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A Chat with a Financial Advisor & Portfolio Manager, Part 2

Part 2

Steve: Now when we talk about insurance, corporate benefits, investments, all of these things have to do with money. In a way, there's a lot of different instruments for people to either protect themselves or to help see their money grow, so that the money can actually work for people who initially worked very hard to make money, and then they would like to see this money work for them. On the insurance side, what are some of the types of insurance, some of the instruments, including some of the technical terms that you deal with, Howie, on that side?

Howie: From the life insurance side, there are two main reasons to have life insurance. Initially, when you're young, married, young kids, you use life insurance to create an estate in the event of your premature death. In other words, you're trying to replace your income with a lump of capital that will generate an income for your family in your absence. The other reason why you would have insurance is to create liquidity in your estate later on, to provide an executor's fund, which may be used to distribute charitable donations, would be used to retire any outstanding debt that might be in your name, or to pay off any tax liabilities that are incurred upon your death. And to do that, there's two generic types of life insurance. There is what is called "term insurance," which is a product that gives you a set amount of life insurance at a set premium for a set period of time. So in other words, you can buy various amounts for various time periods, such as five years, ten years, twenty years, and the premium will remain constant for that level, and then it will renew at a higher rate at that time. That insurance product is very good to cover off the short-term-or not short-term, but very definable liabilities, i.e., when you have a young family. For the next fifteen or twenty years, you're going to have to have some sort of protection for twenty years. The other generic form of insurance is called "whole life" or "permanent" insurance, and this is a product that is designed to stay with you as long as you are alive. So in other words, you can go way beyond age sixty-five, seventy, eighty-five, and you still have this product in mind-or have this product in force-and the reason is to provide liquidity upon your death, no matter when you die, and that's for these problems I stated, with state liquidity and tax and that sort of thing. Steve: Now, there are, of course, a number of sort of sophisticated variations on that that have developed, and could you explain some of these other products, and just what are the trends in the insurance business?

Howie: Well, specifically dealing with whole life or permanent insurance, this is a product where, typically, we would put more money in than the actual mortality charges would dictate. For example, if the mortality tables of an insurance company say that 3.2 people per thousand at age forty die, they can actuarially figure out how much they have to collect to actually cover the cost of the death benefit, and that rises every year, because the older you get, the odds of your dying increase. So that number rises. The odds improve. So what they do in the insurance contracts, they will pay-for example, if the cost is a dollar per thousand of death coverage, they may charge you three dollars, so there's an overpayment there, and that overpayment is invested by the insurance company, earning rates of return, and they typically invest that money in residential mortgages, commercial mortgages. They invest it in the stock market. So that overage, plus its investment return, will pay for any increase in premium later on in life, so that counteracts the effect of an increasing premium, so you can have a level premium.

The other side of it is that life insurance companies are taxed differently than individuals, so that there is an advantage for putting additional funds over and above the actual mortality charge into a life insurance contract, because it will grow tax-sheltered. You won't get a T-5 tax return from the government saying you have to pay income tax returns. So it's tax-sheltered. So using that tax shelter-a lot of companies have designed sophisticated ways of using that for bonusing, shareholders and employees, that sort of thing.

Steve: Now, the returns on the insurance side, I would imagine that they're typically lower, or that the investments are more conservative than, say, the kinds of things, Carrie, that you do, at ZLC. Would that be the case, that the returns are higher and the risks are higher, or is it different? Why don't you explain how you manage people's money, or the different nature of money in your area, as a portfolio manager, as opposed to the insurance scenario that Howie just described? Carrie: Well, what we focus on is we focus on diversification among the different asset classes. So what we have is the Vertex Fund, which I talked about earlier. That's an absolute-return strategy fund, so it's focused on hedging out risk in the marketplace and providing a superior return to our investors. It's low-risk, and the returns have been somewhat, you know, quite attractive in its six-year history. It's averaged about twenty-five percent each year over the last six years, so it has had a very, very nice track record. We also offer the Vertex Balance Fund, and again, you know, the lower the risk, the lower the return. You increase your risk, you can increase your return. With the Vertex Balance Fund, that is fixed-income and a balance fund, a combination of the two asset classes. The Vertex Balance Fund has averaged about ten percent, and it would have more risk than, say, your typical bond portfolio that might be returning anywhere from three to four percent. Next on our list, we have a relationship with another investment manager called Bancorp, and through our relationship with Bancorp, we offer two mortgage investment products, both similar to a bond portfolio; a little bit more risk, but it does provide greater stability than you would find in a balanced portfolio, or for that matter a hedge fund portfolio. One of our products, the Bancorp First Mortgage Fund, invests in a pool of mortgages, predominantly first mortgages. There's residential and commercial real estate within that fund, and it's averaged about eight and a half percent over its six-year history. Even more conservative than that, we have the Bancorp Select Income Fund, which is the newest offering to the Bancorp lineup, and it is nothing but first mortgages, so very stable, lower-risk, and, you know, you're going to get your lower return, and that's averaged about six percent.

