As I was painting, sanding, unpacking, and doing other tasks on the patio, the ever-present Colorado sun distracted me by waving a shadow of the flag over the patio.  I would stop work to see who or what—unnoticed except for the shadow—was annoyingly approaching me.
As the days went by, it dawned on me that I have lived my entire life in the protective shadow of the American flag…

• From birth, through WWII, Korea, the turmoil of the ’60s–the assassinations of John, Bobbie, and Martin–the financial and social trauma of the ’70s, Vietnam—during which I served behind a desk in Dayton, OH—the inflation ravaged Carter years, the rebirth of the American spirit during the Reagan Presidency, the extraordinary boom of the ’90s and the equally extraordinary financial failures of the 2k0s, the terror of 9/11, the historic election of a black American President in 2008, and the failure of that President to fulfill the promise his election held for America.
• During the thirty-seven years that I have been a licensed life insurance agent, The Shadow of the American Flag has also protected the thousands of insurance and financial advisory practices that ethically and honestly serve American families and small businesses.  (The financial services industry has brought both credit and discredit to the American entrepreneurial spirit.  It has produced some of the greatest models of American ingenuity and some of its most infamous frauds.  You can fill in the names.  Regardless, ethical advisors and their clients survive and thrive.)

Now, it’s time for insurance agents, financial advisors, and their clients to assure that the Shadow of the American Flag continues to protect every American’s personal finances in the decades to come.  It is not enough to make a living or make a killing in our business and for our clients.  Insurance and financial advisors and their clients are in a unique position to raise their voices and employ their resources to revitalize America and restore the promise of the American Flag—in whose shadow we and our clients have all lived, survived, and thrived.

We can only make this real by…

• becoming actively involved in the political process
• supporting candidates and issues that…
  • empower individual Americans and diminish the power of bureaucrats and politicians
  • reduce the intrusion into the lives of individuals and the workings of small business by government takeovers, over-regulation, healthcare that interferes with the doctor-patient relationship and imposes an impossible burden on small business, and special treatment for large financial institutions like Fannie Mae and Freddie Mac and their Wall Street cronies

Let’s get to work.

PS – If you are not an insurance agent or financial advisor, you are likely the client of one.  Join us and pass this on.  Ask your agent/advisor to join in the effort to restore America.

How That Theft Created and Burst the Real Estate Bubble

Preamble…

The ASSertion is (OOPS! Keyboard malfunction), “The conventional wisdom says the 1999-2006 residential real estate “bubble” in the U.S. and the subsequent collapse of global financial markets were caused by a failure of the free market.”

That raises the question, “What’s wrong with that assertion?”

That is, of course a loaded question.  The question assumes that something is wrong with the ‘assertion’ and invites only answers that agree with that conclusion.  However, since I believe the ‘assertion’ is invalid, a loaded question is OK with me.

The Basic Argument…

My unequivocal answer to the question is, “Individual liberties create and nurture free markets. Free markets are an outcome and cause nothing unless they have been manipulated to reduce or eliminate individual liberties.” – The Author

Free Markets emerge and prosper only when government, financial structures, and social institutions protect and preserve individual liberties.  A summary review of historical precedent – Mao’s China, Castro’s Cuba, or the USSR – and current events – Iran, North Korea, and countries in South America and Africa – confirm this statement.

A basic knowledge, understanding, and appreciation of the repression of individual liberties by the British, which gave birth to United States of America as an economic powerhouse, demonstrate clearly that individual liberties create and nurture free markets.

However, the practical answer to the question – “What caused the ‘bubble’ and the collapse?” – emerges when we look at the personal economies of Americans during the last thirty years.  My conviction is that the culprit in the collapse is the compromising of individual liberties by dysfunctional government, financial structures, and social institutions.

An Unconscious conspiracy…

Since 1974, there has been an unconscious conspiracy to limit the individual liberties of Americans.  Big government, big unions, big business – especially financial businesses, big non-governmental bureaucracies, and all of their minions – I call them Behemoths – knowingly and/or unknowingly embraced the aim of this unconscious conspiracy.

Some Behemoths, like the current administration in Washington, do so in the name of “change.”  Others like the US Congress, which falls short educationally and intellectually when it comes to economics and historical context, do so out of ignorance, greed for money and power, and their inability to comprehend basic economic principles and historic precedent – not to mention their lack of common sense.

What Benjamin Franklin wrote 250 years ago or so is still true today.  When you give up control of your money, “you give to another power over your liberty.”

