours and sped up the playback by 30%
US-centric: yes but the general ideas apply everywhere

Tony responded to some criticism in this interview for The Wall Street Journal.

At the other extreme, you’ll find gushing praise.

Tony’s Advantage

Do celebrities give better financial advice? Maybe not but Tony reaches the unreachable — people who get missed by conventional financial education. Even when Tony says things you’ve heard before, you might be more likely to believe them now. For instance, I’ve covered things like

$1,000,000 after taxes on investment growth (2007)
Your life expectancy exceeds 1 billion seconds (2009)
Why is financial planning ignored? (2009)
The Globe and Mail on Canada’s insurance loophole (2011)
How to protect your money from Goliath (2013)

We often know the keys about money (e.g., spend less than you earn, disaster-proof your life, save for the future). That doesn’t mean we do. Tony helps people change. He might get you to change too. He has a knack for making financial education engaging. He explains his terms and uses many examples.

Differently

Instead of writing a book, Tony could have created videos and an app. That’s what I thought before getting the book. I don’t see videos, but he has a free app (if you’re willing to give your contact information).

Instead of using a conventional publisher, Tony could have self-published. He could have made the book cheaper. He could have narrated the full audiobook, rather than portions.

Overall, what he did is fine.

Free Meals

Tony is paying for 50 million free meals. Besides donating all his book royalties, he’s made an additional personal financial contribution. That’s rare. Chances are good that you’ll end up on his mailing list, though. That gives him the opportunity to sell you his other stuff with the money you’re saving.

Caution

Tony tackles tough topics such as the conflicts of interest rampant in the financial sector. He gives solutions too. Think before you leap.

The stories from successes like Richard Branson are interesting but may not provide much practical guidance (e.g., how Honest Ed turned $212 into $100 million). Look for patterns rather than a guaranteed formula to financial independence.

I wasn’t expecting much from Tony’s book but because he’s popular, I knew that I had an obligation to read it. Overall, I’m impressed and highly recommend Money: Master The Game. There’s lots of practical advice.

Money books get stale. Tony’s book is new, which means now is the best time to read it.

Links

PS Another must-read (or re-read) is Warren Buffett’s biography, The Snowball

December 14, 2014

UNDERSTANDING THE INGREDIENTS OF LIFE INSURANCE (TERM AND PERM)

Michael James wrote a thoughtful post comparing temporary (term) life insurance and permanent life insurance. Like our canine friends above, both are similar, yet different. The best choice depends on different factors. A winner on one scale loses on another. As Michael’s analysis shows, comparisons can be misleading or omit important elements (like inflation).

Typical Plans

A temporary plan like Term 10 is often

renewable to extend coverage for another 10 years for a higher-but-guaranteed premium
convertible to permanent insurance without underwriting up to a maximum age

Since a permanent plan lasts for life, there’s no need for renewal or conversion options. Here are typical plans.

Temporary Life Plan	Permanent Life Plans
Term 10 (renewable, convertible)	Term 100
Term 20 (renewable, convertible)	Whole Life
Level term to age 65	Universal Life

We won’t be looking at which form of insurance is better. We’ll be looking at how they’re different.

First Principles

Mortality rates underlie all life insurance. The mortality rate is based on the true probability of someone like you (same gender, age, smoking status and health) dying during the year. Your mortality rate increases annually because you’ll die eventually (based on current medical science and how we define life).

Your retail premium rate is based on your wholesale mortality rate with margins added for expenses and profits. Your premium is the premium rate multiplied by how much insurance you’re buying. There may be additional loads for premium tax and Investment Income Tax (IIT).

One Year At A Time

When you buy insurance, you are getting one year of protection at a time.

Comparing With Property Insurance

With your car and home insurance, the insurer will usually offer you coverage for another year under similar conditions. Your new premium depends on factors such as their claims (actual vs. projected), expenses (actual vs. projected), investment earnings (actual vs. projected), capital requirements and profit targets.

The insurer could refuse to insure you next year or change the contract provisions (e.g., weaken protection for water damage). You could decide to switch companies.

The Additional Guarantees With Life Insurance

Life insurance also protects you a year at a time but usually

you have the right to renew your coverage until a maximum age (even if the insurer stops new sales)
your premium rate scale is fully guaranteed (e.g., you keep your nonsmoker rates if you start smoking or stop exercising in the future)
your insurer can’t modify the contract unless the change is an improvement

You get this extra protection because you may not be able to switch insurers if your health has deteriorated. You might even become uninsurable.

Yearly Renewable Term

The building block of all life insurance is Yearly Renewable Term (YRT), which is sometimes called Annually Renewable Term (ART).

Do you see the problem?

Your probability of dying during the year increases from 0.01% to 1% to 10% to 80% to 100%. This means your YRT rates will increase every year and become increasingly unaffordable as claims becomes more likely. That’s not good for you or your beneficiaries.

There is a solution: prefunding. Suppose you need insurance for 22 years. You could average the premiums and put that amount into a savings account every year and make withdrawals to pay the YRT premiums.

