Securities, Stocks and Guarantees

Equity, debt and hybrid securities are readily transferable units of goods or resources which either provide ownership, the option for ownership, or the right to be paid back on an assumed debt(loan) over a specific period of time.  The idea that securities acquired their name because they keep your money secure is a huge misnomer.

Yet, there are those who will tell you that securities will secure your money and that you won’t lose money if you invest in them.  But like a lot of advice that passes under the guise of financial planning, securities do NOT provide any guarantee of protection for your money.  In fact, you can lose your money if you sell a security before it matures, if the issuer of the security defaults, or if inflation rises faster than the interest you are earning over the time period you own it.

Stocks have such a solid sounding name, in fact they are also called equities, which means value.  The value that you possess when you own or purchase a stock is a fractional ownership in a corporation. Therefore, you become an owner of a fractional portion of the corporation’s assets and profits.  Each fraction of ownership in a corporation is called a share.  The value of each of your shares can go up or down based on the profits of the company, the net worth of the company, or the number of shares the company decides to issue.

Much like diluting a glass of juice with water doesn’t reduce the amount of actual juice in the glass, the more shares issued by a company, the less valuable each of your shares becomes.  It hasn’t reduced the expense you experienced when you purchased your shares (the juice in the glass) it merely dilutes that value of each share you own as the volume is increased.

There comes a point in time that too much water destroys the value of the juice in the glass and the same holds true with a company issuing shares.  When too many shares have been issued nobody wants to purchase such diluted shares. This means your shares have now become less transferable (valuable) and you lose money.

In contrast to Stocks and Securities, the Securities and Exchange Commission (SEC), as well as the Financial Industry Regulatory Authority (FINRA), have made it clear that there are only 4 places which provide any type of guarantee to protect your money, and they are:

• Certain Bank products, like
  • Passport savings accounts, and
  • Certificates of deposit
• Treasuries,
  • Bills
  • Bonds and
  • Notes
• Specific Insurance products, including
  • Guaranteed fixed annuities, and
  • Guaranteed whole life insurance policies

Obviously, this list is short and doesn’t include stocks or securities because stocks and securities DO NOT provide you with any guarantee to protect your money.  This is plain and simple enough. It doesn’t mean that stocks and securities are bad, it merely means that when you invest in them (purchase them) you are exposing yourself to the risk of losing money, possibly 100% of what you spent to purchase them, and possibly even more if you are into shorting the market.

• Bank products are guaranteed by the Federal Deposit Insurance Corporation also known as the FDIC, up to $250,000.
• Treasuries are sold by the US Treasury Department and therefore are guaranteed by the United States Government and its ability to tax commerce, income, capital gains, estates, inheritances, as well as collecting tariffs.
• The insurance products listed above are guaranteed by the insurance companies who issue these contracts.

Understanding these facts, wealthy individuals have always appreciated the value of owning guaranteed insurance products in order to protect their assets.  For example,

• Owing a guaranteed whole life insurance contract which has a death benefit equal to or greater than your estate prevents your estate from being destroyed by estate and inheritance taxes when the policy is structured properly and held in certain types of Trusts.
• Transferring retirement savings from a qualified plan or IRA to a whole life insurance policy avoids certain taxes which will be assessed on those funds. Historically, a Stretch IRA could also be used to provide protection from these taxes, but the Stretch IRA is no longer a tax planning option with the 2019 tax law.
• Purchasing a single premium participating whole life insurance policy is one tool the wealthy use to increase what they will leave tax free to the next generation because the death benefit is guaranteed to always be higher than the cost basis of that single premium.
• Smart money managers use life insurance as a tool to be able to spend more, or even all, of their money while they are living and still leave a large amount of tax-free money for their spouse to continue the lifestyle to which the spouse is accustomed.
• Corporations use whole life insurance to fund buy/sell agreements for pennies on the dollar when compared to having to pay off a retiring partner or key employee. Death benefit funds can be used to purchase the shares of a partner who has died, avoiding a fire sale to afford the payout needed to satisfy the inherited values of the desisted partner.
• Fixed annuities are used by those who need a fixed income that is guaranteed for the rest of their life while avoiding ALL risk.
• Whole life insurance contracts which have accumulated large sums of money in cash value can be rolled into fixed annuities for those seeking a guaranteed income for life.

As you can see, securities and stocks can NOT provide you with any guarantee that your money will be safe, secure and available for you tomorrow.  But there are other options for you as the SEC and FINRA have delineated, and they DO provide the guarantees that you need to rest assured that your money will be there for you tomorrow.

Keeping at least 10% of your money where you benefit from these guarantees is not only good money management, but it also happens to be the only way for 70% of wage earners to build an estate for themselves.  According to the SECs and FINRAs required training for all financial planners and investment advisors, 70% of wage earners can NOT build a self-sustaining estate without using life insurance.  The odds are just too high to build such an estate using securities, stocks and real estate without life insurance. This means that stocks, securities and real estate may coincide with your ownership of life insurance, but without life insurance the risk increases that you will fail to build a sustainable estate for yourself.

This is why participating whole life insurance is so important for you to own. And the sooner you begin purchasing it the less it will end up costing you.  Many life insurance agents and financial planners will attempt to sell you universal life insurance products, but NO universal life insurance product, be it traditional, indexed or variable provides a guarantee that your money will be there for you in the future. This is because universal insurance products are built on term insurance which provides NO guarantee the coverage will be converted to paid-up insurance over the course of the contract.  Therefore, as the cost of the foundational term insurance increases over time, your cash values are spent paying the ever increasing premiums.  Ultimately, when your cash values are gone, so is your insurance coverage. By then the cost of the term insurance coverage has become so prohibitive you won’t be able to afford to continue paying the premiums.

This is a well-known fact in the insurance world.  Term insurance pays out less than 98% of the time because the cost of the premiums become too expensive. People either stop paying the premiums or convert the term to a guaranteed product.  Of course, when the policyholder stops paying the increasing premiums the money spent on purchasing that term insurance ends up in the coffers of the insurance company instead of under your control.

With whole life insurance one of the guarantees the company provides is that the death benefit and the cash value will equal each other when the contract matures.  This guarantee provides a way for the savvy money manager to purchase life insurance and “recover” the cost paid in premiums.  In most cases, the cost of the premiums will be less than the cash values within the first 8-12 years, sometimes even sooner.  But this is only if the policy is designed to build high cash value for the policyholder quickly instead of paying the life insurance agent the highest commission possible.

Stock, securities and guarantees, there is a place for them all in your portfolio, but without the guarantees of participating whole life insurance the possibility of building an estate for yourself are narrowed significantly.

Dr. Tomas P. McFie

Most Americans depend on Social Security for retirement income. Even when people think they’re saving money, taxes, fees, investment losses and market volatility take most of their money away. Tom McFie is the founder of McFie Insurance which helps people keep more of the money they make, so they can have financial peace of mind. His latest book, A Biblical Guide to Personal Finance, can be purchased here.