Tag Archives: Wealth Management

Life Insurance 101

By Josh Hegland, CFP®

Life insurance is an important component of a comprehensive financial plan that is often overlooked. While nobody likes to consider their own demise, the idea of a loved one struggling because you didn’t have sufficient coverage is unsettling.

Life insurance can be grouped into two categories: Term and Permanent. Term is the most straightforward and least expensive form of life insurance. It provides coverage to the insured for a specific period of time (usually 10, 20, or 30 years) with a specific premium. Once the period or “term” is over, the policy expires or can be extended for an increased premium. Since term insurance allows a person to only fund the years for which they have a true need for insurance, this type of policy provides a better death benefit for the premiums paid.

Permanent life insurance is designed to provide coverage for the policy holder’s entire life. While lifelong coverage may sound more appealing, these policies are extremely costly and often unnecessary. One example of permanent life insurance is whole life. Whole life insurance policies often carry a 50% minimum front load commission charge that goes directly to the agent. As discussed on our podcast, insurance agents do not have a fiduciary duty, and hence, they are not required to put a client’s interests first when recommending a policy. This can obviously create a conflict of interest, as agents are highly incentivized to sell whole life policies to clients.

In addition to a death benefit, permanent life policies (such as whole life) can offer a savings component. This portion, known as the cash value, typically has a guaranteed return of 2% per year and projected returns of 4-5% over the life of the policy. The word “guarantee” often perks up investor ears. However, keep in mind that historical data1 shows us that a low-cost diversified investment portfolio can provide investors a much higher yield. Over a lifetime, it is highly likely that the investor choosing a well-diversified portfolio will yield more than a life insurance investor. As our core values state, our goal at Cahaba is to always “keep the main thing the main thing”. To that end, we believe insurance should be used for insuring, and investments should be used for investing.

With a few exceptions, we at Cahaba generally prefer the more appropriate term life policies vs. permanent/whole life products when viewing insurance.  We acknowledge that there are situations where a permanent policy might be needed, such as for funding an irrevocable trust for estate planning needs or a buy/sell agreement for business owners. However, these situations are an anomaly. Bottom line, it is important you fully understand what you are buying and how the policy is fulfilling your coverage needs.

With these different types of insurance in mind, we are then left to wonder: how much coverage and what type of policy do I need? In truth, there is no one size fits all answer here, as the “right” amount depends on a number of factors. Do your loved ones depend on your income? How much outstanding debt would need to be retired? What amount of Social Security benefits will your family receive at death? These are all questions we ask our clients during our financial plan construction. Based on your specific situation, we are able to evaluate your needs to ensure your loved ones will be taken care of when you’re gone.

As always, do not hesitate to reach out if you have any questions!

Note: At Cahaba Wealth Management, we do not sell life insurance policies themselves, but we can make recommendations on coverage and types. We can also help you prepare to meet with an insurance agent. 

Josh Hegland, CFP® is an associate advisor in the Atlanta office of Cahaba Wealth Management, www.cahabawealth.com.

Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.

1 Source: https://advisors.vanguard.com/VGApp/iip/advisor/csa/analysisTools/portfolioAnalytics/historicalRiskReturn

Why Are My Medicare Premiums So High?

By Charlotte Disley

The world of Medicare can often times bring on feelings of confusion, and not to mention, high premiums! It is important that those enrolling in Medicare Part B (Medical Insurance) and Part D (Drug Coverage) have a solid understanding of how their premiums are being calculated.  

Income-Related Monthly Adjustment Amount (“IRMAA”) is a surcharge added on top of original Part B and Part D premiums, and is based on different income thresholds which are determined by Modified Adjustment Gross Income (MAGI) from two years prior. For example, premiums in 2023 would be assessed by MAGI taken from a 2021 tax return. 2023 IRMAA premiums for Part B is shown in the tables below. Note that the monthly premium amounts listed are per person.

Source: https://www.cms.gov/newsroom/fact-sheets/2023-medicare-parts-b-premiums-and-deductibles-2023-medicare-part-d-income-related-monthly

Certain individuals may be eligible to appeal IRMAA if they have experienced a life changing event that reduced household income and moved them into a threshold with a lower premium. If income is significantly different in the current year than two years prior, then there are a few steps to take to appeal the premium amount. The SSA will not automatically adjust your premium amount, so it is important to pay attention to your income each year and ensure you are placed into the accurate IRMAA bracket.

Let’s take a look at a hypothetical, yet realistic, example of how this might play out for a couple on Medicare in 2023 looking solely at their Part B premiums.

