Elusive Wealth

I thought it would be interesting to look at some of the 2010 Budget cuts proposed by the Barack Obama’s Executive Administration.  Maybe I am alone on this    But I wanted to highlight some of the terminated programs to see what kind of waste we are dealing with (or hopefully no longer dealing with).  So this is by no means an exhaustive list. You can see the proposed cuts on the White House website (http://www.whitehouse.gov/omb/budget/fy2010/assets/trs.pdf).  This is meant to be a little fun, so please laugh occasionally as you read this.

Advanced Earned Income Tax Credit

The Advanced Earned Income Tax Credit is an extension of the Earned Income Tax Credit that apparently allows people with children eligible for the EITC to receive a portion of the credit through their paychecks (reduced witholding) instead of at filing time. The AEITC is used by a relatively small percentage of people (3% of those eligible for EITC) and is error prone. Cutting this program is estimated to save $125 million.

What I learned from this, is that if 514,000 people used this program, then that means there are about 17 million people claiming the Earned Income Credit.

C-17 Strategic Airlift Aircraft

Well this saves about $91 million.  Supposedly we are dropping this because we have enough of these already.  But I don’t have one, do you?

Christopher Columbus Fellowship Foundation

Yes I think the word is out, the Earth is round and the East Indies turned out to be farther than he thought. Here we save $1 million, but it makes me wonder what Chris C. would think about cutting the program.

Combat Search and Rescue Helicopter (CSAR-X)

Here we save $144 million dollars by eliminating this single purpose helicopter. From the budget: “The Department of Defense is questioning the need for a single-purpose helicopter. Unlike the other services, which carry out this mission with multiple-purpose helicopters, the Air Force has traditionally carried out this mission with single-purpose aircraft.”

Well they call it single purpose, but it searches and it rescues.  Seems like a winner to me!

Cotton Storage Payments

Cotton storage payments appear to amount to planned price fixing by the U.S. Government. They would never do that, would they?  This item allowed credits for storing cotton until prices increased.  The program is being eliminated since storage costs for other commodities are not funded by the Government.  I could see going either way on this, either have the U.S Government pay to store nothing… or, why not have them store everything?

Storing cotton costs around $570 million, so maybe that is why we don’t extend this program to polyester storage, etc.

Inner City Bus Security Program

Costing us $12 million, this program is being eliminated because it does not appropriately factor in risk when determining where the funding goes. If we wanted to factor in risk, I would start by looking for buses that Keanu Reeves is on.

Joint Strike Fighter Alternative Engine

I love this one!  At the tune of $465 million, we had two separate contractors building two different designs of an engine for the same airplane! Perhaps instead of cancelling the program, we could use the losing engine in one of our new GM cars.

Loran-C

This is being replaced because it is a legacy technology that GPS handles better. Loran-C acted somewhat as a backup for GPS, at least according to the budget document (you never know if the scope of the cut is as accurate as the Government believes). But what struck me in the document was the following statement, “Accounting for inflation, this will achieve a savings of $36 million in 2010 and $190 million over five years.”  I just find this funny, that the savings included account for inflation, considering the source of the inflation is primarily the government anyway. Maybe we should just increase inflation to meet our budget targets.

Oil and Gas Company Subsidies

This is one we all heard about during the campaign (if we were listening anyway).  This won’t save us anything in 2010, but the proposal states that we still save $26 billion between 2011 and 2019. Despite the belief of the budget document, it is difficult for me to imagine that this would not impact the price of gasoline. But I will take their word on it, they wouldn’t lie.

Oil and Gas Research and Development Program

Presidential Helicopter

This program subsidizes R&D efforts for improving extraction and delivery of oil and gas products. The budget states that oil and gas companies have the means to fund this work on their own.  I agree with this, they should compete on a level playing field with alternative energy source companies.  So far, from a product cost perspective, they have been winning hands down. This saves the taxpayers $250 million.

Presidential Helicopter

Last, but not least, the Presidential Helicopter! The cost of this beast has grown to $13 billion. This is an entire helicopter program for a single person.  The program is 5 years over schedule. The good news is that the budget has been cut to just enough funds to end the program and evaluate options for the current fleet and an alternative program. The bad news?  The alternative program likely starts the whole process over again.  Maybe we should have another bake off — hire two contractors to deliver two Presidential Helicopters and see which one flies better.

Conclusion

Well this was a short look at some of the terminated programs from the 2010 proposed budget. Hopefully your favorite program did not get cut. If it did, I apologize if I made fun of it in any away.

