Clarity, Vision, and a Strategy for the future

The Objective Advisor

Some Life Insurance Strategies Only Work for the Very Wealthy

April 14, 2014

Very wealthy people take lots of risks with their money that make no sense at all for the rest of us. For example, they:

1. Fund tech startup companies, knowing their investments will likely be a 100% loss.
2. Run for Congress, funding their own campaigns.
3. Bet on the markets with their life insurance.

Most ordinary people, even if they make a comfortable living, don’t even dream about 1 or 2. But a surprising number of people direct their money to #3—betting on the markets with their life insurance—even though it’s equally foolish for anyone who doesn’t have a net worth north of $1.5 million.

Let’s look at why it’s such a bad idea.

Easy to look smart in a bull market.

Some Life Insurance Strategies Only Work for the Very WealthyA recent Wall Street Journal article detailed the growing popularity of Variable Universal Life and Indexed Universal Life policies that link benefits to stock performance. In 2013 alone, sales of these policies rose 24% and 13%, respectively.

And the S&P 500 rose 32%. Coincidence? Of course not.

When the market rises, financial instruments tied to market performance become more popular. It’s always easy to look smart in a bull market.

Variable Universal Life policies are the most linked to market performance, offering policyholders a menu of investment options—managed by mutual-fund companies—in which to invest the interest the policy earns. Indexed Universal Life policies link interest to stock-market benchmarks, currently capped at about 12% a year.

Insurance companies and investment firms will show you illustrations that demonstrate how the returns from these policies can defray insurance costs down the road and enhance your retirement income—when markets go up.

But markets go down, too.

Can’t afford to play games.

Between October, 2007, and March, 2009, the Dow Jones dropped 54%. How do you suppose these policies performed over that 17 month span? Not only did policyholders lose all the interest their policies had accrued—many had to pay in additional funds just to maintain their policies’ death benefits!

Some Life Insurance Strategies Only Work for the Very Wealthy

The 2007 – 2009 Crash

If you’re extremely wealthy, you can afford that kind of risk, just as you can afford to back a tech startup. Lose your whole investment? There’s plenty more where that came from.

But those of us with more modest means can’t afford to play games with our life insurance.

How do you maximize the return on your limited funds with minimal risk? A simple whole life policy is a very safe investment. So is term insurance, as long as you buy the policy based on sound advice and conservatively invest the difference in premiums from a whole life policy.

Boring? It must be to some insurance companies, who lower dividend and interest rates on policies that were issued years ago—while paying higher rates for new business.

Life insurance and financial investments have different purposes and risk profiles. More about that in my next post!

If you’d like to know more about life insurance strategies that make sense for you, please contact us, or call 847-601-8974847-601-8974.


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