March Newsletter 2011 Pacific Advisors

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March Newsletter 2011 Pacific Advisors

  1. 1. Getting Slapped by the ÒFat TailÓ People arenÕt rational. Thats t b c c n lsin o al so t o stde i Õ he asi o cu o f l rs f u is nb havo al fn c , a dscpl e whih tis t u d r an what moiats an e ir ian e iii n c re o n est d t e v d I theory,there is nd tr n s pe plÕ fn cal e i o s. Gre , far t iabl yt d l g at iat n eemie o es ian i d csin e d e , he n i t o eay r i c i , i f oan a ho o ohe c ace faws ar t raso s mo pe pl stmbet o g t i d st f t r har tr l e he e n st o e u l hr u h her no diferenc between f efn call e mi n o ru i e wast g mo e , an n v rq i ac e ig t i ian i i s, ssig ppo tnt s, v i i n n y d e e ut hivn her e theory and prac e. ticfn cal rams. ian i d e Bu, i an io i t st i al appe s t o e o t f tr i po rd csin t n r nc wi , t so ar hat n f he aco s n o e i o - I prac e,there is n tic .makn mayb anover-reliance on logic and science. Thi i a rsut fb l vn t ig e s s e l o ei ig hat e Yogi BerraÒ iniiÓ e o o cmo es c pr vd anac u at pitr o t tuh, whe i f t sce t c c n mi f d l an o ie c r e cu e f he r t n n act se mat mat al an st i ial stde o tn dstr o mi e e n e o o c he he i c d at c st u is fe i o t r srprse t c n miral y e i. tThe Bell Curve Car F id ih Gau (1 l re rc ss 777-1 5 ) was a Geman mat mat i who td i 85 r he i an c o ay sc n d rd o e o hi o ys mo ifu ni mat mat i s. S mei s c ld t o siee n f str st n le t al he i an o t c me al e heÒ rn e o M at mat i s,Ó Gau wo k has had a rmar abe o g ig ifu n e i P ic f he i an c ssÕ r e k l n on n le c nman fed o mat mat s an sce c . y ils f he i c d in e In This IssueÉ S meo Gau std iv le st i is an t pat r s o pr b i t. W o kn o f ssÕ u y n ov d at c d he t n f o abl y st e i r igfo a b cq e in Ò v na r g o po beo to s, whih o e ar mo l ey r m asi u st , Gie an e f ssil uc me o c n s e st i l kt o c rÓ Gau d v lpe a mo e, k o as a Gau an dstiuin t ie t y o c u? ss e eo d d l n wn ssi i rb t , o d ni , o f Getting Slappede pl n an prdc o to s. To ay t s mo e i al o tn rfre t as t Bel x ai d e it uc me d , hi d l s so fe eerd o he l by the ÒFat TailÓ Page 1Cu v , b c se o t shape o t g aph t rsut Ofal po be o to s, t r e e au f he f he r hat e l s. l ssil uc me hemost lik ely rsut ar cu ee at t c ne o t d a r g , whi t least e l s e lstrd he e tr f he at an e l he eprob le events are set at eith end, so t s rfre t as t Òai ab er mei me eerd o he t l sÓ. Increased Saving: A si e v r o o t BelCu v i mappig t po be n meialo to s mpl esin f he l r e s n he ssil u rc uc me An Economic Stimul usfo r l n t si-sie dc . The mo l ey o to fo a r d m t o i 7 r m ol g wo x d d ie i st i l uc me r m k an o hr w s Pl That Mov the an es(whih wi o c r1 .6 o t t , whi t lastl ey c mbn in i et r2 o c l c u 6 7% f he i l me l he e i l o iat s i e k o he r Ò MAL SPI TSÓ ANI RI Page 21 (o l 2 %) These o d mo l ey o to s ar 6 an 8 whih ar e h l ey 2 ny .78 . cn st i l uc me e k d , c e ac i l kt appe 1 .8 % o t t . Thi me s t 4 % o al t o wi b 6 7, o 8 (I o ar 3 9 f he i me s an hat 5 f l hr ws l e , l r. f y uhav an e pein ewi t o e y x re c t he h Ignor Cer ant tainty g ame o caps, t se pr b i t f r he o abl y i (Iam c Ò ertain IdonÕ l t ike dstiuin ar pr b l ale y i rb t s e o aby rad o it,ev though IdonÕ en t know what it is.Ó) Page 3 e ie t vd n.) Reshufling the f Rever Mor se tgage Page 5 Did You Know? W ho were s ome ofthe f t indiv irs idual to be s c ered by le ins ov if urance? Page 6The Bell Cur as a Pr ve edictive Tool Theear man st i ialmappig t rsuti t s b l r e y at c st n s hat e l n hi el -shape f r , wi t d o mat t he hhih pr b i t o to s att c ne, an lw pr b i t e e t atet re d Thi g o abl y uc me i he e tr d o o abl y v ns i ihe n . si so t s rfre t as a Ò o maldstiuin an whe i appe s, an y s i s mei me eerd o nr i rb t ,Ó d o nt ar alst n© Copyright 2011 Page 1