You could have the insurer invest for you instead. With Term 10 life insurance, you pay a level premium for 10 years at a time. The insurer does the averaging and bears the investment risk. At the extreme, Term 100 life insurance has a level premium for life (and is really permanent insurance and often continues beyond age 100 without further premiums).

Whole life insurance uses YRT rates (which might not be guaranteed). Universal life usually offers two guaranteed scales: YRT and LCOI (Level Cost of Insurance).

Start With The Need

Is your need for insurance temporary or permanent? If you’re addressing the risk of dying while you have financial obligations (e.g., children, a mortgage, a spouse or ex-spouse, other family members), life insurance is the ideal way to create or enhance your estate — if you’re insurable. How else can you get a specified tax-free lump sum at death?

For a temporary need, term life insurance is ideal. You get the most protection for the lowest price.

What If You’re Wrong?

A need which initially looks temporary may last longer than you expect. For instance, a child may have a lifelong disability due to an accident. If you guess wrong, term life insurance gets expensive. You can often renew coverage up to a maximum age without underwriting but the premiums shoot up each time.

Compared with renewing, you may be able to save money by buying a new term plan with new underwriting.

Conversion

Term life insurance often allows you to convert to permanent protection without underwriting up to a maximum age (e.g., 65). You pay the premiums for your age at the time of conversion (your “attained age”).

Example: Suppose you buy Term 10 at age 32. If you convert eight years later, you pay the permanent premium for a 40 year old. This will be more than the permanent insurance premium at 32 and may be more than what a newly underwritten 40 year old would pay for permanent insurance.

Why Permanent Insurance?

You might want permanent life insurance for estate planning. You may not see the need now because you’re not thinking of your legacy. Maybe you will in your 50s or 60s.

The tax-free insurance proceeds can be an inexpensive way to pay taxes at death, leave money for heirs or help a charity. Coverage is available in a cheaper form called Joint Last To Die (JLTD), which insures you and your spouse. The money gets paid when the longest living spouse dies. That’s when the bulk of taxes are due.

Some younger people buy a small amount of permanent insurance for their legacy and a large amount of term insurance for their temporary needs.

An Appreciating Asset

Why does permanent life insurance have a savings component? Further, why do the savings grow on a tax deferred basis? The government doesn’t give valuable advantages without reasons. There are ways you can benefit with planning.

Permanent life insurance grows in value every year because the payout becomes more likely — especially if your health has deteriorated. Your insurance contract could easily have a market value which is much higher than the cash surrender value. An investor may want to buy your contract, pay the future premiums and get the death benefit. That’s called a life settlement. They are legal in the US and several Canadian provinces (but not Ontario).

Permanent life insurance gives you the opportunity for tax-deferred savings. Universal life provides the most guarantees, flexibility and transparency. You could

invest more (limited by the Maximum Tax Actuarial Reserve (MTAR))
select the investments
stop paying premiums (e.g., in 20 years or at age 65), though not always guaranteed

Having more options helps with tax planning, especially for incorporated businesses.

Affordability

You can offset the cost of your insurance by reducing your coverage as

your financial responsibilities drop (e.g., children older, mortgage smaller, spouse’s income)
your assets grow (e.g., savings, pension)

Before you do, consider inflation which decreases the value of money. Also, your financial obligations could grow (e.g., new children, divorce, health issues).

Conclusion

Temporary life insurance gets compared with permanent life insurance but both cover different needs and timeframes. Since advisors get paid much more for selling permanent insurance, they may have biases they don’t even realize. Explore different scenarios before deciding and re-evaluate your needs over time.

For general questions, ask below. I'll answer what I can here or on Question an Actuary (QanA). For personalized answers, reserve time to Learn About Life.

November 30, 2014

KEEPING PROMISES: CORPORATE GOVERNANCE 2014 IN CANADA

We can’t predict the future but can take steps to put the odds on our side.

Corporate governance is a measure of companies keeping promises. Since life and health insurance is a long term promise that may last decades, isn’t that important?

Unlike car/home insurance, well-designed protection for mortality, morbidity and disability tends to have premiums guaranteed for life. That provides peace of mind since you can’t easily switch insurers: you’re older and your health may have deteriorated. In addition, newer products may fewer options and weaker guarantees. If the government changes the rules governing insurance, old policies may be “grandfathered” (exempt from the changes).

Similarly, financial advice can have lasting implications even when of high quality.

Lucky 13

The Globe and Mail has compared corporate governance for 13 consecutive years. Board Games 2014 includes 247 major companies in a searchable table. Data was prepared by the Clarkson Centre for Business Ethics and Board Effectiveness at the University of Toronto.

Not much changes, as you’ll see by looking at results for 2011 and 2007.

Selected Rankings

Let’s look at the financial sector, which historically ranks low in trust in comparisons like the annual Edelman Trust Barometer. Here are the banks, insurers, mutual fund manufacturers and advice givers. You’ll likely recognize the names.