All of the Behemoths in the unconscious conspiracy share a single aim.  They all want to gain control of the individual American citizen’s money – income, savings, home equity, legacy, etc.  The unprecedented success of this unconscious conspiracy reduced or, in some regards, eliminated individual liberties.  That’s what created the bubble and the collapse of 2006.

Success for Behemoths = Liberty Lost for Americans…

Unfortunately, the Behemoths have had and continue to have a great deal of success:

• The various government Behemoths have increased their take of Americans’ wages and savings through multiple levels of taxation…
• payroll withholding (city, county, state, federal)
• social security
• Medicare
• sales
• property
• gasoline
• tobacco
• alcohol
• telephone
• natural gas
• electric
• heating oil
• cell phones
• corporate taxes passed on to consumers
• and on, and on…

• Financial Behemoths – investment companies, mutual funds, retirement plans, stock insurance companies, banks – have tightened their grip on the money Americans rely on to deal with life’s surprisingly unsurprising surprises, their future income needs and their legacies.
• Mortgage lenders, credit card companies, big box stores’ charge cards, auto lenders, same-as-cash businesses such as furniture stores, cosmetic medical and dental practices, and other business that promote every conceivable credit opportunity have lured Americans into a financial swamp that restricts their liberty by relieving them of control of their money.

The Steady Erosion of Individual Liberty…

ERISA…

ERISA passed in 1974.  The Behemoths held ERISA out (among other things) as salvation for working Americans whose employers couldn’t or wouldn’t provide them with a pension plan.  ERISA intended – we were told – to give individuals control of their retirement destinies.

The effect of ERISA was, and remains, quite the opposite.  Financial Behemoths today control trillions of dollars that working Americans rely on for retirement income.  This is retirement income that Americans believe they will not have to work for and they cannot outlive.

When the markets in which those retirement funds are invested crash, the minions of the Behemoths exhort the Americans they have misled (they promise only that they promise nothing) to “stay the course” and leave their money under the control of the same folks who just decimated the retirees’ incomes.

The true outcome of ERISA is that the money that Americans give the Behemoths to put aside in IRAs, 401(k)s, and their equivalents is ending up in speculative securities that the Behemoths characterize as investments.

The entire retirement income scheme that ERISA established is like a casino that financial Behemoths – especially the IRS – own and operate.  The Behemoths are the house.  They always profit from the money that Americans gamble there.  Meanwhile, Americans are at the mercy of the gaming-table markets that hypothetically but unrealistically promise to deliver secure life-long income.

Worst of all, their future-income is at the mercy of the future-whims of the IRS.

The Coach – A.L. Williams

1977 introduced America to The Coach, A. L. Williams.  The Coach bears a distinct resemblance to Ali Hakim – the traveling salesman in Oklahoma! – who has the skill to convince even in the absence of evidence.

The Coach developed the idea that Americans should reallocate their money – real money that the individual American controlled – from whole life insurance contracts and other traditional savings vehicles

• and use some of it to buy expensive term life insurance (that pays high commissions)
• and use the rest of their money to buy mutual funds owned and operated by Behemoths (these also pay high commissions).

With all those commissions floating around and a sexy but entirely unproven idea, The Coach easily recruited sales reps.  However, most of his recruits only worked part time to supplement their full time employment, lacked significant financial or economic training and had little or no experience as advisors.  Like so many since, they believed they had found the holy grail of financial success.  They, like their master and mentor, believed (and still do to this day) that the flawed model The Coach developed would work in practice the way it appeared to work in theory.

Regardless of the credentials these advisors claim, the model didn’t, doesn’t, and won’t work. (If only Dave Ramsey and Suzie Orman would figure that out…)  The result is that millions, perhaps billions of American dollars drifted out of the secure savings programs, which individuals controlled and that offered – surprise – security, and into the accounts of Behemoths.

A. L. Williams’ business diminished the liberty of the American public accordingly.

When E. F. Hutton Speaks…

In 1979, E. F. Hutton introduced the insurance industry and the American public to another new and sexy approach to saving and insuring – universal life insurance.  Just imagine, you can deposit your insurance premiums in an insurance policy and hope to earn high returns on the portion of the premium that the insurance company doesn’t need to support the life insurance contract.  It’s The Coach’s “buy term and invest the difference” strategy repackaged.

Countless millions of American dollars flowed out of secure savings programs – whole life insurance policies in particular – and into universal life insurance policies. The results of this flawed model still plague America today.  Over the past three decades, universal life insurance has contributed to the de-mutualization of companies like Prudential, MetLife, Principal Financial Group, and John Hancock.  In addition, universal life was a major contributing factor in the failure in 1991 of Executive Life of California and of Mutual Benefit Life (the oldest insurer in America).