  2. 2. st i is, n u alsce c s, an so i sce c s o tn u t at c atr st in e d cal in e fe se he M ar Gr ss o Lo d n s F n alt a Re arh (Th c o f n o Õ iAn yi c se c eBel r eas a si emo e f rc mplxphe o n l Cu v mpl d lo o e n me a. TruhAb t t ils a dBla k S n Oco e 2 )st e t ou Fa Ta n c wa s, tb r 008 ats I t fn calarn pr b i t mo es ar pev v , n he ian i e a, o abl y d l e r asie i t g o d csin makn c me fo Òo u , f -t ld hat o d e i o ig o s r m r b st at ai eu d b e ey n fo f n man es t idvd al se y v r o e r m u d ag r o n iiu s dstiuin i o r mo eig pr c ss.Ó S ppo t g t s i rb t s n u o dl n oe u ri n hipl nn f r rt e n. An t ri l s a pr be an ig o ei me t r d heen i e o lm: emphasi o d al gwi f -t l v ns, Gr ss wrts, s n e in t at ai e e t o h ieS mei s t sesi emo es jst o Õ d anad q at jb o t me he mpl d l u d nt o eu eo ÒAccording to normal distrib tion,each of uo an y ig t Ò o e phe o n t i f alzn he c mplx n me aÓ hat mpac fn cal t ian i th mark crises ob e et served over th past decade eo to s. uc me sh ld onlyh ou ave occurred once every10 0y ,0 earsItÕ the Im pr s obable Event That Matters or so. Clearly th normal distrib tion , e u Nassi Talb i a Le an se phi so r auho , an m e s b e l phe, o t r d completely misses th lik ood ofmark crisis e elih etst i ii , c re t sevn as a Di ig i d P o e ro at can u rnl r ig st y st ushe r fsso f n and th ore provides risk estimates th eref atRi En ie rn att Ne Yo k Unv r t, P ltc i sk gn eig he w r iesi y oye hnc dangerou u sly nderestimate tru risk Ó e . n i t.I st ue Talb s 2 t e Õ 007 b o ab u u prdcabe e e t o k o t n e it l v ns, * ts fo t s spe c wee po e i a rve fo Rav Noe r m hi eh r std n e iw r m iÒTheBl k S ,Ó was ctd b t New York Times as o e ac wan ie y he n Nag ar , o www.se kn al aj an n e ig pha.c m/ t l/5 09 o ari e2 1 9 co t 1 mo ifu ni b o s wrt nsic W o l W arI. f he 2 st n le t o k i e n e rd al t I Themajrprmi o t Bl k S o e se f he ac wan i t th impact s hat e Fat-Tail Risk Managem ent: Pr otecting Againstofrare events is h ge and h lyu u igh nderrated, and b ecau se W hat W e DonÕ Knowtwe are not conditioned to ex pect th em,we are poorly HereÕs a summary statement from Nassim TalebÕseq ipped to h u andle them, ich mak th impact even wh es eir personal web page (www.fooledbyrandomness.com):greater. ser ee e t ar sai t hav a Òat tailÓ Ð t The ar v ns e d o e f heo to s mihtappe att t l o t dstiuin b t uc me g ar he ai f he i rb t , u s o Éwhile most human thought (particularlywhe t yo c r t i i n he c u , her mpac i e o mo s. ts n r u since the Enlightenment) has focused us on how I f tt i n ac, he mpac o a f t lfn cale e ti so g e t f at ai ian i v n s rat to turn knowledge into decisions, I focus on howt prparn f rt po bl yo i hat e ig o he ssii t f t i to turn lack of information,o c rig i mu h mo e i ran c u rn s c r mpo t t lack of understanding, and The im pact ofa f tail f at inancial event lack of ÒknowledgeÓ intothan prparn f r ohe f mo e e ig o t r ar rl eysc n is. Thu whi a go al i l e aro k s, l lb e is so gr that pr eat epar f the ing or decisions Ð how not to be astock mark meltdown migh b et t e possibility ofit occur ing is m uch r Òturkey.Óu ely preparing to efectively m or im por nlik , f e tant than pr epar f ing or Talb M ar s, Gr ss, an ohe e, k o d t rdeal with it is more important t han otherf m or likely scenar ar e ios. e pet hav c met o g t rc n x rs eo hr u h he e e tmakn fn cald csin b d o ig ian i e i o s ase n rc ssin wi a shar n d f c s o ee o th pe e o u nmo e pr b l, y t lss d amat r o abe e e r ic t ci c n e t man e rsk i he rt al e d o i ag i nsi at n t i s. u o fn cal pr g ams, ian i or btoh fr o I l hto hi Bl k S nig f s ac wan t si he s, ist uin an idvd al M o n it s t o d n iiu s. stTalb has c ld n r dstiuin e al e o mal i rb t o Ò i sc y e e t may hav a lw bg ar v nsÓ e oassu in a Ò rat itl cu mpt so ge nel tal e pr b i t o happe ig b t o abl y i f nn , ufau . De t t sho to n s o t b l (n r r d spi he e rc mig f he el o mal b c set c n q e c s ar tog e , i i f oi t si y e au he o se u n e e o rat t s o l o mpl shdstiuin c r e rl c o i i ac eeat g F n c i rb t ) u v , ei e n t s c lr i É ian e o an n in r t m jst b c se o t i Ò n e n le o Ó g o e he u e au f her o c -i-a-bu -mo nac e a i to e te c d i t par im t stp c l g i ad mi s o nrn he n he adg o o al n t i n u e As Van M u l r a v tr atr. el , e eean l e isu an e if n r canac e abeappr xmat n c pt l o i i .