This won’t be the most exotic blog post you will ever read, but stick with me here. If you own whole life insurance or are considering purchasing whole life insurance, then you want to read this article.
I entered the financial services business in 2012 and have spent the last twelve years studying historical returns of different asset classes and markets around the world. The market crash most people remember most vividly is 2008. This is likely due to the pain lasting much longer than the relative quick crash and re-bound we saw in 2020 amid the virus shut down. 2008 took longer to develop and it took longer to recover from. Some people never recovered. This wasn’t due to poor investments…it was due to poor investment behavior.
Before I go on, I want to make a point relative to poor investor behavior: I’m not making fun of it and I’m not pointing fingers at anyone. I am empathetic to that behavior because crashes are scary. They are FAR scarier if you don’t do what I do every day which is to read and read and read about money and how it works. If I was not in this industry I might very well be as nervous as anyone else. That being the case, I know that when we design investment portfolios, we need to not just build these portfolios to sail the open oceans but we need some calm harbors as well. While we may not WANT to have conservative assets, it’s not only prudent to have them, but in having them, our relative rate of return on our risky assets may very well be higher.
So, what’s this talk of market downturns and crashes? Silicon Valley Bank was a bank that failed recently. There are a lot of reasons for this. I’d like to focus on one particular reason: they bought long term bonds. There is nothing inherently wrong or dangerous in long bonds. However, if interest rates go up (and they did very quickly) then the value of those bonds go down (and they did very quickly). At the same time as the economy worsened, depositors needed cash. SVB didn’t keep 100% of deposits on hand (fractional reserve system at work and beyond the scope of this article). There is nothing wrong or bad about that either. It’s normal banking operations.
In this case and in this economy, it caused some dominos to fall and where it leads us, we really don’t know. No one knows. Those who have predicted a crash for 20 years are saying this is the big one and they believe they were right. If it doesn’t get worse from here then the “Bulls” will say they believe they were right.
Who is right and wrong is irrelevant IF you built your balance sheet to operate from a place of protection first.
Most of my clients own at least some amount of whole life insurance. Why do we position this asset on a balance sheet? Because it is one of the only assets you can buy that is guaranteed to go up every year. The only question is by how much. Last year, a diversified portfolio was down anywhere from 10% to 20% or so. However, my personal cash value inside of my whole life insurance went UP and it did the same for other clients who own it.
Why is this important? Because it’s liquid. Because it’s guaranteed. Because it is totally NON-CORRELLATED to the stock and bond market. In years like 2000-2022, 2008 and 2020, the cash value of a whole life insurance contract is available for anything at all the client needs. It may help you have financial confidence which means you probably ride out the investment downturns and avoid poor investment behavior of selling at the wrong time. It might mean you use your cash value instead of financing a house or a car through a bank at much higher rates. It might mean you use your cash to help fund your retirement income thus leaving your stock assets invested in a down year so they can eventually rebound.
Whole life insurance isn’t exotic. It’s quite boring. GOOD. That means it’s conservative. If you currently own whole life insurance, now would be a good time to ask your advisor how much cash value you have inside that policy and how it might work if you need to access it. If you don’t own any of this on your balance sheet, it’s ok to ask your advisor why you don’t. There may be a good reason for it. Or there might not.
At the end of the day, no one can predict the future. NO ONE. It’s these protection-based assets like whole life insurance that help us not try and predict and it frees us up to invest in the stock market with confidence and avoid poor investor behavior.
1All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values. Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information
2Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 5280 CARROLL CANYON ROAD, SUITE 300, SAN DIEGO CA, 92121, 619-6846400. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. WestPac Wealth Partners is not an affiliate or subsidiary of PAS or Guardian. Insurance products offered through WestPac Wealth Partners and Insurance Services, LLC, a DBA of WestPac Wealth Partners, LLC. CA Insurance License Number – 0I57557. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. | 2023-156465 Exp. 06/25
Data and rates used were indicative of market conditions as of the date shown. Opinions, estimates, forecasts and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security. Past performance is not a guarantee of future results. Indices are unmanaged and one cannot invest directly in an index