At Last, You Can Earn 15.83% Average Annual Rate of Return Without "Wall Street" Risks

Earlier this year I wrote an article with a similar title.

One reader asked: "How can this be possible, because it sounds too good to be true."

Both the "'too-good-to-be-true" quote and the "How" question deserve answers. So, here goes.

Let's start by explaining the TIP investment.Chances are you have never heard of this investment. What is the investment? Life Settlements (LS) --- Also called Transferable Insurance Policy or TIP(s). The best way to understand how a TIP (TIPs is plural) works is by an example, which follows:

EXAMPLE: Joe, age 67, owns a life insurance policy with a 0,000 death benefit and a ,000 cash surrender value (CSV). Joe would like to stop paying premiums. Of course, he can cancel the policy and get the ,000 CSV from the insurance company. An investor (really a group of investors) buys Joe's policy for 0,000, paid in cash to Joe immediately. The investors now own the policy. The group of investors will receive the 0,000 death benefit when Joe dies. This transaction (Joe selling the policy and the investors buying it) is called LS. A TIP is a fractional interest in a LS. Let's say Rick is one of the investors. Say Rick invests 0,000. He will wind up with a diversified portfolio of TIPs (about 5 to 10). Each one of the TIPs will be a fractional interest in Joe's 0,000 policy, say 3 percent or ,000. This TIP (Joe's) will pay Rick exactly ,000 when Joe dies.

A public company (trades on the NASDAQ) invented TIPs. Twice a year the company publishes its average rate of return for the years (now 16) it has been in business.

A common question is, "What are the tax consequences of a TIP?" All taxes are deferred until the TIP is paid. In the above example, Rick would not have any taxable income. A TIP is always ordinary income. It is not payable until he receives the ,000. If Rick had invested his 0,000 from a qualified plan (401(k), profit-sharing, IRA or the like) the income would stay in the plan (like all other investments) and all income taxes deferred until funds are distributed to Rick.

First, a little background about the life insurance industry. There are basically two types of life insurance: permanent [has cash surrender value (CSV)] and term (no CSV). According to Milliman and Robertson, an international actuarial firm, 89.5% of Universal Life policies never result in a death claim. The policies are either surrendered, or worse, allowed to lapse. Note: Universal life is the most common type of permanent life insurance sold in the United States.

And what about term insurances? These facts are, although true, almost unbelievable: According to Tax Planning With Life Insurance, authored by Zaristky and Leimberger, Ten years after issue, there is only a 15 percent probability that at term policy will be in force at the insured's death. There is less than a 2 percent probability that term insurance bought twenty years before an insured's death will be in force. So, on average 93% of all life insurance policies sold never pay even in death benefits.

Amazing! Think about it, life insurance companies deposit premium dollars year after year and about 93% of the time keep all of the dollars, while the insured or his heirs get nothing in return. One exception, the policy owner terminates a policy by getting back the CSV. Long story short, LSs to the rescue. However, before the invention of TIPs, LSs were the sole profit playground of institutional investors: large companies with deep-cash pockets, like giant insurance companies (such as AIG and CNA).

Even Warren Buffet's Berkshire Hathaway has been in the LS game for about 15 years and recently announced a 0 million loan to a new wholly owned subsidiary to invest in LSs. TIPs are the bridge that allows the little guy to get into the LS profit game.

Go back to Joe's LS/TIP example. If Joe had cashed in his policy for the ,000 CSV, the life insurance company would have been off of a 0,000 death benefit hook. It's easy to see why Joe is delighted with his 0,000 LS. Of course, the insurance company is anything but delighted and would like to keep LSs secret.

The pure economic fact is that the investor stands tall in the profit shoes of the insurance company. The investor stands to profit with a gross of 0,000 (0,000 death benefit less an acquisition cost of 0,000), reduced by future premiums (until Joe passes on). The LS side of the transaction with Joe is handled by the NASDAQ company, which then arranges for little-guy investors to purchase TIPs. The potential profit percentage calculated on each TIP investment is based on the projected life expectancy of each LS policy seller at about 16% plus.

Generally, the NASDAQ company only completes LSs where the insured's life expectancy is actuarially five years or less. The result of how a TIP transaction is structured allows the TIP investor to earn an average annual historic rate of return of 15.83%.

No worrying about "Wall Street" volatility or whether "The Market" goes up, sideways, or down.

Now you know how it's done.

You also know because of the strange economics (no death benefit are paid about 93% of the time) of the insurance industry and the ingenious way TIPs are structured that a 15.83% average annual rate of return is indeed, not too good to be true.

Home Equity Loans: Why The Right Interest Rate Makes All The Difference

There is no doubt that the larger the loan, the more expensive it is to pay it back. But if the right interest rate is charged, then some serious savings can be made. Even if home equity loans normally come with very competitive interest rates, repayments can be kept to a minimum if the rate is wisely chosen.

Of course, taking out a loan with the equity on your home used as security is arguably the best way to raise a large sum of money. It depends on the value of the equity held, but it can make accessible funds as high as 0,000. Finding the best interest rates can be the difference between repayments being affordable and not.

For this reason, issues relating to the interest charged on any equity loan deal are extremely important and should be paid careful attention to. Here are some of the issues that should be looked at.

Fixed Rates or Variable Rates?

While the interest rate to be charged on a home equity loan is usually decided by the lender, borrowers can choose between fixed rates and variable rates. But what are the differences between them?

The chief difference is that a fixed rate creates a consistent repayment sum that never changes. And while the rate itself is higher than a variable rate, it is arguably the best interest rate for those on a tight budget.

A variable rate, meanwhile, changes in line with market developments, so the amount to be repaid every month can fluctuate. It is a great option when interest rates are low, but when the rates increase for economic reasons, the repayments increase accordingly. And because an equity loan can often be more than 0,000, this can translate to very large increases.

Terms to Expect

Normally, the rates charged on a home equity loan are quite low, and certainly a lot less than on unsecured loans. But the relative stability of the source of security (property) means that lenders can feel confident they will get their money back. But what are the terms to expect for a deal to be a truly good one?

Well, with a fixed rate loan, the best interest rate is going to be around 4%, depending on the lender and the size of the loan. On a 0,000 loan over 20 years, it will probably require monthly repayments of around 0. A variable rate, however starts at about 3.5%, requiring repayments of around 0. But the rate can increase at any time, even double if the market dictates.

Normally, however, because of the length of the loan term involved, it is possible to mix both fixed and variable rates. The fixed rate can apply for the first 3 or 5 years, allowing the borrower to get a grip on their budget, while the final 15 years or so will be variable, causing the equity loan to become a lot more expensive.

Other Issues to Consider

Of course, the term of a home equity loan is not always 25 years. Most lenders will cap the term to 25 years, but also demand a minimum term of 3 years. This can play a key role in determining the affordability of the loan, but since the borrower can choose practically any term between the two, it is easy to find an acceptable deal.

Variable rates are ideal for short-term loans, where there is not enough time for major fluctuations in the marketplace to develop. The best interest rate for long-term loans are fixed rates since the budget can be adhered to easily.

Discussing your best options with lenders is hugely important. But when these lenders are sourced online, be sure to check their reputation through the BBB website. An equity loan can prove hugely expensive if the lender turns out to have a range of hidden charges and penalties too.