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From: [email protected] (Christopher Lott)
Newsgroups: misc.invest.misc,misc.invest.stocks,misc.invest.technical,misc.invest.options,misc.answers,news.answers
Subject: The Investment FAQ (part 7 of 19)
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Reply-To: lott at invest-faq dot com
Summary: Answers to frequently asked questions about investments.
Should be read by anyone who wishes to post to misc.invest.*
Organization: The Investment FAQ publicity department
Keywords: invest, finance, stock, bond, fund, broker, exchange, money, FAQ
URL: http://invest-faq.com/
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Archive-name: investment-faq/general/part7
Version: $Id: part07,v 1.58 2002/08/14 10:20:04 lott Exp lott $
Compiler: Christopher Lott, lott at invest-faq dot com

The Investment FAQ is a collection of frequently asked questions and
answers about investments and personal finance. This is a plain-text
version of The Investment FAQ, part 7 of 19. The web site
always has the latest version, including in-line links. Please browse
http://invest-faq.com/

Terms of Use

The following terms and conditions apply to the plain-text version of
The Investment FAQ that is posted regularly to various newsgroups.
Different terms and conditions apply to documents on The Investment
FAQ web site.

The Investment FAQ is copyright 2001 by Christopher Lott, and is
protected by copyright as a collective work and/or compilation,
pursuant to U.S. copyright laws, international conventions, and other
copyright laws. The contents of The Investment FAQ are intended for
personal use, not for sale or other commercial redistribution.
The plain-text version of The Investment FAQ may be copied, stored,
made available on web sites, or distributed on electronic media
provided the following conditions are met:
+ The URL of The Investment FAQ home page is displayed prominently.
+ No fees or compensation are charged for this information,
excluding charges for the media used to distribute it.
+ No advertisements appear on the same web page as this material.
+ Proper attribution is given to the authors of individual articles.
+ This copyright notice is included intact.

Disclaimers

Neither the compiler of nor contributors to The Investment FAQ make
any express or implied warranties (including, without limitation, any
warranty of merchantability or fitness for a particular purpose or
use) regarding the information supplied. The Investment FAQ is
provided to the user "as is". Neither the compiler nor contributors
warrant that The Investment FAQ will be error free. Neither the
compiler nor contributors will be liable to any user or anyone else
for any inaccuracy, error or omission, regardless of cause, in The
Investment FAQ or for any damages (whether direct or indirect,
consequential, punitive or exemplary) resulting therefrom.

Rules, regulations, laws, conditions, rates, and such information
discussed in this FAQ all change quite rapidly. Information given
here was current at the time of writing but is almost guaranteed to be
out of date by the time you read it. Mention of a product does not
constitute an endorsement. Answers to questions sometimes rely on
information given in other answers. Readers outside the USA can reach
US-800 telephone numbers, for a charge, using a service such as MCI's
Call USA. All prices are listed in US dollars unless otherwise
specified.

Please send comments and new submissions to the compiler.

--------------------Check http://invest-faq.com/ for updates------------------

Subject: Information Sources - Conference Calls

Last-Revised: 29 May 1999
Contributed-By: John Schott (jschott at voicenet.com)

Companies listed on the various stock exchanges have long held analyst
conferences to spread their message to the investment community. Often,
sponsors such as Hambrecht and Quist have held conferences where
investment professionals could hear many firms in several days. To
accomodate those who couldn�t travel, the conference call allowed
hundreds of analysts to hear a presentation and ask questions in real
time. But access was usually restricted to investment professionals and
often involved long-distance toll charges. Occasionally a friendly
broker would loan you his access codes, some of which found their way to
the Internet. As a result, conferences could be swamped.

The Internet now provides a much more practical venue for the conference
call. With its low cost and ability to accomodate many listeners it is
now practical to open a conference call to almost anyone (at least to
listen). Many firms now do. For example, a recent article in the Wall
Street Journal related how IOMEGA does this as an efficient way to
control the irresponsible babble on Internet bulletin boards. People
posting idle chatter now attract accurate responces from others who have
heard the actual story on a conference call. As a result, the
irresponsible postings are controlled.

Naturally, investment professionals complain that this allows the novice
to access raw information that needs interpretation by someone more
knowledgable - namely such a professional. However, companies like the
ability to make one public statement, and then be free from goverment
limitations on how investment information must be released. And
individual investors like it too, as access to this information gets
them access to information that once only slowly reached the average
investor. Even Chairman Levitt of the SEC sides with the theory of
greater access for the masses. According to an article in the 24 May
1999 issue of the Wall Street Journal, the NASDAQ has even funded a
pilot program to pay for public access to conference calls. Firms such
as DELL and Cosco are early participants .

Using the Internet has many advantages besides the instantaneous
international release that results. It is possible to save the audio
files so that the call can be accessed later at a more convenient time.
Plus it would be possible to edit out meaningless portions to provide
sort of a "Cliff Notes" of each conference. Naturally, there are some
limitations. If everyone could ask a question, real brawls could result
as the conferences became uncontrolled. So most Internet systems limit
who can ask a question.

An outstanding advantage for the average investor is to witness directly
a firm's management in action. While the information might be the same,
an investor gains confidence in management that presents a virtuoso
performane over one that is defensive, hesitant, and obfuscative. The
details aside, the speed of responce and other items that don�t get
incorporated in an analyst's report can add a lot to one's
understanding. Previously, a small investor's only such access might
have been at a company's annual meeting.

Several firms have opened to provide investment-related conference-call
services in one form or another over the Internet. Some require
membership and user fees, but the trend seems to be toward company
funding of the low cost service, and free or very low cost access by the
public. According to the WSJ article mentioned above, firms now
providing some for of access include: Vcall (Philadelphia),
broadcast.com (Dallas), c-call.com (Street Fusion, (San Fransisco), and
CCBN.com (Boston). Expect that more and more firms will offer the
public Internet conference call. Encourage firms you are interested in
to do so. This form of communication is yet another form of ultimate
corporate democracy.

