Category: Rate Calculator

7 Blind Spots of Financial Advisors

Even a seasoned financial advisor can be vulnerable to certain blind spots within the field, what matters is recognizing and learning from these blind spots. Here we have gathered a list of the seven major areas in which advisors can falter, to save you from the same oversights.

1. Forgetting Time Value of Money

As an advisor, the time value of money must be applied to every calculation, and any calculation that does not take this into account is not accurate. Every dollar has a value that increases over time, or in other words, accrues interest. A common blind spot for financial advisors and clients is forgetting to account for this interest. Time value might seem minor with interest rates as low as they are, but when a cumulative sum is plugged into a calculation it loses all accuracy because the interest value is lost.

Interest rates vary depending on the scenario—whether money is being socked away into savings, paid in premiums to an insurance policy, or otherwise—but they are always necessary to include. Regular calculators don’t do a good job of applying the time value of money, which is why interest rates are often overlooked by advisors but Truth Concepts software makes the calculations of interest rates simple and makes the projections you show your client accurate.

2. Having Unequal Time Frames

It is all too easy to fall into the trap of comparing mortgage rates with unequal time frames. As with any scientific experiment, when comparing two things you must have only one variable. Often advisors make the mistake of comparing 15 and 30-year mortgages without adjusting the time frames to equal each other—a common mistake to make.

When comparing mortgages, you already have a variable, so all other components must be the same to get an accurate comparison. In simple terms, that means these mortgages must be compared at the same rates—the simplest being a 15-year mortgage over 30 years compared to a 30-year mortgage over 30 years. When advisors compare rates at unequal time frames, the data will be skewed.

3. Ignoring Opportunity Cost

Opportunity cost is closely linked to the time value of money, which can be boiled down to this: opportunity cost is the loss of a potential opportunity by taking another one. In typical financial planning, the opportunity cost is not often factored into discussions, or at least not in a way that reveals the whole truth. As with every choice, the possibility of another choice is ruled out.

When it comes to investing your money, opportunity cost can be everything—what is the opportunity cost of fees and taxes on the growth of many stock market oriented investments? What is the cost of taking out a loan with the bank rather than borrowing against your whole life’s cash value at the insurance company (or vice versa)? TC software makes it simple to map out multiple options for your client, and Truth Training shows you how through a three-day intensive course.

4. Not Understanding How Interest Rates Work

Interest rates are one of the most commonly misunderstood financial concepts, which is how banks are able to make large profits off of seemingly low rates. As a financial advisor it is crucial to understand the true nature of interest rates, so you can best demonstrate the principals to your clients. When assessing the difference between two rates, borrowing at 3% and investing at 9% may not seem too different—only a difference of 6%, right? Unfortunately, that’s the catch; banks and other companies depend on this misconception when the margin of increase is truly a 200% markup.

When working with interest rates, converting the rates to dollars can help in understanding their true nature. For example, if your client were to take out a loan of $100,000 at a 4% interest rate and invest that same amount at 5%, you can quickly see that the difference is not 1% but 25%. Learning to understand the truth behind interest rates can keep more money in your client’s pocket instead of the bank’s. Using the TC calculators make it simple to calculate these differences without needing a specific formula.

Figure 1 In this example we have shown 4%, the amount borrowed, as the present value. The future value of 5% is the amount invested. One year is the control. The difference is 25%, or a quarter increase from 4%.

Figure 2 This example serves to show the difference between a 4% rate and a 5% rate on the same amount of money over time. One percent makes quite the difference in this scenario–doesn’t look like 1% now, does it?


5. Thinking Life Insurance Only Works If It Has PUA’s

PUA’s can certainly benefit a whole life policy, but they do not make or break one. Whole life does not offer large immediate returns but requires patience to build up cash value. After 5 years a policy truly begins to pick up, which is why it’s important to encourage clients to start early to reap the most benefit from their policy. Even a minimum payment of $100/month for a young person can offer great returns only a few years down the road—and when things are looking up, it doesn’t hurt to add a PUA or increase the premium.