Óo rprse t ie fo W i o si, pu i i hi F b u y 2 1 e e nat r m v sc n n t t n s e r ar 01 , Talb s ci csm i Õ si yanitl cu spat ewe n e Õ rt i sn t mpl i nel tal e bt e c mme t y Va 1 I ea a d Views - F b u y 2 1 t o nar , ns 0 d s n e r ar 01 , hemat n r s o e miue d t l The rali e i ho t se h ed v r n t eai s. e ssu s w he prmar g al is not to mak people rich b t to k i y o Ò e ,u eep themie hav peme e idvd al ian i pl nn pr c sse d as e r atd n iiu fn cal an ig o e s. from b eing poor.ÓP o abl y mo es f r rt e n, rsk tlr c , an rb it i d l o ei me t ir oean e dpo toi al c in fe u nl u t se n r dstiuin rf l l at o o o rq e t se he o mal i rb t y o FAT TAILS & SECOND-LEVEL THINKINGÉmo es t mak pr jcin an g ied csin Thed g r dl o e oe t s d ud e i o s. o an e: IS YOUR FINANCIAL PROGRAM INCORPORATINGBe au t se ar t mo likely o to s, people assu c se he e he st uc me me THESE CONCEPTS? e eir tcomes. W he so t n esehappe s,th will b th ou ese n mehig l n OR ARE YOU STILL W ORKING FROM A ÒNORMALt yar i -prpard he e l e e . l DISTRIBUTIONÓ MODEL? S meohe fn cale pet su r Talb s pespe t e o t r ian i x rs ppo t e Õ r ci . vHo d M ar s, a pr mie t Lo An ee he g f n war k o nn s g ls de udman e an wrtr sai i a F b u y 5 2 1 k y oe ag r d i , e d n e r ar , 01 , e n tad rss at t de he Cou i I v st n M an e n lmba n e me t ag me t Increased Saving:Asso i in t cat * hat su c ssf l iv str n e t d v lp o c e u n e o s e d o e eo An Econom ic Stim ulus PlanÒ c n -lv lt n ig whih g e b y n a me hanst se o d e e hikn ,Ó c os eo d c ii c That Moves the Ô ANIMALappr ac t ve fn cald csin o h hat iws ian i e i o -makn as a Òe i ig rcpefo a c o b o ,Ó an istad f c se o weg n t rm okok d n e o u s n ihig he SPIRITSÕc n q e c s o ohe po beo to s as wel o se u n e f t r ssil uc me l. S M i a Kal i i a Wa SreetJ rn l . t r ia s t ll t ou a ral st erpo tr Tworc n arils, o e e e at e re. ee t t e n c© Copyright 2011 Page 2
  3. 3. o F b u y 8 t ohe o F b u y 1 , 2 1 hihl ht n e r ar , he t r n e r ar 6 01 , g i g t s o fn calu c rait, o e o t b stln - i me f ian i n et ny n f he e o gd amat c g s i t ho sig mar e:mo e b y r ar r i han e n he u n c kt r u es e tr rspo se b t f rb sie s an idvd al i em e n s, oh o u n sse d n iiu s, spayn f r t i ral e at pu c s i c ig o her e st e rhase n ash, an t se d ho t sav É W hi t b e s, su siis, an mo ear o e l ax rak e b de d nt ywho b ro t b y a ho ar c mig u wi l g rd wn orw o u me e o n p t ar e o h poiis c d fntl ifu n ee o o cg o h, t l e an eii y n le c c n mi r wt he c epay ns. me t f u d in f r ln -tr fn cal pr spei an o n ato o o g em ian i o rt y d The swi h t c pu c s i e cal prv e ti t o ash rhase s spe i l e aln n c y st i t, b t idvd al an n in l, i b i o a abl y oh n iiu l d at al s ul n i y o y trale at mar es har e hi b t rc n rc ssin The e st e kt d st t y he e e t e e o . soi b o savn . l ase f ig dNat n Asso i in o Re tr rpo t t i 2 0, 5 .2 i al o cat o f al s e rs hat n 01 4 % oo ho s pu c d i M i weec tan t n I Las f me rhase n ami r ash r saci s. n o Est l n an mait nn he t c abi g d shi naiig al hy ash rsev s n t e re oVe as, 4 .9 o ho pu c s wee pai i c g 5 % f me rhase r d n ash, whi le o l i o e y u idvd al ian i he t c l cieyi ny mpr v s o r n iiu fn cal al ol t l t h, e vP e i had 3 .6 I i tu t man o t setan t n ho nx 5 %. t s r e hat y f he r saci s o ste ghe s t e o o an e egz s t Ò i spii rn t n he c n my d n r ie he anmal rt s.Óiv le f rco d o dste d pr pet s sel g at a n ov o e lse r i rsse o ri e ln i IF YOU DONÕ SEE INVESTMENT OPPORTUNITIES Tdsc u t Ho v r M r i o n. we e, . RIGHT NOW ,KEEP SAVING.Kal a it n td oe t hatd wno o twn M i ami rale W HEN YOU FIND AN OPPORTUNITY,CONSIDERe at prc s r se1 % i st e ie o 5 n THE BENEFITS OF PAYING CASH FOR THEt pasty ar Thi i Õ he e . s sn t PURCHASE INSTEAD OF BORROW ING.jst sc e g r acii . u av n e t t vyPeople are seeingopportu nities, andfinding cash reserves Ignorantare th be est way to People ar seeing oppor e tunities, Certainty:pu ase th rch em. and finding cash r eserves ar the e As f r t o he te d best way to pur rn chase them . ( know I donÕ ÒI ttwar o d l g r d wn ar e o like it,even thoughpay ns, t mo e i Ò rv n mo l b b k who hav me t he v s d ie st y an s, y e I donÕ know tf u d t l g rd wn pay ns dsc u ag d l q e ce o n hat ar e o me t i o r e ei u n is n what it is.