If the Market Continues to Rally, is Whole Life Insurance Dead in the Water?

It’s been a pretty good run for whole life insurance over the course of the last five years. 2008 scared the pants off many Americans and has reminded us all that maybe being an “investor” isn’t all it’s cracked up to be.

As the blood pressure among our investment salesmen and women slowly rises following that last statement, allow me to take a moment and discuss a question we've received a lot lately:

If the market continues to rally, and history does end up repeating itself, will whole life insurance fade into the background just as it did throughout the 90’s?

The answer may surprise you…

2013, the Stock Market Loves You

Despite being a year marked by what many consider the unluckiest of them all—unless your Taylor Swift (that’s right, I watched the AMA’s)—the year has been anything but unlucky for the stock market. Year-to-date, the Dow is up 19.94%, the NASDAQ is up 30.45%, and the S&P500 is up 23.48%.

For those who listened to their broker and held strong throughout 2008 to today they are finally smiling again—or at least breaking even. In fact, we’ve finally broken into positive territory for Compound Annual Growth Rate for the S&P since the beginning of 2008! It’s 4.19%, but it’s something (now all we have to do is hope that the market stays at least close to where it is today by year’s end).

So like most Americans who get excited at the peak and start to entertain getting in, our fellow insurance and investment friends are finally coming around to the possibility that this bounce back from 2008 may not be a bounce back and might just be the beginning of more growth for the American economy.

And we genuinely hope it is, but even the most optimistic among us would probably remain tame in terms of their expectations. Still, let’s ignore all of that for a minute, and let’s pretend that a new day is upon us.

Is whole life insurance dead? Of course not.

When the Butterfly Flaps its Wings

Before we dive into a discussion about rate of return—and don’t worry, we’ll get there—let’s take a more theoretical approach to this discussion for a few paragraphs and talk more strategically.

Keep in mind that life is preciously friable. I don’t really mean this in the teary-eyed “Sunday morning sermon” or “someone just received some bad news” sense, but rather in a much more profound and practical sense (though the fundamental point behind either example applies the same). To be much more to the point, there are a lot of things that can come along and mess things up, and since you only get one shot at getting this whole life thing correct, best to be as strategic about mitigating those oh no moments as possible.

Whole life insurance can be a financial tool that absorbs bad times and leaves options on the table for good ones. And it does it phenomenally well.

How do I know this? Because just like every other financial tool that exists to you and I, it has greatly declined in terms of yield over the last 6 years, and despite this people want it now more than ever.

They All Dance in Unison

Despite what the less adept may tell you, all of the financial products that exist react to market conditions with a relatively high degree of predictability. This is most simply a function of price elasticity and more specifically cross price elasticity. For those who have never heard the term before, allow me to tell you everything you need to know in 60 words or less:

When a condition comes up that makes one good less attractive, people will swap consumption from that good to another good (a substitute). And when a condition comes up that makes one good more attractive, any good that is consumed with that now more attractive good is generally consumed more (a complementary good).

For those who want to dive deep into the weeds, studying the derivative of substitutes and complements can give you some precision when it comes to estimating the exact impact that a certain event will have on consumption of various goods.

For those who are less interested in the math, the important take away is this: as people become more or less interested in certain financial vehicles due to economic conditions, that will have an impact on what happens to those vehicles.

I don’t want to spin this into a lengthy tangent about what events cause what sort of impact on each asset class, but I do want to point out that it’s this very fundamental economic premise that drives the tightly woven nexus that is our economy, which is to say: everything happens in equilibrium.

I Said all of that to Say this

If, by the powers granted by some magical bunny, history does repeat itself and we do see economic conditions reminiscent of the 1980’s and1990’s stocks will not be the only asset class to benefit.

Whole life dividend rates did pretty well over this period of time. If we take the historical rates of the big four mutuals, we see that the 30 year average among the group is 8.54% or 37% higher than today’s average of 6.24%. So if conditions return to yester-decade we can only assume positive things for whole life insurance.

And we’ve seen this play out in real time from this example where someone who bought blended whole life insurance correctly in the early 90’s achieved a 7.76% yield on his policy as of 2009.

Whole life insurance as an asset class is much more than just yield (though it does yield very well). There are some additional reasons to buy it or its close cousin universal life insurance. And for those of you who are wondering what happens to universal life insurance if we ask the same question, check back next week.

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