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    Briefly Noted

    The Facts of Life: What You Need to Know About Life Insurance

    Although consumers widely recognize the importance of life insurance in financially protecting their families, most need significant help in determining the type and amount of coverage appropriate at different life stages, according to the National Association of Insurance Commissioners (NAIC). According to the NAIC, there are three life insurance basics that all consumers should consider:

    1) Start by considering how many people are financially dependent on you, what their major expenses are likely to be and whether you’re likely to leave them with substantial debts or taxes to pay on your estate. Life insurance can help on all of those fronts.

    2) Evaluate the two main types of life insurance: term and permanent. Term life insurance pays a death benefit if you pass away within a specified time period (typically a term of one to 20 years). In contrast, permanent life insurance (which comes in many varieties such as whole life, universal life and variable life) includes both a death benefit and the ability to build up cash value over your entire lifetime. In general, term life insurance is much less expensive than permanent life.

    3) Understand the major factors that can affect life insurance premiums. Some are uncontrollable, like the age at which one purchases a policy or a serious pre-existing medical condition, like cancer or heart disease. Other factors are much more dependent on an individual’s behavior, like poor health habits (smoking and excessive drinking), driving record, and engaging in dangerous hobbies.

    The NAIC’s consumer Web site, Insure U, provides focused tips to consumers based on their likely needs in different life stages. Consumers can visit the NAIC’s consumer education Web site, Insure U, at www.InsureUonline.org.

    Your Financial Inventory

    Whether you are buying a house, planning for college or laying the groundwork for retirement, the first step in the financial planning process is to gather all your financial information in one place in order to create a complete financial picture.

    To help you along in this process, the Insurance Information Institute has created free financial inventory software. This software will allow you to enter all of your relevant financial information including investments, retirement accounts such as 401(k)s or IRAs, insurance policies and other assets and liabilities.

    This financial inventory can play a key role in helping you and your financial advisor assess where you are financially, and to monitor your progress as you move toward your ultimate goals. The software can be downloaded at www.myfinancialhouse.org. For more information about insurance, go to the Insurance Information Institute’s Web site at www.iii.org.

    The Presidential Term: Is the Third Year the Charm?

    A new academic study shows that stocks generally prosper during the third year of a presidential cycle, while at the same time Federal Reserve Board policy tends to be unusually accommodative.

    The study, forthcoming in the Journal of Portfolio Management, considers stock returns during each of the four years of the presidential term. The authors found a prominent pattern, in which stocks generally languish during the first two years of a presidential term, and prosper during the final two years. The third year is shown to exhibit by far the best stock performance, and an examination of fiscal and monetary policy measures identified a corresponding pattern in Fed monetary policy.

    The key findings include:

    • Between 1957 and 2004, returns for large-cap equities averaged 6.9%, 4.9%, 23.8% and 13.3% respectively for the four-year presidential term. Thus, during the 48-year study period, Year 3 returns have been nearly triple the average earned during the first, second and fourth years.
    • The dominance of the Year 3 returns is more pronounced for small-firm stocks.
    • Broad monetary policy measures indicate that, during Year 3, Fed policy has been expansive 65% of the time, while Fed policy has been expansive only 48% of the time during the other three years.
    • The fed funds premium (federal funds rate minus the T-bill rate) indicates that monetary policy was most stringent during the first year of the presidential term, and most relaxed during the third year.

    The study, “The Presidential Term: Is the Third Year the Charm?” was co-authored by Robert Johnson, Ph.D., CFA, managing director of the CFA Institute Education department, Scott B. Beyer, Ph.D., CFA, assistant professor of finance at the University of Wisconsin Oshkosh College of Business, and Gerald R. Jensen, Ph.D., CFA, professor of finance at Northern Illinois University College of Business.

    Source: CFA Institute.