Outside Economics

Age, Spending Plan, and Life Insurance

Posted by Wendell Brock, MBA, ChFC on Fri, Sep 30, 2016

Demographics play a significant role in how much we spend and how we spend it.  Spending is primarily dictated by age where different needs and life essentials change and evolve as consumers grow older. For many families some financial obligations never go away.

Housing, transportation and food are the three largest expenses incurred by all age groups. These basic expenses often fit into the typical needs that many families have for life insurance. When looking at how much insurance to get people should consider an amount that will cover these expenses long into their future. People, even afterchart.jpg retirement will still have these expenses.

These long lasting expenses should be covered with a permanent insurance policy, like whole life. Where the premium will remain level for your entire life. For example a base policy might be something in the area of $250,000 to $500,000 in coverage. Such a policy is much less expensive in a person’s younger years, making them very cost effective over the long term. 

As consumers move from their late 20s into their 30s, we earn more money and families start to grow. Expenditures on transportation, health care and entertainment become prevalent as households grow with children. These more temporary expenses would typically be covered by term insurance. When the financial need or obligation is completed the insurance can be dropped. This allows a family to be covered for the extra needs for vary little money, while at the same time maintaining their base whole life policy, which will provide the needed protection long after retirement.

As we earn more, we also tend to save more in our 30s, 40s, and 50s by contributing to 401k plans and retirement savings. At 75 years of age and older, our retirement savings start to reduce as withdrawals increase to replace lost earned income. Retirement savings is critical to your financial success. The life insurance is what secures the retirement savings. However, even with a large retirement account or pension, the basic need for insurance may not ever go away. How have you determined your needs for life insurance? With September being National Life Insurance Month - now is a great time to review your coverage.

There is the simple acronym: DIME with the meaning: D: Debts; How much do you have in outstanding debt obligations (excluding your mortgage)? I: Income; What amount of your income do you want to replace and for how long? Mortgage: How much would it take to pay off your mortgage? E: Education; What do you want to leave for your children and/or grandchildren for education expenses?

Now add these DIME numbers up and get the total. Subtract from the total how much life insurance you currently have in place and that is your current need. Typically, your current needs may range from 10-20 times your annual income, with up to about three to seven times your annual income as a base amount. Review the second paragraph up top to determine your very long term needs and see how this matches up.

 Sources: Social Security Administration, U.S. Census Bureau


Whatever excuses you may have for not buying life insurance now will only sound ridiculous to your widow!

 - Unknown Author

Topics: life insurance, retirement plan

How Banks Make Money

Posted by Wendell Brock, MBA, ChFC on Fri, Sep 23, 2016

Over the years, banks experienced a metamorphosis from simple corner branches offering savings, checking, and basic bank loans, to mega financial entities offering investment products, mortgages, specialized lines of credit, investment banking, and private banking. All of these additional services along with the regular “fees” banks charge is how they earn money.

The dismantling of the depression era regulation, the Glass-Steagall Act, also known as the Banking Act of 1933, allowed banks, insurance companies, and investment banks the ability to enter into multiple business functions. Some economists believe that the loosening of these regulations, along with the tightening of the Community Reinvestment Act (CRA) that started in the mid 1990s may have led to the financial crisis of September 2008.

For years banks basically made money from the interest earned on their loans and mortgages. This interest earned by banks is known as net interest margin, thus greater interest rates essentially earned larger net interest margins. This formula was fine for years until rates started to drop. As rates dropped, banks were able to earn less of a margin. That margin is the difference between what banks pay the depositors and federal reserve bank to borrow funds versus what they lend it out for to both retail and institutional customers. 


And yes, when you are a depositor to a bank you are lending your money to the bank, so they can re-lend it out at a higher rate. The difficult part of banking is to get enough people to “lend the bank money” through deposits. Having your deposits at the bank is their life blood. Incidentally, that is one way for a bank to fail - if most customers withdrew all their money at a time when the bank could not call in enough loans to meet the needs of the depositors. Historically this is known as a “run on the bank,” which is what happened in the early 1930’s, causing thousands of banks to fail.