In the experiment that is universal life insurance, the money of American families “saved” in universal life policies simply disappeared into thin air when the policies did not fulfill their promises.

The loss of money means the loss of liberty.

Where the Transfer of Money Leads…

During the ‘70s and ‘80s, universal life insurance, A. L. Williams, and the Behemoth bandwagon-followers that adopted the product, the strategy, or both managed to suck a huge portion of the savings out of American pocketbooks.  When the savings ran out, the Behemoths discovered that they could convince Americans to sacrifice not only their savings but also their incomes.

They found two equally effective ways to do that.

First, the Behemoths convinced Americans that they could have everything they needed and anything they wanted as long as they had enough credit. They accomplished this with an onslaught of advertising and promotion for credit schemes ranging from simple credit card solicitations to inculcating the belief that lots of credit created superior credit ratings and that allowed for more credit, better ratings and a circular spiral into a dungeon of debt.

The Financial Behemoths also convinced Americans that the best place for their money was in investments and – worse – that giving the IRS control of the future value of those investments was an equally good idea.  Defined contribution retirement plans multiplied like fleas on a stray dog.

Liberty lost.

Then there was ’99 through ’06.

“Show Me the Money…”

Here comes the bubble.

The Disorganized Conspirator Behemoths had just about decimated the savings accounts of Americans.  They had encumbered American paychecks with debt payments and retirement plan contributions.  Where, the Behemoths wondered, would they find more money for their greedily bulging accounts?

Enter dozens of pseudo financial gurus with “just-like-the-wealthy-do-it ” schemes to transform American homeowners’ equity into money for the accounts of the Behemoths.

• Doug Andrews created the Missed Fortune Myth that relied on steadily increasing home values (OOPS!) and year upon year actual – not average – market returns of seven or eight percent in “investment grade” equity indexed universal life insurance policies (OOPS! Again.)
• Mortgage lenders like Money Tree and others encouraged homeowners to refinance in order to solve their money problems when they got “in debt up to [their] eyeballs”.
• Other mortgage hucksters promoted buying homes to “fix and flip” using the equity in a residence as seed money.
• The Federal government’s Fannie and Freddie, relying on deeply flawed conventional wisdom, burdened Americans with mortgages and payments on homes they couldn’t afford.  (I call this “idiot compassion” – a phrase adapted from Chogyam Trungpa Rinpoche.)
• And, the list goes on…even today VP Joe is telling us “Now, people when I say that look at me and say, ‘What are you talking about, Joe? You’re telling me we have to go spend money to keep from going bankrupt?’” Biden said, “The answer is yes, that’s what I’m telling you.”

What makes it worse, the Behemoths themselves believed their gospel.  They bundled and traded 125% debt to equity loans as if they were gold.  They built and fortified their Jericho but to no avail.  “The walls came tumbling down.”

“And the Beat Goes On…”

Free markets did not fail.  The failure lies with the Behemoths that are supposed to protect the liberties of individual citizens and the free markets that arise from those liberties.  The failure manifests the deceptive, subtle, and persistent erosion of those individual liberties by the Behemoths for their own gain but in the name of free markets.  Today, the Behemoth of Behemoths, the Federal Government, is openly promoting the transfer, reduction, and elimination of individual rights in the name of bailouts, health care, ecology, union jobs, and saving GM.

The bubble that burst in 2006 has allowed a much more pernicious cancer on free markets than the Unconscious Conspiracy that initially caused the failure.

“Without individual liberties, there are no free markets.  Period.” – The Author

How Dinosaurs Were Made Extinct
by Paul A. Cantor on August 26, 2011

Benjamin Franklin and Jonathan Swift were both masters of satire.  Paul A. Cantor rivals their clever insights in the article linked above.  Paul is the Clifton Waller Barrett Professor of English at the University of Virginia. He is the coauthor, with Stephen Cox, of Literature and the Economics of Liberty. See his interview in the Austrian Economics Newsletter.

Paul writes–in part…

…these theories conveniently conjure up various subjects of left-wing paranoia — the grand antithetical fears of global warming and nuclear winter — and they all insidiously suggest remarkable new roles for the federal government, like protecting us from comets and other objects from outer space.

Are even the dinosaurs lining up against the cause of the free market these days? Well I for one, as a student of Austrian economics, have a more plausible explanation: the extinction of the dinosaurs must have been the result of government intervention in the marketplace. Though my speculations have met with some skepticism from the paleontological establishment, I am finally prepared to go public with my findings after a visit to Montana this past summer which allowed me to examine the fossil record firsthand and to reconstruct the true story of the rise and fall of the dinosaurs.