The best way to guarantee the failure of a policy is not to have one at all. Savings are a crucial foundation of prosperity, and a whole life insurance policy is an invaluable savings tool.

6. Believing Life Insurance Only Works If You Borrow Against It

The prospect of borrowing against the CV of a life insurance policy seems to be the biggest benefit, but it is not the only way to make a policy “work.” Life is unpredictable, and having a whole life policy in place can benefit your client in case of an emergency.

In fact, the first job of the cash value of the whole life policy should be an emergency fund, left there at the insurance company. This money creates peace of mind and financial confidence for the family so they can pursue the next phase of the policy: their opportunity fund.  Many advisors know that families benefit from having large amounts of available cash value, even though they may never use it, just for the potential of being able to take advantage of an opportunity when it comes along.  Additionally, the death benefit creates an immediate legacy or estate, just from the stroke of a pen. Whole life insurance provides options and thinking of it as an “and” account that has a death benefit and possibly LTC and Waiver of Premium riders helps out even more.

7. Talking More Than Listening

As advisors, it is easy to fall into the mindset that you have all of the information your client could want, so you must do all the talking. Though not entirely wrong, it is important to remember that the client is an individual, and he or she will have unique problems. Your client wants to be heard, and when you slow down and listen you might find there is a unique way to handle the situation. Typical financial planning tends to have a cut and dry formula for clients, setting up qualified plans left and right, and selling the products advisors are told to sell.

What sets a prosperity economics advisor apart is their willingness to look at the individual’s desires and provide real strategies to achieve prosperity. While it may be a smart move for one client to borrow against their CV and be their own banker, it might be more prudent for a newer client to take out a bank loan and only dip into their CV to bail them out should things go south. Families with few children will have different desires than families with many. As an advisor, set yourself apart by taking the time to listen to your client, and help them find the best strategy, instead of pitching them the typical plan.




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The Whole Truth About Qualified Plan Contributions (John & Jane Jones Pt. 3 of 9)

Mark Twain reportedly said that he tried to not let his schooling get in the way of his education.  I think he was describing a paradox similar to what most advisors know as the “arrival syndrome.”  Said in yet another way, your education should be an ongoing process.  Such is the case with your clients.  We recommend that you schedule regular discussions to help your clients understand the whole truth about money.  And, of course, we are totally biased in thinking the best way to help your clients, is by illustrating situations with our calculators.

I admit it had been far too long since I had met with John and Jane Jones.  In our previous two meetings, they had come to understand the power of Jane’s whole life policy in helping them get out of debt.  They had also learned that even small differences in money owed can have a huge impact on their overall financial situation.

When we were able to meet again, Jane and John were both anticipating their 30th birthdays coming in about 6 months. To begin our third meeting together, we reviewed what we had discussed before.  They had also updated their client fact finder sheet, and I was anxious to talk to them about those newly revealed facts.

Both John and Jane had been diligent at work and both had been rewarded with a $5,000 annual raise.  Their raises were actually awarded to them almost 5 years before, a short time after our initial meeting, but they had not told me. I should have uncovered that fact in my questioning,  hadn’t quite asked enough questions in our subsequent meetings.  Around the same time they were given raises, they also hit anniversary milestones at work and became eligible to participate in the company’s sponsored 401(k) plan.  They told me how they had met with an investment professional who had explained the wonderful tax benefits and the “free” money they would get from the company.  In fact, they repeated his words to me, “There is no better place to put your money.”  The “free” money or company match was 50% of their contribution, up to 2% of their salaries.  In other words, the max contribution by the employer would be $500 a month.

“How do you feel about your decision to participate in the 401(k) at work?”  I asked John.

“Well, it has been awesome these last 5 years, “John answered quickly. “Both the investment professional and our accountant said the returns are phenomenal.”