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Part 2

Steve: Now when we talk about insurance, corporate benefits, investments, all of these things have to do with money. In a way, there's a lot of different instruments for people to either protect themselves or to help see their money grow, so that the money can actually work for people who initially worked very hard to make money, and then they would like to see this money work for them. On the insurance side, what are some of the types of insurance, some of the instruments, including some of the technical terms that you deal with, Howie, on that side?

Howie: From the life insurance side, there are two main reasons to have life insurance. Initially, when you're young, married, young kids, you use life insurance to create an estate in the event of your premature death. In other words, you're trying to replace your income with a lump of capital that will generate an income for your family in your absence. The other reason why you would have insurance is to create liquidity in your estate later on, to provide an executor's fund, which may be used to distribute charitable donations, would be used to retire any outstanding debt that might be in your name, or to pay off any tax liabilities that are incurred upon your death. And to do that, there's two generic types of life insurance. There is what is called "term insurance," which is a product that gives you a set amount of life insurance at a set premium for a set period of time. So in other words, you can buy various amounts for various time periods, such as five years, ten years, twenty years, and the premium will remain constant for that level, and then it will renew at a higher rate at that time. That insurance product is very good to cover off the short-term-or not short-term, but very definable liabilities, i.e., when you have a young family. For the next fifteen or twenty years, you're going to have to have some sort of protection for twenty years. The other generic form of insurance is called "whole life" or "permanent" insurance, and this is a product that is designed to stay with you as long as you are alive. So in other words, you can go way beyond age sixty-five, seventy, eighty-five, and you still have this product in mind-or have this product in force-and the reason is to provide liquidity upon your death, no matter when you die, and that's for these problems I stated, with state liquidity and tax and that sort of thing. Steve: Now, there are, of course, a number of sort of sophisticated variations on that that have developed, and could you explain some of these other products, and just what are the trends in the insurance business?

Howie: Well, specifically dealing with whole life or permanent insurance, this is a product where, typically, we would put more money in than the actual mortality charges would dictate. For example, if the mortality tables of an insurance company say that 3.2 people per thousand at age forty die, they can actuarially figure out how much they have to collect to actually cover the cost of the death benefit, and that rises every year, because the older you get, the odds of your dying increase. So that number rises. The odds improve. So what they do in the insurance contracts, they will pay-for example, if the cost is a dollar per thousand of death coverage, they may charge you three dollars, so there's an overpayment there, and that overpayment is invested by the insurance company, earning rates of return, and they typically invest that money in residential mortgages, commercial mortgages. They invest it in the stock market. So that overage, plus its investment return, will pay for any increase in premium later on in life, so that counteracts the effect of an increasing premium, so you can have a level premium.

The other side of it is that life insurance companies are taxed differently than individuals, so that there is an advantage for putting additional funds over and above the actual mortality charge into a life insurance contract, because it will grow tax-sheltered. You won't get a T-5 tax return from the government saying you have to pay income tax returns. So it's tax-sheltered. So using that tax shelter-a lot of companies have designed sophisticated ways of using that for bonusing, shareholders and employees, that sort of thing.

Steve: Now, the returns on the insurance side, I would imagine that they're typically lower, or that the investments are more conservative than, say, the kinds of things, Carrie, that you do, at ZLC. Would that be the case, that the returns are higher and the risks are higher, or is it different? Why don't you explain how you manage people's money, or the different nature of money in your area, as a portfolio manager, as opposed to the insurance scenario that Howie just described? Carrie: Well, what we focus on is we focus on diversification among the different asset classes. So what we have is the Vertex Fund, which I talked about earlier. That's an absolute-return strategy fund, so it's focused on hedging out risk in the marketplace and providing a superior return to our investors. It's low-risk, and the returns have been somewhat, you know, quite attractive in its six-year history. It's averaged about twenty-five percent each year over the last six years, so it has had a very, very nice track record. We also offer the Vertex Balance Fund, and again, you know, the lower the risk, the lower the return. You increase your risk, you can increase your return. With the Vertex Balance Fund, that is fixed-income and a balance fund, a combination of the two asset classes. The Vertex Balance Fund has averaged about ten percent, and it would have more risk than, say, your typical bond portfolio that might be returning anywhere from three to four percent. Next on our list, we have a relationship with another investment manager called Bancorp, and through our relationship with Bancorp, we offer two mortgage investment products, both similar to a bond portfolio; a little bit more risk, but it does provide greater stability than you would find in a balanced portfolio, or for that matter a hedge fund portfolio. One of our products, the Bancorp First Mortgage Fund, invests in a pool of mortgages, predominantly first mortgages. There's residential and commercial real estate within that fund, and it's averaged about eight and a half percent over its six-year history. Even more conservative than that, we have the Bancorp Select Income Fund, which is the newest offering to the Bancorp lineup, and it is nothing but first mortgages, so very stable, lower-risk, and, you know, you're going to get your lower return, and that's averaged about six percent.