You may be laughing or crying after reading this article depending on your outlook. If you understand basic Austrian economics you may be laughing and crying at the same time.

Keynesian VS Austrian Economics

Keynesian economists of today–perhaps contravening the tenets and intent of Keynes himself–believe that the state should control the economy and manage wealth.  Austrians conversely believe that free enterprise should control the

Jeffrey Reeves MA

Gift Tax Sale…

Gifting has always been a very effective estate planning tool. Not only does a completed gift generally remove the gifted asset from the donor’s estate, it also removes any future appreciation from the estate and may offer income-shifting advantages.

Important changes for 2011 and 2012:

• The lifetime gift tax/estate tax exclusion is increased to $5 million per person ($10 million per couple) with a top tax rate of 35 percent. This increase is unprecedented and creates a rare opportunity for large gift-tax-free wealth transfers.
• The generation-skipping transfer-tax exemption is increased to $5 million.
• The gift and estate tax is reunified. Simply put, to the extent the exclusion is used for gifts during the donor’s lifetime, it is unavailable for bequests upon death.
• Beginning in 2012: The exclusion amount is subject to indexing
• As the law stands today, these limits will be reduced beginning in 2013

Rare Opportunity to Transfer Wealth!

A case study…

• Ron and his wife are both in their middle-50s and have one son. Their net worth is over $8 million. Ron wants to provide a safety net for his wife and leave a legacy for their son and any future grandchildren, all the while minimizing transfer taxes.
• Ron establishes an irrevocable life insurance trust (ILIT), with spousal lifetime access provisions to the cash value. He gifts $1 million to the ILIT, using a portion of his lifetime gift tax exclusion and generation skipping transfer tax exemption.
• The trustee then uses the $1 million to purchase a 10-year certain immediate annuity. The annual after-tax guaranteed income payment is slightly more than $103,000.
• The trustee then uses $102,000 of the annual payment to purchase a universal life policy with a death benefit of approximately $4,400,000.
• Upon Ron’s death, the proceeds of the life insurance policy are to be held by the trustee, with income to be paid to his wife for life.
• Upon her death, income is to be paid to his son for life, and then to his son’s children for life, etc.
• The funds in the trust will escape estate taxation at each death.
• Also, any transfers out of the trust to skip persons (generally persons two or more generations younger than the grantor) will be exempt from any generation skipping taxes.

Discussion…

Gifts may be transferred outright or in trust. An outright gift gives the donee unrestricted control of the property. This may not be suitable if the donee is a minor or a spendthrift. Gifts in trust offer the donor the ability to control the distribution of income and principal, while providing asset management and creditor protection for the trust’s beneficiaries.

Properly structured gifts of life insurance policies and/or premiums offer the donor the ability to leverage the value of the gift by removing the death proceeds from the donor’s estate.

The unlimited marital deduction for gifts and bequests to spouses remains unchanged, as does the annual gift tax exclusion permitting donors to give up to $13,000 ($26,000 for a married couple) worth of gifts to any number of persons each year without incurring a gift tax.

The annual gift-tax exclusion amount is indexed for inflation and is available for certain present-interest gifts to trusts requiring the use of a special notice each time a gift is made to the trust. However, use of the gift tax lifetime exclusion, instead of using the annual gift tax exclusion, means no special notices are required.

Gifting strategies for 2011 and 2012…

Using a cash value life insurance policy to fund the trust provides flexibility in uncertain economic times and amid changing tax laws. Flexibility in drafting trust documents, such as spousal lifetime access or trust protector provisions, can also be beneficial. Taking advantage of the two-year gift tax sale by making gifts in 2011 and 2012 up to the maximum amount of your available gift tax exclusion may result in your heirs receiving significantly more wealth.

by Jeffrey Reeves MA, EUREKONOMIST™

In January of 2008 and again in March of 2009 I posted the following warning.  I didn’t emphasize that the safest place for your lifeboat money is in participating whole life insurance policies from mutual insurance companies.  As you read this reminder, be aware that participating whole life insurance policies continue to deliver guaranteed cash value increases and non-guaranteed dividends as promised and that no American is losing a single penny in their whole life insurance accounts.

A Titanic Failure

In January, 2008 I wrote an entry in my blog about the failure of the White Star Line to add enough lifeboats to the Titanic because they believed it unsinkable.  It’s worth re-reading today as the Titanic of the US economy is compromised by the arrogance and greed of the financial Behemoths and the gluttonous appetite for power by the Dolts in DC – the US Congress, the US Presidents of the past 16 years and the misguided ambition of the current US President for a “change” to the unknown…at least to you and me it’s unknown.