--------------------Check http://invest-faq.com/ for updates------------------

Subject: Information Sources - Free to All Who Ask

Last-Revised: 28 Apr 1997
Contributed-By: Brook F. Duerr, Seshadri Narasimhan

Here are some tips about obtaining cheap or free info.

Local Companies
Look in your local newspapers for information and stories about the
companies in your immediate area. I have found that our local
papers carry some great articles about our local companies long
before the WSJ or other papers pick up on them. The local papers
tend to report very minute details that the "big" papers never
report. The local paper that I get covers insider buys/sells, IPOs
etc., management changes, detailed earnings reports, analyst
opinions, you name it.
Stocks on Call
A free, fax-back service with lots of stories about companies. The
information is biased because it is paid for by the listing
companies, but it is free, so you get what you pay for. The list
has been growing very rapidly, and they company drops the
information after it has been listed for 24-72 hours, so it pays to
call often. Some articles are only posted for one day. It takes
me about 5 minutes to get the 10 or so articles I want. They used
to publish a list in the papers, but the list is too long to do
that now. Once you have the list then you can call and get 3
stories per call sent directly to your fax. It is all handled by
computer (usually). You can call back and get 3 stories per call
for free. I have gotten some great tips here - nice, fast-growing,
small companies (and some F-500s too). Although Stocks on Calls is
automatically provided with your number (a feature of 800 service),
they state that they will not give your number away to third
parties. Contact them at 800-578-7888.
Pro-Info
A second free, fax-back service, different from Stocks on Call (see
above). This service places information into a computer so you can
access it at any time and it is always available. Pro-Info has
such things as Investor Packages, Latest Earnings Reports, news
releases and analysts reports. They cover about 100 companies and
the list is growing. The quality of the faxes is not great because
Pro-Info apparently scans the pages into the computer. Contact
them at 800-PRO-INFO (800-776-4636).
Stock Charts
I get at least one copy of Investor's Business Daily per week. The
Friday edition is particularly great. IBD is available in most
areas at newsstands, bookstores, etc. IBD is a good newspaper for
its charts.
Archive Information
For historical information, I save one copy of Barron's or WSJ or
IBD each month. If I see a company that I am suddenly interested
in then I can just open up those old editions and get some pretty
good historical data. IBD is great for this.
An Important Edition of The Wall Street Journal
I think it is imperative to get a copy of the WSJ that covers the
year in review. This edition comes out usually on the first
business day of the new year. It contains a lot of information
about how each stock has performed during that last year, including
the % movement of the stock during the past year. I get two copies
of this paper because I get so much out of them (one for work, one
for home).
SEC on Internet
This is the place where you can obtain Securities and Exchange
files (10-Ks, 10-Qs, you name it) on companies that file
electronically with the SEC. See the entry for information on the
Internet, elsewhere in this FAQ.
Archive list for ticker symbols
Available by accessing this URL:
ftp://metalab.unc.edu/pub/archives/misc.invest/information/symbols
(See the entry for information on the Internet, elsewhere in this
FAQ.)
Writing Letters
If you are interested in a company then by all means get their
address and write them a letter. If you have a non-discount broker
then they can get you the company's address. Otherwise go to
virtually any library and they will be able to help you find the
addresses you are interested in. When you write to a company, tell
them you are interested in investing in them and you want to learn
more about them. Ask for 10Ks, annual reports, 10Qs, quarterly
summaries, analyst reports and anything else they can send you.
Some companies will bury you with information if you just ask. Ask
them to add your name to their mailing list for future information.
Many companies maintain active mailing lists and so the information
will keep flowing to you. All this for only a stamp.
Public Registers Annual Report Service
This is a outfit that acts as a clearing house for mailing out
annual reports on companies. They have a huge list (several
thousand) companies that they work for, and they are a free
service. They also send out a newspaper called the "Security
Traders Handbook" and "The Public Register". These newspapers
contains wealth of information on earnings, IPOs, insider trades
etc. The price on the cover says $5.00, but I have received
several issues and have never received a bill (I wouldn't pay
anyway). You have to write to them to get on their mailing list.
The address is: Bay Tact Corporation; 440 Route 198; Woodstock
Valley, CT 06282. Write them a letter and ask them what services
they provide. They send out annual reports, but they do not carry
analysts reports and other news release type items. Try calling
them at 800 4ANNUAL.
Reader Service Cards in Investor's Daily or other Places
Another reason I like to get the Friday edition of IBD is because
they usually have a bunch of companies hyping themselves and
offering information if you send in a reader service card. This is
another great almost freebie. For a stamp you can usually find at
least 3-5 companies that are worth finding out about.
The Wall Street Journal's Annual Reports Service
According to their blurb, you can obtain the annual reports and, if
available, quarterly reports, at no charge for any companies for
which the 'club' symbol appears in the stock listings. (The 'club'
symbol is the same as the one on a playing card. Look at Section C
"Money and Investing" of any WSJ and you will see what I mean.)
These reports can be ordered by calling 800-654-CLUB. You can also
fax your request, giving the ticker symbols of the companies whose
reports you want, to 800-965-5679. It usually takes at least a
week to get the information to you.
Mutual fund companies
The companies' toll-free lines may be your best friend, if the
solution might involve investing money with them. Call them, state
your problem simply, and request follow-up information in writing.
I would be completely honest with them, just tell them if they give
the best service, you'll invest your money with them. Of course,
if your problem can't be solved, even tangentially, with mutual
funds, you should probably not waste your (and their) time.

--------------------Check http://invest-faq.com/ for updates------------------

Subject: Information Sources - Investment Associations

Last-Revised: 10 Oct 1997
Contributed-By: Rajeev Arora, D. Laird, Art Kamlet (artkamlet at
aol.com), Jay Hartley (jay at concannon.llnl.gov), Doug Gerlach (gerlach
at investorama.com)

This article introduces several investment associations.
* AAII:
American Association of Individual Investors
625 North Michigan Avenue
Chicago, IL 60611-3110
+1 312-280-0170
Email: [email protected]
Web: http://www.aaii.org/

A summary from their brochure: AAII believes that individuals would
do better if they invest in "shadow" stocks which are not followed
by institutional investor and avoid affects of program trading.
They admit that most of their members are experienced investors
with substantial amounts to invest, but they do have programs for
newer investors also. Basically, they don't manage the member's
money, they just provide information.