Ó)b ice n t b y r e po r t lss an rd cn t y n rasig he u esÕ x su e o o d e u ig heimpac o d ciig prc s.Ó Ban s hav al t htn d t i t f e l n ie n k e so i e e her g The F e c e i rn h ssaystln ig st d d makn i har e f ridvd al t q al y e dn an ar s, ig t d r o n iiu s o u i f M ihe d c l e Mo t g e nainf rmo tag s e e i t y hav su st t d wn pay ns. o rg e v n f he e b ani o al me t (1 3 -1 9 ) 53 52 sag l eyBoh acin hav pr mptdb y r t b igmo ec t t t t s o e o e u es o rn r ash o he o sev d Ò b r e : Noth ing is so f irmly believed as wh is least att l, as t me i d wn pay n r se t 2 % o t abe he dan o me t o o 2 f he k nown. Al u h M o t g es c mme t ar mo e t Ó t g ho nain Õ o ns e r hanpu c rhase prc i 2 0, t hihe pec nag sic 1 9 ie n 01 he g st re t e n e 9 7. f u c nu is od t y st lappl td Ð e cal whe o r e tre l, he i l y o ay spe i l y n(I t f u t q are o 2 , t av r e d wn pay n n he o rh u tr f 006 he eag o me t t tpi i c v u l eisu an e he o c s ash ale i n r c . fwas jst %, an n arz r i so o ehe e mar es.) u 4 d e eo n me v r atd kt I t Untd S ats, t fr f r o c v u l e n he i e t e he ist o ms f ash ale i f Aln wi t s if r in t arils c nai t o g t hi n o mat , he t e o t n wo h o c isu an e appe e ar u d t t o t Ameian Cii n r c ard o n he i me f he rc vlc g n o sev in The fr i valu of cash in h o e t b r at s. o ist s e and. W ar Gie i ln hi o y i wo l se m t c v u . v n t o g str , t ud e hat ash ale sVigna Hal sc a c b y ri t F b u y 8 aril r ii l -Bu h, ash u e n he e r ar t e c l e isu an e wo l b a wel n esto fn calpr d c i n r c f ud e l d r o d ian i o u t -usai, Ò he y u hav a b e o o , i s har o lt o d W n o e ad c n my t Õ d n os f wi a ce l-e abi d po t n i peso al fn cal t h lary st l she si o n r n i ian ipe pl. Bu rg n w, i y u v g tt mo e t pu d wn o e t iht o f o Õ e o he n y o t o pr g ams. Ye a q ik o l e se c rv al man fn cal or t uc ni n arh e e s y ian io a ho se ln tr i s g igt b a g o t n .Ó n u , o g em, t on o e o d hig Õ c mme t o s hav a sto g dstu an o tihtanmo t o natr e r n i r st d urg i si y These o d c mme tc me fo M r Kal a, who st e cn o n o s rm . it ats twar c v u l eisu an e W hy S meo t pr be o d ash ale i n r c . f ? o f he o lmt Òu i ral st epu c s mad wi c i an t r he jmp n e -e at rhase e t ash s ohe h i si y fn calin r c , an t tn e c t d ng at s mpl ian i g o an e d he e d n y o e ir esin o t rvv o anmal spii rtr ig t t g f he e ial f i rt eu nn o he s what s n t asi u d r o d i o e l n esto . ye o o .Ó Ò i spii rfr t a phr fr u d b c n my Anmal rt ees o sÓ ase ist se y Cash valu lif insu e e rance is a complex f inancial1 3 e o o st J hn M ay ar Ke n s t d scie t 9 0s c n mi o n d y e o e rb he produ Bu l eman c mplxistu ns, c v u l e ct. t i k y o e n r me t ash ale i fe o o c c n ie c t pr mpt pe pl t spe d mo e . c n mi o fd n e hat o s o e o n ny isu an e i t ineg t of sev l simp f a c l n r c s he t raion era le in n iaF rKe n s, o e o t f n t n o g v r me t o told o y e n f he u ci s f o en n-c nr l o e c c t Thef n t n an lgco c v u l eisu an e on eps. u ci o d o i f ash ale i n r c fmo ear poiy was t e c u ag t anmalspii Ð t nt y l c o n o r e he i rts o c b rd c d t t e f ry staihto war fn cal an e e u e o hre ail r g f r d ian ipr vd e o o cst ls pac ag s, i td Õ v r ac l . o ie c n mi i u mu k e n o ay s en uar c n e s. o c pt Bu t s c re t e ial fanmal rt has n t n t d t hi u rn rvv o i spii s ohig o o Concept # .I makes sense that the c s oflif insurance 1 t ot ewi g v r me tan fn calist uin poiis. I f t t o en n d ian i n i t h t o l e n ac, c increases with age. A b c c n e o isu an e i asi o c pt f n r c sjstt o si :Ban s an g v r me tag n is, t o g u he ppo t e k d o en n e ce hr u h spradn t rsk o idvd alfn callss aco a l g e ig he i f n iiu ian i o r ss ar ehihe d wn pay ns an t htr ln ig st d d ar g r o me t d i e e dn an ar s, e g n mb r o pe pl. The c sto isu an e i b d o t u e f o e o f n r c s ase n hemakn i har e t b y a ho . Th Ò ig t d r o u me e stimu sÓ is coming lu pr b i t o a lss o c