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.
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.
Now, this data was compiled by Ibottson in a study that was commissioned a few years back by New York Life.
Hang in there, just because the data is a few years old doesn’t make it any less relevant.
Actually, I’d say it’s even more relevant given the volatility that’s present in the financial markets.
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 recently liquidated ownership of a business aren’t really interested in watching their money do the whole rollercoaster thing. 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 your money…that’s what wealthy people do…right?
Most of the people we know have achieved their wealth through a controlling interest in a privately held business. They’re familiar with risk but they very much favor taking risks that they can exercise control over.
Okay, I’ve beaten that horse to death…right? You get my point.
If not, here’s my BIG point…
I know what you’re thinking.
Dave Ramsey and Suze Orman said owning any type of cash value life insurance is b-a-d. They just love to beat up on whole life and all types of universal life insurance.
And honestly, we would agree with them most of the time.
A vast majority of the policies that we encounter other agents selling to consumers, are absolute garbage. I mean real rabid junkyard dogs!
That being said, they’re not garbage because the product itself is bad, they’re garbage because the policies were poorly designed.
Why is that you ask?
Well, that’s another discussion for another day and one that we’ll be having in the very near future. All I can say is “think third dimension” 😉
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.
[title color=”navy-vibrant” align=”scmgccenter” font=”verdana” style=”normal” size=”scmgc-2em”]Click here for the proof[/title]
Look back up at the chart/graph that I posted above.
That graph is representative of data that was gathered by Ibbotson in the study that was commissioned by NYL. What it shows is truly amazing.
The graph proves to all the naysayers that by adding a portion of your investment portfolio to a plain old whole life contract, you would improve the overall result of your entire portfolio.
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 ratings agencies that issue the bond ratings and the significant risk of capital in the inevitable rising interest rate environment over the next few years.
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.
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.
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.
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.