Over the past year or so, we've been hit with this question quite a few times:
If the market rally keeps up, how long before all the people who've been buying cash value life insurance as an alternative asset decide it's time to rush back into stocks?
So, today we decided it was time to address it. Actually this is part 1 of a two part series that we'll be doing on this topic. The first part will focus exclusively on what the stock market rally and subsequently higher investment returns means for participating whole life insurance.
Next week, we'll focus on how this all effects universal life insurance.
I think what people are really asking us is –are we worried that a continued rise in the market will lead people away from purchasing cash value life insurance?
No, we’re not concerned about this in the least.
Because the market doesn’t rise in a vacuum, if the market continues to accelerate we’ll likely see whole life insurance benefit as well. Huh?
Yes that’s right.
Even though participating whole life insurance is directly linked to the performance of the stock market, one cannot deny that market forces effect everything in our economy. That’s just a fact.
So, in a rising market we’re likely to see every sort of investment/savings/asset benefit from the rise as it signals growth in the economy—at least over the long run. One certainly can’t pay attention to short term market fluctuations as any sort of indicator other than erratic human behavior.
Also, let’s not forget the best reason for warehousing cash inside of a whole life insurance policy…
You will not see a decline in your cash value when the market takes a dip. Yes, it’s true that you won’t see a year that your dividend yield matches the return of the S&P 500 but we’d contend…you shouldn’t really compare the two.
For years, it seems that too many advisors/agents have felt that selling whole life insurance meant they had to compete with other market type investments i.e. mutual funds, ETFs, stocks, real estate etc.
We think that’s flawed logic.
Indeed we’re big advocates of employing cash value life insurance as an asset. But there’s a devil in the details of that statement…I said “an asset” not “the asset”.
No we don’t think you should have ALL of your money in cash value life insurance and there’s no right answer as to how much of your money you should have there. However, as things stand today in our world, we’re not aware of any other alternative that offers the degree of safety, liquidity and yield that rivals the cash value of your permanent life insurance policy.
Is the Prosperity Train Back on Track?
That’s hard to say, with every great rise comes a great decline or at least a consolidation where people begin to take money off the table.
We always have to consider institutional investors, who are always under pressure to post ever higher returns to report to their existing clients and to bolster their marketing to new investors. These mutual funds, pensions, and hedge funds can move the market by making large buy/sell decisions at any time.
Where do we think the market is headed…we don’t predict that sort of thing and we don’t sell securities of any kind. But we’ll share something with you that is interesting to see and let you reach your own conclusions.
That is a five year snapshot of the SPY (and ETF that mirrors the S&P 500). I’ve highlighted and circled the value on Dec. 1, 2008 and you can clearly see the value as of this morning.
“The four most dangerous words in investing are: ‘this time it's different.” Sir John Templeton, legendary investor and philanthropist.
So we’ll assume that all the financial pundits are correct and that investment returns do average out quite well over time.
Our problem with this philosophy is—how much time? If you were 65 and planning on retiring in January 2009 the downturn in the market derailed that retirement plan of yours. Not good.
But let’s assume that doesn’t happen again in the future. Let’s assume that over the next 30 years we have a meteoric rise in the market akin to the rise that we had throughout the past 30 years or so.
Does that destroy the relative performance of whole life insurance?
No. We believe you would see a steady increase in dividend interest rates. If history proves true, a rising stock market increases the Fed's perception of inflationary pressure which leads them to raise rates to cool the economy, which in turn leads to higher bond yields. The result…higher yields for life insurance company general accounts.
Now, please consider that I just summarized in two sentences something that entire careers are based on and it's not quite that simple.
Keep in mind we also don’t think that you should view the money you are investing in the market as the same “bucket” of money that you would apply to a participating whole life insurance policy. In other words, there’s a certain amount of money that you’ve decided you can afford to lose and another amount of money that you’ve decided you can’t afford to lose.
But How Does Whole Life Actually Perform?
One of the best resources for actual and accurate performance data, you should check out The Truth About Participating Whole Life Insurance. This report has been compiled for a number of years by Richard Miller, CLU, ChFC. In the report, Miller uses a policy that was purchased back in 1963 and is still in force today.
I won’t spoil it for you by spilling all the beans here but you should spend a bit of time reading it if you’re interested in that sort of thing.
What’s really amazing about the data he’s compiled?
1. The policy is with Assurity…hardly known for its prowess in the participating whole life insurance market.
2. The policy wasn’t designed to maximize cash value growth. In fact, many of the options we can use today to enhance the internal rate of return on cash value weren’t available back in 1963. But despite that fact, the policy has performed quite well. An IRR on cash of 5.57% to be exact.
Not too shabby.
Also, let’s not forget two of the biggest advantages of using whole life insurance:
1. Liquidity and a great yield on the money until an opportunity comes your way and
2. No tax liability along the way or when you take the money out if done correctly.
Stay tuned for more next week!