Certainly the economy remains a major concern in most people’s minds. This could be in either a negative way for the many people who have been affected by job loss, income reduction, or loss of investments. In a more positive view, some people have seen new opportunities and others have begun to save more. The media plays a bigger role in our perception of things than it ever has in the past. Social networking also helps contribute to that perception in both positive and negative ways.

Let’s take a look at the economy as an example. A Pew Research poll (Interest in Swine Flu Remains Strong) shows that 44% of people follow the economy very closely as of early May. This is down significantly from a peak of 70% last September.  Remembering back to that time, the economy was the top story almost daily.  And usually the word crash was thrown in for good measure.

World Crisis

The same Pew Research study shows that while 24% of the people surveyed view the economy as their top interest from the media, only about 12% of the news coverage is now on the ecomony. Most of the coverage, on the other hand, is given to the terror and torture discussions.

Perhaps “swine” flu, or H1N1 provides an even better example. The actual hysteria over H1N1 lasted a few weeks, and of course it was a top story. Since then, we have experienced a flu that, at least in the United States, is less deadly than the seasonal flu. That’s not to say that there is not reason to be concerned with new strains of the flu like H1N1, but is media coverage proportional? Today 21% of people surveyed still look to stories on H1N1 as their top media priority, yet media coverage of H1N1 has been reduced to 2%.

Although this is not necessarily definitive, what this demonstrates to me is the extreme effect that media has on the public mindset. For the vast number of people to still have H1N1 as their top concern shows me that media coverage and hysteria were over the top.

Once the hysteria and fear begin to fade away, it does not necessarily leave the public mindset, even for those less affected by the events, until well after recovery begins. The media on the other hand tends to ignore the signs of recovery, relatively speaking. Sure there is some media coverage on signs of recovery in the economy and the less than anticipated potential impact of H1N1. But the reality is that the coverage is disproportional to the coverage of the negative events.

As time passes it is important that we keep these things into perspective and avoid panic. Panic breeds on itself, and very likely made both the economic and H1N1 situations worse than they could have been.

Knowing where to put money away for retirement is more complicated than ever. With less than 20% of workers now in employment that provides a full-benefit pension plan, self funded options such as 401(k)’s and IRA’s are a must for those who have the income to fund them. With some companies removing matching contributions, maybe the factors for your decision have changed.

What to invest in is obviously an important topic as well, but I am not going to cover that in this post. Instead here we are going to talk about the different types of plans. It is important to keep in mind that with most retirement account plans, there are a range of options from conservative to aggressive investments. If you have 10 or more years until your retirement, the most important factor here is that you are contributing to some retirement plan. If you are closing in on your retirement and have less than 10 years left, it starts to become more important where the money is invested. Asset allocation, risk, and all that good stuff is still very important. You do not want to be too conservative early, or too aggressive late. But before we talk about how to invest the money, let’s first cover whether to contribute to a retirement plan and which one to choose.

Should I Contribute to a Plan?

The answer to this should almost always be yes. If you have company matching, at the very least you should contribute enough to get that match.  You may not have the benefit available in the future, and with every paycheck that passes by when you do not contribute enough to get the match, you lose some income opportunity.

Beyond the match, you should contribute as much of your income as possible, targeting 15% or higher, into retirement accounts. But I do believe there is an exception to this, and that is when you have consumer debt, vehicle debt, or high interest student debt. Debt creates a stranglehold on your finances and ultimately your freedom. Some people are able to handle debt and wealth accumulation at the same time. But the reality is that most people cannot handle both simultaneously.

Once the debt is paid off, if you do not have an emergency fund of at least 3 months, you need to get that in place first. Your chances of staying out of debt and continuing to contribute to your retirement is at risk without this savings cushion. After the debt is paid off and the emergency fund is established, you should begin contributing to your retirement above and beyond any match.

If you have to hold off from your retirement savings to pay debt, you must make certain that debt payoff and creating the emergency fund are a one time, relatively short (1-3 year) process. That means that process must be done with intensity. If you can’t pay off debt and get the emergency fund established in that time frame, then consider looking for additional sources of income to attack the debt or cutting back lifestyle to make it work.  Dealing with debt and retirement at the same time is usually extremely difficult unless your income is high enough to handle both. But in that case, attacking the debt first should take very little time.

Preparing for Retirement

How Much Should I Contribute?