“What has been your return thus far?”  I asked.

“So far we’ve gotten a 4% return, and as you can see,” he said, pointing to the statement on my desk, “we already have $29,125.” John proudly stated.  “I know that doesn’t sound like a huge number, but our accountant tells us we are really getting about 15% return when we consider taxes.”

“Isn’t that a good feeling to have a good sum of money in an account somewhere?”  I stated.  Both Jane and John nodded in agreement.  “I am going to put your numbers into my rate calculator and verify what your accountant is saying.  When you started, you had a zero balance of course.  You have been putting your entire raise of $5,000 a year into your qualified plan.  But if the money just came to you as part of your income, you’d only get $3,750 because you get a tax deduction at your 25% tax rate.  Your current balance as you said is $29,125.”  I then pointed to my computer screen and said; “Yes it looks like the number is about 15%.”

“Wow, there are the numbers,”  John said.  “Oh but wait, you forgot the company match.  Some of that 15% is because we work for such a generous company.”

“Yes, you are right.”  I corrected myself.  “I am glad you pointed that out.  As I said to you before and I say often to myself, my family and others; when making a financial decision, it is always good to have the whole truth.  With that in mind, let’s take a closer look at things.  Since you two seem to have a good grasp of things, I am going to use a more sophisticated calculator.  This one is specialized for analyzing qualified plans.”  I quickly put in their numbers, being sure to include their employer match and pointed to the screen.  “Here are the numbers.”

“Something is not right,”  Jane said or maybe asked.  “Our account balance is $29,125 not $30,981.”

“You don’t miss much do you, Jane?”  I complimented her.  “Do you know why my number is different from your statement?”  I asked her.

After a moment of silence, she simply said, “No, but I am guessing you know.”

“I wouldn’t be a good advisor if I didn’t know what was going to come out of a calculation before I did them,”  I said.  “Actually you do know why there is a difference, you’ve just forgotten.  I am pretty sure the investment professional that came to your work to help you get enrolled in the plan, told you they had some of the smallest fees in the industry.  Well, when we put those fees 2% fees in, we should see a number that agrees with your statement.”

“I’m not sure that makes us feel more comfortable.”  John retorted.  “I know your calculator has the same numbers as our statement, but wow that is a lot of fees we’ve had to pay so far,” John complained.

“When will you stop paying those 2% fees?”  I asked John.

“I guess never,” was his response.  “But now I see something that doesn’t seem right to me.  Our accountant says – and you verified – that we are getting 15.06% on our money.”

“Yes, you’re right again, but you are getting ahead of me – but that is awesome.”  I smiled and said to John.  “I am going to put in the effect of your tax deferral.  You are in a 25% tax bracket so when I put that in your rate of return is…?”

“Exactly what we’ve said – 15%,” John said sounding a little more relaxed.

“Okay, let’s shift gears a minute and talk about how accessible this money is to you,”  I suggested.  “Let’s say for some odd reason you needed or wanted to take money out of this account. How much of a penalty or tax would you be required to pay?”  I asked.

“If I remember correctly, we will have to pay our income taxes and since we are not 59 and 1/2 years old we will also have to pay a 10% penalty,” was Jane’s response.

“You are right – at least as the law now stands.  But it could change right?”  I said.  “I will adjust my calculator to show what the tax cost and penalty would be if you withdrew your money.” Pointing to the calculator I asked, “Now what do you see?”

“Something I do not like.”  John frowned as he spoke. “This calculator is telling us that the actual rate of return on our money if we decided to use it today is a measly 0.32%.  That is not what the accountant or the investment professional told me.  And, it’s not a number I find anywhere on our 401(k) statement.”

