We receive phone calls and emails every week from people looking to “de-risk” their portfolio and possibly add life insurance as a complement to their other investment and savings strategies.
A comment that tends to trend among these good folks notes that while we’ve done a pretty decent job explaining the more esoteric aspects of life insurance (according to the comments) it’s still somewhat difficult to understand exactly how this works and why it’s beneficial.
I can accept and agree with this comment and in an attempt to build out more comprehensive understanding I'd like to present a case study today that highlights some of the power behind life insurance when used as an asset in one’s portfolio. We’ll be publishing several more of these in the coming year. While we’ve been given permission to share these stories, names have been altered a bit to protect identity.
Daniel, a 48 year-old software engineer, came to us with a degree of frustration over available bond yields. He’s been pretty aggressively saving money in bonds for years and was quite well read on the subject of bond investing. His concerns were two fold:
We used a lump sum funding strategy for a whole life insurance contract to transfer $500,000 into a policy making heavy use of paid-up additions and blending ensuring max cash accumulation in the policy. Projected results were very attractive.
By year 10 projected annualized return on Daniel’s money was 4.66% and by year 20 it was 5.72%. He was quite happy with these results and noted the difficulty he’d have in finding bonds to compete with returns like this.
To give you a better idea, using data from BondsOnline here are the current yields (as of 12/15/2015) for various bonds:
As you can see, A-rated corporate bonds are the best in terms of yield (excluding tax considerations) at 3.47% with 10 year maturities and 4.39% for 20 year maturities. But there’s more to understand.
Bond yields, however, are the income produced by the bond. One cannot automatically reinvest bond income. One could take the bond income (if large enough) and buy new bonds at whatever the newly prevailing yield is (maybe higher or lower than the original bond). There is no easy way to compound bond earnings.
The annualized return on the above referenced 10-year A-rated corporate bond for the same amount of money is 3.02% and for a 20-year A-rated corporate bond 3.20%.
But that’s not all…
Beyond a higher return on Daniel’s money, the whole life insurance contract afforded these additional benefits:
Not to be all cliché or anything, but this statement is true. Life insurance offers an array of benefits that no other financial tool can accomplish.
On top of all that, it’s a pretty spectacular tool purely for rate of return on your money. Add in the additional perks that it brings along, and you have a very unique and powerful financial tool.
The policy used for Daniel was not a standard off the shelf policy, though. So please don’t assume that any plain old whole life policy will do. If you’d like more information on how this might work for you, please don’t hesitate to reach out to us. We’d be delighted to discuss with you.
Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. Brandon was born in Northern New England, and he currently calls VT home. He attended Syracuse University and graduated with a triple major in Economics, Public Administration, and Political Science.