Ever flip on over the CNBC and watch their stock picking experts talk about chartology? It's the process of looking at a graphical depiction of a stock or market performance and making “educated” guesses about where the market (or a particular equity) is going based on the statistical data that represents the chart's graphical display. It's not perfect, but it's something a lot of Wall Street types get really excited over, and it's probably something you've run into if you've spent more than 10 minutes with a stock broker who wanted to pitch you on his or her latest and greatest stock idea. Well, here's a chart that most 3rd graders could make a prediction off, and it's not good news for the buy and hold folks. It's the historical data for the Dow Jone Industry Average, the index of the largest publicly traded companies in America (read: where the “low risk” blue chips call home).
Here's something we should address right off the bat that I think a lot of people in the BOY et. al. crowd tend to forget to mention: YOU CAN SPEND YOUR MONEY! So, if today I'm serving you dinner in the form of financial security, we're going to start first with dessert. And if it weren't for copyright law (and a little bit of laziness), I might think about stealing a picture off the internet of a young child with ice cream all over his/her face. But I'll just let you envision that instead.
Prior to booming interest rates from the later '70s and early '80s, your life insurance options were pretty much term insurance and whole life insurance (and these nifty things calls endowment contracts that have since gone the way of the dodo). But, as interest rates started to skyrocket and insurance companies appeared to lag way behind, many began tough criticisms of the industry for offering such tiny returns compared to CD's and other interest-based savings vehicles.
The industry maintained that its payment of dividends accounted for the fact that policy loans did not change the dividend paid (essentially taking money out without taking money out) and required a smaller dividend payment. Still, the spread was pretty great and a lot of people began taking large policy loans and placing the money into other savings vehicles with much better returns in the short run.
Some companies tried to combat the interest rate environment by changing the way in which they paid dividends. The Guardian Life Insurance Company of America was instrumental in changing the payment of dividends by pioneering what is now known as Direct-Recognition to compensate for the interest spread.
They paid a higher dividend rate by addressing what all of the insurance companies were fearing, money leaving the contracts. So, Guardian began a practice of paying higher dividends if the money stayed in the contract, and reduced the dividend on loaned values of the policy.
Others in the industry decided to go in a different direction. Instead of changing up dividend treatment, they decided to create a new product. A product that took the guarantees that Whole Life brought off the table, but allowed for an opportunity to make more money on the cash value in the policy if interest rates continued their rally. This new product was called Universal Life Insurance
Known by a few different names, and probably the most tweaked product in the industry, Whole Life (aka straight life in older circles) has a several centuries history of offering guaranteed death benefit for the entire lifetime of the insured.
In the world of guarantees, nothing beats it, and it has been an anchor for conservative savings plans for just about as long as it's been in existence. It's also one of the most hotly debated products in the insurance industry as opinions run wild about its overall usefulness compared to other products that exist today.
The simplest form of life insurance is called Term Insurance. Term takes its name from the notion that it is purchased simply for a term (period of time), after which is it no longer renewable. Not that long ago the general rule was term products were renewable to age 75 and that was it. More recently this has been reviewed and some companies are offering term products that can be renewed past this date. This is also governed by state insurance law so you should check on this for your specific state.
It started on a cold dark night…
Sort of, actually more late afternoon/early evening, but this post is going up as we drag into an unseasonably cold evening even for New England. Everyone has to start some where and here we are…