Membership costs $49 per year for an individual; with Computerized
Investing newsletter, $79. A lifetime membership (including
Computerized Investing) costs $490.

They offer the AAII Journal 10 times a year, Individual Investor's
guide to No-Load Mutual Funds annually, local chapter membership
(about 50 chapters), a year-end tax strategy guide, investment
seminars and study programs at extra cost (reduced for members),
and a computer user' newsletter for an extra $30. They also
operate a free BBS.

* NAIC:
National Association of Investors Corp.
P. O. Box 220
Royal Oak, MI 48068
Tel +1 810 583-NAIC, Fax +1 810 583-4880
Email: [email protected]
Web: http://www.better-investing.org

The NAIC is a nonprofit organization operated by and for the
benefit of member clubs. The Association has been in existence
since the 1950's and states that it has over 633,000 members.

Membership costs $39 per year for an individual, or $35 for a club
and $14 per each club member. The membership provides the member
with a monthly magazine, details of your membership and information
on how to start a investment club, how to analyze stocks, and how
to keep records.

NAIC also offers software for fundamental analysis, discounts on
investing books, research information on member companies, and
other educational manuals and videotapes. A network of over 75
Regional Councils across the US provide local assistance.

In addition to the information provided, NAIC operates "Low-Cost
Investment Plan", which allows members to invest in participating
companies such as AT&T, Kellogg, Wendy's, Mobil and Quaker Oats.
Most don't incur a commission although some have a nominal fee
($3-$5).

Of the 500 clubs surveyed in 1989, the average club had a compound
annual growth rate of 10.8% compared with 10.6% for the S&P 500
stock index. Its average portfolio was worth $66,755.

* Investors Alliance:
The Investors Alliance, Inc.
219 Commerical Blvd.
Fort Lauderdale, FL 33308-4440
Tel 888-683-1181
Email: [email protected]
Web: http://PowerInvestor.com

Investors Alliance was formed to enhance the investing skills of
independent investors through research, education, and training.
They claim membership of over 65,000 investors in 22 countries.

Basic Membership is offered at $49 per year and includes twelve
monthly issues of the Investors Alliance Investor Journal, an
educational newsletter packed with valuable insights to maximize
your investment success. Computer Membership is offered at $89 per
year and includes a copy of Power Investor for Windows on CD-ROM
and free daily modem updates of the entire 16,000 security
database. New members at either level receive a free voucher for
two zero-commission stock trades from a leading discount broker.

The Investment FAQ is an associate of Investors Alliance. If you
use the link shown below to enroll in this club, a small referral
fee is paid to The Investment FAQ.
http://PowerInvestor.com/referral.asp?id [email protected]

--------------------Check http://invest-faq.com/ for updates------------------

Subject: Information Sources - Value Line

Last-Revised: 10 Aug 1997
Contributed-By: John Schott (schott at voicenet.com), Chris Lott (
contact me )

The Value Line Investment Survey is the grand-daddy of published
information about stocks of large companies (primarily U.S. companies
plus a few leading ADRs). It is a weekly, three-part publication, but
it takes 3 months to cycle through the full list of stocks covered. The
main document reviews one firm per page (over 100 per week), with a
description of the business, a chart showing the historical stock
performance, tables showing key financial data, plus a written
commentary about the prospects of the firm. They cover over 1700 stocks
in their normal edition, and over 5,000 in extended coverage offered at
higher prices. The weekly document also includes short notes on
important developments in covered stocks. A separate booklet updates
summary ratings and fundamental information on all of the 1700 stocks
each week. A third document highlights a stock of the week and gives
Value Line's views of the market. They also have a new CD-ROM based
service that duplicates the data in the hard copy edition and offers the
ability to search and compare stocks automatically. Several recent
reviews have critiqued the way the program works - but not the quality
nor quantity of the renowned Value Line data base.

Value Line proudly advertises their rating system. They divide stocks
into 5 classes (1 is best). Over the years, their #1 rated stocks have
significantly outperformed the markets (and each other group, its
subordinates, as well). Value Line has been highly regarded for the
both the quality and quantity of its data for decades. Almost the
Lingua Franca of investors, you'll find a well-thumbed copy in most
broker's offices, as well as many public and university libraries.

Value Line offers a special, 10-week trial subscription for US$75
(frequently discounted to $55) which will get you the full set of pages
plus a few updates. A six-month subscription currently costs $300, and
one year is $570. The CD-ROM trial subscription is $55 ($95 for the
5000+ stock version). One-year CD-ROM subscriptions cost up to $995.

Visit their web site at http://valueline.com , or contact them the
old-fashioned way:

Value Line Publishing Inc.
220 East 42nd Street
New York, New York 1001-5891
800 535 9648 ext 2761
+1 212 907-1500

--------------------Check http://invest-faq.com/ for updates------------------

Subject: Information Sources - Wall $treet Week

Last-Revised: 26 July 1999
Contributed-By: Chris Lott ( contact me )

Wall $treet Week With Louis Rukeyser is a television program aired on
the public broadcasting networks on Friday evening (often repeated on
Saturday morning). The program tries to help the individual investor
understand the doings of the stock market and invest wisely. The usual
program features a special guest and three regular guests. The "regular
guests" are investment analysts who appear regularly on W$W. Rukeyser
also reports on the opinions of his "Investment Elves," a group of 10
technical analysts who attempt to forecast the market's path over the
coming weeks. If you've ever heard of the "Elve's Index," this is the
source. Of course many of the elves are also regular guests on the
program.