rig g e e pr b i t e u s o abl y f o i c u rn ; ratr o abl y q al ifrom individu with cash savings. als hihe prmims. g r e u Thi mo e n rfe t so s v me t elcs me c mme t mad i o r o ns e n u Ot r f tr b ig e u , te likelih he aco s en q al h ood of d gyinJ u y2 1i e an ar 01 ssu : in rea wit a e. Thu t c sto se u ig l eisu an e c ses h g s, he o f c rn i n r cf Eventu ,th increase in cash reserves will ally e o an an u b s ice s wi ag . Thersuto t s ag - n n al asi n rase t eh e l f hi e e ncertainties in th economy I resolve some ofth u e .n b d prcn stu tr i a ho k y st k shape g aph Ð se ase iig r cu e s ce i c d r e© Copyright 2011 Page 3
  4. 4. t e ampl b lw (F g r 1 -- wi lw r e o ice he x e eo iu e ) t o ats f n rase h F r t se who wan l e isu an e f r tr peid o ho t i n r c o em f ro st o g ag 5 t n ci ig d amat al as o e hr u h e 0, he l n mb r i l c y n e dn b f r t ho k y st k o isu an e c st st t t n ig eo e he c e i f n r c o s ars o cappr ac s l ee pe t c . o he i x can y f b n shar y u ed pl pwar , lv l tr prmims may b a d e e em e u e sat aco y fn calstatg . Ho v r atod rag s man i tr ian i r e y sf we e, le e y Figure 1 idvd al fn t t u r n o epay n rq ie f r n iiu s id hat he p-fo t v r me t e urd o lv lprmims i jstto e pe sie Ye u l eohe f r ee e u s u o x n v. t ni t r o ms k o isu an e t pr b i t o lss o l e i 1 pec n Ð f n r c , he o abl y f o f i s 00 re t i f e e tal , e ey n de Un est dn t s ral y many v nu l v r o e is. y d r an ig hi e i , t people recogniz th potential valu of k e e e eeping life insu orce f oneÕs entire lif d ig so n to l rance in f or e; on o ny rsut i a rtr (t y u b n fcar )fo prmims pai, e l n eu n o o r e eii y r m e u s d b t sopr vd s f ra g e e d g e o fn cal et nyat u al o ie o ratr e re f ian i c rait t e d o l e The c ln e i ho t o ec me t he n f i . f hal g s e w o v ro he fn cal r l o k e n t l eisu an ei f ret o g ian i hu de f e pig he i n r c n o c hr u h f odag . l e Cos I reas as Ris of t nc es k Payout I reas nc es Rel e to Lif Ex tanc ativ e pec y Concept # .For longer term periods,it makes sense to 3 give policy olders access to th ex h eir cess premiu deposits m e orm ofcash valu A lv lprmim rq ie t in th f es. e e e u e urd o mait n l e isu an e f r o es e t e l ei nai i f n r c o n Õ ni r itf me i s su st t l hihe t b ani y g r han sho tr tr pl s, b c se t al re em an e au he su pls prmims ac u l e i t e l y ar o t ru e u c muatd n he ary e s f he FROM AGE 35 TO 85 poiy mu b su st t t c v r t ste c st o lc st e b ani o o e he e p o s f al isu an e l e i l e (se F g 3 . F r e ampl, a lv l n r c atr n i f e i. ) o x e ee prmim l e isu an e poiy c c l e t rmai i f re e u i n r c f l c aluatd o e n n o c u t ag 1 f r a 3 -y ar l rprse t a 6 -y a tr ni e 00 o l 5 e -od e e ns 5 e r em p r d whih i mu h ln e t a 1 1 - o 2 e tr e io , c s c o g r han 0-, 5 r 0-y ar em Concept # . I makes sense to p yf lif insurance 2 t a or e pl . anwith le e premiu over specif periods.Theral y o vl ms ied e i f tice n l c st prmims as o e g t co r t d ig n rasigy o l e uy n es lse o yn Figure 3ce e a fn caldlmma:Each y rats ian i i e ear,it becomes morecostly to protect against an event th is more likely to at ANNUAL COST OF LIFE INSURANCEoccu On way t rsov t s i e i t si y d o t r. e o e le hi ssu s o mpl r p hec v r e Theohe i t e abi a lv l e u stu tr. o eag . t r s o st l sh e e prmim r cu e W hol eI t s aran e n, prmims ar fx df ra spe iidtr n hi r g me t e u e ie o cfe em, le if premiutpial f r1 1 o 2 y ar Du ig t e l po t n o y c l o 0, 5 r 0 e s. y rn he ary ri f o m Annualc t ost tr t an u prmim i g e e t t acu c st he em, he n al e u s ratr han he tal o ofinsuranceo isu an e The isu an e c mpan c l cs t s su pls f n r c. n r c o y ol t hi r u ean iv st i Latri t tr t an u prmim i lss d n e s t e n he em, he n al e u s e .t t acu c st b tt su pls c l ce fo t e l han he tal o , u he r u ol td r m he ary ey ar (pls t iv st n e nn s)mak s u t dfee c e s u he n e me t ar ig e p he ifrn e(se F g 2 . e i. ) Figure 2 20 YR LEVEL TERM VS. ANNUAL Under payment ART) RENEW ABLE TERM ( Coverage ART TERM ends af 20 ter Ov payment er LEVEL years TERM 1 5 9 13 17 21 25 29 33 37 41 