America’s Problem Is A Problem for Americans

The problem for the typical American is the possible failure of the good ship Economy – especially the financial structure that supports it.  The media is not trumpeting the nature and outcome of such a failure, nor is the faltering financial community keeping us honestly informed.  Instead they feed us the pabulum advice…

• • stay the course,
  • don’t make decisions now,
  • wait for the market to settle,
  • buy now when the market is down so you can capture the gain on the upswing
  • and on, and on, and on…

BUNK, BUNK, BUNK, BUNK, AND MORE BUNK!

You were told the same thing when the market was at 12,000, 11,000, 10,000, 9,000, 8,000, and today.  That advice has created immense losses for Americans – TRILLIONS OF DOLLARS OF LOSSES.

Then There’s Common Sense

What if, on the other hand, you had done what common sense, and a few advisors that are not controlled by the Behemoths, recommended as early as July of 2007?  What if you had moved your money into a lifeboat when all the signs pointed at the sinking of the good ship Economy?  You would have lost nothing.

Of course, if the market had surged at that time you might be disappointed that you didn’t hang on for the gain.  However, that is like folding a losing Texas Hold’em blind only to discover that the next three cards would have made it a winner.

An Example

In the current situation, had you opted to move your money from “the market” to the lifeboat of a credit union, money market account, CDs, whole life insurance [my choice], or any other financial product with guarantees, you would not have lost a penny – not one single penny – and would have earned fair market interest rates the entire time.  Want proof?

$100,000.00 left in the “market” in July of 2007 is worth less than $50,000.00 today.

$100,000.00 moved into a lifeboat in July of 2007 at 3% is worth over $105,000.00 today.

That difference of over $55,000.00.  3% doesn’t look so bad from this perspective.

Nobody Told Me

The advice of the Behemoths and their Minions aims to bolster the balance sheets and income statements of–believe it–the Behemoths and their Minions, not yours.  Their advice aims to keep their ship afloat at your expense.  It is bad advice for you and me and for 99.9% of Americans.

Hell, Warren Buffett – America’s iconic investment guru – lost money last year.  So did T. Boone Pickens and many other notable investors.  The Wonks on Wall Street [I now call it Dull Street] – the same folks the Behemoths quote to entice you to “invest” [aka gamble] with them - have failed across the board.

It Gets Worse

The Dolts in DC have spent over a trillion dollars in a disorganized and undisciplined attempt to right the good ship Economy.  They have committed almost two trillion dollars more of our money since.  They have failed so far.  We all want success in this regard.  However, the plenitude of pork that permeates the spending plans of these programs indicates discomfort for “We the People” and contentment for the cronies of the Dolts in DC.

Take Refuge

If you haven’t taken refuge in a lifeboat yet, it’s time.  If the market grows dramatically and rapidly you may miss a part of the upsurge.  That’s very unlikely.  If there’s hope to repair the massive breach in the hull of the good ship Economy, it will likely have to be put in dry-dock for a period of time.  In the short-term it is better to have a small guaranteed gain than the possibility of no gain or significant losses.  For all practical purposes there is no long-term until the good ship Economy returns to full functioning capability.

“Relying on the long run for investment decisions is essentially relying on trend lines. But how certain can we be that trends are destiny? Trends bend. Trends break. Today, in fact, we have no idea where any trend lines might begin or end, or even whether any trend lines still exist.”

Posted Feb 27 2009, 10:16 PM
by John Mauldin
Investors Insight

If your advisor continues to encourage you to keep bailing while the ship is sinking and sturdy lifeboats are waiting, fire him or her.  S/he is obviously not looking out for you.

Common Sense – Again

The common sense approach to creating wealth and managing your personal economy does not depend on the success or failure of other people and self-serving financial institutions.  It relies on you and other like-minded Americans taking control of the money that flows into your life to assure your success, not the success of some Behemoth, banker or politician.

by Jeffrey Reeves, MA, EUREKONOMIST

“The significant problems we have cannot be solved at the same level of thinking with which we created them.”Albert Einstein

The 50 page leather bound personal finance plan that you receive from the well known company with the large advertising budget is at best a snapshot of a fantasy. It is out of date when you receive it and out of touch with the reality of your life’s daily challenges.

Financial Plans want for wisdom.

Think about it. Do you rush to the bookshelf to pull out your neatly bound financial plan when an opportunity presents itself or your family faces a crisis and you need to put your hands on easily accessible money?