Weekly transcripts may be ordered for Wall $treet Week With Louis
Rukeyser by mailing your request along with a check or money order for
$5 for each transcript to Wall Street Week Transcripts, C/O MPT, 11767
Owings Mills Blvd, Owings Mills, MD 21117-1499. You must specify the
program date and guest's name. Maryland residents must add $0.25 in
sales tax.

Visit the W$W home page, part of the Maryland Public Television web
site, at http://www.mpt.org/wsw/

--------------------Check http://invest-faq.com/ for updates------------------

Subject: Insurance - Annuities

Last-Revised: 23 Jul 2002
Contributed-By: Barry Perlman, Chris Lott ( contact me ), Ed Zollars
(ezollar at mindspring.com)

An annuity is an investment vehicle sold primarily by insurance
companies. Every annuity has two basic properties: whether the payout
is immediate or deferred, and whether the investment type is fixed or
variable. An annuity with immediate payout begins payments to the
investor immediately, whereas the deferred payout means that the
investor will receive payments at a later date. An annuity with a fixed
investment type offer a guaranteed return on investment by investing in
government bonds and other low-risk securities, whereas a variable
investment type means that the return on the annuity investment will
depend on performance of the funds (called sub-accounts) where the money
is invested. Based on these two properties with two possibilities each,
there are four possible combinations, but the ones commonly seen in
practice are an annuity with immediate payout and fixed investments
(often known as a fixed annuity), and an annuity with deferred payout
and variable investments (usually called a variable annuity). This
article discusses fixed annuities briefly and variable annuities at some
length, and includes a list of sources for additional information about
annuities.

Fixed Annuities
The idea of a fixed annuity is that you give a sum of money to an
insurance company, and they promise to pay you a fixed monthly amount
for a certain period of time, either a fixed period or for your lifetime
(the concept of 'annuitization'). In either case, the payment does not
change, even to account for inflation. If a fixed-period is chosen, the
annuity continues to pay until that period is reached, either to the
original investor or to the investor's estate or heirs. If the investor
chooses to annuitize, then payments continue until the investor's death;
after death, the insurance company pays nothing further to the estate or
heirs (neither principal nor monthly payments), no matter how many (or
how few) monthly payments you received.

Fixed annuities allow you some access to your investment; for example,
you can choose to withdraw interest or (depending on the company etc.)
up to 10% of the principal annually. An annuity may also have various
hardship clauses that allow you to withdraw the investment with no
surrender charge in certain situations (read the fine print). When
considering a fixed annuity, compare the annuity with a ladder of
high-grade bonds that allow you to keep your principal with minimal
restrictions on accessing your money.

Annuitization can work well for a long-lived retiree. In fact, a fixed
annuity can be thought of as a kind of reverse life insurance policy.
Of course a life insurance contract offers protection against premature
death, whereas the annuity contract offers protection for someone who
fears out-living a lump sum that they have accumulated. So when
considering annuities, you might want to remember one of the original
needs that annuitities were created to address, namely to offer
protection against longevity.

Another situation in which a fixed annuity might have advantages is if
you are extremely worried about someone being able to steal your capital
away from you (or steal someone's capital away from them). If this is
the case, for whatever reason, then giving the capital to an insurance
company for management might be attractive, although a decent trust and
trustee could probably do as well. As you might have guessed, fixed
annuities are not very popular.

Variable Annuities
A variable annuity is essentially an insurance contract joined at the
hip with an investment product. Annuities function as tax-deferred
savings vehicles with insurance-like properties; they use an insurance
policy to provide the tax deferral. The insurance contract and
investment product combine to offer the following features:
1. Tax deferral on earnings.
2. Ability to name beneficiaries to receive the balance remaining in
the account on death.
3. "Annuitization"--that is, the ability to receive payments for life
based on your life expectancy.
4. The guarantees provided in the insurance component.

A variable annuity invests in stocks or bonds, has no predetermined rate
of return, and offers a possibly higher rate of return when compared to
a fixed annuity. The remainder of this article focuses on variable
annuites.

A variable annuity is an investment vehicle designed for retirement
savings. You may think of it as a wrapper around an underlying
investment, typically in a very restricted set of mutual funds. The
main selling point of a variable annuity is that the underlying
investments grow tax-deferred, as in an IRA. This means that any gains
(appreciation, interest, etc.) from the annuity are not taxed until
money is withdrawn. The other main selling point is that when you
retire, you can choose to have the annuity pay you an income
("annuitization"), based on how well the underlying investment
performed, for as long as you live. The insurance portion of the
annuity also may provide certain investment guarantees, such as
guaranteeing that the full principal (amount originally contributed to
the account) will be paid out on the death of the account holder, even
if the market value was low at that time.

Unlike a conventional IRA, the money you put into an annuity is not
deductible from your taxes. And also unlike an IRA, you may put as much
money into an annuity as you wish.

A variable annuity is especially attractive to a person who makes lots
of money and is trying, perhaps late in the game, to save aggressively
for retirement. Most experts agree that young people should fully fund
IRA plans and any company 401(k) plans before turning to variable
annuities.

Should you buy an annuity?
The basic question to be answered by someone considering this investment
is whether the cost of the insurance coverage is justified for the
benefits that are paid. In general, the answer to that question is one
that only a specific individual can answer based on his or her specific
circumstances. Either a 'yes' or 'no' answer is possible, and there may
be much support for either position. People who oppose use of annuities
will point out that it is unlikely (less than 50% probability) that the
insurance guarantees will pay off, so that the guarantees are expected
to reduce the overall return. People who favor use of annuities tend to
suggest that not buying the guarantees is always an irresponsible step
because the purchaser increases risk. Both positions can be supported.
But the key issue is whether the purchaser is making an informed
decision on the matter.

Now it's time for some cautionary words about the purchase of annuities.
Many experts feel that annuities are a poor choice for most people when
examined in close detail. The following discussion compares an annuity
to an index fund (see also the article on index funds elsewhere in this
FAQ).