We already mentioned contributing at least enough to get the company match.  If you have none of the consumer debt mentioned and are able to contribute beyond that, how much should you save? You should consider contributing as much you are able up to 15% of your total household income. You can go beyond that if desired, especially if you are looking to retire early. But 15% is a good guideline for what should be “good enough.”  This of course does depend on a few factors such as when you start saving for retirement. If you start saving early, 15% may seem like too much. But if you can manage it, I would stick with 15% or higher. If you started saving later and are closer to retirement age, you are going to have to save beyond 15%.

In future topics we will discuss determining how much money you might need. This is a more concrete and realistic way to determine how much you need to save. For now, 15% is just our guideline to get started.

Which Plan Should I Choose?

Once you have decided how much to contribute, choosing the plan itself has some challenges.  Income limitations, investment options, fees, and taxes are all considerations for where you should put your money. So let’s go through the most common available options

IRA (Individual Retirement Account, a.k.a. Traditional IRA)

An IRA is a pre-tax (or deductible) investment option. The investments in the account grow tax free, however taxes are taken on all distributions from the account. In 2009, the contribution limit for Traditional IRA’s is $5000 for those under age 50. For ages 50 and older, the contribution limit is $6000.  This limit is shared with the Roth IRA. That is, you cannot contribute more than this limit in a Traditional IRA and a Roth IRA combined.

When should you contribute to a Traditional IRA?

• If you have reached your contribution limit in other retirement investment options, and you still have money to to contribute to a tax deductible retirement account.
• If you have no company match in a 401(k), contribute to the Traditional IRA first, then contribute to the 401(k).
• If you believe that taxes will go down in the future, invest in a Traditional IRA over a Roth IRA.

In general, since I don’t recommend guessing where taxes are headed (though it seems clear they can only increase with the significant debt we now have), if you have the option to invest in a Roth IRA and a Traditional IRA, you may want to split the investment in half. This gives you a hedge against taxes without guessing incorrectly on which direction they go.

Traditional and Roth IRA’s can be opened at many financial institutions. However, usually banks are not the best place for these retirement vehicles.  I specifically like Fidelity and Vanguard for opening IRA’s because of their low fees on some of the best mutual fund investment options, and because of their range of investment options.

Roth IRA

Unlike the Traditional IRA, the Roth IRA is an after tax investment. But the investments in the Roth IRA grow tax free and you do not pay any taxes on distributions (unless they are early distributions).  The contribution limits are the same as the Traditional IRA with one notable exception.  With a Roth IRA there are contribution limits based on Adjusted Gross Income (AGI).  For married couples with an AGI of $166,000 or less, they can contribute up to the full $5000 each. There is a phaseout (reduced contribution limit) between $166,000 to $176,000.  Above an AGI of $176,000. a married couple cannot contribute to a Roth IRA.  For single filers, the phaseout range is $105,000 to $120,000.

When should you contribute to a Traditional IRA?

• If you have contributed up to the company match of your 401(k) and you are eligible for a Roth IRA.
• If you cannot contribute to a 401(k) or SEP-IRA.
• If you believe that taxes will go up in the future, invest in a Roth IRA over a Traditional IRA.

Like with the Traditional IRA I don’t recommend guessing where taxes are headed. But, given the advantage of being able to take tax free distributions out at retirement, the Roth IRA and Roth 401(k)’s are my favorite plan. And except for the company match, I prefer the Roth IRA over the Roth 401(k) because it gives you more control over your money.

Traditional and Roth IRA’s can be opened at many financial institutions. However, usually banks are not the best place for these retirement vehicles.  I specifically like Fidelity and Vanguard for opening IRA’s because of their low fees on some of the best mutual fund investment options, and because of their range of investment options.

401(k) / 403(b)

401(k)’s and 403(b)’s are pre-tax or tax deductible employer sponsored retirement plans. While most of the contributions are made by the employee, companies may match a certain amount of employee contributions. Employer matching has of late been a benefit that many companies have cut back on.  A 403(b) is a very similar retirement investment, however it pertains primarily to employees in public education and some non-profit entities. In this section we refer to 401(k) but a 403(b) should have the same considerations.  The one likely negative difference of the 403(b) is that they reportedly have significantly higher fees. The best 403(b) provider in terms of fees is TIAA-CREF, so if that is your option then you are ok here.