Ask yourself how you’d feel if, instead of fantasies in a binder,

3 You were free from debt-to-others;

3 You had an income you didn’t have to work for but you couldn’t outlive;

3 You had ready money to take care of yourself and your family when some planned or unplanned life event required it – job loss, college for the kids, illness or disability, a long awaited second honeymoon, long term nursing home expense;

3 You had a secure legacy of your wisdom and your wealth that you could pay forward as a legacy – on your terms – to those you care about.

Who’s In Control?

These are the Four Pillars that are the framework of all stable personal financial  plans and they rest on a foundation of money that you – and you alone – control.

The question arises: Where can you deposit your money and be guaranteed that:

• it will grow every year,
• will convert to a secure income in the future,
• will allow ready access without hassles, applications, or proving your worth,
• assure your family that they will be OK no matter what happens to the greater economy?

Where?  Participating whole life insurance from a mutual insurance company. Lay this foundation, erect this framework, and guarantee yourself peace of mind about money… and about life.

by Jeffrey Reeves MA, EUREKONOMIST™

How many times have you heard someone say, “Let’s buy it! It’s only fifty bucks. We’ll save twenty-five dollars!”

Good Grief! There is no “only” when you are dealing with your personal finances. The automobile salesperson might want you to believe that the car you are considering is only $15,000 and, since the sticker price is $20,000, you are saving $5,000.

Savings are only savings when you put them into an account that you control.

If, instead of spending it, you put your $15,000 in your family bank–regardless of the form that bank takes–it would compound to nearly $65,000.00 in 30 years at 5%.   If you add the $5,000 you saved, you’d have improved your family finances by almost $90,000 from a single decision to not save-by-buying.

Americans make those kinds of savings decisions frequently but on a smaller scale – say $50 twelve times a year. Compound those dollars over 30 years and your family finances will be a lot closer to fifty grand than fifty bucks.

Every penny counts.

“Only” fifty bucks?  It’s self-deception. The old adage “every penny counts” is still in common use because it’s true.

We all tend to convince ourselves that our buying decisions are wise regardless of the reality those decisions impose on us when it comes to our family finances.  It’s one of the oldest tricks in the world to tell ourselves “It’s only…”.

The next time you think you are saving money by buying a product on sale, ask yourself if the product you are buying and the amount you are “saving” is really worth it.  (Often it will be.  Americans have the most enviable lifestyle in the world and EUREKONOMICS™ does not espouse a life of deprivation.)

EUREKONOMICS™

EUREKONOMICS™ espouses the economic principles and financial practices that the Founders and Builders of America  paid forward to us.  These principles and practices have been twisted and manipulated by the Behemoths–big government, unions, banks, investment firms, etc.–to serve their aims and not those of the American people.

Remember – only money is money. For everything else–your 401(k), IRA, mutual funds, investments, and so on–you have to spend your money, and worse, relinquish control of your family finances to strangers.

When you’re closer to pushing up daises than doing fifty push-ups, having cash and income instead of the stuff you bought will be a blessing. Tennessee Williams expressed it best over half a century ago:

“You can be young without money but you can’t be old without it.”

PS – There is one purchase that Americans can make to assure…

• the safety of their family finances
• tax-free growth every year
• they never incur a loss
• their cash is accessible at all times without penalties or restriction:

participating whole life insurance from a mutual company.

By Jeffrey Reeves MA, EUREKONOMIST™

We Resolve

We resolve to strengthen the foundation of our financial management plan and of the Four Pillars that support our – and every – successful personal economy.

1. We resolve to continue to eliminate all debt-to-others from our personal economy. That means getting rid of our last debt-to-others, the mortgage. We may not get it done this year but we’ll make progress.
2. We resolve to continue to convert assets into income that we do not have to  work for and we cannot outlive.  Every year we add substantial amounts of money to our private pension funded by participating whole life insurance polices, which are not controlled by any company and is not “tax qualified.”
3. We resolve to add more money to our whole life insurance “banks”so that any unplanned money needs – a new car, a new roof, medical expense, etc. – can be met without invading our income or our income producing assets. We hope to increase the available money in these “banks” by at least 20% each year.
4. We resolve to continue building a legacy of both money and wisdom to pass on to our children, their children and their children’s children by creating whole life insurance “banks” for each of them as we are able and by teaching them how EUREKONOMICS™ serves them today and into the future.

Aggressive But Realistic Goals

These may seem to be  aggressive goals. They are. They are not, however, unrealistic or punitive. We will not give up any lifestyle gains we made in prior years and we expect to continue to improve our lifestyle. Every American can benefit from EUREKONOMICS™. Get the whole story here…

By Jeffrey Reeves MA, EUREKONOMIST™

A client recently sent me a copy of an email received from an insurance agent promoting whole life insurance policies from a specific life insurance company.  The primary goal of the original email seemed to be to demonstrate that one form of dividend calculation on whole life insurance policies is better than another.