Variable annuities are extremely profitable for the companies that sell
them (which accounts for their popularity among sales people), but are a
terrible choice for most people. Most people are much better off in an
equity index fund. Index funds are extremely tax efficient and provide,
overall, a much more favorable tax situation than an annuity.

The growth of an annuity is fully taxable as income, both to you and
your heirs. The growth of an index fund is taxable as capital gains to
you (which is good because capital gains taxes are always lower than
ordinary income) and subject to zero income tax to your heirs. This
last point is because upon inheritance the asset gets a "stepped up
basis." In plain English, the IRS treats the index fund as though your
heirs just bought it at the value it had when you died. This is a major
tax advantage if you care about leaving your wealth behind. (By
contrast the IRS treats the annuity as though your heirs just earned it;
they must now pay income tax on it!)

If you remove some money from the index fund, the cost basis may be the
cost of your most recent purchase (or if the law is changed as the
administration currently recommends, the average cost of your index
investments). By contrast, any money you remove from an annuity is
taxed at 100% of its value until you bring the annuity's value down to
the size of what you put in. (The law is more favorable for annuities
purchased before 1982, but that's another can of worms.)

Tax considerations aside, the index fund is a better investment. Try to
find some annuities that outperformed the S&P 500 index over the past
ten or twenty years. Now, do you think you can pick which one(s) will
outperform the index over the next twenty years? I don't.

Annuities usually have a sales load, usually have very high expenses,
and always have a charge for mortality insurance. The expenses can run
to 2% or more annually, a much higher load than what an index fund
charges (frequently less than 0.5%). The insurance is virtually
worthless because it only pays if your investment goes down AND you die
before you "annuitize". (More about that further on.) Simple term
insurance is cheaper and better if you need life insurance.

Annuities invest in funds that are difficult to analyze, and for which
independent reports, such as Morningstar, are not always available.

Annuity contracts are very difficult for the average investor to read
and understand. Personally, I don't believe anyone should sign a
contract they don't understand.

Annuities offer the choice of a guaranteed income for life. If you
choose to annuitize your contract (meaning take the guaranteed income
for life), two things happen. One is that you sacrifice your principal.
When you die you leave zero to your heirs. If you want to take cash out
for any reason, you can't. It isn't yours anymore.

In exchange for giving all your money to the insurance company, they
promise to pay you a certain amount (either fixed or tied to investment
performance) for as long as you live. The problem is that the amount
they pay you is small. The very small payoff from annuitizing is the
reason that almost no one actually does it. If you're considering an
annuity, ask the insurance company what percentage of customers ever
annuitize. Ask what the payoff is if you annuitize and you'll see why.
Compare their payoff to keeping your principal and putting it into a
ladder of U.S. Treasuries, or even tax-free munis. Better yet, compare
the payoff to a mortgage for the duration of your expected lifespan. If
you expect to live to 85, compare the payoff at age 70 to a 15-year
mortgage (with you as the lender).

For a fixed payout you would be better off putting your money into US
Treasuries and collecting the interest (and keeping the principal).

Now let's consider a variable payout, determined by the performance of
your chosen investments. The problem here is the Assumed Interest Rate
(AIR), typically three or four percent. In plain English, the insurance
company skims off the first three to four percent of the growth of your
investments. They call that the AIR. Your monthly distribution only
grows to the extent that your investment grows MORE than the AIR. So if
your investment doesn't grow, your monthly payment shrinks (by the AIR).
If your investment grows by the AIR, your monthly payment stays the
same. When the market has a down year, your monthly payment shrinks by
the market loss plus the AIR.

If you do decide to go with an annuity, buy one from a mutual fund
company like T. Rowe Price or Vanguard. They have far superior
products to the annuities offered by insurance companies.

Annuities in IRAs?
Occasionally the question comes up about whether it makes sense to buy a
variable annuity inside a tax-deferred plan like an IRA. Please refer
to the list of four features provided by annuities that appears at the
top of this article.

The first, income deferral, is utterly irrelevant if the annuity is held
in an IRA or retirement account. The IRA and plan already provides for
the deferral and, in fact, distributions are governed by the provisions
of Section 72 applicable to IRA retirement plans, not the general
annuity provisions. I would go so far as to tell anyone who has someone
trying to sell them one of these products in a plan based on the tax
benefits to run as fast as possible away from that adviser. S/he is
either very misinformed or very dishonest.

The second, beneficiary designation, is also a nonissue for annuities in
a retirement account. IRAs and qualified plans already provide for
beneficiary designations outside of probate, for better or worse.

The third, annuitization, is potentially valid, since that is one method
to convert the IRA or plan balance to an income stream. Of course,
nothing prevents you from simply purchasing an annuity at the time you
desire the payout rather than buying a product today that gives you the
option in the future.

I suppose it is possible that the options in the product you buy today
may be superior to those that you expect would be available on the open
market at the time you would decide to "lock it in" or you may at least
feel more comfortable having some of these provisions locked in.

Finally, the fourth feature involves the actual guarantees that are
provided in the annuity contract. To take care of an obvious point
first: the guarantees are provided by the insurance carrier, so clearly
it's not "as good" as FDIC insurance. But, then again, it's generally
been good when called upon.

Normally, any guarantee comes at some cost (well, at least if the
insurer plans to stay in business [grin]) and the cost should be
expected to rise as the guarantee becomes more likely to be invoked.
Some annuities are structured to be low cost, and tend to provide a bare
minimum of guarantees. These products are set up this way to
essentially, provide the insurance "wrapper" to give the tax deferral.

I would note that if, in fact, the guarantees are highly unlikely to be
triggered and/or would only be triggered in cases where the holder
doesn't care, then any cost is likely "excessive" when the guarantee no
longer buys tax deferral, as would be the case if held in a qualified
plan. Note that the "doesn't care" case may be true if the guarantee
only comes into play at the death of the account holder, but the holder
is primarily interested in the investment to fund consumption during
retirement.

