Cash Value Life Insurance Is the Original Non-Correlated Asset

With all the recent bad news surrounding pandemics, toilet paper shortages, store shelves devoid of my beloved Ramen noodles and the most volatile stock market we’ve seen in decades, it seems like a good time to talk about non-correlated assets.

Several years back, I promised a marketing expert that we hired to help with some things on this site that I’d never use the phrase “non-correlated asset” ever again.

Seriously, he promised that he’d give me a virtual slap if I did.

But I’m guessing since he’s not on our payroll anymore, he’s not reading our blog.

And hey, I’m convinced our audience is smarter than the average bear anyway. Ooooh maybe using the term bear is insensitive right now?

Nonetheless and with as much seriousness as I can muster…it is a great time for most people to rethink wealth accumulation.

The Efficient Frontier Proves Life Insurance is Non-Correlated

Perhaps you’ve heard of the efficient frontier before or maybe not, either way, what's it got to do with cash value life insurance?

First, let's start with a brief explanation of the efficient frontier, then I'll get to the good stuff:

The efficient frontier is shown by the lines in the graphic below.  It represents the best exchange between risk (standard deviation) and expected return.  The goal for investors is to have a portfolio that’s as tightly matched to the line represented by the efficient frontier as possible.

The graphic is captured from a ten-minute presentation from Robert Shiller, professor at Yale. If you wanna explore the efficient frontier in much greater detail, watch it.

A basic concept that most of us understand regarding risk/reward is that in order for us to attain a higher return, we must accept a higher degree of risk—this is clearly illustrated by the ascending line in the graph below.

Well, I guess I should say that’s what we’ve been taught by the investment industry.

As we noted last week, that’s not always true.

A few years back, New York Life, commissioned a study to be conducted by Morningstar/Ibottson in a study that was commissioned a few years back by New York Life.

Yes, the data is a few years old but it doesn’t make it any less relevant.

I’d say it’s even more relevant given the volatility that’s present in the financial markets.

But Cash Value Life Insurance is So Boring

Brandon and I talk to a lot of people on a daily basis who’ve had about all they can stand of investments tied to the market.  Many of these people take on a substantial degree of risk in their day-to-day lives.

People who are professional investors, have a significant portion of their net worth tied to their ownership of a business or have accumulated wealth through steady savings over their lifetime.

I know it’s a bit counterintuitive.

The Wall Street marketing machine would have you believe that in order to invest like the 1%ers you have to give them ALL of your money…that’s what wealthy people do…right?

Wrong.

Most of the people we know have achieved their wealth through a controlling interest in a privately held business and/or the discipline of stashing away a significant percentage of their income over time.  They’re familiar with risk but choose to pursue risks that afford them a degree of control.

That’s not to say they don’t invest any of their money in the market, however, they do so with the understanding that they may go through periods of pain. A la, last week.

Okay, I’ve beaten that horse to death…right?  You get my point.

If not, here’s my BIG point…

Cash Value Life Insurance Is Non-Correlated

I know what you’re thinking.

Dave Ramsey, Suze Orman, and all of the new generation F.I.R.E (financial independence retire early) crowd say that owning any type of cash value life insurance is b-a-d.  They love to beat up on whole life and indexed universal life insurance.

First, let’s be honest, they’re not entirely wrong.

We’ve seen some really poorly designed policies that were sold to people who have no idea what they own or why they own it.

That being said, the policies are not garbage because the product is bad, they were implemented poorly.

How’s that?

It goes back to something we’ve discussed in detail in the past. We call it the “third dimension” of life insurance. If you’ve never read that piece, take a few minutes to check it out now.

That doesn't make much sense now, but fear not…clarity is coming!

But for now, stick with me in thinking of cash value life insurance as a non-correlated asset…one that could add a significant bump in those seeking a bit more alpha for their investment portfolio.

And at worst could protect a significant portion of your wealth from tanking at the worst possible time.

This graphic is representative of the data gathered by Ibbotson in the study that was commissioned by NYL.  What it shows is truly amazing.

It proves that adding a portion of your liquid net worth (money/portfolio/savings) to a plain old whole life contract, you stand to improve the overall result of your entire portfolio. I should also point out, this information holds true for any whole life insurance policy, not just those issued by New York Life. 

Gasp!  It can’t be.

Consider this, cash value life insurance is among maybe three different products that provide the unique ability to have tax-deferred growth and potentially tax-free distributions–the other two being Roth IRA’s and Municipal bonds.  Roth IRA’s are not realistic for many people we work with because they have restrictive limits for high net worth individuals and for those people considered to be high-income earners.

Muni Bonds are not nearly attractive as they once were with questions surrounding rating agencies that issue the bond ratings and the significant risk to capital in the inevitable rising interest rate environment over the coming decades.

Also, remember that the income (coupon/interest payments) from Municipal Bonds is included in the calculation of your provisional income (making your social security income taxable).

Whole life dividends tend to more or less mirror the Moody’s Bond Index, with some lag of course.  Keep in mind that as interest rates rise, life insurance company general accounts will surely benefit, however, the upward movement will take time.

Returns Similar to Bonds Without Risk to Principal

The great benefit of the money you have inside of your cash value life insurance is that it will receive this competitive return without the risk of capital loss that you have with bonds.

You should always be aware that life insurance companies are looking to fulfill obligations which by and large will have to be met many years in the future.  So, they tend to live on the long end of the curve.

Not to mention they will be buying assets with higher rates but only as new premiums come in.

Why am I saying all this?

Just to make you aware that they will benefit, but it will take some time for these assets with higher interest rates to affect the dividend rates of the general account.

Think about it this way, the general account is like trying to turn the Titanic…you can turn the wheel but it takes a while for the ship to react.

What’s really impressive and is worth mentioning is that the IRR (internal rate of return) for properly structured cash value life insurance is very competitive compared to your other alternatives.

Our disclaimer:  The growth of your cash value has minimum guarantees.  Dividends are not part of those guarantees.

If you’d be interested more to see how this strategy may benefit you, feel free to contact us and find out more.

About the Author Brantley Whitley

Brantley is a practicing life insurance agent and has been for over 18 years. After years of trying to sell like his sales managers wanted him to, he discovered that people want to buy life insurance if you actually explain the benefits.

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