The email from the agent was inaccurate and therefore misleading. I have no doubt the agent was convinced that the information in the email was correct or that s/he was operating in good faith.  However, my client asked me to confirm or deny the claims in the email and I felt compelled to clarify the inaccuracies as much as possible.

The exercise of clarifying the issues raised in the email are meaningful so I am repeating my response here and expanding on it as needed.

The original email content is in standard type. My responses are indented, bold, in italics, and preceded by my initials in brackets thus [JR].

Two Types of Mutual Insurance Companies…

There are two types of Mutual Insur­ance com­pa­nies . They are called direct recog­ni­tion and non-direct recog­ni­tion. I have poli­cies in both these types of companies.

[JR] Actually there are direct recognition mutual companies and mutual holding companies and non-direct recognition mutual companies and mutual holding companies.

If a company is structured as a mutual company or a mutual holding company is as significant as whether it pays dividends on a direct recognition or non-direct recognition basis.

Direct Recognition VS Indirect Recognition

Non-Direct Recognition…

Non-Direct means the pol­icy owner receives the same div­i­dend rate no mat­ter how many dol­lars he has bor­rowed from the insur­ance com­pany using his death ben­e­fit as col­lat­eral.

[JR] Well, that’s not exactly correct. Actually, the policy’s cash value is the primary collateral used when a policy loan option is exercised by a policy owner.  One cannot borrow more than a whole life policy’s currently unencumbered cash value.

Death benefit only comes into play in the event of death.

So you may have bor­rowed $10,000 whereas another pol­icy owner bor­rowed $100,000 but you both earn the same div­i­dend rate.

[JR] The statement is true as far as it goes.  However, it ignores the fact that the policy owner that borrowed $100,000 would pay a lot more interest to the insurer than the policy owner that borrowed only $10,000.

In both cases, the interest paid by the policy owners–one to a greater extent than the other–would add to the surplus of the insurer; and the company pays dividends from its’ surplus is where dividends come from

Or you may not have bor­rowed any­thing but you would still earn the same div­i­dend as some­one else who has bor­rowed and is using that bor­rowed money to earn even more profit some­where else.

[JR] The unasked question is, “Why is that a bad deal for anyone?”  Some indirect recognition companies have followed this pattern for over a century.

(As an aside, what the devil difference does it make what the policy owner is doing with the money s/he borrowed from the policy that s/he owns?  Sorta sounding like a Robin Hood argument.)

Direct Recognition…

Direct means the com­pany deter­mines the div­i­dend rate accord­ing to pol­icy hold­ers fair share

[JR] This statement is irresponsible. It assumes the indirect companies dividend paying practices are unfair to their policy owners.

Should indirect recognition companies like Mass Mutual  be ashamed after over 100 uninterrupted years paying top dividends? How unfair!

accord­ing to how many dol­lars he has bor­rowed from the insur­ance company’s gen­eral fund using his death ben­e­fit as col­lat­eral.

[JR] There you go again Mr/Ms Agent…it’s cash value not death benefit that is the primary collateral used to back a policy loan.

The higher the amount of dol­lars on loan to you does mean you will receive a lower div­i­dend rate.

[JR] Ah! A moment of clarity. It’s true. Direct recognition companies apply a lower dividend rate to those policies that have loans outstanding.

The obvious conclusion according to this agent is that a policy owner that plans to exercise the right to take policy loans granted by his or her policy–a binding contract–an indirect recognition company may not be the best option.

Now, why does this mat­ter? Well, it doesn’t really mat­ter a whole lot

[JR] Another brief moment of clarity.  Often the difference between the performance of non-direct recognition policies and direct recognition policies is not significant enough to make it a deciding factor on a buying decision.

But…if it doesn’t matter, why the epistle?

but some insur­ance agents use the fact that a com­pany is a non-direct com­pany as a sell­ing point when try­ing to sell some­one a pol­icy.

[JR] OK…now i know why. Mr/MS Agent in this epistle uses the direct recognition dividend practices to promote the sale of policies for their direct recognition companies.

The Banking Concept

But it is good to under­stand that an insur­ance com­pany makes money using the veloc­ity of cash flow,

[JR] If a policy owner-borrower is being what R. Nelson Nash, formulator of the Infinite Banking Concept™, calls “an honest banker,” the insurer has very good cash flow.