Credit Card Debt On The Rise

An example of how banks make moneys the use of credit cards. U.S. banks have ramped up lending to consumers through credit cards at the fastest pace since 2007. The industry has accumulated an additional $18 billion of credit card loans and other types of revolving credit in the past three months.

Data released by the Federal Reserve shows that the U.S. banking industry has seen credit card and other revolving loans rise at a annual rate of 7.6% in the second quarter of 2016, to $685 billion. The credit card business remains among the most profitable in banking as banks can charge much higher interest rates than other loan types, with average credit card rates between 12% and 14%. 

Taking the lower rate of 12% with the typical CD rate of 1.0%, that gives the bank a net interest margin of 11.0% on that book of business. However for most banks, (small community banks) credit cards are a very small percentage of their business. To the larger banks, like Capital One and many others, credit cards lending is a much larger part of their business model. Along with credit card lending the default rate is much higher too, which lowers profits. 

As credit card debt levels have risen, so have reserves for losses as banks anticipate delinquencies to rise. According to Federal Reserve data, within the past year U.S. banks have piled on about $54 billion worth of loans to consumers through credit cards,. Financially savvy consumers that pay their balances down each month avoid hefty interest charges, but those that don’t, known as “revolvers,” pay average rates of between 12% to 14% and significantly more, as much as 30%, if they are considered higher risk borrowers. 

Seven years since the recession ended, consumers who were hit hard during the financial crisis have found their credit scores improving.  Bankers attribute a rise in credit card issuance to rising home prices and low unemployment. Banks are also lending more since one of the most important drivers of their profits are net interest margins, the difference between returns on assets and the cost of funds, which remain near their lowest levels in decades. The average credit limit per card for a subprime borrower is about $2,300, compared with about $11,500 for the safest customers. 

How does this affect you personally? I would suggest monitoring your banking relationships regularly. Review the fees you pay, what rates you pay on credit cards, etc. Look for the low cost solutions. And above all GET OUT and STAY OUT OF DEBT! Don’t get sucked into the emotional feeling that you “need” something so badly that you will borrow for it (home excluded). The credit card offers are so enticing with all the points they give you back, etc.; these are bank promotions and marketing games.  Just get out and stay out of debt. Period. Your real financial strength is not from your credit score - it is from your ability to stay out of debt.


Sources: Federal Reserve, FDIC, Office of the Comptroller of the Currency



"Gold is money, anything else is credit." - J.P. Morgan


Topics: credit score, debt free, bank loans, financial strength

The Only Good Life Insurance Policy

Posted by Wendell Brock, MBA, ChFC on Fri, Sep 16, 2016

September is National Life Insurance month - let me guess, you did not know that we had a national life insurance month, few people do. Now is the time to make the public more aware of life insurance and its uses and benefits. There are two main questions people ask when talking about life insurance: How much do I need? and What type of life insurance should I have?

While those two questions are important, they are often answered like this: buy approximately five to ten times your annual income, and buy the cheapest term insurance you can get. In reality there is much more to those questions than that! After all, life insurance is a major part of your personal financial foundation, it is there to protect your greatest asset: You, Your Life!bigstock-Life-Insurance-Protection-Bene-134100164.jpg

When building a financial strength, a solid foundation is needed, a person starts with risk management and estate planning. These two elements never go away. For as long as you live you will need to manage the risks you and your assets are exposed to and plan for the disposition of those assets upon your death - when ever that is. 

Your assets consist of all the things you own: investments, bank accounts, home, vacation home, retirement accounts, automobiles, business assets, heirlooms, art, etc. The disposition of these assets becomes vitally important because if you don’t take the time to plan for their distribution, by law the state government, where ever you live, will tell your heirs how your assets will be divided.

