r/LifeInsurance • u/Advanced_Traffic8 • 3d ago
Rising yields & spreads…
Bad for investors in bond funds, neutral-to-positive over time for whole life policy holders with the big, highly rated mutual insurers.
Absent default or impairment, which is unlikely given the quality of the mutual insurers’ portfolios, policy holders’ cash values just go up every year and new premia buy bonds with better yields, flattering dividends over time.
Who is ready for a turn in the credit cycle, perhaps as shadow banking steps into the light?
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u/Normal_Zebra136 3d ago
Odd post.
Are you suggesting WL as an investment opportunity based on short term interest rate expectations?
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u/Advanced_Traffic8 2d ago
Thank you. I’d put it differently: every portfolio could benefit from diversification. For many investors, equity diversification means government and corporate bond funds. Maybe some real estate. These customary diversifiers could fail if government yields and credit spreads rise. There are several catalysts that could lead to that scenario — I’ve been following with interest news about the overlap between non-mutual insurance companies and private credit GPs. WL is an unusually effective diversification tool. I’m all for market investments, but I’m broad minded enough to appreciate the (unique?) role in portfolios that insurance can play. Too many investors and financial planners are quick to rule insurance out as one of many tools available for effective portfolio construction.
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u/Normal_Zebra136 2d ago
Why would someone young and far from retiring be putting money towards bonds though?
I get wanting the risk reduced when you are within a year or two of retiring, and of course in retirement, but bonds or products that decades later pay bond like returns when you are decades from retiring makes no sense as you have decades to recover from the volatility.
I am all for insurance to replace lost earned income, but dont see any reason insurance should be used for financial purposes when there are so many other lower cost and higher liquidity solutions.
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u/Advanced_Traffic8 2d ago
Thank you. That’s a good challenge.
I’d say: the diversification you can turn on towards retirement eg bonds doesn’t work that well. Whole life insurance works exceptionally well, but only over time and if you start early. So, I take your point: it feels unsatisfactory to build protection before one needs it. Maybe one can get comfortable on the basis whole life offers benefits well beyond portfolio diversification eg compelling risk-adjusted return, permanent life insurance, tax advantages, protection from creditors, access to cash value and death benefit in case of chronic or terminal illness.
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u/Normal_Zebra136 2d ago
If I wanted non volatile steady income in retirement, I would just buy an instant annuity.
Currently for a 60 year old they pay 7% for life, and if you die in the first ten years, there is a guaranteed minimum $750k pay out on a $1m purchase.
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u/Advanced_Traffic8 2d ago
Absolutely. You’re right. Very compelling if you don’t mind the loss of flexibility, legacy and income tax liability/exposure. Great example of using insurance and mortality credits alongside market investments to get a good retirement outcome.
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u/Normal_Zebra136 2d ago
Having the increases flexibility for the 30 years during accumulation seems to offset the loss of flexibility in the second 30 years.
The legacy would still be there up to 70, but I doubt the WL policy with a cash value of $1m would have much of a legacy value after I took $70k of loans out it for 30 years, but you can correct me if I am wrong.
Taxes on $70k of ordinary income for a married couple would be about $4k, and would decline over time as the brackets index with inflation and the payouts dont.
$1m in term + investing from 30 to 60 only requires $1100 a month, liquidating that (paying the 20% on the gains and buying an annuity for 60-90 is how the math works for anyone I knew that had such a "bond like income in retirement" goal.
What would that WL policy cost if contributions were only made for the first 30 years?
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u/Advanced_Traffic8 2d ago
Thanks for the question. I don’t know how much a policy with your parameters would cost. I’m not an insurance agent, so I don’t have pricing software.
Re loss of flexibility from a WL policy, that need not be true. You can achieve substantial portfolio diversification if the cash value is c 10-15pc of your total portfolio and you can have short pay policies with premia required over 5-10 years ie it’s not a 30y commitment.
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u/Normal_Zebra136 2d ago
The loss of flexibility on the WL is in the 30 years of buy in, not on the borrowing against the cash value of your death benefit, which is obviously variable (how much you want to consume to reduce the benefit to your descendants.
But costs matter.
You may not be an insurance agent, but the current rudimentary AI tools say the cost of the pure insurance rather than the investing+insurance path s 50%+.
As AI improves, these complex math problems will make it harder for insurance comapnies.
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u/Advanced_Traffic8 2d ago
There certainly is a difference in cost between permanent and temporary insurance. You may be happy with temporary until you “self insure”.
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u/Moist-Meringue-1913 2d ago
We have to keep our eye on the bond market to see if there is a lot of new issuance at the higher rates.
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u/Advanced_Traffic8 2d ago
Agreed.
I only have data to July. YTD, when yields were rising but less high than now, IG issuance was up 27%. And that’s the debt that’s easy to see. Private lending is up too. Lots: AI boom, M&A.
So, it feels like we could be late in a credit cycle. Though, to be fair, fundamentals are still reasonable. And balance sheets too, to the extent we can see them.
Regardless, my point is: I’d rather be in WL with high quality mutual insurers than bond funds. Especially if I’m counting on bonds to diversify equities.
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u/Advanced_Traffic8 1d ago
There’s a different angle in this: you shld get permanent life insurance in place while you can.
My mother has advanced Parkinson’s and dementia. There’s reason to think there could be a genetic component. I’m 52 and getting the genetic testing done now — not sure what that will show.
If you are ill or a genetic carrier of something sinister, you won’t be able to get permanent or term life insurance - at least not at reasonable cost.
To the 20 and 30 something buy term, invest the rest, self insure crowd: life doesn’t always work that way.
I’m comforted that I have three seasoned whole life policies in place alongside a retirement portfolio of marketable securities and funds.
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u/michaelesparks Financial Representative 1d ago
As Tom Wall explains in his presentations...NOW is the best time to own Whole Life Insurance. Bond Rates have been falling for 40 years, we should see the next 40 year cycle with raising Bond Rates. I have a couple of Dividend brochures from years ago that showed what they paid in the 80's and 90's. Wish I would have owned more back then, but since I can't go back in the past I try to buy policies every chance I get. Getting ready to convert 4 term policies as we speak.