How Whole Life Insurance Quietly Outperforms Bonds | with Tom Wall

Speaker 0 | 00:00.264

You're about to hear one of the clearest, most compelling breakdowns of why we may be in the best era for whole life insurance, especially in its comparison to bonds. Tom Wall, PhD in retirement income planning, lays out one of the clearest explanations I've ever heard on where whole life insurance fits in your portfolio. Originally, this was delivered to a room full of financial advisors, actually at my event, the Life Insurance Summit, but the insights were too valuable not to share with you here. Let's dive in.

Speaker 1 | 00:27.030

I always start out here. Come on, here. With bonds. Okay, interest rates and bonds. That green line is the interest rate environment over the last 100 years. Okay, we are coming off the biggest bull market in bonds we have ever seen. What you can see here is as that green line has been going down, clients in any asset allocation model have been making tons of money. In 1981, the Paul Volcker, the Fed Funds Chairman at the time, raised the overnight rate to fight inflation. Sound familiar? Okay. And they actually made it so attractive to save and so unattractive to borrow that they soaked up all the capital and immediately killed inflation. What that kicked off was the biggest bull market in bonds we've ever seen, because there's two ways you make money in bonds. One is the interest, the coupon payment on the bond. It's kind of like a CD at the bank. When you give them money for five years, they pay you interest, and at the end of five years, you get your money back. Bonds are the same thing, just on a much bigger scale for corporations and governments around the world. And during that time, as interest rates were falling, not only were people earning money on bonds and those coupon payments, the interest. But the other way you make money on bonds is the directionality of those interest rates. As interest rates fall, bonds that you bought at higher rates become more valuable to new purchasers. They'll actually pay you a premium over what you paid for it. And vice versa, as interest rates rise, nobody wants the thing that you bought at low rates. They want the one at higher rates. So I'm showing you this because you look over this period of time. During that period of time, you were getting 30, 20 returns in the teens. This environment where our financial planning world was built. The 60-40 allocation, the asset allocation models, target date funds, anything you know about financial planning and investment management happened during this period of time. But what happened prior is what got me thinking. During this mirror image rate environment, for the prior 40 years, as you can see interest rates rising, you got a lot of volatility. And during this period of time, when rates were kind of low for long, you got middling returns, you know, low single digits. So we're in this environment now where all of our clients, all of our clients that have earned any money, all of you, who have earned any money, have earned it during a period of time when bonds could do no wrong, and they were the perfect diversifier for equities. And I've highlighted 2022 because that's when all the articles came out and said, is the 60-40 portfolio dead? If interest rates are going to bounce off this low, or even just stay low for long, because we are still historically low, what does that mean to the portfolio? What does that mean to that perfect diversifier? And I'll put it in context. During this period of time, you lost money in bonds about once out of every six or seven years. No real volatility until we saw here. During this period of time, you lost money in bonds, maybe not in this chart, but overall in the market, about one out of three years. That's more volatile than the equity market. And most advisors think bonds are just a slightly less volatile version of stocks. That's not the case. It's based on math and interest rates. So what do we do with that? Well, the economics of participating whole life insurance is so good as a diversifier for this part of the portfolio. And the reason it's so good is just one example. This is MassMutual's general investment account, but they all look the same. The favorite investment of the major mutuals is long-term corporate bonds, which sounds like a paradox. I just told you bonds are kind of in trouble moving forward relative to where they've been. The difference is the insurance companies don't care about the mark-to-market value of the bonds. They are buying bonds for long durations, 20-year durations, receiving interest off of that, and eventually will hold to maturity and get that money back. Variations in interest rates don't affect major mutual life insurers. So when you think of it, it's effectively a giant bond ladder. Now, there's some other holdings. Some of these companies have wholly owned subsidiaries. Just like if you own Apple stock, you get a dividend every quarter. When they own the stocks of these companies, they get a dividend as the mutual holding company. And there's some other things in there as well. But generally speaking, 75% to 100% of these major mutual life insurance companies' general investment accounts are fixed income. And the purpose of that is to generate cash flow. The cash