If the policy owner fails to repay the loan and the interest, the insurer uses the policy’s cash value, which was used as collateral, to repay the interest and protect the other policy owners/borrowers. If the policy cash value is all used to pay premiums and/or interest, the policy lapses.

just like a bank does.

[JR] Insurance companies, like banks, use the money that policy owners pay in premiums and interest to make loans and enter safe and conservative joint ventures. That much is accurate.

However, insurance companies do not act “just like banks.”  Banks work for shareholders not depositors.  Mutual insurance companies and a holding company’s mutual insurance company work exclusively for the benefit of policy owners.

If you have your money sit­ting in a 5 or 10 year CD at the bank, the bank knows that it has a set amount of money that it can lend over and over and over again dur­ing that set period of time. An insur­ance com­pany does the same thing

[JR] Banks operate on a completely different set of principles and rules than insurance companies.  Insurers do not do “exactly” the same thing.

Banks operate on money that they derive from depositors . In addition, they have access to a form of  ”matching funds” from the Federal Reserve Bank.  Therefore, the banks can actually lend up to ten time the amount of money they have received from depositors!

Insurance companies limit themselves to using only the money they have on hand.

The Velocity of Money – Sorta…

You pay your pre­mium and it can lend an amount of money over and over and over again for a life­time. How­ever, if YOU bor­row money from your life insur­ance com­pany, now they can no longer veloc­i­t­ize that money.

[JR] An insurance company can only lend up to the limit of its cash available excluding reserves.  Insurance companies cannot leverage FED funds to increase the amount they can lend. That’s not at all the same as a bank.

In fact, if the insurer lends money to Home Depot they cannot “velocitize” (not a recognized word in any dictionary) the money either, nor can they leverage through fractional banking like a commercial bank.

Instead, you are now in con­trol to veloc­i­t­ize your own money.

[JR] The insurance company is in fact “velocitizing” the money by charging the policy owner a competitive interest rate and—again—by contract, the policy owner is always in control of the cash value in a whole life insurance policy.

Moreover, because a whole life policy is a contract with borrowing provisions decided by the insurer, the burden is contractually on the insurer to make sure it makes money for all of its policy owners and not one more than others—and that’s true for both direct and indirect recognition companies.

The Attempted Deception Falls apart

How­ever, one must con­sider this fact. How long will an insur­ance com­pany be able to stay in busi­ness if a large por­tion of their pol­icy own­ers are receiv­ing an unfair share of the prof­its?

[JR] Hmmm – how is it possible for a policy owner to receive an “unfair share of the profits” by being charged a fair interest rate under contract terms determined by the insurer.  Robin Hood again?

Again, does that put Mass Mutual—100+ years old—and never missing a dividend at more risk than a direct recognition company like Northwestern Mutual—also over a century old with a great dividend record?

Who actu­ally owns the insur­ance com­pany again? The pol­icy own­ers. That would be YOU.

[JR] This is accurate when description of mutual companies. Although mutual holding companies “operate” as mutuals, the holding company–not just policy owners–holds significant interests in the mutual insurance company.

That is not an indictment of the mutual holding companies. It’s merely an attempt to bring clarity where none exists.

Some of the non-direct recog­ni­tion com­pa­nies restrict the num­ber of loans, or the amount one can take as a loan or the num­ber of poli­cies one can own etc.

[JR] I’ve not experienced that in 40 years of dealing with a wide variety of insurance companies of both types except when the insurance company was in receivership–and that happened only twice that I know of.

(Tell me who you are talking about so I can avoid them.)

Do you want to have a pol­icy that restricts your cap­i­tal avail­abil­ity?

[JR] This is a cheap shot and poor salesmanship.  I know of no direct or non-direct company that issues a contract that says the owner of a whole life policy cannot access to all of their cash value on demand.

Some non-direct recog­ni­tion com­pa­nies fire the agents that tell their clients about bank­ing

[JR] This too is uncalled for. If an insurance company were to take this action, it would be grounds for a significant law suit by both the agents and the insureds. The insurer cannot deny rights granted by the insurer in a recognized contract.

and also some have been bought by stock com­pa­nies and are in the process of con­vert­ing from mutual to stock because too many of their cus­tomers were bor­row­ing from their poli­cies.

[JR] I’d like to know the names of those companies so I can confirm the claim, avoid doing business with them, and make sure the agents and advisors I deal with all across the US know about it.

The com­pany I rec­om­mend is a direct recog­ni­tion company.

[JR] Well – who woulda guessed!  This agent is surely operating in good faith, but is in dire need of information, knowledge, and wisdom.

by Jeffrey Reeves MA, EUREKONOMIST™