45 49 FROM AGE 35 to 85 F r man poiy les, pl ig t s mu h e c ss o y l hod r c acn hi c xe prmim wi an isu an ec mpan rprse t a sinfc t e u t h n r c o y e e ns g iian Ò ppo tnt c st t t i peso al fn c s, e . Ò hat o ru i o Ó o her r n ian e .g W y c ud t mo e b wo t t mei Idd Õ u i t b i a o l hat n y e rh o f in t se t o uld su pls ac o n f rt isu an ec mpan t pay t c sto r u c u t o he n r c o yo he o f l eisu an ei myodag ? i n r c n f l eÓ 1 3 5 7 9 1 1 1 1 1 FROM AGE 355 7 1 3 to 9 Re o nzn t s i e l e isu es gv poiy les c g iig hi ssu , i n rr ie l hod r f c 55 co-ownersh of th ip ese excess premiums Ð and th e© Copyright 2011 Page 4
  5. 5. earnings f rom th investment ofth e em Ð in th f e orm of e nn s ar av l l t t poiy le i t f r o c ar ig e ai e o he l hod r n he o m f ash ab ccash valu S be tt t tr o t poiy t se c es. u jc o he ems f he l , he ash c v u s. Thi rsut i t f l wigb n ft ale s e l n he ol n e ei s o s:v us cnb ac ale a e c essed b te p yh er in a v riet of y h olic old a ywa whi st l naiiga l eisu an eb n ft ys l i mait nn i n r c e ei e l f . The certainty t t an u c sto isu an e i lv l hat he n al o f n r c s e e I poiis i e b wel n l e ssu d y l c -man e isu an ec mpane ag d n r c o is, an fx d an n t be t oc g i t f tr. d ie , d o su jc t han e n he uu ei i q i l ey t c t s ut i l hat ash v u b an e wi , o e t , e k ale al c s l vr i l me Thecertainty t prmims pai wi e e tal d l e hat e u d l v nu l ei r l y ve c e t prmims t hav b e pai. Diie d i ., t x e d he e u hat e e n d vd n s, .e he a b n ft e ei.n n u ane d e nn s o t e c ss prmims, c b o -g ar te ar ig n he x e e u an e The certainty t e c ss prmims d po td wi t hat x e e u e sie t he hrc ie b t poiy le, u d t pay f tr prmims, e ev d y he l hod r se o c uu e e u isu an ec mpan (as welas t dvd n s t mayrsut n r c o y l he iie d hat e l )al we t ac u l e an c mpo n , o appl d t t l d o c muat d o o ud r i o he e c b ac e db t poiyo e. an e c sse y he l c wn rpu c rhaseo ad i o al d p isu an e f dt n pai-u n r c . i The certainty t hat t se fatrs ar spe iial he e ue e cfc l y Thi aran e n i raso abean e ut l f rb t t s r g me t s e n l d q i e o oh he ab e u r e an c nr tal g ar te . n meatd d o tacu l u ane d ypoiy le an t isu an e c mpan . The c l hod r d he n r c o c y ash v u ale Cash v u l e isu an e i a c mplx fn calpr d c ale i n r c s f o e ian i o u tfatr gv s t poiy le a r in e f r pl ig t e u e ie he l hod r at al o acn he c o d sin d t pr vd fn calc rait t efciey ad rss e g e o o ie ian i et ny o fe t l d e ve c ss prmims wi t isu an e c mpan . Lar e xe e u t he n r c o h y gr t wo stt c ud happe , y tpr vd o in f ra r g he r hat o l n e o ie pt s o o an eprmims gv t isu an e c mpan g e e iv st n e u ie he n r c o y ratr n e me t o ohe e e t as wel Ev n i hid g mihtidc et f t r v ns l e f n siht g n iat hat .c t , ln e t peid an g e e fe ii t t me t he api o g r i al me ro s d ratr lxbl y o e t i ohe statge mayhav b e mo epr ft l Ð inte p st t r r e is e e n r oi e ab h a Ðo l at n o f tr cai Att same t , c mpei o bi i f uu e l ms. g o he i me o t in t ,cash v u l e isu an e c niu s t hav fn cal ale i n r c o t e o f n e ian iamo g isu es pr vd s ic nie f r c mpane t n n rr o ie n e t s o o v is o rlv c b c se i f r ee an e e au t o matrc g ie t i ran e o s e o nz s he mpo t c fmaxmie t i c i z her ash v u ac u l in an ac o n ale c muat s o d cu t rspo dn t ftre u k o s. e n ig o uu n n wnfatrs f rt b n ft ft poiy le. e u e o he e ei o he l hod r c Ev n fo t s b ifo eve i sho l b apparn t e r m hi re v r iw, t ud e e t hat READY TO LEARN MORE ABOUT HOW CASHc mbnn t t e v i ls o ag -b d isu an e c st o iig he hre arabe f e ase n r c o s, VALUE LIFE INSURANCE COULD MAKE Alv l prmims, an c ee e u d ash v u ac o ns mak s f r a ale c u t e o DIFFERENCE IN YOUR FINANCIAL PLANS?c mplx fn cal pr d c. S me o t dst e f r c o e ian i o ut o f he i ast o ashv u l e isu an e i pr b l d e t t pr d cÕ ale i n r c s f o aby u o he o u tsc mplxt. F n call eac i t Untd S ats i o tn o ei y ian i i r y n he i t e t e s feso ey l kn . A po l o -l e fn calad ie we si rl ac ig puar n i ian i n vc b t e Re-shufling the Rever Mor f se tgagedsmi s c v u l eisu an et s way Òng n r , t s i sse ash ale i n r c hi f : I e eal hi Som e changes in the rever m or se tgage m ar m ay keti a v r c mpl atd tpi an welb y n t sc pe o s ey o i e o c d l e o d he o c f m ake it easier f senior to access their hom e or swhatwec e l c v rhee S , i t c n e s ar o e an asi o e r.