flow is the dividend. So when a company says they're paying a 5% or 6% dividend, They're telling you they're getting 5% or 6% cash flow off of that portfolio, very much like an income-based mutual fund, that they are passing through to the policy owner in the form of a dividend. It's not just some made-up number. They're not selling assets to raise capital to pay a dividend. They're actually telling you that's what they're getting. And the best representation of it, and the only company I've ever seen that can show you this, is Northwestern Mutual. They actually will publish their dividend interest rate back to the 1800s. And over that period of time, you can see that unlike... The inverse relationship of interest rates and bonds, bond prices, There's an absolute positive correlation between interest rates and whole life insurance dividends. Whole life insurance must go up in value. The only question is how fast. And that question is simply the rate at which the dividend is going to be paid. So if we are in this low for long period of time, you're going to see whole life dividends also stay low for long, but basically like a rolling average of the long end of the yield curve. In a rising interest rate environment, you will see dividend interest rates rise. That's why we see all of the major mutuals starting to nibble at higher. higher and higher dividend interest rates, 20, 30 basis points each year for the last couple of years, because that rising environment is starting to flow through to the dividend. What that has created is a massive tailwind for the whole life insurance space. I mean, if you've been around a while, when were you able to call a client and say, hey, remember that policy I sold you? It's performing even better. We've been apologizing for whole life insurance performance for decades. And we're now in a position to share with our clients, hey, it's actually better than it was illustrated and probably will get better from here. If the economics stay the same. And this is, I'm not just making this up, this is the Moody's Season Corporate Bond Average. If there was an index for the way the major mutual companies invest, this is it. It's actually a published index. There are insurance policies that actually refer to this index when they set their adjustable loan rate. And these insurance companies today are investing new dollars at double the yields they were able to just a few years ago, and higher yields than they were able to 15 years back. Talk about a tailwind. This is the new golden era for whole life insurance. Now, if we take a look at dividend interest rates for the industry going back about 100, I'm sorry, only 45 years here, you can see the Barclays aggregate, which is kind of the most well-known bond index, if you will, averaged 6.8%. Remember stats class from college, standard deviation, that bell curve? Well, what standard deviation means is that during that period of time, you've gotten, on average, 6.8% plus or minus 7.2, one-third of the time. That's one standard deviation from the mean. The other third of the time, you're either higher. Remember 1980s? You're getting like 30% returns. Or lower. 2022 is our worst year. Now, the thing with whole life insurance, if you look at the dividend interest rate average over that period of time, it was 8%. It should be bond. It should be corporate bond-like because they're investing in corporate bond-like stuff. Over long periods of time, the short-term gyrations average out. And you will get a corporate bond-like dividend interest rate. So even though the blue bar here is higher, it's not meant to say that whole life insurance did better than bonds necessarily, because there are more expenses and fees for all of the best reasons, although I think it did. It's meant to show you the difference between the return you're getting and the risk you're taking, the volatility you're experiencing. It's also known as the Sharpe ratio. It's an oversimplification, but the Sharpe ratio on Wall Street is the holy grail. How do we, the ratio is return you're getting over volatility experienced, right? There's two ways to improve that ratio. We either get higher returns. Will whole life get you higher returns in corporate bonds? No, it will not. The underlying investment is long-term corporate bonds, maybe with some equities, but it's going to be very similar. So you're not going to do better than you can do elsewhere necessarily over long periods of time. But the other way to improve that ratio is to reduce the volatility. And that is something you can't do with market-based investments as well as whole life insurance. The magic of whole life insurance is that through the life insurance contract, This is what participating means. You are participating in the profitability of that mutual life insurer who is operating for your benefit and passing through their profitability in the form of a dividend. And through the life insurance contract, they've guaranteed away all potential for loss. They've guaranteed that your cash value must go up every single year. The only question is how fast. And that question of how fast is how much will they enhance it with that non-guaranteed dividend, which by the way, is also a terrible way to say it. It's not guaranteed, but once it's yours, it's now guaranteed.