Rank	Company	Score
1	Bank of Montreal (includes BMO Insurance)	98%
2	Sun Life Financial	97%
3 tie	Bank of Nova Scotia	96%
3 tie	Royal Bank of Canada (includes RBC Insurance)	96%
6	Manulife Financial	95%
8	Intact Financial Corp (belairdirect, Grey Power, Jevco)	94%
13 tie	CIBC / National Bank / TD Bank	93%
30	Industrial Alliance Insurance and Financial Services	89%
62	Western Canadian Bank	81%
69	Laurentian Bank	79%
81	CI Financial Group (CI Investments, Assante Wealth Management, Stonegate Private Counsel)	76%
185	Power Financial Corp (Great-West Lifeco, IGM Financial)	58%
197 tie	Canaccord Genuity Group / Fairfax Holdings Inc	55%
197 tie	IGM Financial Inc (Investors Group, Investment Planning Counsel, Mackenzie Investments)
205	AGF Management	54%
221	Great-West Lifeco (Canada Life, Great-West Life, London Life)	48%
231	Dundee Corp	46%
237	Power Corp of Canada	44%

Look at the range. Some companies are at the very top with near-perfect scores. Others are closer to #247 (Fortuna Silver Mines, scoring 35%).

Missing Companies

You may be dealing with companies which aren’t rated. That doesn’t mean they’re “bad”. How would they score f they were included? That’s very tough to say. You can’t really tell. You can ask them if they are ranked by credible independent parties in a transparent way. You may get measures of financial strength. Maybe that shows they’re great at making money but doesn’t mean they’re great at keeping promises.

As usual, buyer beware!

November 8, 2014

WHAT IF INSURANCE WERE FREE?

If insurance were free (and there were no catches), how much would you get?

You might

top up your current coverage (e.g., more life insurance)
protect against risks you’ve neglected (e.g., critical illness insurance)
explore types you don’t know much about (e.g., long-term care insurance)

You might be willing to go through the hassle of the buying process. You might encourage your family and friends to follow your path.

Maybe you wouldn’t do anything what’s free (e.g., air) doesn’t seem to be worth much.

Sale Prices

If insurance were on sale, how much would you get? Your answer might depend on the size of the discount. If large enough, you might even buy protection you’ve refused in the past.

What if there were a one day sale? Would you buy then? Insurers avoid discounts because insurance isn’t an impulse purchase. Instead, they tend to have competitive “every-day” pricing. That’s to encourage advisors to consider their products. They may have contests to motivate advisors but you’re unlikely to know.

You don’t gain by waiting to buy. Even if your health and gender don’t change, you’re getting older. Your age affects the price you pay. Also, newer products don’t mean better guarantees.

Reducing The Price

You can’t save money by buying half an iPhone. You can save on insurance by buying less coverage. Granted, you get less protection but is no coverage better? Since insurance requires ongoing maintenance, you can re-evaluate your situation during a future inspection.

Insurance costs more as you age and even more if your health deteriorates. You reduce the future price by acting today. When the asset being protected is a human life, the premiums can often be guaranteed for life.

The Limits

A billionaire bought a record $201 million of life insurance, which required 19 insurers and an annual premium in the millions of dollars. Why not more? There are limits on how much insurance you can get even if you can pay.

Underwriters determine what you’re worth. Let’s say that’s $5,000,000. You’ll have trouble replacing more than that. If you try to buy $2,000,000 from five companies, don’t count on getting $10,000,000 of protection. That’s because each company will ask about your other insurance you already have and are in the process of getting.

Real Life

Insurance isn’t free. There’s no Boxing Day, Black Friday or Cyber Monday sale either. Insurance may look like a luxury or waste until you need it. Unfortunately, you can’t buy insurance at moment before misfortune strikes --- at any price.

Links

PS It’s currently Financial Literacy Month. Follow #FLM2014 on Twitter.

November 1, 2014

A CHALLENGE FOR FINANCIAL LITERACY MONTH (#FLM2014)

November is Financial Literacy Month in Canada. Getting attention during the busy period between Halloween, Black Friday, Boxing Day and New Years Day isn’t easy. According to Google Trends, interest in financial literacy has been growing. That’s great news. Kudos to everyone helping create awareness.

"financial literacy" - Google Trends in Canada

There’s more to do.

The Challenge: Current Creators

If you already create ongoing financial education, Thanks! Why not try something new:

change your format: you likely prefer text, audio, video or photos. Try a different one.
go live: e.g., hold a Hangout On Air, speak at an event or have a Twitter chat
adjust your frequency: create more content or cut back to make time for something new
alter the length: you could make your content longer or shorter
experiment with a different platform: are you using the LinkedIn Publishing Platform or Pinterest?

You might reach a new audience and feel more enthused to create more content.

The Challenge: The Silent Million

According to Statistics Canada, 1,122,300 people worked in finance, insurance, real estate and leasing in 2013. That’s 6.3% of the workforce (1 out of 16 people). How many of them publish their own original content to help the public understand money better? Now’s an ideal time.