Ó o f he o c pt e v r y equity,but they also protect lender fom declining s ry u he , f r e i (J st e au mo pe pl d n t nt l o r ad o g t t u b c se st o e o Õ ii al ? i y values in the r estate m ar eal ket.u d r an ho t o r ean auo bl d e Õ me t y n est d w o peat tmo i o sn t an he esho l set f rrdn a bk t rsto t i l e Thats ud t e o iig ie he e f her i s. l v Õ A rv r mo tag al ws pe pl ag 6 o od r t e ese rg e l o o e e 2 r le owhywehav d ieÕ e u at ncasse e rv rs d c i l s.) o c n ete ut i t i ho t c o v r q i n her me o ash, i t f r o a lmp y n he o m f u An t r raso so fn cale pet ar anag nst ohe e n me ian i x rs e t o i i c su a l e o ce i o mo t y dstiuin Bo r wes m, i f rdt r nhl i rb t s. n o ro rtwar c o d ash v u l e isu an e i t i b l f i t ale i n r c s her ei n he f e u n a rv r mo tag d n t hav t mak mo t y sig e ese rg e o o e o e nhlprob ilities o n tn e ig l eisu an eas o se t t ab f o e dn i n r c f ppo d o he rpay ns. The lan i d e wi itrst whe t e me t o s u, t nee , h n hepossib ilities o ral n e ig i Thi i v r si l t t f e l e dn t y . s s ey mi o hear b ro rde mo e sel t ho seo f l t paypr pet o r we is, v s, l he u r ai o s s o rymid to t sepe pl whoin r t f t lc n q e c s n se f ho o e g o e he at ai o se u n e t e o ho o eÕ isu an e To q al y f r a rv r ax s r me wn rs n r c . u i o f e eseo o c -i-a-l ei e e t (as dsc sse i t prvo s f ne n i t f me v ns i u d n he e iu mo tag , t pr pet mu b t b ro rs prmar rg e he o ry st e he o r weÕ i yaril) Usigt s tpeo t n ig t e. c n hi y f hikn É rsie c , an mu et rb hed fe an ce o b pai e d n e d st i he e l re d lar r e d o fwi a po t no t pr c e s fo t rv r mo tag . f t h ri f he o e d r m he e ese rg e o Yo prob ly t n y u d n tn e l eisu an eÐ y u ab hik o o Õ e d i n r c f et. Theamo n rc ie d pe d o t pr petÕ v u an t u t e ev d e n s n he o ry s ale d he(Afe al y u r st l ie tr l o Õe i al .) , l v ag o t rcpin. e f he e i e t Yo prob ly t n y u wo Õ n e o wan l e u ab hik o nt e d r t i f W hi rv r mo tag s c pr vd a mu h n e e l e ese e rg e an o ie c ed disu an ei y u odag b c se n r c n o r l e e au É so reo rt e n ic mef rrt e s, so c mme t o s u c f ei me t n o r o ei e r me o natr Yo prob ly t n y u wi hav sav d e o g f r u ab hik o l l e e nuh o hav ci cz d t i u r n fe whih c tt as mu h as e rt ie her pfo t e s, i c an oal crt e n, an É ei me t d r 5 o a ho Õ v u . TheF d r Ho sig Ad nstat n % f mes ale e eal u n mii r i ,o Yo prob ly t n y u wo Õ hav an e at t i e u ab hik o nt e st e ax ssu , whih has o esiht rspo sii t f r rv r mo tag s, c v r g e n bl y o e ese i rg ebt uÉ al pr vd s isu an et ln es sho l t f tr v u o so o ie n r c o e d r ud he uu e ale f Yo prob lyt n y uwi hav ohe asses t lav as u ab hik o l l e t r t oe e t pr pet b less ta te a n owed wh te loa he o ry e h n h mou t en h nanihei c . n rt e an comes d e.To c v r t s rsk F u o e hi i , HA c l cs an u r n ol t e p-fo t Ofc u se i i l ey t o eo mo eo t sepr b l o r , t s i l hat n r r f ho k o abe isu an efe whih c b as hih as 2 o t pr petÕ n r c e, c an e g % f he o ry so to s wo Õ c me t pass. An t n t pr b i t o uc me nt o o d he he o abl y f i v u , ac o dn t a J u y 8 2 1 Wa SreetJ rn l ale c r ig o an ar , 01 , ll t ou aral wanigl eisu an ec udb mu h g e e. e ly t i n r c o l e c ratr n f rpo tb An e Teg se . I ad i o , b k al tpial e r y n r e n n dt n an s so y c l i y I c nr , t stu tr o a c v u l e isu an e n o tast he r cu e f ash ale i n r c f ad tan t n an sevc fe f r o iiat g a rv r d r saci o d r ie e s o rgn i n e esepoiymak s i po bef ridvd al t k e l eisu an e lc e t ssil o n iiu s o e p i n r c f mo tag . Thu t tan t n c st f ra rv r mo tag rg e s, he r saci o s o o e ese rg ei f ref ras ln t y l e u n a lv lprmim f r . n oc o o g he i , sig e e e u o mat v o a $ 00,000 pr pet c udappr ac $ 5 n 5 o ry o l o h 2 ,000.Beo e t e d o l e t e c ss prmims an t i f r he n f i , he x e f e u d her© Copyright 2011 Page 5