“How many people do you think would sign up for a program like this if that number were discussed?”  I asked John.  “I am willing to bet there would be very few.  But let’s not dwell on the past because there is nothing you or I can do about it.  But when you learn new information, you might want to change it if possible or make a different decision next time.  Let’s imagine the economy improves and you are able to get 6% from now until you turn 65.  At that time you decide to use your money.  Do you see your effectual rate of return is 4.18%?”

I continued, “Please take note that your net account value is $410,341.  Please write that number down so you’ll to be able to remember it.  The next question – and I already know the answer, but here it is anyway: Would you like to have more money than that?  Of course, you would. The easiest path to achieve that is simply getting a higher rate of return.  But for a moment, let us just assume you decide to drop your contribution to $1,000 annually. What does that do to your rate of return?”  I said pointing to the calculator.

Before he could answer I continued, “it went up didn’t it?  Just so you know, the rate of return went up because a higher percentage of your contribution dollars were being matched by your employer.  However, as expected, your net account value went down to $174,454, right?  When we subtract that $174,454 from the previous number of $372,798 we get $198,344.”  I handed John a basic hand-held calculator and allowed him to verify my numbers.

“That is what I get,”  John said.

Now if we were to use a different financial tool, say a whole life policy, we would need to make sure we made up that $198,344, right?”  I asked them.

“Right,” Jane chimed in.

“Since we fund the policy with after-tax dollars, we will have to pay our income taxes up front.  So instead of having  $4,000 to use, we will only have $3,000, i.e. $3,000 is the result of $4,000 minus 25% taxes.  Are you following me?  I want to be clear here, you do not get a tax credit when you put money into a qualified plan.  When you earn money, you have a choice to either include that money and pay the tax, or not include it as part of your income and avoid paying the tax on it immediately.  However, you will pay tax on it when you do include it as part of your income – in other words when you take money out of your qualified plan.”

I quickly put into the funding calculator a $3,000 annual premium for a male age 30 with a preferred health rating.  Then I asked, “If you use that $3,000 and pay the premiums on a whole life policy, what will be your projected cash value at age 65?  And how does that compare to the qualified plan?”

John and Jane looked at each other and smiled and then Jane started to talk. “For some reason, I knew you were going to show us something better.  The difference is not huge –  $198,344 less in our qualified plan, but having $209,820.  Again, not huge, but about a 10% difference.  John and I were talking about this on the way over.  We are losing our confidence in the economy in general and in the stock market in particular.  The numbers in your calculator for our qualified plan are based on the market always going up.  The numbers here in the whole life policy, have guarantees, and the track record of the life insurance industry is much more reassuring.”

“I have never told you, but my uncle is a dentist.  He followed to the ‘T’ everything his financial planner told him to do.  He thought he had the world at his feet and was planning a comfortable retirement late 2008.  But then the market went south.  Well, the short of the story is, he is at work today trying to recover what he lost in the downturn.  I simply like the safety of the whole life route.”  Jane finished.

“Other than the track record and the guarantees, why do you like the whole life route?” I asked Jane.

“In one word, CONTROL,” Jane said rather emphatically.  “With the qualified plan, just as you have already shown us, we do not have the ability to use the money in there.  Our money is locked away in a type of prison until we are 59 and 1/2.  Sooner or later we are going to have children and I am hoping I can stay at home and help them learn and grow.  But I am not confident we will have enough money from just John’s salary. I am thinking I will need to start a business where I can stay at home.”  Then looking at John she said, “Where will we get the money to start a business?  Certainly not from our qualified plans because of the steep penalties and tax bite.”

Without looking at me, John answered Jane, “You’re right, I am feeling the same way.  I like the whole life route so much better.  In fact, I am going to HR this afternoon and cutting my qualified plan contribution to $1,000.”

John then addressed himself to me and said, “Thank you.”


-Jason Henderson for Truth Concepts 

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Truth Concepts on

Visit Truth Concepts on Today!New Truth Concepts Client Presentations!

We’ve been busy loading up our Truth Concepts YouTube channel  with videos for you! Now there are 15 videos featuring Todd Langford and/or Truth Concepts software.