If a mere 2.7% published a single article during Financial Literacy Month, we’d have 30,000 new articles --- 1,000 a day. And 100,000 articles only requires 8.9% to volunteer for a worthy cause which their employers likely support.

Others know about money too. For instance, accountants, entrepreneurs, executives, lawyers, professors, retirees and teachers. Include them and 1,000 pieces of fresh content a day looks even more feasible.

If each creator promotes to their connections, imagine how many new people could be reached and helped.

Case Study

I’ve been looking for ways to engage people who aren’t especially interested in learning more about money.

For last year’s Financial Literacy Month, I organized Money 50/50: Insider Advice For Today’s Topsy-Turvy Times at the University of Toronto (like TEDx plus Q&A). November got postponed to February and the Ted Rogers School of Management (see recap). Since TEDx Talks become videos, I decided to skip a live event and interview these insiders who might have been speakers:

How much money do you need before getting financial advice? (Joe Barbieri)
Financial independence at 31 (Sean Cooper)
The Capital Gains Exemption isn’t a gimme (Mark Goodfield)
Insights from an advisor to the insurance industry (Ross Morton)
Reaching the unreachable (Jonathan Chevreau)
Investing outside the markets (Vikram Rajgopalan)
Five essentials to being a better investor (David Toyne)
Planning for aging (Gary Hepworth)
Demystifying SR&ED (Julie Bond)
Retirement planning for small business owners and professionals (Clark Steffy)

This month, I’m

guiding Grade 8 students through the Economics For Success via Junior Achievement
sharing Business Strategies For Taxing Times at the Toronto Regional Board of Trade
launching a series of short educational videos called QanA (Question an Actuary)

Thanks to past, current and future creators of money-related content. Thanks also to everyone who invests in learning.

Links

PS Money matters every month

October 20, 2014

WHY DON’T PERSONAL FINANCE EDUCATORS HAVE A LARGER AUDIENCE?

The very first blog post was published over 20 years ago. Newspapers, magazines, books, radio and television started even earlier. The personal finance educators tend to use those media. Yet financial literacy remains a serious problem. Maybe the audience has been shifting their attention elsewhere.

What about the trends towards video and mobile devices? Canadians are big users. According to the 2014 Canada Digital Future In Focus report

video viewing is up 33% since 2012
74% watch online video
viewing time is 1,769 minutes per month – 43% higher than Americans

There’s a huge (and growing) audience on YouTube. How much personal finance information is available there?

As we’ll see from case studies, current approaches to using video for financial education aren’t working well. There are opportunities to experiment and make breakthroughs. If you’re a less established blogger, you might want to focus on video. Ditto if you’re established and looking to evolve.

Case Study: Investor Education Fund (585 views)

(click to enlarge) YouTube views - InvestorEDfund 2014-10-14

You’ll find good videos on the InvestorEDFund channel from the nonprofit Investor Education Fund. Host Rob Carrick conducts short 1-2 minute interviews which are co-branded with The Globe and Mail. The last 15 videos garnered 585 views. The most popular title got 84 views.

Viewership might improve with

Better thumbnails: the current images aren’t always enticing; might show the title, guest and host
Longer videos: short clips tends to simplify and generalize (e.g., 84 seconds on whether to cancel your home insurance); more time might let guests give better, less rushed answers

Case Study: Financial Post (714 views)

(click to enlarge) YouTube views - Financial Post 2014-10-14

You’ll find good videos on the Financial Post channel. I especially like the ones with Melissa Leong. The last 15 videos got 714 views. The most popular had 134 views (an ice bucket challenge).

Viewership might improve with

Better thumbnails: generally good but some don’t look enticing or relevant (e.g., “Can I leave my estate to my pet?” could show an animal)
Start titles with the important information: move the less important like “Save your #@%* money” or “What the what?!?” to the end (e.g., “What the what?!? My husband drives like a…” is incomplete)

Case Study: Money Minute (undisclosed views)

Money Minute with Ashleigh Patterson has good content and lots of visuals. The title is odd since the videos tend to be 3-4 minutes long (a satisfying length). The thumbnails are nicely done.

The basic problem is that the videos aren’t on YouTube. That means you won’t find them with the #2 search engine and there’s a learning curve. For instance, I couldn’t figure out how to improve the playback quality or share a video with Buffer or Hootsuite (each video uses the same URL ca.finance.yahoo.com/video/money-minute). I couldn’t find a way to subscribe either.

Viewership might improve with

Hosting on YouTube: likely a nonstarter but who goes to Yahoo for video?
Transparency: Yahoo hides the number of views and even the publication dates

Case Study: Taxevity (737 views)

Our new Taxevity Insurance Advisory channel features in-person interviews over tea in my office. The last 15 videos got 737 views with less than 50 subscribers. The most popular title had 124 views. The lengths varied from 13:54 to 64:03 minutes. As much as 1,290 minutes of content was viewed on a single day.