What this means is that you need a) a full and complete understanding of
exactly what promise has been made to you by the guarantees in the
contract and b) a full understanding of the costs and fees involved, so
that you can make a rational decision about whether the guarantees are
worth the amount you are paying for them.

It's theoretically possible to find a guarantee that would fit a
client's circumstance at a cost the client would deem resaonable that
would make the annuity a "good fit" in a retirement plan. Some problems
that arise are when clients are led to believe that somehow the annuity
in the retirement plan gives them a "better" tax deferral or somehow
creates a situation where they "avoid probate" on the plan. A good
agent is going to specifically discuss the annuitization and investment
guarantee features when considering an annuity in a plan or IRA and will
explicitly note that the first two (tax deferral and beneficiary
designation) don't apply because it's in the plan or IRA.

Additional Resources
1. Raymond James offers a free and independent resource with
comprehensive information about annuities.
http://www.annuityfyi.com/website/
2. Client Preservation & Marketing, Inc. operates a web site with
in-depth information about fixed annuities.
http://www.fixedannuity.com/
3. Scott Burns wrote an article "Why variable annuities are no match
for index funds" at MSN Money Central on 15 June 2001.
http://moneycentral.msn.com/articles/invest/extra/7272.asp
4. TheStreet.com rated annuity comparison shopping sites on 5 May 00.
Also look for the links to two articles by Vern Hayden with
arguments for and against variable annuities.
http://www.thestreet.com/funds/toolsofthetrade/934103.html
5. Cornerstone Financial Products offers a site with complete
information about variable annuities, including quotes,
performance, and policy costs.
http://www.variableannuityonline.com
6. "Annuities: Just Say No" in the July/August 1996 issue of Worth
magazine.
7. "Five Sad Variable Annuity Facts Your Salesman Won't Tell You" in
the April 5, 1995 Wall Street Journal quarterly review of mutual
funds.

--------------------Check http://invest-faq.com/ for updates------------------

Subject: Insurance - Life

Last-Revised: 30 Mar 1994
Contributed-By: Joe Collins

[ A note from the FAQ compiler: I believe that this article offers sound
advice about life insurance for the average middle-class person.
Individuals with a high net worth may be able to use life insurance to
shelter their assets from estate taxes, but those sorts of strategies
are not useful for people with an estate that falls under the tax-free
amount of just over a half-million dollars. Your mileage may vary. ]

This is my standard reply to life insurance queries. And, I think many
insurance agents will disagree with these comments.

First of all, decide WHY you want insurance. Think of insurance as
income-protection, i.e., if the insured passes away, the beneficiary
receives the proceeds to offset that lost income. With that comment
behind us, I would never buy insurance on kids, after all, they don't
have income and they don't work. An agent might say to buy it on your
kids while its cheap - but run the numbers, the agent is usually wrong,
remember, agents are really salesmen/women and its in their interest to
sell you insurance. Also - I am strongly against insurance on kids on
two counts. One, you are placing a bet that you kid will die and you
are actually paying that bet in premiums. I can't bet my child will
die. Two, it sounds plausible, i.e., your kid will have a nest egg when
they grow up but factor inflation in - it doesn't look so good. A
policy of face amount of $10,000, at 4.5% inflation and 30 years later
is like having $2,670 in today's dollars - it's NOT a lot of money. So
don't plan on it being worth much in the future to your child as an
investment. In summary, skip insurance on your kids.

I also have some doubts about insurance as investments - it might be a
good idea but it certainly muddies the water. Why not just buy your
insurance as one step and your investment as another step? - its a lot
simpler to keep them separate.

So by now you have decided you want insurance, i.e., to protect your
family against you passing away prematurely, i.e., the loss of income
you represent (your salary, commissions, etc.).

Next decide how LONG you want insurance for. If you're around 60 years
old, I doubt you want to get any at all. Your income stream is largely
over and hopefully you have accumulated the assets you need anyway by
now.

If you are married and both work, its not clear you need insurance at
all if you pass on. The spouse just keeps working UNLESS you need both
incomes to support your lifestyle (more common these days). Then you
should have one policy on each of you.

If you are single, its not clear you need life insurance at all. You
are not supporting anyone so no one cares if you pass on, at least
financially.

If you are married and the spouse is not working, then the breadwinner
needs insurance UNLESS you are independently wealthy. Some might argue
you should have insurance on your spouse, i.e., as homemaker, child care
provider and so forth. In my oponion, I would get a SMALL policy on the
spouse, sufficient to cover the costs of burying them and also
sufficient to provide for child care for a few years or so. Each case
is different but I would look for a small TERM policy on the order of
$50,000 or less. Get the cheapest you can find, from anywhere. It
should be quite cheap. Skip any fancy policies - just go for term and
plan on keeping it until your child is own his/her own. Then reduce the
insurance coverage on your spouse so it is sufficient to bury your
spouse.

If you are independently wealthy, you don't need insurance because you
already have the money you need. You might want tax shelters and the
like but that is a very different topic.

Suppose you have a 1 year old child, the wife stays home and the husband
works. In that case, you might want 2 types of insurance: Whole life
for the long haul, i.e., age 65, 70, etc., and Term until your child is
off on his/her own. Once the child has left the stable, your need for
insurance goes down since your responsibilities have diminished, i.e.,
fewer dependents, education finished, wedding expenses done, etc

Mortgage insurance is popular but is it worthwhile? Generally not
because it is far too expensive. Perhaps you want some sort of Term
during the duration of the mortgage - but remember that the mortgage
balance DECLINES over time. But don't buy mortgage insurance itself -
much too expensive. Include it in the overall analysis of what
insurance needs you might have.

What about flight insurance? Ignore it. You are quite safe in airplanes
and flight insurance is incredibly expensive to buy.

Insurance through work? Many larger firms offer life insurance as part
of an overall benefits package. They will typically provide a certain
amount of insurance for free and insurance beyond that minimum amount is
offered for a fee. Although priced competitively, it may not be wise to
get more than the 'free' amount offered - why? Suppose you develop a
nasty health condition and then lose your job (and your benefit-provided
insurance)? Trying to get reinsured elsewhere (with a health condition)
may be very expensive. It is often wiser to have your own insurance in
place through your own efforts - this insurance will stay with you and
not the job.

