Cash

February 20, 2017

Cash:

The public markets so far this year have been as kind to us, as this part of 2016 was unkind.  This doesn’t mean much though, as 2016 turned out to be a decent year in the public markets.

We like Mark Hulbert’s musings on the public financial markets, as he generally offers observations based on history and solid analysis, rather than attempting to divine what may happen next.  In late December, he wrote a column suggesting that we should lament the length of time it has taken the Dow to reach 20,000.

In the article, Hulbert offered that if the domestic stock market had risen at the same rate in the 21^st century as it had in the 20^th century, the DJIA would be above 24,000.  At some point of course, the DJIA will hit 100,000.  If the DJIA has an annualized return of 2%, Dow 100,000 shows up in 2098.  If on the other hand, the DJIA has an annualized return of 6%, Dow 100,000 shows up in 2044, less than 30 years from now.

You can find the entire article at http://www.marketwatch.com/story/why-dow-20k-is-the-mark-of-an-underachieving-market-2016-12-15.

In business news, Coke said its profit fell 55% as global sales volume dipped, and the company took charges related to exiting the manufacture and distribution of its drinks.  The company will redeploy proceeds into marketing.  According to CB Insights, VC firms put $3.1 billion into a record 279 cybersecurity startups in 2016, as security breaches continue to make the news and cause concern.

In economic news, the BLS issued its JOLT report, or Job Openings and Labor Turnover Survey.  It showed that as of the end of December, there were 5.5 million job openings in the U.S.  During December, 5 million people lost jobs, and 5.3 million found new jobs.  There are currently about 152 million non-farm private sector employees, meaning that there are 3.6 job openings for every 100 employees.

The employment challenges seem to have more to do with location, training, preparedness, and other factors, than anything else.  According to the BLS, continuing jobless claims are near 2 million.

The labor force participation rate, according to the BLS, stands at 62.9%, at or near the 63% mark where it has parked since October 2013.  The participation rate high point came in the late 90’s, peaking at 67.2%.  What’s remarkable though, is not the decline in the participation rate.  That’s a function of everything from the macro and micro economies to personal choice.

What’s remarkable is that while the population of the U.S. continues to grow, our economy continues to find jobs for people.  Some background.  In 1790, the U.S. population was 4 million.  It hit 50 million in 1880, 100 million about 1919, 150 million in the late ‘40’s, 200 million before 1970, and 300 million before 2005.  During this stretch of the last half of the 20^th century, we continued to put people to work.

What’s even more interesting is which companies have been doing the hiring.  More on this later, but it’s not the Fortune 1000.  It’s those privately held firms with fewer than 500 employees who have been doing the bulk of the hiring.

So what happens when doctors only take cash?  Art Villa, of Helena, Montana, found he needed a knee replacement.  The hospital near his home charged $40,000, not including the anesthesiologist, physical therapy, or the rehab stay. 

During his research, he found the Surgery Center of Oklahoma, founded by Keith Smith and Steve Lantier in Oklahoma City in 1997.  The entire facility is cash based.  It accepts no insurance or third party reimbursement from any vendor or provider of any kind.  Villa’s knee replacement was $19,000, which all-in price included airfare to Oklahoma City, physical therapy, meds, and other costs.

You can read the entire story at http://time.com/4649914/why-the-doctor-takes-only-cash/.

Health care in the U.S. appears to be the best in the world.  Health care financing however, is a bit messier.  Since there appears to be little clarity regarding health care financing, we expect all cash health care financing to continue to be a viable option for many.

Quote of the week:

“There is no illness that is not exacerbated by stress.”

                                                                                             Allan Lokos

                                                                                               

LIFE

Glad to be back with you.  It seems the first few weeks of the year have been full for us, though we are grateful for work to do.

Perhaps you’ve seen an advertisement for 26(f) investment programs.  We’ve had a few questions, so wanted to give a summary here.  26(f) pertains to U.S. Code 26 Subtitle F.  The programs themselves are nothing new, though the marketing title is a bit different.  Note that the 26(f) programs are life insurance.  Here’s some detail.