The YouTube channel houses our Truth Concepts, Truth Concepts Academy, and Summit videos, as well as several presentation videos and  Banking for Life excerpts and outtakes with Todd Langford.

Eight of the newer videos are from a client event at a local insurance brokerage. We recorded and “screen captured” Todd’s presentations and divided it up by topic. (FYI, Todd’s presentations followed a presentation by Nelson Nash, you’ll hear him refer to Nelson who is in the audience.)

Truth Concepts: How Banks Make Money (1 of 8)

Even most bankers don’t understand this. (If a bank has a 6% spread between the savings rate and lending rate for customers, they are NOT making 6% on their money!) The reality of bank profits – especially when interest rates are low – is frankly shocking. Approximately 15 minutes.

Truth Concepts: Maximum Potential (2 of 8)

As we mentioned in an earlier email, many advisors like to use this calculator in their first meeting with a client. It outlines what a client’s full financial capability and demonstrates that if you’re saving too little, a chasing higher rate of return isn’t necessarily the answer. Approximately 10 minutes.

Truth Concepts: The True Cost of Paying Cash (3 of 8)

Todd explains opportunity costs and why they matter so much. (Not suitable viewing for Dave Ramsey fans!) Approximately 7 minutes. 

Truth Concepts: Qualified Plan (4 of 8)

Todd examines the real rate of return in a typical qualified plan. What impact does a company match, a typical fee, and taxes have on the dollars in a 401(k) or other tax-deferred retirement plan? It’s not a pleasant surprise to see how much of “our” money ends up in someone else’s pocket!  Approximately 14 minutes.

Truth Concepts: Funding Calculator (5 of 8)

Todd Langford discusses whole life cash value in the context of other savings vehicles (with some interesting commentary on the “safety” of FDIC-insured accounts) and busts the “buy term and invest the difference” myth with hard numbers and compelling logic.  Approximately 16 minutes.

Truth Concepts: Car Financing and Borrowing (6 of 8)

Todd shows the reality of “0%” vehicle financing, then compares the results of making major purchases through bank loans, cash purchases, certificates of deposit or whole life cash value. Emphasizes the advantages of having and using your own capital.  Approximately 23 minutes.

Truth Concepts: Real Estate (7 of 8)

Todd explains the advantage of participating mutual company dividends and analyzes the powerful potential of using cash value to finance other assets and sound, cash-flowing investments. See how leveraging your cash value can produce exponential benefits when combined with other strategies and investments.  Approximately 11 minutes.

Truth Concepts: Laffer Curve on Cash Flow (8 of 8)

Todd gives a contextual history of income taxes and how lower taxes can actually translates into more money for BOTH taxpayers and the government.  Approximately 5 minutes. 

Visit Truth Concepts on Today!

Click on links for individual videos above or view all available videos on the Truth Concepts YouTube channel at:

Can you see the potential of using Truth Concepts software to analyze various financial strategies and communicate with clients about essential financial concepts?

Join Todd in Houston for our next LIVE 3-day training for hands-on training with Truth Concepts calculators. At this writing, our next event is October 22-24, 2014 in Houston, TX. See our Truth Training page for current dates, details and registration.

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Do PUAs Grow Less Efficient Over Time?

Do PUAs Grow Less Efficient Over Time? Should Clients Buy New Policies to Better Utilize PUAs?

As you know, in the early months and years of a whole life policy, the PUAs are more efficient than the base premium as far as generating cash value for the policy. While the base premium alone can take years to generate a positive internal rate of return where cash value is concerned, the PUAs are converted to cash value right away, which increases the efficiency of the policy overall.

However, after 5-7 years of funding a whole life policy, the impact of the PUAs appears to lessen. Illustrations of a policy funded with maximum PUAs vs. no PUAs at all show that, several years into the policy, the PUAs no longer have a dramatic affect on the internal rate of return of the policy.

