Cash value life insurance is a funny subject. I strongly admire and strongly detest this product within the American system of finance, long known for its stable returns and obscurity. Proponents tout its many benefits while opponents scream about its expenses and lack of disclosure.
For those who have followed us for a while, you'd expect today might be one where we reinforce the benefits and side with the cash value friendly crowd.
You'd be sorely mistaken.
Lots of agents learn very early in their career that a Modified Endowment Contract is a bad thing. Perhaps it's because they hold the first-in-first-out and tax free via loan distribution privileges in such high regard that losing those benefits seems to kill the whole thing. I'll admit that these benefits are certainly coveted and optimal, but there are times when intentionally owning a modified endowment contract might makes sense, in fact a lot of sense.
Last time I talked about designing cash value life insurance as an asset class using whole life insurance, today we'll dive into how it works for universal life insurance.
Universal life insurance is often used by agents as a lower premium permanent life insurance option as compared to whole life insurance, huge mistake. As a product that seeks to establish a permanent death benefit, it needs adequate incoming money to build an appropriate reserve to ensure the policy's sustainability.
Many of the people who reach out to us hope to use cash value life insurance to create retirement income. They’ve heard about this possibility, maybe read a book or two that talked about it, and, in some cases, even talked to a “certified” advisor.
But, they’re still scratching their heads as to how it all works, and they’re often convinced they haven’t seen the best representation of the strategy.
In the last few years particularly, this strategy has gained significant momentum, and it’s not surprising with the sagging long-term rates of fixed income investment vehicles (treasury bonds, corporate bonds, and CDs) and the volatility of the stock market since 2008.
It occurred to me somewhat recently that all my praise for cash value life insurance has left some unanswered questions regarding execution. This is purely a function of precious little time and the needs for a more diverse range of topics. This week I'll be rolling out a two part series on the subject (two so that we can spend ample time sorting out how it's done with whole life and universal life insurance). And since whole life is way trickier, we'll start there.
In a world where almost every talking head and financial pundit (think Suze Orman and Dave Ramsey) is telling you that cash value life insurance and particularly whole life insurance are terrible, we stand atop the shining city on the hill and declare them wrong. As a matter of fact, it’s great up here, and we recommend you check out the view!
Alas, so far, most of our cries have gone unheard.
Sometimes I just feel like being edgy, and throwing the words invest and Modified Endowment Contract about seems like a good way to be edgy. Of course this so called “edginess” is more a testament of my dork-dom–analogous to my saying, “I know my AGI is >$33,750 but screw form 6251.”
If you got that joke, I think I love you.
But in all seriousness a few recent events played out that gave way to this post. You see, It's been a long time since I thought real estate was a good place to invest. When I was in college I had a professor point out that the 30 year CAGR on real-estate in the United States was under 4%. Yikes! That was before the bubble popped, and let's not forget that real-estate can be super volatile.
Northwestern Mutual is a large mutual life insurer well known for it's financial stability and smug career agency sales force. Another thing the “Quiet Company” is somewhat well known for within the industry is its not so quiet approach to brandishing about its latest investment moves.
A few weeks ago we learned that Northwestern now includes a $142.5 million dollar loan to Douglas Emmett, Inc. for its latest project: the Warner Center Towers.
On its face this may not seem like such a big deal. It's certainly not a huge investment on the behalf of Northwestern. $142.5 represents about a 10th of one percent of Northwestern Mutual's total general account. But one thing to be gleaned from this news is the diversity of investment exposure your money has when it sits in an insurance company's general account.
These sorts of investments are pretty typical for most insurance companies. In fact, one of the most astute comments I've ever heard from a fellow agent was, “These companies tend to run mini private equity firms inside a portion of their general account.”
We've been hammering the alternative investments point pretty hard lately, and this is because the financial services industry is abuzz about what to do with its tarnished image for cuddling up with the main stream stock market for so long and and now being accountable for it's general lack of reliability to the average investor.
So, what are money managers and general financial planners (the certified kind) doing to restore faith and peace of mind among their clientèle? The answer is quite interesting.
Alternative Investments? You say…hear us out.
I'll admit it, I have a certain penchant for the unusual and I have a huge tendency to buck the trend. According to certain personality tests circulating the internet, I share personality traits with only roughly 5% of the U.S. population. Bad for social gatherings, great for dissecting conventional wisdom and avoiding common pitfalls.
I've been a finance geek for a long time (I like numbers). I was an online investor back when stock quotes were delayed more by my dial-up internet connection then by the speed of the ticker tape. And I've always been amazed at the crazy ideals we dogmatically hold onto in the personal finance world.
So imagine how I attacked the notion of using cash value life insurance as an asset class when the idea was first presented to me.
