De-risk Your Portfolio with Whole Life Insurance • Insurance Pro Blog

We have had great success with the stock market over the past 10+ years. It seemed like the market was on a non-stop race to higher and higher levels. Instead, many hobby investors have amassed untold fortunes by starting blogs and offering financial advice that have already made Jack Bogle’s history a reality. And they looked like professionals until recently.

Now everyone is looking to diversify the risks and find products that will protect them from the market volatility that will never end. Bonds do not work. According to the morning starsThe 10 largest bond funds lost an average of 5.42% in the first quarter of 2022.

And if we look at the same collection of funds, we will find that the performance has increased since Q1 of this year:

Top Bond Performance YTD 2022
YTD figures are January 1 to August 26 of 2022 using data collected from the Portfolio Visualizer.

Now the nominal decrease in the total income is -7.22%. It is true that bonds are considered safer than the overall stock market. Using the S&P500 Index as our measuring stick, it is down about 12.62% YTD.

Life Insurance, The Real Flight to Safety

Using whole life insurance or universal life insurance as a hedge against volatility is something we’ve been doing for decades. I’m not looking to create an “us vs. them” argument that seeks to convince everyone that they should sell all their stocks/bonds and buy as much life insurance as they can afford. It’s ridiculous and it’s never been the way we take it now Insurance Pro Blog.

What I want to say today is that you can use life insurance as a way to de-risk your portfolio if you follow the right steps.

First, let me say that life insurance (other than variable life insurance) is a very low-cost or non-convertible product in relation to annuity accounts. It is designed to insure losses, and there are many benefits it can offer you. Today is not the day that we can explain any good, but I want you to use that idea as we open this discussion.

And because it’s very difficult to understand what each type of annuity can offer when discussed in theory, I’ll instead use examples to clearly state what life insurance has to offer.

De-risking Your Portfolio with Whole Life Insurance by Transferring Assets to Life Insurance

Let’s look at the following events. A man, 50 years old who has made several million dollars. He is on track to prepare for retirement, but he is worried about the damage that could destroy his hard-earned wealth. He understands that just because he has made enough money to date, stocks and bonds do not guarantee that his portfolio will be worth anything today or beyond.

They will sell $500,000 worth of property and move to whole life insurance. The policy uses several advanced tweaks to ensure that it provides the maximum amount of money possible while minimizing unnecessary contributions from the insurance company (that is, death).

Here is a book that explains what they will achieve with this move:

De-Risk portfolio with Life Insurance Lump Sum

Note that by 10 years, he has earned a 3.10% return on his investment. This is an impressive result for an economy with limited opportunities. This result is best in year 20 when the result is 4.28%. But return rates are misleading and mean nothing when looking at day-to-day spending.

At age 20, they can withdraw about 5.5% of the total amount of the account, and keep that money for up to 100 years (not pictured above). This amount is exempt from income tax, does not count toward Modified Adjusted Gross Income, and is fully adjustable. When I say flexible, I mean that they are not forced to take a certain amount at any given time—such as an annuity benefit or dividends.

The possibility of earning money against this product which is much higher than the traditional opinion of 4% comes from the scarcity of the product. The fact that the policy will not have a year in which the return on the premium is negative gives the owner more leverage. The rate of collection may vary, but this has a much smaller effect on the amount that can be distributed than the period of negative returns.

Keep in mind that they still have more than a million worth of stocks that will hopefully grow at a rate equal to the market’s normal returns. The whole game of life insurance is simply locking in a certain amount of value to provide peace of mind against future volatility in the stock market.

Also, it is important to note that all of this is scalable in any direction. If they have more assets and want more money to go into life insurance or if they have less assets and put less into life insurance, the results are very similar. I only bring this up to show you that if your situation is different, it does not exclude you as an advocate of such a way.

But there is another way that may be better for many people.

Setting the Stage to Eliminate Risk in the Future

Now let’s look at other events. A 40-year-old man who has begun to worry about the risks he will face as he nears retirement. He’s saved enough money so far, but he’s wondering if he needs to change his strategy to deal with future threats. They need to leave their current assets in the market and take advantage of what they can do in the next few decades.

He will take $50,000 from his annual savings and invest it in whole life insurance. In most cases, insurance agents can show him a situation closer to the following:

De-accident is a 40yo fixed whole life insurance

This is very good and works as a retirement income. But we can make a few changes that can extract more buying power from these products, but combine them with its other products as a way to reduce risk.

We know that they will accumulate wealth through other means beyond the whole life cycle. What if he takes some of those things and pays some of the money that will cost his life insurance in retirement?

The above costs are based on a number of factors regarding the whole life policy. It depends on a certain area. It assumes that the policy owner will receive 100 years of income and then retire. It also assumes that the debt that will be used to finance this investment will earn interest each year and that interest will be added to the debt – i.e. not paid by the owner.

But what if he he said pay interest? What if they could borrow money from other assets and pay interest every year? Here’s what happens:

de-risk and whole life insurance 4yo new concept

He earns about $92,000 a year. He accomplishes this by moving some of his risk assets into whole life insurance through a mortgage, thus empowering himself to increase the fixed and tax-free income he received from his whole life insurance. Notice that in the first five years he pays $79,246 in interest and earns $459,115. It’s a sweet exchange.

Think about it, your current income is exactly $91,823. This means that if he leaves money in some of his assets, he must be sure that he can earn that much – or something like that – per year by leaving that money in other assets.

Remember that life insurance has no volatility which makes its earning power very strong against other assets. Also, don’t forget that life insurance costs are inclusive – including taxes and fees.

Even if he chooses to forego the sale of other assets to pay the life insurance premium at a later date, he may still receive more than the original $106,291. That’s where most people get stuck on what’s right. How much more should I invest in life insurance when I get older to increase my income? That is an unknown answer, and you should not torture yourself with it. The purpose of this experiment is not to determine the exact method that one should follow in all situations. It’s pointing to what’s there. Helping people understand what they have when they include life insurance in their portfolio. And more importantly, how effective life insurance can be in reducing risk when used in this way.

And you know what else? There are more options than you might realize from reading this article. And that’s a big lesson for another day.