For instance, in one example, adding PUAs to a 12k premium whole life policy for the first five years increased the internal rate of return on the net cash value in the 12th year from only .57% (no PUAs) to 3.29% (with 5 years of PUAs) – a difference of 477%! (See illustration 1.)

Illustration #1

PUA illustration #1

However, when the PUA is paid for 10 years, the PUAs only bring the IRR up to 3.52%. The difference between 3.29% – the IRR produced when 5 years of PUAs were added to the policy – and 3.52%, the IRR resulting from 10 years of PUAs – is only 6.99%.

Illustration #2

PUA illustration #2

Why is this? Do PUAs become less efficient over time?

And what should the client do? After the initial years of the policy, should a policy holder start a new policy and put their PUAs into the new policy to increase the efficiency of the PUAs? Is the “old” whole life policy not the best place for the client’s PUAs?

To test this, Todd compares the effect of transitioning the PUAs to a second new policy after 5 years to see if the average internal rate of return (of the policies combined) is greater when the newer policy receives the PUA payment as opposed to the older policy. This example is given in the first 15 minutes of Todd Langford’s 2013 Think Tank presentation, along with a related discussion (and a hilarious story) about how the numbers alone don’t always tell the whole truth about a situation.

What Todd discovers is this: the combined IRR of both policies when the PUA stays with the first policy is 2.34%, while the IRR of both policies when the PUA shifts to the new policy is a nearly identical 2.32%.

Illustration #3

PUA illustration #3

Todd also discovers virtually no difference in internal rates of return when the policies are extended to age 70. (The results are 4.76% and 4.75% IRR of the combined policies when the PUA is shifted from one to the other.)

Illustration #4

PUA illustration #4

The conclusion? Starting a new policy is not necessary to increase the effect of a PUA.

Therefore, there is no numerical reason to start a new policy to “increase the efficiency of the PUA.”

However, the numbers alone don’t always tell the whole story.

There may be other reasons to start a new policy. As Todd mentions in the video, starting a new policy creates a new “bucket” into which cash can be stored, which may be very beneficial for the client. Each new policy creates an opportunity to store more cash in the way of PUAs. If a client is easily maxing out their PUAs or must prepare for a way to store additional cash, then it may be time to begin a new policy.

The PUA may appear to lose efficiency, but in fact, it does not. It keeps performing as well as it ever did, but the impact lessens because the base premium catches up over time in its efficiency. Therefore, the PUA does not continue to create as much contrast when compared with the efficiency of the base premium.

A very simple metaphor to understand or explain PUAs vs. base premium efficiency might be that of two joggers. If Jogger A gets a 5-minute head start on a marathon, that will put him or her way ahead of Jogger B in the first few miles. However, by the time they both reach the finish line, that five-minute head start will seem much more insignificant. If they progress at the same speed, at an “average” marathon pace, their times will be less than 2% apart.

In the same way, the differences between the efficiency of a PUA and the base premium become negligible as time goes on. Like the first jogger, the PUA gets a “head start” while the base premium is responsible for establishing the foundation of the policy (paying for the death benefit, commission, and other policy costs), which slows it down, initially.

Ultimately, the PUA will earn (or “run”) at the same pace in an existing or a new policy. The PUA does not grow less efficient with time, the base premium simply becomes more efficient, which narrows the contrast between the two.

The only way to start a new policy and have the PUA earn at a greater rate and efficiency than in an existing policy would be to begin a new policy on a child or grandchild. When this is done, typically, the new policy is more efficient because the cost of insurance is less for a younger person. However, as you are limited as to the amount of insurance you can take on a child – often a maximum of half of what the parent is insured for – you will want to make sure that you are adequately insured.

Watch the whole Think Tank presentation here.
Think Tank video image
You can also find this video and other tutorials and videos at the bottom of our Tutorials page


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