Speaker 0 | 08:39.179

Hey, it's Caleb Williams here. I'm just interrupting this video quickly to invite you to check out our Andesit Vault. You may have been there. We've actually revamping it. And if you are somebody that wants to learn more about, is life insurance the right fit for me? Does this Andesit make sense? Does this actually help me be more efficient? We've put together a 10-minute documentary-style video that I think does a really, really good job giving the history, why the Andesit, different setups and designs that we use. And then we have and that's a fall that gives like case studies, calculators, handbooks, and so much more, we are here to serve you whether it's a conversation, whether it's education, or the video. So make sure to go check out andasset.com slash vault, learn more.

Speaker 1 | 09:19.550

So many people look at that non-guaranteed column and they think what can be delivered can be taken away, just like the market. That's not the case with life insurance. The non-guaranteed nature is just the rate at which the dividend is going to be paid. But as long as the mutual structure of these major companies is still around, as long as they don't demutualize and start selling out to stockholders, you're going to get a dividend. But here's the thing, I actually did this a little bit further in the last couple months. I said, what about the last 20 years, my career effectively? Well, over the last 20 years, the numbers are off the charts. We are now living through this new golden era for whole life insurance. In fact, for my 22-year career, I've been living through it the entire time and didn't know. Because as rates started to hit the bottom and dance around the bottom, bonds also bottomed in terms of their returns, and the volatility was much higher. And we saw the massive volatility when interest rates spiked in 2022. Whole life insurance, however, has been chugging right along at 6%. 6.3% dividend interest rate average for a few of the major mutuals. But absolutely no volatility. So what would have been the value for your clients if they owned this asset during this period of time, instead of just sticking their head in the sand and buying that target date fund or that 60-40 portfolio? They would have been doing so much better. And that is the holy grail of investing. We are trying to improve people's risk-adjusted return. Now, is whole life an investment? No, it is not. Do not say that to your clients. That's how you get sued. But is it a diversifier for an overall portfolio? When you fill out a risk tolerance questionnaire, don't they ask you about pension income or other safe conservative assets? That factors into how you invest elsewhere. This is about as safe as it gets. In fact, it's guaranteed to rise. It's not just there's no 0% floor and then hope like heck it works out. You are actually guaranteed to make money year after year here. The only question is how much. And that's a very big deal. When I talk about whole life insurance, I say there's an art to it. There's a few things that it does really well. One is we all know that whole life insurance, all permanent life insurance has amazing tax advantages. You can essentially multiply your money by many times over the course of your life and not owe the IRS a dime. But a big one that people forget is access. You know, think during the pandemic. There are people that I know that borrowed six-figure sums from their whole life policies to make investments, buy properties in cities that were dead now because no one was going to go in cities anymore. Make those kind of investments and be opportunistic on the upside because they had access to it. If all of their money was tied up in their home equity, Okay. or their 401k, they would not have had those opportunities as the market was crashing and things were cratering and no one knew what to do. So yes, we all know it's a great defensive asset, but it's also opportunistic on the upside. No one thinks about that in financial planning. It's a big part of it. I already talked about risk, right? It's going to give you better bond like returns over time. I'm saying over time, not five years from now, I'm talking about 15, 20, 25, right? We don't plan for two years at a time here. We plan for two generations at a time. And over that period of time, whole life insurance will do better. And with that in mind, we can multiply your money by many times over the course of your life and never really IRS a dime. So think about that. If you can replace or add to that portion of the portfolio, that fixed income piece, that safe stuff, however you define it, with an asset that must go up in value, give you bond-like returns, have complete access and unlimited tax advantages, what does that do to the rest of your investing? What does that do to your mindset around everything else? That is the magic. Too many of our clients start talking about whole life versus real estate, whole life versus the stock market, whole life versus ETFs or whatever I listed before. That's a stupid comparison. That is not the right comparison. The comparison is cash, bonds, money markets, fixed income, safe stuff, however you define that. And if you stay in that lane and your client has an open mind, they will win. And by the way, only whole life does that. IUL does not do that. VUL. does not do that. Traditional UL, guaranteed UL, no other permanent life insurance policy can say all of those things. VUL, in fact, is actually more risky than owning those same investments outside because of the mortality charges. VUL actually has inherent sequence of returns risk. The market goes down, that monthly charge is going to come out that month no matter what. Only whole life insurance has all three of these things.

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