Financial Tricks & Treats

In today’s society, “Trick or Treat” is a bit of an obsolete phrase.

In a few days, when we take Lilly out to prance around the neighborhood—either wearing an Ariel costume or dressed as a ghost (she wavers between the two from day to day, so I guess it will be a game time decision)—she’ll say “Trick or Treat” when someone answers the door. But my guess is that if somebody doesn’t give her a treat, it’s not likely that she’ll be rounding up her three-year-old compatriots to egg their house later that evening.

So in her case it’s really “Treat or…just move along to the next house.” Not many tricks happening in 2016. (Insert obligatory statement about kids these days not being able to stop looking at their phones long enough to toilet paper somebody’s yard).

If only things could be so wholesome in the financial world. Alas, there are many things in the financial world that seem to be treats, but they’re actually tricks. Let’s assess whether some of these things are tricks or treats:

1) Free financial advice from your 401k administrator

Trick or Treat?

Analysis: Trick

I see this one a lot. You’ve been at your company for a long time and you’re now in your prime earning years. One day, you get a call from someone at your 401k custodian (Fidelity, Prudential, etc.) who says something like, “As a valued and highly compensated employee, you have access to one of our financial advisors at no cost to you. Would you like to set up a time to talk with one of our coaches?”

“Terrific!” you exclaim. “My hard work over the years has been recognized by my employer and they’re including this little perk as part of my compensation.”

Well, not so fast. Your employer actually doesn’t care about this deal. In fact, they probably have no idea about this “benefit” you’re receiving.

Here’s the trick. The folks at Fidelity (or wherever) see that you have a lot of money in your 401k. They also see that you’re earning a decent salary. So they assume that you probably have some other money invested in some other accounts besides your 401k.

So they offer to give you some free advice. And what does that free advice consist of? It usually entails you transferring some (or all) of your non-401k assets over to some mutual funds that they recommend for you. Which just happen to be their own proprietary funds. Which just happen to be the funds that make them a lot of money when you invest in them.

It’s possible that those funds are good options for you. But it’s more likely that there are better ways for you to invest. Either way, the bottom line is that you didn’t get advice. You got a sales pitch disguised as an opportunity to get free advice.

2) Life insurance with an accelerated death benefit

Trick or Treat?

Analysis: Treat

It seems that a lot of people don’t know about this treat, but it’s often a pretty good fit for folks.

This is a strategy that’s designed to combat the “use it or lose it” component of long term care insurance. If you buy a long term care insurance policy and pay premiums for 20-25 years, but you never go into the nursing home, then you never get a return on all of those premiums (except the peace of mind of knowing that you had coverage for a nursing home stay).

Here’s how the life insurance strategy works. Let’s suppose you have a $200,000 policy with an accelerated death benefit. If you die, your beneficiary gets the $200,000, just like any life insurance. But now let’s suppose you go into the nursing home. The life insurance company says, “Well, he/she is probably going to die soon anyway, so we’ll have to pay out this death benefit soon. Might as well let them use it to pay for the nursing home.”

So you can accelerate the payment of that death benefit to get your hands on the money before you actually die. If you spend it all on nursing home care, then there won’t be any death benefit left. But now you’ve eliminated the use-it-or-lose-it problem. That money is either a death benefit that passes on to your beneficiaries, or you use it to pay for your care. Either way, you get your money eventually.

3) Reverse Mortgage

Trick or Treat?

Analysis: Trick (usually)

If you spend any amount of time watching cable news, you’ve probably run across The Fonz telling you about reverse mortgages. It used to be Fred Thompson making the pitch. Ten years from now, it will probably be Marco Rubio.

The idea is that you can easily turn the equity in your home into liquid cash. Usually you can get payouts in the form of a monthly check, a one-time lump sum, or an account where you can take money as needed at irregular intervals.

If your parents are in their 80s, with no assets, living off Social Security, then this could be a good strategy for them. It’s a last resort that allows them to stay in their home and pay the bills.

But in most cases, the reverse mortgage isn’t a very efficient option. If it’s not an emergency or last resort, it’s usually just a really expensive way to turn your equity into cash.

So when the trick-or-treaters come to your door this year, seize the opportunity to teach them about some of the tricks and treats of the financial world. Or if you’re hoping to not get your house egged, maybe just keep this newfound knowledge to yourself.