John and Jane Doe are both age 70 and are married filing jointly. Jane retired at age 50 from company X, but her only source of retirement income is in the form of an IRA. John spent his life working at company Y where they offered a 401(k), a qualified pension (monthly annuity payment), and a non-qualified pension paid in annual installments over a 10 year-period. John retired at the end of the year in which he turned 58. They are not yet at the age of needing to take RMDs from their retirement accounts. John had been consulting since his retirement, bringing in annual earnings of $200k, but stopped at the end of 2021. On top of this, his last non-qualified pension payment of $150k paid at the end of 2021. As a couple, they have consistent streams of taxable income in the form of his qualified pension ($75k/year) and the taxable portion of their social security payments ($80k/year).

Given this information and assuming they have no other taxable income streams, in 2021, John and Jane had a MAGI of $505k. Looking back at the premium threshold, this would set them comfortably into the bracket with a $527.50 monthly premium each for 2023. Comparatively, today (assuming no additional income other than qualified pension and social security), the reality of their MAGI is $155k. This places the Doe’s into the lowest IRMAA bracket with a monthly premium of $164.90 each. This produces a whopping ~$8,700 of savings on Medicare Part B premiums if they take the time and effort to appeal IRMAA.

So, how do you actually appeal IRMAA?

You will need to fill out the following form (https://www.ssa.gov/forms/ssa-44.pdf) and provide supporting documents that show a more accurate depiction of current income. This is where Cahaba comes in to assist our clients with the process! Knowing our clients’ financial situations inside and out allows us to help prepare supporting documents, as well as cover letters detailing the request for adjustment. This takes much of the burden for preparation off of our clients, and usually results in a successful appeal!

Charlotte Disley is a financial planning analyst in the Atlanta office of Cahaba Wealth Management, www.cahabawealth.com.

Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.

The Case for International Stocks

By Don Keeney, CFA, CFP®

Many of us have heard statistics1 claiming:

  • Domestic stocks have outperformed international stocks eight out of the last ten years.
  • Domestic stocks have outperformed international stocks by a cumulative 20 percentage points over the last three years.
  • Domestic stocks have outperformed international stocks by a cumulative 50 percentage points over the last five years.

These truths make it seem as though investing in international stocks is a complete waste of time. To help explain why that’s not the case, let’s take a look at some additional data.

Figure 1

The above chart containing data from 1973 to 2022 outlines the following:

  • Over the last 50 years, domestic stocks have outperformed international stocks only 59% of those years.
  • International stocks have outperformed domestic stocks 100% of the time when domestic stocks had returns of less than 4% for the year.
  • International stocks have outperformed domestic stocks 96% of the time when domestic stocks had returns of less than 6% for the year.

Some of what we hear is rooted in Recency Bias. Recency bias is a behavioral pattern in which people incorrectly believe recent events will soon either occur again or persist indefinitely. This bias inhibits an individual’s ability to objectively gauge probabilities, which can lead to poor decisions. While domestic stocks have outperformed international stocks more recently, this has not consistently been the historical norm – nor can we say it will be the case in all future years. We have to separate recent market occurrences from future anticipated market movements.

There is solid evidence that shows the outperformance of one stock market over the other occurs in long cycles (see figure 2). The current cycle is now over 12 years long (including 2023 year-to-date). However, immediately before the current cycle started, international stocks outperformed domestic stocks for roughly eight consecutive years. While the below graphic consists of 5-year rolling returns and not stand-alone calendar years, the perspective remains meaningful. The current cycle is not going to last forever. Investors should acknowledge recency bias and expect the market to NOT stay that way.

Figure 2

When is the next cycle going to start? Who knows! Was international’s outperformance in 2022 the start of a new, long-term outperformance cycle? Who knows! Only one thing remains certain: at some point, the current performance cycle will flip, and international stocks will outperform domestic stocks (at least until the next cycle begins).

With this in mind, Cahaba Wealth Management appropriately constructs your investment portfolio to maximize the potential return for an appropriate amount of risk over the long term. The conversation above about which asset class is going to outperform another asset class actually misses the bigger, more important idea at play: diversification. Diversification is the process of spreading your investments around to multiple different asset classes so that your exposure to any one type is limited. As we tell our clients, diversification is the only “free lunch” in investing!

In other words, an investor can purchase two (or more) risky assets and simultaneously (1) improve the expected rate of return for the combined portfolio AND (2) reduce the portfolio’s overall expected risk. Diversification is a true “two-for-one special”! The only caveat is that the assets cannot act exactly like each other – meaning the assets should not have the same performance and volatility patterns. The more dissimilar the returns are, the larger the “free lunch”.

The takeaway is not to ask if international stocks will ever outperform domestic stocks again (or vice-versa); instead, it is to capitalize on the value of diversification and the resulting higher expected returns, with lower volatility, over your long term investing horizon. The inclusion of temporarily underperforming asset classes will always remain a positive contributor to your portfolio, given the power of diversification!

Don Keeney, CFA, CFP® is a financial advisor in the Nashville office of Cahaba Wealth Management, www.cahabawealth.com.

Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.

1Source: ycharts.com