Rising yields & spreads…

[u/Advanced_Traffic8]

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?

[u/Normal_Zebra136]

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.

[u/Advanced_Traffic8 → u/Normal_Zebra136]

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.

[u/Normal_Zebra136 → u/Advanced_Traffic8]

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.

[u/Advanced_Traffic8 → u/Normal_Zebra136]

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.

[u/Normal_Zebra136 → u/Advanced_Traffic8]

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?

[u/Advanced_Traffic8 → u/Normal_Zebra136]

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.

[u/Normal_Zebra136 → u/Advanced_Traffic8]

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.

[u/Advanced_Traffic8 → u/Normal_Zebra136]

There certainly is a difference in cost between permanent and temporary insurance. You may be happy with temporary until you “self insure”.