So the biggest question I get all the time is why? Why do I need to change the savings/retirement plan that I have currently (and for many the answer is, because doing something…anything is an improvement over what you are doing, now)? Why should I look at life insurance as a savings vehicle? How does that even work? Besides, as many point out, I know plenty of people who aren’t doing it…
And maybe you begin to think, the nay-sayers are correct. No one else is doing it. So why should I? Well for starers since only 4% of American workers successfully save enough money for retirement, it’s hard to suggest following the herd on this one is a good idea
But perhaps the why we should be asking here is: Why have Americans failed so miserably to adequately prepare for retirement? Many pontificate freely on this topic. Several have for years faulted our love of material things, and perhaps there is a large element of that involved. But perhaps also, we’ve failed so miserably because we’ve been fed such terrible advice. Dare we suggest that the industry we support–the Financial Services Industry–is at the core of the American retirement problem?
How could this be though? Why is the establishment that set out to avoid this problem actually advancing it? There are two basic reasons for this:
1. Most Advisers are not Equipped to Advise Middle America
The financial industry is much more interested in the wealthy. And they only do a so so job with most of them (if you were the crappiest doctor in the world, but your patients insisted on leading healthy lives, you’d still look like a rockstar). So, most advisers believe they can approach every situation like their last one (the only one fore which they are trained in most cases). They pick their favorite investment plan (read mutual fund) and push it on anyone who doesn’t run away arms flailing (and perhaps even those who trip in their attempt to get away) from them. For most advisers Assets Under Management (AUM) is the primary focus. For some advisers, average rate of return is important (this is mostly for marketing purposes) but don’t be fooled, the measure of your financial guy when he goes out to play golf with his fellow buddies from the industry is all about how much money he oversees. Obviously its easier to build AUM when you talk to a few really rich people than if you work hard to convince a lot of people of moderate to lesser means to hand their money over to you for stewardship. At the same time, most advisers understand that they get paid based on volume (volume of the accounts they oversee).
2. Most Advisers View Their Role as a Salesman and are Trained for this
It’s perhaps an ugly truth about the industry, but advisers are more worried about how they bring clients’ money in and less about being right when it comes to their recommendations. It doesn’t really matter what company we talk about, or what type of “professional standard” (suitability or fiduciary) an adviser is held to. At the end of the day, paychecks don’t get cut and therefore bills don’t get paid unless the adviser transacts business. In truth, this isn’t all that out of the norm of how enterprise in the United States works, so it’s not entirely fair to blame the short-coming of American savings on this feature alone.
It is important to understand that the noble allusion the industry likes to create about trusted advisers that are here to be your resource of information about the complexity of personal finance is mostly a crock as the average adviser would have a hard time filling the back of a postage stamp with his/her knowledge of the topic.
The other sad truth is a lot of advisers lack the spine to go against the grain (either because they lack the personal conviction or because they find it much more convenient to simply do what the customer comes to them saying they want to do). Like politicians, they are like little blades of grass waving back and forth in the wind.
But is it really True that No Body is doing it?
So, your best friend, neighbor, cousin, etc. hasn’t said much about infinite banking or using cash value life insurance as a super low risk, but surprisingly high yielding (relatively speaking) asset held in their portfolio (then again, since when did any of these people earn the right to opine on the topic?) but does that really mean that no body is doing it? Absolutely not.
The practice of holding a not so insignificant portion of one’s assets in permanent cash value life insurance is a practice as old as the product itself. In fact the insurance industry even decided to name a product after its number one customer: the Banking Industry. The product is commonly referred to as BOLI (Bank Owned Life Insurance) and it’s reserved for larger (usually north of $100k of premium/year) policies. In fact, the largest 4 banks in the United States (ranked by assets) hold over 52 billion dollars in life insurance cash surrender value (according to their balance sheets maintained by the FDIC). Compare that to the roughly 26.5 billion dollars these same 4 banks hold in equity securities (stocks). Not even the banking industry is dumb enough to follow the stock jockey/WSJ/CNBC/Money Magazine advice of buy and hold vis-à-vis the put all (or almost all) of your money in stocks because that’s the magical path to prosperity.
But the banking industry sometimes conjures up images of evil and ill will, so what about some other aspect of American life, how about large enterprise? Like General Electric? A company who has no doubt had an impact in one form or another on everyone’s life. Last year, Jeffry Immelt’s (GE current CEO) Non-qualified deferred compensation account increased in value by over six million dollars. And for those of you who don’t know, NQDC is primarily funded with life insurance products. On top of that, we know that Mr. Immelt (or GE on his behalf rather) is spending about $100k/year on life insurance premiums.
In fact, Corporate America is such a fan and frequent flier that they too get their own specially named products: Corporate Owned Life Insurance (or COLI) The insurance industry isn’t all that creative on the marketing side. Have you seen those terrible New York Life commercials?
So, why should you do it? Because cash value life insurance is commonly regarded as the most stable asset available (according to the Treynor Ratio). It has an amazingly impressive ability to leverage cash value growth, while still having access to your money, a feature you’ll find nowhere else (we’ll dive into this plenty in the future). Corporate America loves it (and we criticize the hell out of them for all of the stuff they have access to that we don’t…but maybe we do).
But, we’re all about free will around here. So keep in mind, this is all about choices. You don’t have to do this (so much for violent conviction). And if you’d prefer to go to cocktail parties and bemoan Wall Street with the rest of your friends and colleagues because your account crashed another 25% this quarter, hey that’s your thing. We won’t be the ones to roll up the pity party though, so please, no emails or other contacts on that subject. We’re a tad busy doing things like paying for college, developing massive safety reserves, capitalizing on investment projects we’ve earned the right to embark on because we have more than enough cash on hand to do so, and ensuring a comfortable and secure retirement.