The contribution limits for 401(k)’s, if your employer offers one of them, is $16,500 for 2009. For those individuals 50 and older, the limit is $22,000 when “catch-up” contributions are included.  This limit is shared with the Roth 401(k) if it is offered by the employer. That is, the total contributions to the Traditional 401(k) and the Roth 401(k) cannot exceed this limit.

Other limitations apply that may affect your eligibility for 401(k)s. For instance, some employees deemed “highly compensated employees” are not eligible to contribute to 401(k)’s. The income threshold for this depends on the contributions of lower income workers in a company versus the deferrals of higher income workers.

When should you contribute to a 401(k)?

• If you have a company match, contribute at least enough in the 401(k) or Roth 401(k)  to get the match. Whether you have debt or not, it is important to contribute enough to get the match. This provides “free money” in a sense.
• If you have maxed out your eligible IRA contributions and want to put more into retirement.
• If you believe that taxes will go down in the future, invest in a 401(k) over a Roth 401(k).

401(k)’s exist within a plan that is sponsored by employers and managed by an investment company.  Once your money is in a 401(k), you can move it between investments managed by the investment company. You cannot move out of the 401(k) into a more flexible IRA until you leave the company. Some plans do allow a wider range of investments by participating in Self Directed accounts. These allow investing in more stocks and mutual funds than the predefined plans usually allow. For the average investor, the predefined plans are usually sufficient and often better because of lower expenses and fees. We will discuss more about this in a future topic.

Roth 401(k) / Roth 403(b)

The Roth 401(k) and Roth 403(b) are offered at fewer companies than the Traditional 401(k) / 403(b). Like the Roth IRA, contributions are after tax and earnings and distributions are tax free.

If your company offers a match and you contribute to a Roth 401(k), the matching funds will be placed in the regular 401(k) because company matches are always pre-tax (therefore you need to pay taxes on the funds contributed by the company match when you receive the distributions).

When should you contribute to a Roth 401(k)?

• If you have a company match, contribute at least enough in the 401(k) or Roth 401(k)  to get the match. Whether you have debt or not, it is important to contribute enough to get the match. This provides “free money” in a sense.
• If you have maxed out your eligible IRA contributions and want to put more into retirement.
• If you believe that taxes will go up in the future, invest in a Roth 401(k) over a 401(k).

Most of the same rules apply for Roth 401(k)’s as they do for 401(k)’s, with the exception of Roth 401(k) contributions being after tax. My recommendation is always to prefer the Roth 401(k) to the regular 401(k). This allows you to effectively put more money in even at the contribution limit, since it is after tax.

SEP-IRA

The Simplified Employee Pension or SEP-IRA is an employer funded IRA. This becomes a fantastic option if you are self employed, are the sole employee of the company, and have significant profits. A self employed individual can contribute up to 25% of compensation, up to a maximum of $49,000 in 2009. Since the contribution amount has to be the same for all employees, it may be rare to find an employer willing to put aside the maximum 25% for all employees of a company. But for small companies with one or two employees, you can set aside significantly more money with this retirement option than the others.

Since this is a rare scenario compared to other options, this is really only recommended in those situations of a small company with few employees. And for employees other than the owner, this is more of a pension than a self funded retirement option.

Whole Life Insurance

Whole Life insurance is not really a retirement vehicle, but it does offer a savings component. Often it is offered by insurance companies as a way to save money for later in life. The problem is that the investment portion of the policy is not a good investment. You can, with a little bit of work, do much better with the other retirement options.  And the other side of the product, life insurance, is not usually a great deal either. Term life insurance is a much better product if you are looking for life insurance.  Combining savings and life insurance together seems like a great idea, but in this case the sum of the whole is not greater than the individual parts.

Annuities

Annuities are a product that you typically buy with retirement savings that provides a constant distribution over a period of time (a defined period or the life of the annuity owner). Annuities are sold by insurance companies in the form of variable annuities and fixed annuities. The problem with annuities are that they while they are a fairly simple concept, the investment vehicle within them are very complex and fees are generally high.  Variable annuities offer different investment options inside the annuity, giving the potential for a higher overall return from the annuity.

When you should you choose an annuity?

• Ideally I would say never, however:
• If you need a guaranteed monthly check or deposit into your account to support your finances

Really you can do better on your own. But if you don’t have the desire or discipline to manage the money yourself, an annuity is a viable option.

None of the Above

Once your have contributed the maximum to IRA’s and 401(k)’s, what next?  What if you don’t have 401(k) as an option, but you have more money to save than the $5000 IRA limit?  First, if you have children, consider saving in a College 529 plan. If you don’t have children or want to allocate the additional money to retirement, there are many options.  There is nothing wrong at this point at paying down your mortgage or investing in options outside of a retirement account.

