Though it requires patience, as it takes time for the initial policy creation costs to be recovered and for cash value to accumulate, long-term investors may find that the long-term net returns on cash value accumulation within a whole life policy may be competitive with the fixed-income returns a household could otherwise obtain from traditional bond investments. This fourth role for life insurance focuses on cash value growth, with the postretirement death benefit serving as an afterthought. In this regard, one might even consider whole life insurance as an alternative source for a temporary death benefit instead of term insurance with the intention to build tax-deferred cash value to later surrender as an alternative to buying term and investing the difference in bonds.
Cash value life insurance provides a way for the policyowner and the insurance company to share the benefits of tax-deferral afforded to life insurance. To be comparable with cash value, the net return on bonds would have to be evaluated as the gross return less investment expenses, taxes, and the term premiums required to purchase an equivalent death benefit for preretirement human capital replacement needs.
The ability for cash value returns to potentially outperform other fixed-income investments relates to several factors. First, regarding the underlying portfolio of assets, the general account of the insurance company is better positioned than the household to manage the risks involved in earning higher fixed-income returns by accepting duration, illiquidity, and credit risk. Actuaries at insurance companies generally can make reasonable estimates about their future claims-related expenses. This allows for a longer-term investment focus with assets held to maturity that can offer higher yields than households could otherwise muster within their own fixed-income portfolios.
The general account is highly regulated with respect to the amount of assets to be maintained relative to liabilities and to asset allocation. Assets must be sufficient to fund policy claims, including death benefits, policy surrenders, and loans, after accounting for future premiums and investment returns.
General account investments typically include corporate and government bonds, mortgages, policy loans, a small allocation to equities, and potentially other types of alternative investments. The general account has greater return potential through its ability to invest in longer-term and less liquid assets, and to diversify the credit risk of higher-yielding corporate bonds. Households have less capacity to diversify and manage these risks. Asset values for households are too small, their timeframes are too short, and their liquidity needs are too high. Policyholders do not have individual accounts within the general account. The account value is aggregated across all policyholders.
The general account of the insurance company is using projections about the inflows of premiums and outflows of benefits and surrenders/loans and is using an asset-liability matching framework so that bonds do not have to be sold at a loss. Because insurance companies generally hold the fixed-income assets to maturity, rising rates will not trigger capital losses, but will allow new premiums to be invested at a higher rate. Any policy dividends should generally be more closely related to interest rate movements, slowly rising after interest rates rise and slowly falling after interest rates fall. Because insurance companies use asset-liability matching, a rise in interest rates allow subsequent bond purchases to be made at higher yields. This stable value aspect of cash value is a key motivator for using it in the volatility buffer strategies.
As well, fixed-income returns must be considered net of taxes. For bonds held in a taxable account, taxes must be paid on the annual interest payments, reducing the compounding growth potential of the assets. Likewise, in a tax-deferred account, taxes must be paid when distributions are made. Cash value within life insurance accumulates on a tax-deferred basis while the asset can potentially also be accessed without needing to pay any additional taxes.
Furthermore, cash value accumulation is already reported net of fees. Fees are internal to the policy and loaded into the stated premium. To be comparable, investment and advisory fees charged on bonds must be incorporated so that bond returns are identified on a net-of-fees basis.
Finally, cash value life insurance also provides a valuable death benefit. If we assume that a pre-retiree needs life insurance and is considering between term and permanent life insurance, the net returns on a bond portfolio would also need to be reduced to account for the cost of term premiums as a percentage of the whole life premiums. Bond investments could only be made with remaining funds after paying for the term premiums covering the preretirement life insurance need.
*This is an excerpt from Wade Pfau’s book, Safety-First Retirement Planning: An Integrated Approach for a Worry-Free Retirement. (The Retirement Researcher’s Guide Series), available now on Amazon.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