Now, how much insurance? One rule of thumb is 5x your annual income.
What agents will ask you is 'Will your spouse go back to work if you
pass away?' Many of us will think nobly and say NO. But its actually
likely that your spouse will go back to work and good thing - otherwise
your insurance needs would be much larger. After all, if the spouse
stays home, your insurance must be large enough to be invested wisely to
throw off enough return to live on. Assume you make $50,000 and the
spouse doesn't work. You pass on. The Spouse needs to replace a
portion of your income (not all of it since you won't be around to feed,
wear clothes, drive an insured car, etc.). Lets assume the Spouse needs
$40,000 to live on. Now that is BEFORE taxes. Lets say its $30,000 net
to live on. $30,000 is the annual interest generated on a $600,000
tax-free investment at 5% per year (e.g., munibonds). So this means you
need $600,000 of face value insurance to protect your $50,000 current
income. These numbers will vary, depending on interest rates at the
time you do your analysis and how much money you spouse will need,
factoring in inflation. But the point is that you need at least another
$600,000 of insurance to fund if the survivng spouse doesn't and won't
work. Again, the amount will vary but the concept is the same.

This is only one example of how to do it and income taxes, estate taxes
and inflation can complicate it. But hopefully you get the idea.

Which kind of insurance, in my humble opinion, is a function of how long
you need it for. I once did an analysis of TERM vs WHOLE LIFE and based
on the assumptions at the time, WHOLE LIFE made more sense if I held the
insurance more than about 20-23 years. But TERM was cheaper if I held
it for a shorter period of time. How do you do the analysis and why
does the agent want to meet you? Well, he/she will bring their fancy
charts, tables of numbers and effectively lead you into thinking that
the biggest, most expensive policy is the best for you over the long
term. Translation: lots of commissions to the agent. Whole life is
what agents make their money on due to commissions. The agents
typically gets 1/2 of your first year's commissions as his pay. And he
typically gets 10% of the next year's commissions and likewise through
year 5. Ask him (or her) how they get paid.

If he won't tell you, ask him to leave. In my opinion, its okay that
the agents get commissions but just buy what you need, don't buy some
huge policy. The agent may show you compelling numbers on a $1,000,000
whole life policy but do you really need that much? They will make lots
of money on commissions on such a policy, but they will likely have sold
you the "Mercedes Benz" type of policy when a Ford Taurus or a Saturn
sedan model would also be just fine, at far less money. Buy the life
insurance you need, not what they say.

What I did was to take their numbers, review their assumptions (and
corrected them when they were far-fetched) and did MY analysis. They
hated that but they agreed my approach was correct. They will show you
a 12% rate of return to predict the cash value flow. Ignore that - it
makes them look too good and its not realistic. Ask him/her exactly
what they plan to invest your premium money in to get 12%. How has it
done in the last 5 years? 10? Use a number between 4.5% (for TBILL
investments, quite conservative) and 8-10% (for growth stocks, more
risky), but not definitely not 12%. I would try 8% and insist it be
done that way.

Ask each agent these questions:
1. What is the present value of the payment stream represented by the
premiums, using a discount rate of 4.5% per year (That is the
inflation average since 1940). This is what the policy costs you,
in today's dollars. Its very much like paying that single number
now instead of a series of payments over time. If they disagree
with 4.5%, remind them that since 1926, inflation has averaged 3.5%
(Ibbotson Associates) and then suggest they use 3.5% instead. They
may then agree with the 4.5% (!) The lower the number, the more
expensive the policy is.
2. What is the present value of the the cash value earned (increasing
at no more than 8% a year) and discounting it back to today at the
same 4.5%. This is what you get for that money you just paid, in
cash value, expressed in today's dollars, i.e., as if you got it
today in the mail.
3. What is the present value of the life insurance in force over that
same period, discounted back to today by 4.5%, for inflation. That
is the coverage in effect in today's dollars.
4. Pick an end date for comparing these - I use age 60 and age 65.

With the above in hand from various agents, you can see fairly quickly
which is the better policy, i.e., which gives you the most for your
money.

By the way, inflation is slippery and sneaky. All too often we see
$500,000 of insurance and it sounds great, but at 4.5% inflation and 30
years from now, that $500,000 then is like $133,500 now - truly!

Have the agent do your analysis, BUT you give him the rates to use,
don't use his. Then you pick the policy that is the best value, i.e.,
you get more for your money. Factor in any tax angles as well. If the
agent refuses to do this analysis for you, get rid of him/her.

If the agent gets annoyed but cannot fault your analysis, then you have
cleared the snow away and gotten to the truth. If they smile too much,
you may have missed something. And that will cost you money.

Never agree to any policy unless you understand all the numbers and all
the terms. Never 'upgrade' policies by cashing in a whole life for
another whole life. That just depletes your cash value, real cash
available to you. And the agent gets to pocket that money, literally,
through new commissions. Its no different that just writing a personal
check, payable to the agent.

Check out the insurer by going to the reference section of a big
library. Ask for the AM BEST guide on insurance. Look up where the
issuer stands relative to the competition, on dividends, on cash value,
on cost of insurance per premium dollar.

Agents will usually not mention TERM since they work on commission and
get much more money for Whole Life than they do for term. Remember, The
agents gets about 1/2 of your 1st years premium payments and 10% or so
for all the money you send in over the following 4 years. Ask them to
tell you how they are paid- after all, its your money they are getting.