Conclusion

The most critical step in preparing for retirement is simply setting money aside.  The investment vehicle helps determine how efficient that money keeps its value or grows, but that is still secondary to the process of saving over long periods of time. And remember that referring to retirement here means more than just socking away money to stop working and live happily ever after. Beyond the traditional retirement, what we are really after here is providing freedom of career choice and  security when you may want to do something else in your life or when you may have no choice but to do something else.

There are certainly more options, limitations, and considerations than covered here. Of course the limits and the options in general are also changed regularly by Congress. Once you have an idea of which option(s) might fit best for you, do some further research on the specific option. Also consider the details of your employer’s plan if you are considering the 401(k) options. And if you have concerns over your options, consult a fee only financial advisor to help create a viable plan.

So it is not generally recommended that a blog specifically focus on the blogger. Especially a blog that is just getting started. You don’t want to hear about me, and I get that.  But I do want to talk about our current financial plan, not necessarily because it is about me and my family, but mostly because it aligns with a lot of the recommendations I give to others regarding personal finance. Before I get into this, I also want to mention that I realize not everyone has the financial room to contribute a lot of money toward debt, or a lot of money toward retirement, or both. There will be future topics that can address boosting income, or spending less.  But this article is not about frugality or increasing income, it is much more about just having a plan.

Putting the Plan Together

Our Goals

We would not have a plan without first setting out some goals. While we have long term goals around our childrens college savings and our retirement, the short term goals are the focus for this topic. The short term goals are part of the longer term plan, but the 1-2 year goals really indicate what we need to be doing today.

Two primary factors have led to creation of these goals:

• Birth of our premature son – demonstrating the need for an emergency fund and more stability in our finances
• Upcoming reduction in income – my wife will be reducing her work within the next two years

So here we have a past event that encouraged us to take action. But we also have a future event that we control. Because it is our choice to reduce income in this case, we have set some predefined targets that we must hit before my wife can reduce work. This gives us real incentive to work together and hit the goals. Our two financial goals for the short term are 1) reduce our debt to the point where our home value is greater than our remaining debt, and 2) establish an emergency fund of at least 4 months expenses. When we started the plan last May, we had two 401(k) loans, a home equity loan, a student loan, and a mortgage.  And we had no sizable emergency fund.

Bringing our debt down below the current value of our home is advantageous because we could then sell the house and be completely debt free. With the housing market down, we do have to work harder than we expected when we started the plan!  Nevertheless it is still our target. Establishing the emergency fund is key to providing the stability we craved after the birth of our son.

Crafting the Plan

Our first decision to make was which loans to pay off and in what order. After some thought about each loan the decision was not all that difficult. The type of loan, the size of the loan, and the interest rate were all factors. Here is how we broke it down:

• 401(k) Loans – Generally speaking 401(k) loans are recommended against, which I will cover in a future topic. The only factor for making these loans the top priority was to have more freedom to change jobs (or withstand a layoff) without having to repay the loan immediately or owe interest and a penalty.
• Home Equity Loan – This became our second priority because of the relatively high 8.85% interest rate.
• Student Loan – Our interest rate on this loan is a very fortunate 1.75%. If it were 2 or more percentage points higher, I would be inclined to include it in this debt repayment plan. This became our lowest priority and would only be paid off in a medium to long term plan.
• Mortgage – The interest rate for the mortgage is 5.75%, and it is our largest debt balance. This is our third debt priority, but would have to be addressed after retirement savings and various other needs and wants in our medium to long term plans.

Our intention was to attack this debt with extreme focus. So while we have not followed Dave Ramsey’s Baby Steps exactly, the steps we have taken are not far removed from his approach.

Started a Budget and Reduced Spending

Where we had no formal budget before, we began to track our spending. We tracked our spending for the first month before establishing any budget. We identified areas to cut and began implementing those changes. The key point here is that we communicated what each of our priorities were within the budget, including some available money for non-essentials such as entertainment, eating out, and so on. Instead of eliminating all of the non-essentials, we put together a budget that reduced the number of smaller non-essential items like eating out. Where we really created room in the budget though was by eliminating and putting off the big non-essentials like out of state vacations, recurring monthly expenses, and cosmetic home improvements. Our income situation allowed for this, though if we had more debt or less income we would have had to focus on all discretionary expenses.