The topics are diverse but all relate to money (especially the often overlooked aspect of investing in yourself). The guests are diverse and some wouldn’t be considered conventional money experts. That helps reach people who avoid financial education. The questions and flow are planned with the guest before recording. The thumbnails are going to be redone to include the interview title. Most of the marketing takes place on LinkedIn, the place you’ll find people with money. Canadians are big users --- #5 in the world.

You'll have your own approach.

Your Turn

If you create personal finance content, why not create three new videos? One isn’t enough because of the learning curve.

All you need is a webcam or smartphone, a free video editor and free natural daylight. You can upgrade later (e.g., our recommended gear on Amazon).

You might want to

talk directly to the camera: impromptu or with a script (which you can re-use in a blog post and the YouTube video description)
do interviews: in person or over Skype (Singularity 1 on 1 with Nikola Danaylov uses both) or a Hangout (the Because Money podcast with Jackson Middleton, Sandi Martin and Robb Engen)
get creative: say with a whiteboard, an animated whiteboard or a PowerPoint voiceover. Use your imagination (e.g., the funny series The Tax Man from Allan Madan).

Video has impact and is easy to share. Your tools include visuals, audio, text, music and movement. You don’t have to use them all. Maybe you’ll find that video is more enjoyable for you and more valuable for the vast audience waiting.

Links

PS Have you got a moment to subscribe to the Taxevity channel?

October 11, 2014

FIVE ESSENTIALS TO BETTER INVESTING (AND INSURING)

How can you lose by learning to invest better?

Steadyhand Investment Funds sells no-load low-fee mutual funds directly to investors.
They've prepared an easy-to-read report called Five Essential Elements To Being A Better Investor (PDF). The focus is on sound, timeless basics rather than trendy quick-fix tips.

You'll find interpretations at

My Own Advisor by Mark Seed
Retire Happy by Jim Yih
CPA Magazine (co-written by Steadyhand’s Tom Bradley)
The Globe and Mail (by Tom Bradley again)

Watch

You can also watch my chat with David Toyne, their Toronto-based Director of Business Development on Tea At Taxevity (interview #20).

An Extension

The steps to becoming a better investor also apply to becoming better insurance buyer. The following list shows the Steadyhand recommendation in bold and my interpretation for health or life insurance in italics.

Be realistic: risk happens even if you’re optimistic and we have a knack for worrying about the wrong risks
Have a long-term plan: prepare for your financial risks during your working years (disability), retirement years (longevity), throughout (morbidity, mortality) and at death (taxes!)
Commit to a routine: if your insurance gets cancelled because you missed premium payments (e.g., cheques bounced during a long vacation), you lose your protection.
Prepare for extremes: that’s precisely what insurance does by transferring unpredictable financial risks from you
Act as the CEO of your portfolio: be proactive to make sure you get the service for which you're paying. Without regular checkups, you risk having the wrong amounts of insurance and perhaps the wrong types of insurance.

The Steadyhand report is well-worth reading. You might even want to invest with them.

Links

PS Invest in yourself too. Keep developing marketable skills.

July 26, 2014

FINDING VALUE IN UNEXPECTED PLACES WITH JOE BARBIERI (@joetheinvestor)

Saving money is like making money but better: you’re keeping more of what’s already yours. Could value be lurking in places you aren’t looking?

Joe Barbieri, a true fee-only financial planner gives tips in the new series, Tea At Taxevity. The short conversation encompasses:

simplifying your finances
why people don’t already consolidate their accounts
the place for joint accounts
the risk of too few accounts
the time/money conundrum
finding the best choices
tax strategies
the right place to put investments
the ROI on learning
the risk of oversimplifying

The Interview

Here’s the quote from Albert Einstein:

“Everything should be made as simple as possible but no simpler.”

July 7, 2014

WHY DO YOU CARE WHAT YOUR INSURANCE ADVISOR GETS PAID?

Life insurance offers solid protection and powerful tax advantages when properly implemented. If buying puts you in a better position, why does the amount of money your advisor gets matter? Logically it shouldn’t. Emotionally, it does.

We Balk At The Unfair

We have an innate sense of fairness from birth. Give a child a cookie and they’re happy … until they see another kid got two.

Let’s say a stranger and you can share $10. The stranger decides on the split. If you’re not satisfied, both get nothing. If you were offered $1, you’re still ahead but would you let the stranger keep $9 (a 10/90 split)? Maybe you think a 50/50 split is fair but would accept 30/70. If you don’t get enough, maybe you’d cancel the arrangement leaving each with nothing. That’s what happens in the Ultimatum Game.

The Insurance Dilemma

Now suppose you don’t know how much money is available. You might might reject $7 if you think the stranger has more than $10 to share. Perhaps the stranger has $20 or even $100 to split.

With insurance, the products have margins built in. Advisors and buyers don’t know how much. Insurers decide on the split in value between the advisor and you. As the advisor gets more, you get less. Insurers who sell through independent advisors must pay compensation similar to their competitors. Otherwise, advisors are tempted to sell products from other companies (even if inferior).

