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Life Health > Life Insurance

What "everybody knows" is not always right

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According to a Society of Actuaries study, roughly three-quarters of people surveyed felt they would live until age 80, but roughly the same percentage thought they’d be dead by age 85.

I believe the reason for this groupthink, whereby everybody dies in the same five-year period, is due to the media talking about life expectancy and the public misunderstanding it. We keep hearing about our life expectancy being 81.6 years or 83.1 years or such. It appears many people take this to mean that if they are age 48 today, they will die on November 2, 2042, exactly as their lifespan hits 83.1 years – as if some cosmic actuary pulls the plug on their life cord.

The reality is life expectancy is the point at which half of the people in your particular segment will be dead. This means half will die earlier – maybe you need more life insurance? And half will live longer – that GLWB might be very useful!

Many exits on fixed annuity highway

One of the stranger conclusions I once read was that annuities lock up your money for 40 or 50 years. The reason was that the writer confused maturity date with the surrender period. Suppose a 65-year-old consumer purchased an annuity with a maturity date of age 95 and a 10-year surrender period. The consumer would probably incur a penalty if the annuity was cashed in before age 76. However, there would be no charge for almost every annuity on the market if the consumer cashed in the policy after 10 years. What about the age 95 maturity date? All this means is the consumer must begin to withdraw money from his annuity at age 95. The maturity date is the longest the consumer can force the insurer to keep the money, not the other way around.

Fixed annuities have maturity dates that permit the consumer to keep an annuity until age 85, 95 or even 105. However, saying that this locks you in is like saying if you get on Interstate 80 in New York, you can’t get off until you reach San Francisco. A fixed annuity is a financial highway, and just like on the Interstate, the driver can choose to exit at any time, but they need to be aware of any early tolls.

P/E ratios don’t foretell the future

You have probably heard some wag say something like, “Since the average market P/E ratio is much higher than the long-term average, this means the stock market will head lower.” It’s a wonderful line, but the problem is it’s not supported.

The ratio shows how many times higher the price (P) of a stock is when compared with the stock’s earning (E). A higher P/E is viewed as a bullish indicator of the company’s expected future. A lot of folks say a really high overall market P/E ratio is too bullish and this means the market will go down, and a really low P/E ratio means the market is too bearish, so it will go up.

However, a study published in the Journal of Portfolio Management looked at 128 years’ worth of P/E ratios and concluded “they provide unreliable forecasts of future returns.” The study also said “there is no statistically significant relationship between P/E ratios at the beginning of a year and returns during the following year.”

What “everybody knows” in the financial world often is wrong, or at least only part of the story. It is usually a good idea to question everything, especially those facts that “everybody knows” to be true.

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