Now why don't I like UNIVERSAL or VARIABLE? Mainly because with Whole
Life and with TERM, you know exactly what you must pay because the
issuer must manage the investments to generate the appropriate returns
to provide you with the insurance (and with cash value if whole life).
With UNIVERSAL and VARIABLE, it becomes YOU who must decide how and
where to invest your premium income. If you guess badly, you will have
to pay a higher premium to cover those bad decisions. The insurance
companies invented UNIVERSAL and VARIABLE because interest rates went
crazy in the early 80's and they lost money. Rather than taking that
risk again, they offered these new policies to transfer that risk to
you. Of course, UNIVERSAL and VARIABLE will be cheaper in the short
term but BE CAREFUL - they can and often will increase later on.

Okay, so what did I do? I bought both term and whole life. I plan to
keep the term until my son graduates from college and he is on his own.
That is about 10 years from now. I also bought whole life (NorthWestern
Mutual Life, Milwaukee, WI) which I plan to keep forever, so to speak.
NWML is apparently the cheapest and best around according to A.M. BEST.
At this point, after 3 years with NWML, I make more in cash value each
year than I pay into the policy in premiums. Thus, they are paying me
to stay with them.

Where do you buy term? Just buy the cheapest policy since you will tend
to renew the policy once a year and you can change insurers each time.
Check your local savings bank as one source.

Suppose an agent approaches you about a new policy and wishes to update
your old ones and switch you into the new policy or new financial
product they are offering? BE CAREFUL: When you switch policies, you
close out the old one, take out its cash value and buy a new one. But
very often you must start paying those hidden commissions all over
again. You won't see it directly but look carefully at how the cash
value grows in the first few years. It won't grow much because the
'cash' is usually paying the commissions again. Bottom line: You
usually pay commissions twice - once on the old policy and again on the
new policy - for generally the same insurance. Thus you paid twice for
the same product. Again - be careful and make sure it makes sense to
switch policies.

A hard thing to factor in is that one day you may become uninsurable
just when you need it, i.e., heart attack, cancer and the like. I would
look at getting cheap term insurance but add in the options of
'guaranteed convertible' (to whole life) and 'guarranteed renewable'
(they must provide the insurance). It will add somewhat to the cost of
the insurance.

Last thought. I'll bet you didn't you know that you are 3x more likely
to become disabled during your working career than you to die during
your working career. How is your short term disability insurance
looking? Get a policy that has a waiting period before it kicks in.
This will keep it cheaper. Look at the exclusions, if any.

These comments are MY opinion and not my employers. All the usual
disclaimers apply and your mileage may vary depending on individual
circumstances.

Sources for additional information:
* Consumers Reports printed an in-depth, three-part series in their
Jul/Aug/Sep 1993 issues.
* Many sites on the web offer life insurance quotes. Here are a few
that have been rated highly by consumer advocates. Also see the
article in the New York Times of 1 August 2001.
Insweb.com , NetQuote.com , Quicken.com , Quotesmith.com ,
Youdecide.com , Term4sale.com .

--------------------Check http://invest-faq.com/ for updates------------------

Subject: Insurance - Viatical Settlements

Last-Revised: 19 Aug 1998
Contributed-By: Gloria Wolk ( www.viatical-expert.net ), Chris Lott (
contact me )

A viatical settlement is a lump sump of cash given to terminally ill
people (viators) in exchange for the death benefits of their life
insurance. Along with so much of the English language, the name has its
origins in a Latin word, viaticum , which means provisions for a journey

These settlements are attractive to a viator (seller) because the person
gets a significant amount of money that will ease the financial stress
of their final days. Viatical settlements are attractive to investors
for their potentially high -- but not guaranteed -- rates of return.

The way it works in the simplest case is the investor pays some
percentage of the face value of the policy, let's say 50% just to pick a
number, and in return becomes the beneficiary of the policy. The
investor is then responsible for paying the premiums associated with the
life insurance policy. Upon the demise of the viator, the investor
receives the death benefit of the life insurance policy. If the viator
dies shortly after the transaction is completed, the investor makes a
large amount of money. If the viator survives several years past the
predicted life expectancy, the investor will lose money.

Like any other deal, there are risks to both parties. For the viator,
the main risk is settling at too low a price. For the investor, there
are risks of not receiving the full death benefit if the insurance
company goes bankrupt, not receiving any death benefit if the insured
committed fraud on the insurance application, etc.

As of this writing, a few honest and a number of less-than-scrupulous
companies market viatical settlements to viators and investors. Be
careful! This investment is not regulated, so there is little or no
protection for investors.

Here are a few tips for potential viators.

* Are you holding back from medical treatment, thinking this will
give you a larger viatical settlement? Don't. It won't get you
more money. Viatical providers take into account Investigational
New Drugs (INDs) when they price policies. Even if you never took
any and don't plan to, they expect viators will try anything that
gives hope, and they price accordingly.
* Was your policy resold by the viatical company? If so, you have no
obligation to a second buyer -- unless you signed an agreement to
extend obligations to future owners. This is like selling a car:
If you sell the car to B and B resells it to C, you have no
obligation to C.
* Be sure to check with your insurer to find out if your policy
includes Accelerated Death Benefits. If so, and if you qualify,
you will get much more money -- and it will be paid faster. This
applies to some group term life as well as individual policies.
* Are you are a member of a Credit Union? Credit Unions may be a
source of information about and referrals to licensed viatical
providers.
* Don't apply to only one viatical company -- even if the referral
was made by your doctor, lawyer, insurance agent, social worker, or
credit union. If you ignore this advice, you're likely to get
thousands of dollars less. Here are a few tips for potential
investors in viatical settlements.
* Are you thinking of using your IRA for viatical investments? Don't.
No matter what viatical sales promoters tell you, life insurance as
an IRA investment is prohibited by the Internal Revenue Code. And,
if you have a self-directed IRA, you are fully responsible for
investment decisions.
* Are you thinking of buying a policy that is within the
contestability period? Don't. If the viator committed fraud on the
application and the insurer discovers this, you could be left with
nothing more than a return of premiums. Gloria Wolk's site offers
much information about viatical settlements.
http://www.viatical-expert.net

--------------------Check http://invest-faq.com/ for updates------------------

Compilation Copyright (c) 2002 by Christopher Lott.