You can’t tell if you’re getting an optimal deal since you don’t know what’s possible. There are different types of products (e.g., term, whole life or universal life), different companies varying in corporate governance and different ways to structure strategies. You only know what the advisor chooses to show you. You don’t know what factors influenced the selection.

Secrecy

If you paid your insurance advisor directly, you could compare what you’re spending with the value you’re getting. The industry fears you wouldn’t pay as much as advisors want. Their solution is to hide the compensation inside the products.

The lack of transparency has a side effect. You may think your advisor gets paid too much.

You probably don’t know what your peers earn and advisors don’t know what other advisors get paid. Compensation can vary by distribution channel (captive agents vs independent advisors vs national chains). While commissions are standardized within a channel, insurers pay varying bonuses (called “overrides”) to intermediaries called Managing General Agents (MGAs). In turn, these MGAs keep a small portion and pay the rest to the advisors contracted through them. Since top MGAs and top advisors get more, the rest get less. That seems fair — pay for performance.

Perceived Value

Becoming an insurance advisor requires little more than passing a multiple-choice exam. People who invested heavily in their careers — say by going to university, getting a professional designation or achieving financial success — may resent advisors making lots on a sale.

Sales success comes more from prospecting than technical skills.

Advisors who’ve been in business for 10+ years know how to sell. They look and act trustworthy. Appearances aren’t evidence of product knowledge or signs that you’ll get ongoing service. Advisors might keep selling what they’re used to selling rather than mastering better options.

When you have doubts about value and fairness, maybe you need more information?

Links

PS When you fill out an insurance application, your advisor finds out what you're paid and what you're worth.

June 15, 2014

READ THIS BEFORE GIVING REFERRALS TO AN INSURANCE ADVISOR

Insurance advisors love referrals but why would you bother giving them? They sell the same products from the same insurance companies at the same prices. What really sets an advisor apart?

The potential advisor must show they are significantly better or different to overcome the client's inertia. As with other consumer goods, packaging helps.

A common approach among insurance advisors is claiming to offer “exclusive” financial strategies. There’s a risk with financial innovation but there’s an allure too. The advisor might sell something different, but at least they got to meet the prospect. The “10-8” insured leveraging strategies were often used as door-openers, though the 2013 federal budget reduced their appeal.

Before giving a referral, consider these questions.

Do you understand the strategy?

If you can't explain it simply, you don't understand it well enough.
— Albert Einstein

Just because you don’t understand a magic trick like levitation doesn’t mean you can believe your eyes. Insurance strategies are designed to look appealing and plausible. Advisors are trained to look knowledgeable and sincere.

Results which look too-good-to-be-true, might be. Assumptions and interpretations affect the results in ways that may not be obvious.

What if the advisor is wrong?

You likely aren't an expert in what the advisor is selling. You might not be especially interested in the details. If the advisor is wrong, what's the worst that could happen?

You're a steward with an obligation to protect your connections. What happens to your relationships and credibility if you make a bad referral because you didn’t do enough checking?

What makes the new advisor a better choice?

Unless the new advisor seems better, why go through the hassle of switching? The new advisor might appear more innovative, more knowledgeable and better at providing ongoing service. That doesn't mean you get what you see. Advisors are trained at prospecting. The successful ones get very good at building rapport and getting business.

What makes the advisor a true expert?

The only source of knowledge is experience.
— Albert Einstein

Advisors get rewarded for selling. Success requires being good at that. Once they've found a prospect, they can bring in other people to help them. I was a resource for them when I worked for insurance companies.

It's unrealistic to expect an advisor to be an expert in the technical details, the substance. They are rewarded for creating the sizzle that marks the start of the sales process and the closing at the end. They get help in the middle.

Think of buying a car. You start with the salesperson, talk to a service advisor for maintenance, have the work done by a technician and pay the service reception desk. This division of roles is more efficient and provides you with better service.

To get more than sizzle. Who taught the advisor? Who supports the advisor?

Does the advisor claim to have unique strategies?

The secret to creativity is knowing how to hide your sources.
— Albert Einstein

If an advisor claims to have have something unique, you may not be getting the whole story. The only difference may be in the packaging. Ultimately, you get the same product from the same insurance company at their normal price.

When I was the product actuary at National Life, we created white label products like MD Life Plan (sold to doctors) and TD Universal Life (sold to bank clients). These products performed better than our normal products because the compensation was lower. Other advisors who sold our products were not pleased that we were helping their competition. Sales suffered. Lesson learned. Future white label products had our normal street pricing and differed only in packaging (e.g., exclusive investment choices in UL).

What are the potential side effects?

A fiduciary like a doctor, lawyer or accountant has a legal responsibility to tell you about side effects from a recommendation. Salespeople need not unless you ask.

For instance, when I got my first SUV, I wasn't told the tires only lasted 40,000 km and that replacements cost $500-$700 each! I wasn’t told how pricey the scheduled maintenance was either. Caveat emptor in action.