Most people have all of their assets insured, certainly their home and its contents, bank accounts, and automobiles. Those are very important assets, and improper use of automobiles can cause serious injury to another person if an accident were to occur. So the amount of life insurance may fall into an easy answer of five to ten times your annual income, sometimes a proper needs analysis should be done to determine the right amount. So what about the type life insurance…

Many financial advisors and drive-by financial planners (the ones on the radio) often simply tell folks all they need is cheap term life insurance. They say never get whole life or any other type of cash value life insurance, because “its too expensive.” Or if you want to “invest” your money put it in the market. Another classic one is, the goal is to accumulate enough money so you can “self-insure your life” so you don’t need any life insurance.

Now don’t get me wrong I am a firm believer in term insurance and I think it is a tool to use in the right circumstances, in addition to their base or foundation policy, that being a solid cash value policy. Term insurance was never meant to be the bedrock foundation of a person’s financial structure. A foundation should last more than 10 or 20 years. How would that work if your contractor who built you a new house put in a term foundation, telling you the concrete in the foundation is only good for 20 years then it will expire and the house will fall down! Or in order to keep the house standing you will need to replace the foundation in 20 years.

That would be an expensive foundation. Replacing and/or buying a new foundation for a 20 year old house would be really expensive! A term policy is more like the roof - you know that will wear out and need to be replaced at some point in time. Yes, it protects the house but it is not the foundation.

As a practicing professional, I have visited with many people over the years who had purchased a cheap term policy when they were younger believing that it would serve their needs. That was it - no other insurance. Fast forward to when the term policy is close to the end of its life and the person still needs insurance. For what ever reason they did not accumulate enough to, as the drive-by’s would say, “self-insure”. Only now to get the same amount of term insurance is cost prohibitive, and they certainly cannot afford the same amount of coverage with whole life.  So they look at a reduced amount of death benefit. But now at their advanced age even a reduced amount is expensive. So that brings me to a question, that can be asked at any age: What is too expensive?  

Obviously expensive means different things to each person and in relation to life insurance that is all over the board. But what is “too expensive”? They say that term insurance is cheap - then what defines cheap? Maybe we should start with the purpose of life insurance. Life insurance first and foremost is for your family, to protect your loved ones or others from the economic hardship that will occur upon your death. It is not for the insured person, it is for the people they leave behind. 

This means that a person has an economic value. Typically that economic value is determined by the income a person produces, the debts they carry, and their estimated final expenses. At a minimum a person should leave the world debt free. A question is then asked: Do people have an economic value clear into retirement and even into their 80’s or 90’s? Yes they do. Remember the economic value is not for the insured who may be 85 or 90 years old; it is to help the people that person may leave behind. And those values can change and the people left behind may change over time too. But value is still there. And because there is value, there is a need for life insurance.

Now about the type of coverage, obviously the only good policy is one that pays a death benefit when a person dies. All other policies are not relevant. The premium to buy the policy may not be relevant. Only if the policy is in force and pays a death benefit is the policy of any value. 

Understanding that key element, a term policy may or may not be in force when the insured dies. It all depends if the insured happened to die within the term period and if the premiums were paid. The saddest thing is when a person dies shortly after their term policy expired or lapsed, leaving nothing for their heirs. There is a reason term insurance is so “cheap”, most policies never pay a death benefit. If more term insurance paid a death benefit, the premiums would be more expensive. 

In reality the most expensive policy is one in which a person paid on for years and years and then lapses before death and heirs never received a penny. Even the policies that cost only $50 per month, over a year that is $600 and over 20 years that is $12,000!

What about a whole life policy, it is more expensive? For the same policy that may cost someone $50 per month may cost $250 per month or $3000 per year. Yes that is true, however this policy will likely still be in force when the person dies and will actually pay the death benefit. Giving the heirs much needed thousands of dollars. Yes initially it costs more $50 vs. $250 but if the policy actually pays a death benefit and the other does not, which one cost more?