Picture credit: clipartbest.com

When you have a taxable investment account, and own Coke stock, you take the dividends as income, and pay tax on the capital gain if/when you sell the stock.  Nice and clean.

When you have a 401(k), IRA, etc., you make deposits, generally on a pre-tax basis, and all earnings/gain are tax-deferred until your age 70.5.  At that point, you are subject to RMDs, or required minimum distributions, which are taxable, and which are about 3.5% of total IRA balances the first year of the RMD, and increase on a % basis thereafter, as the distribution table is a life expectancy table.

When you have a Roth IRA/401(k), under current tax law, deposits are made after tax, and all earnings and distributions are tax free, given a nominal holding period.

When you put dollars into a permanent whole life insurance contract, those dollars are, in most cases, after tax dollars.  If you keep adding funds to the contract over many years, or if you make a lump sum deposit, or larger than required annual deposits, you can, in short order, build significant cash inside the life contract.  Taxation of life insurance is a bit unique.

With life insurance, during the accumulation phase, earnings inside the contract grow tax-deferred, similar to growth within your 401(k)/IRA.  Any time you want to take money from a life insurance contract, such distributions are treated as deposits first, earnings second, basically FIFO (First-In, First-Out) accounting.

However, it is possible for a policyholder to accumulate significantly more in cash value than they have in basis/deposits, especially if they load up the policy with deposits, or hold the contract for decades, or both.  In that case, the policyholder, if they want cash flow, can take distributions until basis is exhausted.  Thereafter, they can continue to take distributions, which will be taxed as ordinary income, or they can change the characteristics of the distribution to a loan from the policy.  If the policyholder takes cash flow in the form of a loan, it is not considered taxable income.

So, some in the life insurance community, knowing these characteristics, promote the use of permanent life insurance as an alternative form of retirement cash flow, which is one way to use permanent life insurance.  In years past, it was common to frontload a permanent life policy with cash, and use a nominal death benefit, in order to maximize cash accumulation, given the tax characteristics of life insurance. 

Picture Credit: money.cnn.com

Congress got involved, with TAMRA 1988, and under current law, tax characteristics of life insurance change if the contract is considered a Modified Endowment Contract, or MEC.  Though a complete discussion of MEC contracts is far beyond the scope of this commentary, the simple answer is that if a life insurance contract is considered a MEC, distributions are taxed on a LIFO (Last-In, First-Out) basis, instead of a FIFO basis. 

I personally have no issue with permanent life insurance and in fact, believe it can serve as a good planning tool as part of long term planning.  I have significant amounts of personal life insurance myself, with a company and an agent that I’m pleased to work with.  

Keep in mind that, if you use life insurance for long term retirement planning purposes, the contract will need to stay in force for life, or all earnings are taxable.  This decision, like all financial decisions, needs to be made taking into account all aspects of your financial life, and with the advice and input of experienced professionals.

What I have an issue with is that small percentage in the life insurance community developing marketing ideas and plans built on obfuscation, confusion, and misinformation, as a way to sell life insurance.  Most people need life insurance, and most need more than they have.  There should be no need to turn to fuzzy marketing to get the job done, including using 26(f) language as a way to create confusion.

Picture Credit: theamericancollege.edu

Solomon Huebner, of the Wharton School, was a leader in the development of economic theory around human life values, in the early part of the 20^th century.  He was also founder of the American College of Life Underwriters, now known as the American College, in Bryn Mawr, Pennsylvania.  The American College is one of the premier educational institutions for the professional in financial services.  I’ll wrap this week’s thoughts with one of his quotes.

“The basis of life insurance is the dollar value of human life-the factors of personal character, health, industry, education, training and experience, creative ability, and driving force and patience, to bring about a realization of what the mind creates.  Were it not for this value, there would be no property values.  The human life value is the cause rather than the effect, the permanent producer rather than the temporary product.”

                                                                                                                 Solomon Huebner