Who is the supporting the advisor working?

Advisors need help with complex strategies. Asking for help creates obligations to

sell higher compensation options to "feed" the extra mouths
sell products from a specific insurer if getting help from them
close sales to get the revenue

If an advisor claims to be working alone, be wary. That’s unlikely. Life insurance combines the specialized worlds of risk, accounting, investment and law. How well could one person know all of them?

How forthright is the advisor?

"It's the words that we don't say that scare me so."
— Elvis Costello, Accidents Will Happen

A forthright advisor tells you what you ought to know before you ask.

Have you been given adequate information about the advisor's hidden incentives (e.g., commissions, bonuses, conventions), the downsides, the reasonability of the assumptions used or the alternatives? You may have difficulty figuring out what's left out, which makes it tougher to ask the right questions and gauge the responses.

What does Google say?

Experts publish and get interviewed. Is the advisor an expert?

Do a web search for the advisor’s original content. In particular, look at their LinkedIn profiles. What have they published there? How recently? How many readers do they have?

Nothing stops advisors from creating and publishing quality content continually — except themselves. Their digital tapestry shows the past and may predict future performance.

Why does the advisor need your help?

If you bought what the advisor wants to sell to your connections, you have a reason to tell the ones who might benefit.

If you didn't buy, you don't have direct experience with the advisor’s full process. That’s a reason to be more cautious. The post-sale service might not meet your pre-sale expectations.

Who backs the promises?

Things can go wrong. What then? What is the advisor guaranteeing? The fineprint often tells you to get independent advice, which is a way to transfer responsibility from your advisor.

If you're using standard strategies backed by mega-insurance companies with solid corporate governance, they have incentives to fight on your behalf. For 10-8 insured leveraging, insurers fought all the way to the Supreme Court. If you're buying an “exclusive” for-your-eyes-only strategy, who can you count on?

What’s your reward?

Advisors might pay you a referral fee if a sale occurs. This is illegal in Ontario but still happens. If you're getting rewarded for giving referrals, your objectivity may suffer --- even if you think you're unbiased. It's tempting to believe what makes us money. It's not as if people are forced to work for tobacco companies or today's equivalents like processed foods.

Would you make a referral for free? If not, should you for money?

Links

PS Buyer beware. Referrer beware too.

March 30, 2014

WHEN CAN INSURERS CHARGE MORE FOR THE INSURANCE YOU ALREADY OWN?

Insurance companies make mistakes which cut into their profits. This is called underpricing and happens more often than you might expect. Sometimes assumptions prove wrong and other times matching the competition causes the trouble.

Can the insurer charge you more for the insurance you already bought?

When Prices Can Increase

Some products have premiums which adjust annually (usually upward). You’ve probably noticed that with your car insurance and home insurance. The premiums for employee benefits (e.g., hospitalization, prescriptions, dental care, disability) also change but you may not know. Since that’s one of the two types of insurance you can’t own, your employer can cut back on benefits to save money.

If you’re not happy with your insurer, you’re free to switch companies with no penalties and little effort. When prices go up, you can also reduce or cancel your coverage, which exposes you to more risk.

Where You Have More Protection

You face problems when you buy insurance with premiums based on your health. If your health deteriorates, switching to a new company will cost more — if you can even get coverage. Put differently, you’re stuck with your insurer. You have no recourse against their premium increases.

Guarantees reduce the insurer’s flexibility to make changes. Since you’re protected from surprises, you pay more. You also get much more. The level of guarantees depends on competition and regulation.

Example: Long-Term Care Insurance

Imagine buying a Lexus for $5,000 down plus $500 a month under a contract that allows the dealer to raise the monthly payment if he wants to. Six months in, it goes to $800, and you have a free choice between paying up or handing in the car and losing your down payment. That would be a ridiculous contract to sign. LTC [Long-Term Care insurance] buyers sign contracts like that.
— Forbes (Aug 2013)

Here’s a sad example from the world of Long-Term Care Insurance in the United States. By 2012, half the top 20 insurers stopped selling new policies (though you can likely keep coverage you already have). Premiums keep going up.

John Hancock is boosting premiums by an average of 40%. Some clients are paying much, much more. Would you believe 90%? That’s what a couple in their 60s faces as their annual premiums jump by $3,958.74 from $4,398.61 to $8,357.35.

"We bought these policies because this [long-term care] is the only insurance you really need. Long-term care will eat up all your assets. We were told when we first bought the policies that the rates could go up, but 90% seems outrageous." — John Holtzman, age 67

To offset the increases, this couple is planning to reduce their protection. That puts them at greater financial risk. Cancelling coverage would be worse.

What Went Wrong?

“… the industry over all made incorrect assumptions when it set premiums for older policies — particularly, those issued before 2002 — and didn’t set rates high enough. For instance, far fewer people than anticipated let their policies lapse. And interest rates in recent years have been much lower than expected, making it difficult for companies to earn adequate returns on invested premiums.” — Thomas J McIrney, Genworth CEO

Long-Term Care insurance usually pays a daily benefit if you’re unable to perform two or more activities of daily living such as bathing or eating. The money can go towards help at home or a nursing facility.