Created an Emergency Fund

Getting the budget completed allowed us then to put together a small emergency fund.   As quickly as possible we put in place $2000 for this emergency fund. We chose $2000 because while our expenses we under more control, they were still high enough that an expensive emergency could derail our plan. We keep this money in our ING Savings account in order to be able to access it quickly if an emergency required it.

We Threw Money at the Debt Constantly

All “extra” money we had went directly to the debt.  Well almost   With the 401(k) loans we had to pay them off in full, so we had to save the money first. This gave us extra perceived cushion on our emergency fund as well, but it requires much discipline to avoid dipping into the money that is saved to pay off debt.  All of our excess money went to paying off debt. By the end of 2008 we had our two 401(k) loans paid off. This had a fortunate side effect as well, at least for one of the loans. With the crash in the stock market, if we had all of the money from the loan still in our 401(k), we would have lost much of it in the crash. But instead it was like having a cash investment. We paid one loan off before the crash, so we lost around 40% of it in the downturn. But the other loan was repaid after the crash, coincidentally a great time to be buying into the stock market. This of course was luck, and I would not suggest trying to plan it this way.

Aside from the budget and reduced spending, we also made some other temporary changes:

• Reduced 401(k) contributions – we reduced our 401(k) contributions to just enough to get the company match.  If this plan were going to take more than two years, or if we were going to just incur more debt after we paid these debts off, then this would be a bad move.  All the money that previously went to 401(k) contributions now goes to the debt.
• Any extra income or money such as bonuses, income tax refunds, and reimbursements from Child Care Dependent Care account and our Health Savings Account goes directly to the debt.

Our Current Progress

These changes enabled us to pay off our two 401(k) loans by the end of last year, and cut our home equity loan debt in half. At this rate, we should be able to meet our goal of having less total debt than the value of our home by February of next year. Then within about 6 months of completing that goal, we should have our emergency fund established. So a plan that originally took us through mid 2011 is on track to be accomplished by mid 2010.  We are thrilled about the progress, especially given the current economic conditions. What we have found is that this focused intensity has enabled us to meet these goals much earlier than we imagined. It does not always work out that way for everyone, but my hope is that this provides some motivation for others.

Next Steps

Once we meet our target around mid 2010, our focus will shift slightly to medium range plans.  A major item for that time frame will include saving to buy our next cars.  Our current cars will reach 10 years old around 2013 and we want to be prepared to buy our next cars without incurring new debt. Once we have saved the money, if the cars are still running fine we will wait to buy them though. We own our current cars and are in no rush to replace them — we want them to last as long as possible.

Also during this timeframe we will re-establish fully funding our retirement accounts.  We will plan a vacation.  And my wife will be able to scale back her work.  So with that, I will provide more information on our progress and our medium to long term plans in future posts!

Wall Street Journal recently had an article on how life insurance policies were being placed on employees by a number of companies in order to help fund executive pensions. I also mentioned this briefly in a post describing why we are moving away from Chase as our primary bank (Voting with Dollars: Banking).

The article specifically discusses a number of banks (all the “biggies”) that are using this tactic. Three of the banks have policy valuations totalling 12 billion or more.  The kicker is that while the policy is on the employees, the beneficiary is the company itself. This money is then used to fund pensions for executives.

The practice helps the companies avoid taxes because the “proceeds” from the policies when the employee passes are tax free. This results in situations where the family of the employee (or former employee) may get little to nothing in insurance payout, but the company profits. For example, a current lawsuit has been filed over just such a situation. An employee who had survived two brain tumors signed an agreement for $150,000 in supplemental insurance which also acted as his consent for his employer to take out their own policy.  His company later fired him, and he passed away not long after. His family received no life insurance money because he was fired. But a check was mistakenly mailed to his widow for $1.6 million, but made out to his former employer.

New rules in 2006 require companies wishing to implement this to get consent from the employees that they take policies out on. And the rules limit the employees that they can take policies out on to the higher earners.

Having an employer win when you work for them, or win when you die, is a terrible conflict of interest. Certainly companies wouldn’t resort to murder to fund pensions, would they?  Probably not…but the situation described above demonstrates how murky this practice gets. The employer is no longer employed the individual, so his policy was canceled — but theirs remained in effect.  Having survived two brain tumors, the company may have fired him as a result of failing health.  Perhaps they were justified in doing so, assuming that his work was suffering. But benefiting from his death crosses a line.