056 Cash is King

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In the 56th episode of the Financial Procast:

Today we are diving into a financial planning strategic philosophy.  This really serves as an overarching theme in everything that we do at The Insurance Pro Blog.  It probably comes as no great surprise to our community that we really feel traditional financial planning is too rigid.

We think that rigidity can leave people in a very uncomfortable situation in the long term and only serves to back them into a corner.  Common financial advice will give you all sorts of “rules of thumb”.  I don’t guess it’s any big secret the disdain we have for distilling financial advice down to cute little blanket statements.

It would be nice if it were always so neat and tidy.

However, we all live in a complex world where the difference between winning and losing is decided by nuance.  Every client we engage has a slightly different situation with any number of variables that may or may not exist in other people’s financial lives.

For those of you who’ve followed us for a while…none of this is new to you—you already know how we feel about this.

So, why do we have our undies in a wad?

We recently ran across this article from the Washington Post and we got a little fired up.  You see, it seems that professor Harold Pollack from the University of Chicago has distilled “All You Need to Know About Personal Finance” down to 11 simple rules that will fit onto a 4×6 index card.

Well, isn’t that cute.

What’s his sage advice?  If you listen at 5:04 you can hear exactly what each point is and you can hear our glorious commentary on all 11 points.

But none of his “advice” is new…right?  It’s the same advice that personal finance gurus and financial advisors have been spewing for years.  And over the last few years the volume of all this noise has gotten louder but strangely it doesn’t seem that it translates into great financial security for Americans.

Almost every report regarding financial security in America details how we’re all in worse financial shape than ever.

In fact, we’ve encountered quite a few people who’ve followed all of this typical advice and get to the end of the rainbow only to find there’s really no pot of gold there.  Many times, there’s just a great big tax bill.  Saving boatloads of money in tax qualified plans sets up a very nice annuity for the IRS.

In our experience, those who’ve had the most financial success don’t follow common financial wisdom.  Most financially successful people consider alternative philosophies and turn off the noise of the talking heads.

Now, that we’ve digressed…let’s get back to the topic at hand.

What is the Case for Cash?

We are of the opinion that holding more cash or cash equivalents is always a good idea for two reasons:

  1. To be able to take advantage of opportunities
  2. Wonderful safety net when you need it

Options are a good thing.

The one thing that seems to unite most successful investors is that they are extremely patient.  If the growth potential isn’t there or they don’t see obvious deep value opportunities, they simply sit on their pile of cash until the time is right.

Consider what Sir John Templeton had to say:

“Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

Sage advice to say the least—you won’t lose money if you’re holding cash in a market that is inflated and subsequently crashes.  And you’ll have the ability to cash in on the opportunity that abounds as a result of the crash.

It’s probably no big surprise that we really like cash value life insurance as a place to store cash equivalents.  It provides a competitive return, tax favored status and the ready access to funds when opportunities arise.

BOLI Sales Keep on Growing

What is BOLI you ask?  Well, it’s an acronym for bank owned life insurance.  Yep, you read that right.

Banks love to use life insurance and the life insurance companies love their bank customers.

Why?

It’s a mutually beneficial relationship.

The banks give the life insurance companies very large premiums and the life insurance companies provide tier 1 capital with a wonderful ROR on cash to the banks.

It seems that bank owned life insurance sales grew to $140 billion in the first six months of 2013, which is up from $134 billion in the first half of 2012.

Typically banks will use BOLI to fund retirement benefits for their executives as non-qualified deferred compensation plans.  There are no worries about mark to market rules as the cash value of life insurance isn’t subject to the whims of market forces.  In other words, they don’t have to worry about the dips.

BOLI keeps cash available to the bank and opens doors to grasp opportunity as it comes along.

 

Transcript

Click Here to Download the Transcript for Episode 56 (PDF)


2 Responses to “056 Cash is King”

  1. Debbie says:

    Hello,
    I’ve been following your comments for a short time now. I’m wondering if there is any conversation about the possibility of taxing the cash value in life insurance policies. Are there any ideas of changing the rules using life insurance policies to build retirement cash values.

    Curious.
    Debbie

    • Brandon Roberts says:

      Hi Debbie,

      Given the immense amount of taxes life insurers pay on premium received, and the huge role they play in the bond and equity market, I seriously doubt we’ll see a move to imperil the industry like this.

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