The Problems

Problems arises when

you think you have guarantees but don’t
you don’t explore the guarantees you have
you know premiums can increase but don’t examine the “worst case scenarios”

The best time to find out is when you have the most options: before you buy.

March 2, 2014

BUYING A CAR VS BUYING LIFE INSURANCE

You’re probably more familiar (and interested in) getting a car than getting life insurance. Let’s compare key elements of both decisions.

The Research

You’ll find lots of information when shopping for a vehicle. There are lots of reviews and comparisons online. You’ve seen the vehicles on the road. You can take test drives. You can visit more than one Toyota dealership and also try other brands.

Life insurance is very different. You’ll find very little information online. Where is the Build Your Own option to configure your insurance, estimate costs and compare companies? You won’t see what other people have and the products are complex. These factors nudge you towards advisors but do advisors help with your financial literacy?

Related: How would Mike Holmes fix the financial sector?

The Price

The price you pay for a vehicle depends on factors such as demand and your negotiation skills. There are often specials which expire at the end of the month. Repeat customers might get loyalty bonuses.

With life insurance, your premiums depend on you (age, health) and your advisor (skills, companies represented). You’re usually required to buy at list price, which means you don’t need to worry about negotiating. Choosing a different advisor won’t cut the price.

Depreciation

No matter how shiny or well-maintained, a vehicle drops in value. Resell the day after you buy and you’ll take a loss.

Life insurance becomes more valuable each passing day because the probability of a claim keeps increasing. Permanent insurance will pay a benefit one day. Temporary insurance may not for two reasons. We’ll use Term 10 as an example:

Premium increase sharply every 10 years when you renew coverage.
Coverage ends at an age like 75 before claims are most likely.

Maintenance

Vehicles have maintenance schedules you’re encouraged or forced to follow. You might get a gentle reminder each time you start your engine.

Don’t count on a prompt to update your life insurance, regardless of how long since your last inspection or how your life has changed. Advisors earn more from selling than servicing.

Surprises

The cost of repairing and maintaining a vehicle increases every year. You never know what surprise is lurking. The biggest risks lie outside the warranty period when you’re liable for the full cost and suffer the full inconvenience.

Life insurance requires some maintenance too. As long as you keep paying the premiums, you don’t need to worry about breakdowns. Your coverage may not remain suitable for your evolving needs. You’ll probably need help from a suitable advisor to explore your options.

Related: What happens if my life insurance company goes out of business?

The Nudge To Buy

There are lots of incentives to get another vehicle. The repair bills on the old one might start stacking up. Perhaps you visited an autoshow or saw an intriguing ad. Your lease might be ending. Maybe a friend or neighbor got new wheels.

There isn’t much pressure or motivation to buy insurance. These days, life changing events no longer trigger insurance purchases (e.g., marriage or the birth of a child). We have “tax season” and “RRSP season” but no “insurance season” (though the US has Life Insurance Awareness Month each September with celebrities like Boomer Esiason, the Cake Boss, Lamar Odom and Leslie Bibb). It’s easy to delay buying insurance.

Preowned

You might save money by getting a used vehicle. You save on depreciation but face higher maintenance costs and don’t know how long your ride will last.

You can’t buy used life insurance because the coverage is personalized to you. You can save money by getting coverage that’s temporary rather than permanent — like leasing instead of buying.

Reselling

You can sell your vehicle for cash. The value keeps going down with age and condition.

Permanent life insurance grows in value after purchase. You might be able to cancel your coverage and get some money back. If legal, you could sell your coverage to an investor (a “life settlement”), though it’s creepy to know the buyer gets a higher return the sooner you die.

Finding The Money

A vehicle is expensive. Where do you find the money? We’re good at getting what we want by distorting our spending. Perhaps more money for a car means less dining out or road trips instead of flights.

Life insurance gives you peace of mind but you can’t touch that. We don’t think anything will happen to us, which makes insurance premiums look like a waste.

Changing Your Mind

“Unlike most other contracts, vehicle purchases are binding once signed, and can only be cancelled under certain conditions.”
— Office of Consumer Affairs

Buying a vehicle gets emotional and the advisors have ways to add to the pressure. Once you sign the contract, try changing your mind. It doesn’t look like you can unless you got a lemon (which you won’t know until later).

Life insurance is different. You have a 10-day free look from the time you take delivery of the insurance contract. You can change your mind for any reason without penalty.

The Biggest Difference

For many, getting a new vehicle is exciting and even the search is enjoyable. New wheels might be a necessity. Heated seats, navigation and great sound aren’t but make driving more pleasurable.

Getting life insurance isn’t like that at all. The first challenge is finding an advisor who will help you and nudge you to take action.

Links

PS Do you have better insurance on your tires and rims than on your life?