  6. 6. As a rsuto t rc n d cie i ho sig prc s, i i e l f he e e t e l n u n ie t s n l ey t man c re trv r mo tag e will owe more i l hat k y u rn e ese rg e s ta te v lu of h p ert whih lav s t F h n h a e teir rop y, c e e he HA o t n he DID ho kt mak u t dfee c . Tomii z t s o c re c o o e p he ifrn e nmie hi c u rn e YO g ig f r d t ag n y has auho ie a n w rv r on o war , he e c t rz d e e ese mo tag f r . I e c g f r rc iig a smal r rg e o mat n x han e o e evn l e U pec nag o e ut fo t i rv r mo tag , F re t e f q i r m her e ese rg e HA has y KN lwee t i isu an e prmim t 0.01 o t pr pet o rd her n r c e u o % f he o ry v u . I ad i o , so b k hav et rlwee o waie ale n dt n me an s i ei he o rd r v d OW fe pr vd d t t b ro rt e a lmp-su pay n e s, o ie hat he o r we ak s u m me t (t s ac r ig itrst o t f l amo n o t rv r hu cun nee n he ul u t f he e ese ?.. . mo tag lan . The itrstc g d f r a n -fe lan i rg e o ) nee har e o o e o s tpial hihe as wel y c l g r y l. Early W hi t se pr vsin may lwe u r n c st t l he e o io s o r p-fo t o s o life insurance policies covered the Pope c n mes, t y al et r lwe t rsk f r ln es, o o su r he so i he o r he i o e d r r and government officials ice poe t rtr s f rln es. I so cru an e n rase tni eu n o e d r n me ic mst c s, al idvd al may fn t od r Ò r e pe sie f r i n iiu s id he le, mo e x n v Ó o mat s S me o t fr rc r e l e isu an e c nr t wee o f he ist e o d d i n r c o tacs f r acu l a b t rv u i t ln r n tal y et ale n he o g u . e o e b Ial b k r t isu e t l e o rl iu wn d y t i an es hat n rd he i s f ei o s an v g Given these new var iables,a consultation with an g v r me to fcal The ac o n b o s o Ben d d o en n fii s. c u t o k f r ar o your tr usted financial specialist is r ecom m ended Camba, a b k r wi t po ru Ial f l, t i an e t he wef l t i ami he h an y bef e consider or ing a r ever m or se tgage. And the M e ii sho prmims pai f rP peNihoas V, t Do e dcs, w e u do o c l he g FHA actually has a nationwide networ ofappr k oved o Ve iean t Kig o Ar o . F E. d Ro v r auho f nc d he n f ag n . e o e, t r rever m or se tgage counselor s. o t 1 4 b o Ò l Ex f he 9 5 o k Eary ampls o M art I su an e e f i me n r c ,Ó i c mme t t t se c nr t wee e ni l peso al o ns hat he o tacs r sse t y r n al wag r o t l e o t se me , as t r wee n l e es n he i s f he v n hee r o i f e pe t c t ls o whih t c c l e t isu e Õ he t x can y abe n c o aluat he n rd s al h o ln e i (al u h P peNihoas sev d jsteg y ar r o g vt t g o y ho c l r e u iht e s an de whi i o fc , so t M e ii may hav c l ce d id l n fie e he dcs e ol td e o t i iv st n) n her n e me t. This newsletter is prepared by an independent third party fo r distribu tio n by yo u r representativ e. M aterial disc u ssed is m eant fo r g eneral illu stratio n and/o r info rm atio nal pu rpo ses o nly and it is no t to be c o nstru ed as tax , leg al o r inv estm ent adv ic e. A ltho u g h the info rm atio n has been g athered fro m so u rc es believ ed reliable,please no te that indiv idu al situ atio ns c an v ary, therefo re the info rm atio n sho u ld be relied u po n when c o o rdinated with indiv idu al pro fessio nal adv ic e. L ink s to o ther sites are fo r yo u r c o nv enienc e in lo c ating related info rm atio n and serv ic es. The R epresentativ e(s) do es no t m aintain these o ther sites and has no c o ntro l o v er the o rg aniz atio ns that m aintain the sites o r the info rm atio n, pro du c ts o r serv ic es these o rg aniz atio ns pro v ide. The R epresentativ e(s) ex pressly disc laim s any respo nsibility fo r the c o ntent, the ac c u rac y o f the info rm atio n o r the q u ality o f pro du c ts o r serv ic es pro v ided by the o rg aniz atio ns that m aintain these sites. The R epresentativ e(s) do es no t rec o m m end o r endo rse these o rg aniz atio ns o r their pro du c ts o r serv ic es in any way. W e hav e no t rev iewed o r appro v ed the abo v e referenc ed pu blic atio ns no r rec o m m end o r endo rse them in any way. © Copyright 2011 Page 6

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