The amount of insurance you carry and the type of insurance you have are important particularly when you look out twenty, thirty, or even 50 years from now. I still have my first whole life policy I bought when I was 18 years old. It has served me very well and I have used it (the cash value) on several occasions, such as to purchase an automobile. It has been a solid part of my financial foundation and protected my family well. I bought that policy long before I ever knew that I would spend most of my professional life serving people in the financial sector and I am so grateful I did!



"The only good life insurance policy is one that pays on death." Wendell Brock


Topics: life insurance, Whole Life Insurance, Estate Planning, Financial Foundation

New Neighbors: Bankers Help Foreigners Buy U.S. Real Estate

Posted by Wendell Brock, MBA, ChFC on Fri, Sep 02, 2016

A growing number of foreigners have been actively buying real estate here in the U.S. Buyers from other countries such as China, India, Canada, and Mexico have been acquiring both residential homes and commercial properties in selective areas. Foreign buyers purchased $102.6 billion of residential property from April 2015 to March 2016, made up of 214,885 in residential properties.

Bankers Involved

Foreigners and/or undocumented aliens obtaining bank loans has been something the Federal Reserve Bank started pushing ten plus years ago. In 2006 I attended a meeting for bankers where the Fed was teaching bankers how to underwrite home loans for undocumented people here in the U.S.sold_sign.jpg

Making these bank loans is a major stimulus to economic growth. Homeowners buy things for their new homes, make home repairs, and banks make money which goes back out into the economy. Homeownership in general is a good thing; it creates a store of value where people can save more money, put down some roots, and contribute to society. 

Treasury Monitoring 

The U.S. Treasury Department closely monitors these transactions as it tries to identify any irregular buyers that may be filtering illicit funds into U.S. assets. Data revealed that the bulk of acquisitions by foreigners are occurring in particularly higher-end markets including Manhattan, Miami, various New York boroughs, San Diego, Los Angeles, San Francisco, and areas of Texas.

Of suspicious nature are those properties that are bought as straight cash purchases and priced at the top 10% of their respective market. The original initiative began in March of this year and has thus far helped Federal authorities identify various criminal activities.

Data reveals that foreign buyers typically purchase more expensive properties, purchasing those valued at $277,380 compared to the median price of $223,058 of all U.S existing home sales.  Forty-five percent of foreign buyers who purchased residential property came from China, Canada, India, the United Kingdom, and Mexico.

Although foreigners purchased property nationwide, five states accounted for 51 percent of total residential property purchases:  Florida, California, Texas, Arizona, and New York.

Seventy-two percent of non-resident foreign buyers purchased property as a vacation and/or residential rental property for investment, while 21 percent of resident foreign buyers purchased property for vacation and/or rental use.


These new homeowners that use the property for rentals can be a problem - as many landlords from other countries may not know our laws. Owning rental property in the United States is much different than in other countries - here the tenants have rights! In an effort to save money these new landlords may expect the tenant to pay for repairs that are the landlord’s responsibility.

One friend of mine had such an experience - he and his wife rented a property from someone who was clearly new to the country and new to being a landlord. The landlord tried to get them to make all the repairs to the property whenever anything broke, for example fixing the AC unit when it went out. They were so fed up that they finally had to threaten the landlord with legal action to get him to fix things. The problem was that every time something went wrong they had to make a threat via certified mail to get the problem repaired. The landlord simply wanted them to pay to fix everything! 

Needless to say they did not renew their lease. So a word to the wise if you are going to be a tenant of a foreigner, know your rights, as you may need to help them learn the responsibilities of being a landlord, otherwise you maybe paying for repairs.  

Sources: U.S. Treasury Department, National Association of Realtors



 You make a living by what you get, but you make a life by what you give. - Thomas S. Monson

Topics: real estate, save money, bankers


Wendell W. Brock, MBA, ChFC

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